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WCI Offsets Market Review & Outlook: Supply and Demand Dynamics After AB 398

  • Report

  • 56 Pages
  • September 2020
  • Region: Global
  • cKinetics
  • ID: 5145265

The offset program has proved one of the more contentious aspects of the WCI Cap-and-Trade market opening in California and Quebec. Compliance offsets have been used as a cost-containment measure for regulated entities, and as a means to drive to scale new environmental technologies. This report offers rich insight, telling data visualisations, and insider opinion regarding the dynamics in both supply and demand of the market's history from 2013-2020. This report is also one of the first publicly available studies to comprehend and analyze the upcoming impact of AB398. The ruling will drastically alter the whole structure of the offsets market, potentially leaving out-of-state suppliers with an unsold excess of credits, and compliance entities with a shortage of in-state credits. This report will guide you through the extent of this change and highlight the lucrative opportunities emerging in this new market setting.

Usage trends

Offsets have always received a disproportionate amount of market attention, especially since they can only be surrendered as 8% of compliance. And so at a 20% price discount, they have offered the entities around a 1.5% saving in compliance cost. Not that the 8% limit has been utilized, in Compliance Period 1 (CP1) total offset usage was at 4.4%, this increased to 6.4% for CP2.

This offset saving can be worth more than $20 million for the largest emitters like Tesoro, but may be less than ten thousand dollars for the smallest firms. This lack of saving incentive for smaller firms is the primary reason why 48 firms, representing 53.6% of the program’s emissions, used their maximum quota of offsets, and why 186 far smaller firms, representing 44.87% of emissions, used no offsets whatsoever. Invalidation risk is often touted as the reason for the underuse of offsets, but this seems an over-estimated risk, as only a few thousand ODS offsets have ever been invalidate, and 12% of all historic offsets remain in ARB’s buffer system.

Supply Trends

80% of all offsets generated so far have been from forestry projects, ODS makes up most of the remainder with 12%, whilst Mine Methane and Livestock projects share 4% each. Earlier in the program’s life offset generation in California led the way, in more recent years huge forestry projects in Alaska as developed by Finite Carbon have swamped offset supply. The other available protocols, such as urban forestry, have seen no projects, and are generally not deemed viable in the current price region. Registries are developing protocols around soil improvement that could swell supply again, though nothing has been approved by ARB yet.

Assembly Bill 398, passed in 2017, shook up the post-2020 offsets future, it stipulated that the new offset limit for 2021-2025 would be 4%, and then raised to 6% for 2026-2030. At a 20% current price discount to allowances, this would drop the maximum saving to just 0.8% of compliance, and then 1.2% for the second half of this decade. ARB’s highly contentious response to further align to AB 398 was to rule that 50% of all offsets had to have Direct Environmental Benefits (DEBs) to the state of California. In plain English, at least half of all firm’s offset surrender had to be generated in California, notably Quebec firms are free to surrender any balance of offsets. It was this divisive ruling that spawned this report.

The Market for DEBs Offsets

From a market theory perspective, it follows that if Californian and Ex-Californian offsets must be used in equal measure next year, and that there is a difference in the supply of these two assets, then a price difference must result. The question this report answers if there will be a shortage, and when will it kick in.

Historically speaking just 17% of offsets qualify as DEBs. Moreover, for reasons explained below, CC.info sees limited future DEBs production under the current protocols. Extrapolating from current offset usage behavior, and under ceteris paribus for other factors, CC.info estimates that a shortage of DEBS offsets would occur midway through CP6. Not to say this future will occur, as more developers and traders cotton on to this imbalance, we expect the price differential to go some way in incentivizing increased offset generation within California. This is not accidental from ARB’s perspective.

