The American Power Act: Trees Fare Well in Latest US Climate Bill

It’s been a good run for trees in climate-change talks, and that run continues with the latest climate bill introduced two weeks ago in the US Senate (read the full discussion draft here).  For proof, just check out the differences between how the new American Power Act treats programs that reduce emissions from deforestation and forest degradation (REDD) compared to its predecessor the American Clean Energy and Security Act of 2009 (ACES).

“We all want to see it go through,” says Jeff Horowitz, founder and president of Avoided Deforestation Partners, “it takes everybody to pitch in – it’s a matter of getting the necessary 60 votes.”

He says he’s optimistic about the bill ultimately including strong forestry provisions, but sees room for improvement – particularly the missing 5% set-aside funding, and inlcuding language for initial project development (see more on these below).  He also believes REDD will make passing the US bill more palatable in the long run – for "the heartland states, in particular, where international deforestation creates unfair agricultural, timber, and cattle competition."

“The forest element also makes the bill more affordable for US citizens which we believe will help move the bill along,” he says.

The new act takes many of the same numbers for emissions reduction targets and years as were included in ACES, and states that covered entities may “use offset credits to demonstrate compliance for up to a maximum of 2 billion tons of greenhouse gas emissions annually.” (See page 332 of the discussion draft.)
 

The Basics

The cap-and-trade program is set to start in 2013 with an initial target of a 4.75% reduction of emissions from 2005 levels.  Annual emissions allowances will then be incrementally ratcheted down every year through 2050, after which it will remain constant.  Benchmarks of the reductions (all from 2005 levels) are, in turn: a 17% reduction by 2020, 42% by 2030, and 83% by 2050.  (If emissions levels are found to be different at some point, the bill identifies how to subsequently adjust the emissions levels to correspond to the new data.)

As in the Waxman-Markey-cum-House bill, the APA distinguishes between

allowances

– issued by the government – and

offsets

– created by an approved clean development project that measurably reduces emissions.

The Menu of Offsets

There is a variety of potential sources for offsets, including a range of forestry offset projects – ranging from afforestation/reforestation to REDD related projects.  (See below under “Eligible Projects” for more.)  Both domestic and international offsets are allowed, and as in ACES, domestic offsets are indefinitely on par with allowances; while international offsets begin on an equal 1:1 ratio until 2018 when they become 4/5 of an allowance

.

Forestry offsets need approval by the EPA and USDA (Sec. 733(a)(1)(B)(i), p. 379), and once approved, are allowed in the scheme.  Any credits in the program set up by the EPA and USDA must be “additional, measurable, verifiable, and enforceable.”

The first auction of allowances is to take place no later than March 31, 2012, and will then happen quarterly.  The U.S. Commodities Futures Trading Commission (CFTC) is given clear jurisdiction over the carbon markets.

Put Your Money Where Your Mouth Is

Two main points of weakness in the bill, as identified by Gus Silva-Chávez Gus of the Environmental Defense Fund, are regarding the set-aside funding and the sub-national crediting.

The set-aside funding was already acknowledged as a tough sell, even before the draft of the bill was released, because it would be politically difficult to defend sending billions of dollars abroad (to fund forestry projects, no less).  Despite it being expected, however, the amount in set-aside funds is zero, which is a point of concern, says Silva-Chávez.  In the House bill last year 5% of total emissions allowance value from carbon auctions was to be set aside, bringing in an estimated $3 to $5 billion a year, to protect forests in developing countries around the world, with the end goal of offsetting that equal to 10% worth of carbon emissions from the US  This is not in the KL bill, and is disconcerting to some, seen as adding to the challenge of reaching the emission reductions targets, given that they are the same as those in the House bill.

This lack of funding has evoked the ire of some environmental groups, power utilities and other companies.  On the other hand, however, Silva-Chávez points out that there are already countries – such as Mexico, Brazil, and others – that are going ahead anyway and not waiting for US funding to come through.  With a fairly large amount of public financing outside the US, this becomes less of an immediate issue.  Leslie Durschinger of Terra Global Capital also says that the lack of funding toward international REDD projects is something that is missing in the bill; however, she is of the same mind that, despite what she sees as funding that could be used to catalyze REDD projects not being there, there is a lot of money elsewhere ready for REDD.

Sub-National for All

The sub-national crediting has been opened up to include all states and provinces, as opposed to just the “big boys” – Brazil, Indonesia, India, China.  It also gives all states and provinces the same five-year window to prepare a domestic scheme before they have to go to federal standards.  The corresponding part in the House bill was more flexible, in that it allowed for an eight-year extension for states that were in the process but needed more than the initially allotted five-year window; this is not the case with the KL bill.

