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GHG Compliance Complexities

Greenhouse-gas regulation will impose vastly greater compliance difficulties than did the Acid Rain program.

Fortnightly Magazine - February 2008

affairs for Duke Energy, Indiana ratepayers would see increases as much as 63 percent if carbon prices were to reach $30 a ton (see Figure 2) .

Advocates of a free allowance formula argue that giving allowances to entities that neither generate GHG emissions nor have to meet caps simply will reward non-GHG emitting utilities financially, while adding costs to those who will have to invest in new technologies or credits in order to meet caps.

Offset Uncertainties

Under the Kyoto Protocol, the Clean Development Mechanism (CDM) was established to allow offsets from projects in non-Annex I countries (the developing world, including China, India, Africa, Brazil, etc.) that reduce GHG emissions. Certified emission reductions (CERs) may be acquired and traded in the European Union’s Emissions Trading Scheme (EU ETS).

Carbon offsets provide a potentially valuable tool for buying time for utility transition to lower carbon generation. Offsets serve the function of keeping a lid on the price of allocations on the market, and thereby can benefit consumers. As long as offsets are verifiable and real, no matter the location in the world, they should be treated the same as a reduction.

U.S. utilities are very aware of the problems of verification, legitimacy and leakage associated with offsets. All agree that the process must be transparent and auditable with international standards that will be possible when a Kyoto II agreement is signed in the future. There are risks in illegitimate offsets, but the problems are being addressed based on experience.

Fundamental issues with offsets have arisen in the European Union’s attempt to use offsets to cushion the financial shock of Kyoto Protocol mandates for emissions reductions by 2012.

In the early years of the Kyoto Protocol in Europe, it turned out that the major and cheapest source of CERs was in projects that reduced emissions of hydrofluorocarbons (HFC23) in the manufacture of Freon. The cost of incineration of waste gases is about $0.50/ton of CO 2e, much cheaper than carbon credits being traded in the EU ETS. The problem is that this lowers the cost of plants participating in the CDM market, thereby promoting the manufacture of Freon that is supposed to be phased out by 2040 in developing countries, under the Montreal Protocol for controlling ozone. The CDM’s solution is to allow credits only for existing Freon plants, not new plants. Nothing is simple.

Pending regulations will have to identify acceptable protocols for obtaining emission reduction credits from offsets. Many protocols now exist. The Kyoto CDM established a process for obtaining CERs, and likewise the Chicago Climate Exchange (CCX) has established its own protocols. In California, the California Climate Action Registry also issued its own protocols for registering emissions and claiming credits for offsets from forestry and livestock manure projects.

One of the problems of offsets stems from leakage of various kinds. A reforestation project in Honduras that reduces rainforest cutting in one area simply may lead to the transfer in cutting of forests elsewhere in the same country, unless the regional government has a program in place to control