California Carbon Buffer Pool and Estimated Reversals
Key Points: A new study of CA’s “insurance” for its carbon offsets highlights the rising risk for nature-based offsets of re-releasing CO2. This can help inform ICVCM’s recently launched push for higher standards in voluntary markets. It also supports our proposed “point” system for corporate disclosures, which devalues offsets, in part, on impermanence risk.
Study warns 100-year buffer to compensate for carbon reversal risks may be inadequate, particularly as a result of climate change. A CarbonPlan study released in early August concludes that California’s “insurance”, or buffer pool, of forest-project carbon offsets is not nearly large enough. The buffer pool is designed to compensate for release of CO2 back into the atmosphere (i.e., “reversal”) from the premature (< 100 years) demise of forests. The study’s assessment of each of the four categories of risk for which the buffer seeks to compensate (see Exhibit) varies in empiricism, yet it highlights the vulnerabilities of nature-based offsets to reversal. Climate change is exacerbating the natural and perhaps the financial and management risks. Please see summary comments of the study further down.
Integrity Council on Voluntary Carbon Markets (ICVCM) issues draft principles and protocols; ensuring adequate buffers for reversal risk is one element. In late July, the ICVCM issued its draft Core Carbon Principles and Assessment Framework and Procedures along with initiating a 60-day public consultation period. One of the 10 Core Carbon Principles is that the carbon storage must be either “permanent” or have measures in place to fully compensate if the offset is reversed prematurely. The Council accepts the use of buffer pools as an insurance mechanism for reversal; it simply notes that whatever mechanism must be robust enough (e.g. must have enough credits in the buffer pool) to fully compensate for it.
ICVCM sees a role for rating agencies and rating offsets; the Sustainable Finance Lab recommends taking it one step further. Separately, in its introduction of the public consultation period, the ICVCM welcomed the participation of public ratings agencies — and ratings for offset projects — to promote transparency. As the Sustainable Finance Lab has opined, we support taking a carbon offset rating system one step further. For the purposes of corporate reporting of offset purchases, we recommend allotting different amounts of “credit” per ton of CO2-equivalent based on each offset project’s rating. (The range of values could be 0-1, with a score of 1 reserved for permanent removal technologies; a project’s rating could be influenced by how conservatively offsets are created or the extent to which the offsets are reserved, similar to a buffer pool.) Thus, corporations buying offsets for the purposes of meeting decarbonization targets could only report an offset “value” commensurate with the independently-assessed climate (decarbonization) benefit.
CarbonPlan Study’s Buffer Pool analysis details. The buffer in the California forest offsets program (part of its Compliance Offset Program, see below) is comprised of offset “set-asides” — a portion of the offsets generated from forest management projects (which can actually come from across the U.S.). In different ways, the study concludes and/or warns that these reserves across the four categories of buffer pool offsets are either already “used up” or at risk:
- Wildfires (19% of buffer pool). Since 2015 in California have likely already depleted the formal allotment of offsets to the Wildfire category (the blue section in the exhibit). Thus, the buffer that was intended to last 100 years appears to have been depleted in less than 10 (see blue bars in the Exhibit).
- Disease & Insects (18%). The study estimates that even a single forest disease, “sudden oak death”, could result in enough tree mortality to use up more than the allotted offset buffer for the whole Disease & Insect category (orange bars).
- Other (18%). The Other category is intended to include damage due to wind, flood, and ice. Yet the study notes that drought may prove to be more severely damaging (grey bar).
- Financial & Management (44%). This relates to the non-natural risks to ongoing forest preservation/management, such as change in ownership. The study does not quantitatively assess if the allotment is adequate. Rather it notes that bankruptcy can discharge the liability for failing to perform and that separate studies of 100-year default probability point to higher rates of bankruptcy than is presumably provisioned for in the pool (yellow bar).
Background on the role of forest carbon offsets in California’s Cap-and-Trade program. In the California Cap-and-Trade Regulation that sets declining limits on Greenhouse Gas emissions for the state, the Compliance Offset Program offers use of carbon offset purchases to help entities meet a small portion (currently up to 4%) of their emissions obligations. Forests are one of six approved project areas for the Carbon Offset Program; the other project types are ozone depleting substances, livestock, mine methane capture, rice cultivation and urban forests.