Table of Contents

Executive Summary:
  • Usage trends
  • Supply Trends
  • The Market for DEBs Offsets
1 Introduction: Context for offsets in California
1.1 California’s ambitious climate goals led to the setting up of a cap-and-trade program
1.2 Compliance offset program is a cost-containment tool
1.3 Current Market Sentiment
2 Offset Supply Dynamics
2.1 Total historic offsets supply: In-State & Out-of-State
2.2 Historic annual offsets supply: In-State & Out-of-State
2.3 Historic offsets supply: DEBs and Non-DEBs
2.4 Breakdown of Offset Projects: Protocol Type
2.5 Lead-times for Offset Generation: Protocol Type
2.6 Proportion of Offset Generation: Invalidation Period & Registries
3 Offset Usage Dynamics
3.1 Offset usage behavior: Emissions and offset usage
3.2 Offset usage behavior: CP1 & CP2
3.3 CP1’s Largest Offset Projects and Buyers
3.4 CP2’s Largest Offset Projects and Buyers
3.5 Quebec Offset usage
3.6 Invalidation Timeframes and CCO prices in CP1
3.7 Invalidation Timeframes and CCO prices in CP2
4 Scenario Analysis
4.1 Expected Emissions, Current Buffer Pool, and ROC Backlog
4.2 Scenario Analysis: Demand-side
4.3 Scenario Analysis: Largest emitters under S1 and S2
4.4 Scenario Analysis: Scenario 1 - Max and Min Offsets Users
4.5 Scenario Analysis: Scenario 2
4.6 Scenario Analysis: Demand Compliance Scenarios
4.7 Scenario Analysis: Offset surrender forecast up to CP7
4.8 Scenario Analysis: Offset issuance forecast up to CP7
4.9 Scenario Analysis: Net demand and supply (S1)
4.10 Scenario Analysis: Net demand and supply (S2)
5 Survey Results
5.1 Survey Results: Participant Overview
5.2 Survey Results: Why some entities do and some don’t maximize offset limit
5.3 Survey Results: Impact of COVID-19 on offsets
5.4 Scenario Results: Impact of 4% offset usage limit
5.5 Scenario Results: Measures, risks and opportunities 406 Take Aways and Outlook
List of Data Sources
  • Glossary
  • About the Author
  • Rights
  • Disclaimer
  • Contact
List of Figures
Figure 1 Total historic in-state and out-of-state supply
Figure 2 Type of protocol: In-State and Out-of-State
Figure 3 Type of CCOs: In-state and Out-of-State
Figure 4 In-state and out-of-state supply by calendar year
Figure 5 In-state and out-of-state supply by vintage year
Figure 6 Percentage of DEBs and non-DEBs credits in the current offset market
Figure 7 In-state and out-of-state supply of DEBs
Figure 8 Distribution of out-of-state DEBs credits
Figure 9 Percentage of credits by protocol type
Figure 10 Count of projects by protocol type
Figure 11 CCOs by top 15 project developers by protocol type
Figure 12 Breakdown of lead times by protocol type (Source: CaliforniaCarbon.Info)
Figure 13 Avg. lead time from first reporting period start date to CCO issuance date in 2013 and 2020
Figure 14. Total number of credits by invalidation period and protocol type (Source: CaliforniaCarbon.Info)
Figure 15 Total number of credits by registry and protocol type
Figure 16 Offset generation by registries: CAR, ACR, and VCS
Figure 17 - CP1 and CP2, Offset Usage vs Total Surrender and 8% Limit
