California operates one of the most comprehensive carbon markets in the world, with an impact extending beyond its borders. The program is “economy-wide,” covering any entity—corporate, utility, university, or otherwise—that emits over 25,000 metric tons of carbon annually. It plays a key role in California’s ambitious goal of reducing GHG emissions by 40% below 1990 levels by 2030, with aspirations to further intensify these targets in the near future.
Every year, applicable entities are required to surrender allowances to cover their reported and verified emissions. These allowances are distributed by the California Air Resources Board (CARB) through free allocation, quarterly auctions or purchased from entities with an excess. The aim is that, over time, the total number of allowances decreases in line with the state’s targets to motivate state entities to reduce their emissions at the same or higher rate.
To help entities on their journey to the emissions reduction targets, California’s program also uses ARB Offset Credits, commonly known on the market as “California Carbon Offsets (CCOs),” to meet a portion of their obligations. CCOs are tradable credits representing verified emissions reduction or removal from sources outside the Cap-and-Trade Program’s compliance obligations. Alongside their climate and environmental benefits, CCOs offer crucial cost control and flexibility for regulated entities.
In both cases, each allowance and CCO represents the right to emit one metric ton of carbon dioxide equivalent (CO2e).
How to use CCOs
On top of annually surrendered allowances, entities may use CCOs to cover up to 4% of their annual emissions from 2021 to 2025, and up to 6% from 2026 to 2030. The California Air Resources Board (CARB) requires at least 50% of the offsets surrendered from each CA entity to be sourced from projects providing direct environmental benefits (DEB) to the state of California.
CARB maintains a public record of all offset credits issued into the program. The six current protocols and methodologies approved for issuance under the cap-and-trade program are:
- Livestock
- Mine Methane Capture
- Ozone Depleting Substances
- U.S. Forestry
- Rice Cultivation (has not issued credits)
- Urban Forestry (has not issued credits)
Projects are issued by the California Air Resources Board (CARB) and held in, surrendered and transferred via the Compliance Instrument Tracking System Service (CITSS) system. Once issued, CCOs do not expire and are eligible to be used for compliance.
Direct Environmental Benefits (DEBs)
DEBs are projects that result in “the reduction or avoidance of emissions of any air pollutant in the state or the reduction or avoidance of any pollutant that could have adverse impact on waters of the state.” CCOs that meet DEB qualifications are identified by the state and indicated on CARB issuance records and in the CITSS account where the offsets are held.
How can I obtain CCOs?
Unlike allowances, CCOs are not auctioned by CARB. They are produced by projects that abide by the CARB approved protocols. The CCOs are held in CITSS and transacted on the secondary market bilaterally with market participants. If a company has an excess or insufficient amount, parties can reach out to STX to source or sell the credits.
Invalidation Time Frame
Though once issued, CCOs do not expire and are eligible, there is a possibility for invalidation. Starting from the end of the reporting period, CCOs have a standard 8-year invalidation risk period. If a project undergoes a second third party verification after issuance, the project is eligible for a reduced invalidation period of 3 years. Once a project has completed its invalidation period, the project is no longer subject to invalidation risk.
A project can be invalidated for the following reasons:
- Overstatement of GHG reductions or GHG removals of more than 5%.
- Offset project activity and implementation not in accordance with all local, regional, state, and national environmental health and safety laws/regulations applying to the project based on location.
- CARB determines that offset credits have been issued in any other voluntary or mandatory program within the same project and reporting period, otherwise known as “double counting.”
Surrendering Process
At the completion of each calendar year, all compliance entities must submit an annual emissions report to CARB. In the November following that emissions year, compliance entities must surrender compliance instruments in accordance with that year's emissions. In Year 1 and Year 2 of a three-year compliance period, 30% of the emissions produced in that year must be surrendered. After the third year of the compliance period, the remaining 70% from Years 1 and 2, as well as 100% of Year 3 will be required to be surrendered in the triennial compliance surrender.
The Path Forward
As the U.S. strengthens its approach to carbon regulation through regional programs, companies must proactively manage their emissions. Cap-and-trade programs are intended to give the economy an increasing carbon price to incentivize decarbonization. The cost of emitting will not continue to be free. Companies that are not working toward these goals may begin to feel the consequences of inaction.
Though renewable energy development is increasing, the market is suspected to reach an inflection point, as compliance allowances fall, and companies draw closer to their 2030 net zero goals. Initiating effective sustainability programs and investing in long-term renewable energy solutions are paramount to reduce long-term financial and regulatory risks.
The availability of renewable energy technologies is increasing as the US green transition progresses. Investing in long-term renewable electricity or renewable natural gas offtakes can help to reduce emissions, reduce your risk and secure your potential as program targets lower, the cost to comply rises, and renewable energy supplies become competitive.
With a portfolio of cap-and-trade allowances and credits, emissions reductions solutions and consulting services, STX can help you navigate the evolving landscape of carbon compliance while optimizing your sustainability efforts. Connect with us today to find out how we can provide personalized support for your organization across any regional carbon program.
