“We certainly see it positively that members of Congress are serious,” said Jason Patrick, director of greenhouse gas services as brokerage Evolution Markets.
But Patrick pointed out that one of the bill’s main weaknesses as it is currently drafted is that it restricts the use of certified emissions reductions (CERs) in a prospective US emissions trading system, which he said would be detrimental to its development.
The bill’s text states: “a credit shall have been issued by a foreign country pursuant to a governmental program that imposes mandatory absolute tonnage limits on greenhouse gas emissions from the foreign country.”
This provision would effectively prohibit the use of CERs generated from clean development mechanism (CDM) projects in developing countries, which are not subject to binding emission reduction targets under the Kyoto protocol.
Though Aimee Barnes, manager of regulatory affairs at Ecosecurities, a London-listed company that pools carbon credits, said she thinks it is unlikely that the Lieberman-Warner bill, or one like it, will be passed before 2009, the bill’s language and the political debates surrounding it “provide an important signal to the market about the kinds of opportunities that we might expect under a federal cap-and-trade system.”
“We are quite concerned that the bill prohibits use of CERs, as we believe that CER credits represent important, real, and additional GHG reductions that provide least-cost opportunities for US regulated entities to meet their targets, and an important cost control mechanism for protecting US consumers,” she wrote in an email from the UN climate change summit in Bali.
“While these signals act as more of a general orientation on big picture issues, rather than specific guidance, they do give some hints about where we might be headed. Unfortunately, some of those hints are currently indicating that the offset market will be quite limited both in terms of domestic and international credits,” she added.
Protectionist pressures
Throughout the bill’s markup last week, environment committee senators raised concerns about the rapid growth in greenhouse gas emissions in China and India, with some stressing that the US should not adopt mandatory emission reduction programmes without similar actions being taken by those countries.
According to Bjorn Fischer, managing director of carbon asset management group 3C, the protectionist tone of these political debates will have an impact on how any US climate change legislation will address the use of offsets.
“I think there will be a preference in the US for US-based projects – a CDM light kind-of system," Fischer said, noting that legislators will need to prove that the carbon market can deliver “local benefits.”
But Fischer urged US lawmakers to first take steps to create an “infrastructure” that will give the public confidence in the benefits offset projects are delivering, clearly outlining methodologies for project approval and spelling out how the approval process works.
“This is nuts and bolts of a climate bill,” Fischer said. “Lieberman-Warner is not specific about these issues, but these issues need to be addressed down the line in order to establish credibility in the market.”
The International Emissions Trading Association (Ieta) brought the offset restriction to light last month during the Lieberman-Warner bill’s hearing period in the Senate environment committee and sent a letter to the committee’s chairman and ranking member, urging them to reconsider the legislation’s restriction of the use of international offsets.
“If the United States does not engage countries seeking to use offsets to reduce greenhouse gas emissions, either other countries will step in to provide this leadership and reap the economic benefits of an active offset sector, or an important opportunity to begin the process of mitigating climate change will be lost,” wrote Andrei Marcu, president of the lobby group, in the November letter.
Base case
Janet Peace, a senior fellow in economics at the Pew Center for Global Climate Change, said that CDM projects need to be factored into a future US carbon market because it is the only way to ensure that it can link to other global markets.
“This is base case for getting the lesser developed countries started,” Peace said, adding that the CDM would ensure environmental results while keeping the costs of emissions reductions down.
Peace said she does not think the offset provision in the Lieberman-Warner bill is the final word, and offered options for including CERs in future climate change legislation in the face of a lack of political appetite for them.
She said one avenue could be to allow the use of CERs for a certain period of time, after which a host country would be required to take on a mandatory target. She also suggested that there be a limit to the amount of CERs that could be used in a US emissions trading scheme.
Peace added that the Lieberman-Warner bill has only established a framework for future US climate legislation, and noted there is still time to influence policy.
“I don’t think that’s an insurmountable issue,” she said. “Certainly we can still have some say in the process.”
Bali prompts re-think
On the sidelines of a panel discussion on the US Senate bill at the UN climate change summit in Bali on Monday, staff from the offices of Senators Lieberman and Warner told Point Carbon that the level of interest in global carbon markets they witnessed first hand at the UN negotiations may prompt a re-think of the proposal’s international credit provisions.
David McIntosh of Lieberman’s office said that up until now, the ability to buy CDM credits had not been a high priority for many of the stakeholders with whom he has discussed the bill. He said that it will take strong lobbying pressure to put the issue higher on Senate staffers' agendas.
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