Figure 18 - Count of entities using x% of offsets and their respective share of emissions
Figure 19 CP1 & CP2 offsets surrender (Source: CaliforniaCarbon.Info)
Figure 20 Top 10 entities and their offset surrender in CP1 (Source: CaliforniaCarbon.Info)
Figure 21 Top 10 entities and their offset surrender in CP2 (Source: CaliforniaCarbon.Info)
Figure 22 CCOs available in CP1 vs. CCOs used by top entities (Source: CaliforniaCarbon.Info)
Figure 23 Breakdown of CCOs used by largest entities in CP1 (Source: CaliforniaCarbon.Info)
Figure 24 CCOs available in CP2 vs. CCOs used by top entities (Source: CaliforniaCarbon.Info)
Figure 25 Breakdown of CCOs used by largest entities in CP2 (Source: CaliforniaCarbon.Info)
Figure 26 Offsets surrendered in CP1 vs. offsets issued in CP1
Figure 27 Entities that used offsets in CP1
Figure 28 Total offsets surrendered in CP1 and CP2
Figure 29 Offsets surrendered in CP2 vs. offsets issued in CP2
Figure 30 Top Quebec offset users in CP2
Figure 31Quebec entities offset surrender vs. California entities offset surrender
Figure 32 State-wise CCOs surrendered in CP2
Figure 33 CCOs surrendered by vintage
Figure 34 Canadian projects surrendered in CP2 by vintage
Figure 35 Offset credits by issuance year
Figure 36 Breakdown of invalidation period by protocol type under CP1
Figure 37 CCO-3 and CCO-8 pricing between 2013-2014
Figure 38 Breakdown of invalidation period by protocol type under CP2
Figure 39 CCO-3 and CCO-8 pricing between 2015-2017
Figure 40 Emissions forecast up to 2025 under base case, high case and low case scenario
Figure 41 Current offsets buffer pool
Figure 42 Current offsets backlog
Figure 43 Offset surrender under S1, S2, CP2, and CP2 optimal mix
Figure 44 Top 10 entities and the impact of 4% offset limit
Figure 45 Top 10 entities and potential savings
Figure 46 Top offset users and their surrender under S1, S2 vs. CP2 28Figure 47 Entities with the highest potential savings
Figure 48 Offset usage of entities under CP2 and under 4% limit
Figure 49 Potential savings of entities under CP4
Figure 50 Surrender breakdown in S1 and S2
Figure 51 Forecasted offset surrender under CP4 and CP5
Figure 52 Forecasted offset issuance under CP4 and CP5
Figure 53 Net demand-supply under Scenario 1
Figure 54 Net demand-supply under Scenario 2
Figure 55 Type of participants
Figure 56 Participants familiarity with the offsets market
Figure 57 Respondents on why entities use offsets
Figure 58 Respondents on why many entities do not maximize their offset usage
Figure 59 Extent to which offsets supply will be affected by COVID-19
Figure 60 Duration of COVID-19’s impact on the offset market
Figure 61 Ways in which COVID-19 will impact the offset market
Figure 62 Impact of 4% offset usage limit on CCOs
Figure 63 Impact of 4% offset usage limit on CCO prices
Figure 64 Change in own org’s strategy due to the 4% offset usage limit
Figure 65 Measures which could be taken to improve offset usage
Figure 66 Potential risks in the offset sector between now and 2025