Taking a step back and a broader look at this, the strict five-year window was the case for the “big boys” in the House bill and so that is what they have been looking at for a year now, and since they are the ones that most need to start getting their cards in line, that is not a problem nor is it a surprise.  For those that states that are not among the major emitters or are completely new to the scene, on the other hand, the rigidity of the five-year window may not allow them enough time to adequately set up an emissions scheme.  Of those are the poorer countries, which typically have negligible emissions in comparison to those in the top ranks.  Opening the playing field to all is good, but not leaving room for training and team formation leaves for a steep learning curve when it’ll come to competition.

Eligible Projects

Among the eligible projects for the offset credit program for domestic emission reductions, those with respect to forests include (Sec 734, pp. 383-387):

• Projects involving afforestation or reforestation of acreage not forested as of January 1, 2009
• Forest management in an increase in forest carbon stores, including harvested wood products
• Forest-based manufactured products
• Projects for biochar production and use
• Projects for changes in carbon stocks attributed to land management change, including –
  • Improved management or restoration of cropland, grassland, rangeland (including grazing practices, and forestland;
  • Avoided conversion that would otherwise release carbon stocks;
  • Reduced deforestation;
  • Management and restoration of peatland or wetland;
  • Urban tree-planting, landscaping, greenway construction, and maintenance;
  • Sequestration of greenhouse gases through management of tree crops;
  • Adaptation of plant traits or new technologies that increase sequestration by forests; and
  • Projects to restore or prevent the conversion, loss, or degradation of vegetated marine coastal habitats

Offset projects are required to demonstrate additionality of emission reductions – that is to say, they are only considered additional to the extent that the emission reduction results would not have already occurred regardless of the offset program.  “Otherwise ensuring that offset credits provide for a reduction in the net concentrations of greenhouse gases and are consistent with regulations under section 733(a).”  (Section 733(a) is where the basic ground work for how the domestic offsets program is structured and will work is laid out.)

Whereas the crediting period for general offset projects must be between five and ten years, the crediting period for forestry projects cannot be greater than thirty years (Sec. 735(c)(2)(B), p. 401).  One further distinction between the domestic and international offsetting programs is that, rather than 30 years as in the domestic section, the crediting period for a forestry offset cannot exceed 20 years (Sec. 755(c)(1), p. 440).

Emission reductions from offset credits under the bill must be measureable, additional, verifiable, enforceable, and permanent. (Sec. 740(b)(4)(A), p. 417)

Through the bill two new agencies will be created.  One will be the Greenhouse Gas Emission Reduction and Sequestration Advisory Committee – “to provide scientific and technical advice on the establishment and implementation of the offset project program” (Sec. 732(a)(1), p. 367).  It will give recommendations on projects and methodologies regarding domestic offsets.  The other will be the International Offsets Integrity Advisory Committee – which will be responsible for “promulgating and revising regulations” (Sec 752(a)(2)(A), p. 423) and “ensuring the overall environmental integrity of the programs established pursuant to those regulations.” (Sec. 752(a)(2)(B), p. 424)  Another responsibility of the International Advisory Committee is a “scientific review of international offset and deforestation reduction programs,” (Sec. 752(d), p. 427)

International Deforestation Offset Requirements

The bill goes into some detail about for sector-based credits (Sec. 756(a), p.442), issuance of credits by an international body (Sec. 756(b), p. 447), as well as requirements specifically for offsets from deforestation (Sec. 756(c), p. 449).  Some of said requirements, for “international offset credits for greenhouse gas emission reductions achieved through activities to reduce deforestation” (Sec. 756(c)(1), p. 449), include:

• Being identified on a list maintained by the “Administrator”;
• The quantity of the offset credits being determined by comparing the national emissions from deforestation to a national deforestation baseline established for that particular country;
• The emission reductions have to occur before the offset is issued, and must be verified – having been demonstrated by using “ground-based inventories, remote sensing technology, and other methodologies to ensure that all relevant carbon stocks are accounted”;
• Adjustments are made, such as discounting for any uncertainty, to account for circumstances per specific country;
• Forest management practices, among other things, that (Sec. 756(c)(1)(F), p. 449) –
  • Take into consideration local and indigenous peoples “as primary stakeholders,” consulting them and collaborating with them – including them in all stages of projects (design, planning, implementation, monitoring and evaluating) – as well as giving “due regard to the rights and interests of local communities, indigenous peoples, forest-dependent communities, and vulnerable social groups.”
  • Not only seek to avoid impacting the “natural biodiversity, resilience, and carbon storage capacity of forests,” but to maintain it, and promote and/or restore native forest species and ecosystems
• Reductions are consistent and satisfy relevant requirements under the UNFCCC Comparisons of national emissions to the deforestation baseline must: be made publicly available, monitor social and environmental impacts, and transparent distribution of revenues
• In so many words, the requirements seek to ensure that the offsets are, as consistent with the general and larger objectives: measureable, additional, verifiable, enforceable, and permanent.  The American Power Act also gives a series of qualifications for what determines whether or not a country is eligible to sell offsets credible in the US as per the bill.  (Sec. 756(c)(2), p. 453)

