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Planet Ark World Environment News California Offset Frustration Continues

Date: 29-Jul-11
Country: USA
Author: RETURES

Carbon market participants on Tuesday said revisions to key rules may not be enough to ensure that trading in secondary offset markets in California is liquid and stable.

At issue is the question of who should be held responsible for replacing offset credits in the event that a project is found to be flawed.

The market's primary regulator, the California Air Resources Board (ARB), has for months maintained that the holder of the offset should be required to replace any invalidated credits, even if that holder had no relationship with the project.

But carbon brokers, project developers, and businesses have warned repeatedly that putting the liability on the offset buyer would introduce enough risk into the system to freeze offset trading, raising the overall cost of the program.

In April, those entities offered a solution, which consisted of ARB managing an offset credit account, or "buffer pool," which could be tapped to replace invalidated credits.

But in its updated market design document released Monday, ARB rejected that idea - much to the dismay of those actively trading offset in the run-up to the launch of the compliance market.

"We were surprised," one broker told Point Carbon News Tuesday. "A thoughtful and workable solution was proposed and ultimately rejected by ARB. We are perplexed."

Sources said ARB staff continues to be wary of having to administer the buffer pool, and believe the market should find a solution to the issue.

OFFSET ISSUANCE?

ARB did, however, add a new line into the regulations released Tuesday, which said the offset project registry may choose to offer an insurance mechanism to cover the invalidation of ARB offset credits.

Sources close to the situation on Tuesday said that investment company Fidelity, and possibly others, had approached ARB in recent weeks, saying they could offer an insurance product that would cover the liability for invalidated offsets.

Many of the same market participants who were supportive of the buffer pool were quick to criticize the so-called "insurance option" on Tuesday.

"This is not the answer," said Josh Margolis, CEO of CantorCO2e. "ARB's hands off policy is not consistent with its traditional responsibility to protect both the currency and the environment," he said.

"The concern can be addressed simply through the use of ARB reviews of offsets, ARB-issued permits to sellers, and/or an ARB administered insurance pool," he said.

Hannah Mellman, US policy advisor for the International Emissions Trading Association (IETA), a trade group involved in the discussions, agreed that the new idea presented problems, but said she her organization was still reviewing it.

She said IETA would submit comments to ARB on the new regulations by the August 9 deadline.

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