Companies Mentioned

  • 3 Phases Renewables, Inc.
  • Aemetis Advanced Fuels Keyes, Inc.
  • Aera Energy, LLC
  • AES Alamitos, LLC
  • Air Liquide Large Industries U.S., LP
  • Air Products and Chemicals, Inc.
  • Air Products Manufacturing Corporation
  • Algonquin Power Sanger, LLC
  • AltaGas Power Holdings (U.S.), Inc.
  • AmeriGas Propane, LP
  • Anheuser-Busch, LLC
  • Apex Oil Company, Inc.
  • Applied Energy, LLC - NAS North Island
  • Applied Natural Gas Fuels, Inc.
  • Ardagh Glass, Inc.
  • Arizona Electric Power Cooperative, Inc.
  • Arizona Public Service Company
  • Avangrid Renewables, LLC
  • Avista Corporation
  • B. Braun Medical, Inc.
  • Badger Creek Limited
  • Bear Mountain Limited
  • Berry Petroleum Company
  • Bicent (California) Malburg, LLC
  • BNSF Railway Company
  • Bonneville Power Administration
  • BP Products North America, Inc.
  • BreitBurn Operating, LP
  • Bridge Energy, LLC
  • Brookfield Energy Marketing, LP
  • California Dairies, Inc.
  • California Institute of Technology
  • California Power Holdings, LLC
  • California Resources Elk Hills, LLC
  • California State University
  • California Steel Industries, Inc.
  • Calpine Energy Services, LP
  • CalPortland Company
  • Campbell Soup Supply Company, LLC DB a Dixon Canning Corporation
  • Carlsbad Energy Center, LLC
  • Carlton Forge Works
  • Cemex Construction Materials Pacific, LLC
  • Centen Ag, LLC
  • CertainTeed Corporation
  • Chalk Cliff Limited
  • Chapel Street Environmental II, LLC
  • Chevron Power Holdings, Inc.
  • Chevron U.S.A., Inc.
  • Citigroup Energy, Inc.
  • City of Anaheim, Public Utilities Department
  • City of Azusa
  • City of Burbank
  • City of Colton
  • City of Glendale
  • City of Long Beach, Gas and Oil Department
  • City of Los Angeles Hyperion Water Reclamation Plant
  • City of Needles
  • City of Palo Alto
  • City of Riverside Public Utilities
  • City of Roseville
  • City of Solana Beach
  • City of Tacoma, Department of Public Utilities, Light Division dba Tacoma Power
  • City of Vernon, Vernon Public Utilities
  • Civic Center Cogen, LA County
  • Clean Energy
  • CMO, Inc.
  • Comision Federal de Electricidad
  • ConAgra Foods Packaged Foods, LLC
  • Covanta Stanislaus, Inc.
  • CP Kelco US, Inc.
  • CPV Sentinel, LLC
  • Crimson Resource Management Corporation
  • Crockett Cogeneration, a California Limited Partnership
  • CWP Energy, Inc.
  • CX a La Paloma, LLC
  • Del Monte Foods, Inc.
  • Demenno/Kerdoon
  • Dicalite Minerals Corporation
  • Direct Energy Business, LLC
  • Double C Limited
  • DTE Energy Trading, Inc.
  • Dynegy Moss Landing, LLC
  • E&B Natural Resources Management Corporation
  • E. & J. Gallo Winery
  • Eagle Petroleum, LLC
  • Eco Services Operations Corporation
  • EDF Trading North America, LLC
  • El Segundo Energy Center, LLC
  • Elbow River Marketing, Ltd.
  • Energia Azteca X, S.A. de C.V. and Energia de Baja California S. de R.L. de C.V. (La Rosita Power Marketing)
  • Escondido Energy Center, LLC
  • Exelon Generation Company, LLC
  • Ferrellgas, LP
  • Flint Hills Resources, LP
  • Flyers Energy, LLC
  • Foster Poultry Farms
  • Frito-Lay, Inc.
  • Genentech, Inc.
  • GenOn California South, LP
  • Georgia-Pacific Gypsum, LLC
  • Grade 6 Oil, LLC
  • Greenleaf Energy Unit 1, LLC
  • Greenleaf Energy Unit 2, LLC
  • Guardian Industries, LLC
  • Guzman Energy Partners, LLC
  • Guzman Energy, LLC
  • High Desert Power Project, LLC
  • High Sierra Limited
  • Hilmar Cheese Company
  • Holmes Western Oil Corporation
  • Idaho Power Company
  • Idemitsu Apollo
  • Imerys Filtration Minerals, Inc.
  • Imperial Irrigation District
  • Indigo Generation, LLC
  • Ingomar Packing Company, LLC
  • Ingredion, Inc.
  • Inland Empire Energy Center, LLC
  • IPC (USA), Inc.
  • J. Aron & Company, LLC
  • J. G. Boswell Company
  • Jaco Oil Company
  • Johns Manville
  • Kern Front Limited
  • Kern Oil & Refining Company
  • KES Kingsburg, LP
  • Kimberly-Clark Worldwide, Inc.
  • Kiva Energy, Inc.
  • Land O' Lakes, Inc.
  • Lansing Trade Group, LLC
  • Larkspur Energy, LLC
  • Lehigh Southwest Cement Company
  • Leprino Foods Company
  • Lhoist North America of Arizona, Inc.
  • Liberty Utilities (CalPeco Electric), LLC
  • Live Oak Limited
  • Loma Linda University
  • Los Angeles Department of Water & Power
  • Los Gatos Tomato Products
  • Lunday-Thagard Company
  • Luz Solar Partners, Ltd., III - VII
  • Luz Solar Partners, Ltd., VIII & IX
  • Macpherson Oil Company, LLC
  • Macquarie Energy, LLC
  • Malaga Power, LLC
  • Mariposa Energy, LLC
  • Marsh Landing, LLC
  • Martinez Cogen Limited Partnership
  • Matchmaster Dyeing & Finishing, Inc.
  • McKittrick Limited
  • Midstream Energy Partners (USA), LLC
  • Midway Peaking, LLC
  • Midway Sunset Cogeneration Company
  • Mitsubishi Cement Corporation
  • Mizkan America, Inc.
  • Modesto Irrigation District
  • Morgan Stanley Capital Group, Inc.
  • MRP San Joaquin Energy, LLC
  • Musket Corporation
  • Naftex Operating Company
  • National Cement Company of California., Inc.
  • New NGC, Inc.
  • New-Indy Ontario, LLC
  • New-Indy Oxnard, LLC
  • NextEra Energy Marketing, LLC
  • Northern California Power Agency
  • NRG Power Marketing, LLC
  • NV Energy, Inc.
  • Olam West Coast, Inc.
  • OLS Energy - Chino
  • Orange Grove Energy, LP
  • Owens Corning Insulating Systems, LLC
  • Owens-Brockway Glass Container, Inc.
  • PABCO Building Products, LLC
  • Pacific Coast Energy Company, LP
  • Pacific Coast Producers
  • Pacific Ethanol, Inc.
  • Pacific Gas and Electric Company
  • PacifiCorp
  • Panoche Energy Center, LLC
  • Paramount Petroleum
  • Pasadena Water & Power
  • PBF Energy Western Region, LLC
  • Petro Diamond, Inc.
  • Phillips 66 Company
  • Pilot Travel Centers, LLC
  • Pio Pico Energy Center, LLC
  • Pixley Cogen Partners, LLC
  • Plains Marketing, LP
  • Plains, LPG Services/ Lone Star Frac & Isom Facility
  • Plumas-Sierra Rural Electric Cooperative
  • Portland General Electric Company
  • Powerex Corporation
  • Praxair, Inc.
  • Pro Petroleum, Inc.
  • Public Service Company of Colorado, a Colorado Corporation
  • Public Service Company of New Mexico
  • Puget Sound Energy, Inc.
  • Qualcomm, Inc.
  • Quemetco West, LLC
  • Rainbow Energy Marketing Corporation
  • Redding Electric Utility
  • Redwood Coast Energy Authority
  • Regents of the University of California
  • Rio Tinto Minerals, Inc.
  • River City Petroleum
  • Robinson Oil Supply & Transport, Inc.
  • Russell City Energy Company, LLC
  • Sacramento Municipal Utility District (SMUD)
  • Salt River Project Agricultural Improvement and Power District
  • San Diego Gas & Electric Company
  • San Diego Gas and Electric Company
  • San Joaquin Refining Company, Inc.
  • Saputo Cheese USA, Inc.
  • Schlosser Forge
  • Searles Valley Minerals
  • SEI Fuel Services, Inc.
  • Sempra Gas & Power Marketing, LLC
  • Seneca Resources Corporation
  • Sensient Natural Ingredients, LLC
  • Sentinel Peak Resources California, LLC
  • Shell Energy North America (US), LP
  • Shiralian Enterprises
  • Shultz Steel Company
  • Signal Hill Petroleum, Inc.
  • Silicon Valley Power (SVP), City of Santa Clara
  • Solar Turbines, Inc., a Delaware Company
  • Southern California Edison Company
  • Southern California Gas Company
  • Southern Counties Oil Company, a California Limited Partnership
  • Southwest Gas Corporation
  • Spreckels Sugar Company, Inc.
  • Stan Boyett & Son, Inc.
  • Stanislaus Food Products Company
  • SunSelect Produce (California), Inc.
  • Superior Plus Energy Services, Inc.
  • Tenaska Power Services Company
  • Terracore Operating Company, LLC
  • Tesla Motors, Inc.
  • Tesoro Refining & Marketing Company, LLC
  • The Energy Authority, Inc.
  • The Metropolitan Water District of Southern California
  • The Morning Star Packing Company
  • The Neil Jones Food Company
  • The Newark Group, Inc.
  • The Procter & Gamble Manufacturing Company
  • The Procter & Gamble Paper Products Company
  • The Soco Group, Inc.
  • TransAlta Energy Marketing (U.S.), Inc.
  • TransCanada Energy Sales, Ltd.
  • TRC Operating Company, Inc.
  • Tricor Refining, LLC
  • Truckee Donner Public Utility District
  • TST, Inc.
  • Turlock Irrigation District
  • Twin Eagle Resource Management, LLC
  • Ultramar, Inc.
  • Union Pacific Railroad Company
  • United Liquid Gas Company
  • United States Gypsum Company
  • United States Pipe & Foundry Company, LLC
  • USS-POSCO Industries
  • Valero Marketing and Supply Company
  • Valero Refining Company-California, Benicia Refinery and Asphalt Plant
  • Valley Electric Association, Inc.
  • Vista Metals Corporation
  • Vitol, Inc.
  • Vitro Flat Glass, LLC
  • Walnut Creek Energy, LLC
  • WAPA-Sierra Nevada Region
  • Wild Goose Storage, LLC
  • Windset Farms (California), Inc.
  • Wm. Bolthouse Farms, Inc.
  • Wonderful Pistachios & Almonds, LLC