Turn up the Baseline

As mentioned above, the quantity of offset credits is determined by comparing the national emissions from deforestation to a deforestation baseline for said country.  As such, the baseline shall (Sec. 756(c)(4), p. 457):

• “Be national in scope;
• “Be consistent with nationally appropriate mitigation commitments or actions with respect to deforestation, taking into consideration the average annual historical deforestation rates of the country during a period of at least 5 years, the applicable drivers of deforestation, and other factors to ensure that only reductions that are in addition to those commitments or actions will generate offsets;
• “Establish a trajectory that would result in zero-net-deforestation by not later than 20 years after the date on which a national deforestation baseline has been established, including a spatially explicit land use plan that identifies intact and primary forest areas and managed forest areas that are to remain while the country is reaching the net-zero-deforestation trajectory;
• “Be adjusted over time to take into account changing national circumstances; and
• “Be designed to account for all significant sources of greenhouse gas emissions from deforestation in the country.”

Biomass a Bio-mess?

Biomass is another point of contention.  The Kerry-Lieberman bill considers that carbon emissions from producing and burning biomass is carbon neutral, in that it states the emissions let out are counter-balanced by the ones that were absorbed by the biomass as it grew beforehand, and as such, do not require credits.  Dan Lashof, of the Natural Resources Defense Council, points out that the carbon emissions from “renewable biomass” fall short of the uptake during its growth for many of the fuel sources that fall under the categorization of renewable biomass, in turn resulting in net carbon pollution.  By allowing covered entities to not have to count emissions from renewable biomass, Lashof asserts that this leaves a loophole in the legislation, and creates an incentive for entities to switch to biomass, thereby degrading the bills carbon pollution reductions, and diminishing its integrity.

There is concern that this interpretation of biomass will be a loophole in the bill.  This may be seen as problematic as there is a common concern about the sustainability of biomass as an energy source, in general.  That being, that biomass use may incentivize further deforestation and degradation, and in turn threaten biodiversity, reduce carbon stores, and increase carbon emissions.  More explicit definitions could incentivize more proper use of bioenergies, while reducing the aforementioned threats.

In the KL bill it says that studies must be conducted on the impacts of renewable biomass use.  (Sec. 808, p. 671)  No later than 6 years after the enactment of the American Power Act, and every 5 years after that, a study is to be conducted and a report written by the EPA, in consultation with the Secretary of Agriculture and Secretary of the Interior.  The National Academy of Sciences (NAS) is also directed to conduct a study (Sec. 809(a), p. 673), within a year of the enactment of the legislation, “to evaluate how sources of renewable biomass contribute to the goals of increasing the energy independence of the United States, protecting the environment, and reducing greenhouse gas pollution.”  It is up to the EPA to make adjustments with respect to what requisites credits, and EPA’s recent ruling on biomass needing permits under the Clean Air Act may be indicative of biomass’s future under the current KL bill.

And a touch of REDD

Toward the end of the bill – starting on page 903, of 987, in the discussion draft – is Section 5004, “Emissions Reductions through Reduced Deforestation;” or essentially what is now commonly just referred to as REDD.  The language in the bill is generally very favorable toward, and adopts, the language often used by REDD advocates.  One point of that might raise some eyebrows is regarding project-based REDD eligibility.  That is, the section only allows for national and sub-national (province-level) REDD projects; however, in the list of eligible project types avoided deforestation is included (see above), which is contingent on the approval of the EPA – which most types are expected to be approved – for both domestic and international offset sources.

The core focus of offsets and provisions for REDD are there, says Ms. Durschinger, however, the components to go from the project level to national were not.  She also says that while the funding to catalyze international REDD projects was not there, she would rather see the mechanics to enable REDD projects in place first.  Given the donor, or non-market related, funding that currently exists, the urgency from its absence in the KL bill may be less.

As the bill stands, from the international perspective, it’s a “mixed bag.”  As Michael Streck of Forest Carbon Group – a European project developer – mentions, there seems to be a lot going for carbon offsets in the bill and a wide range of potential forestry projects, with the potential of land-use offsets playing a big role; however, the news for international project developers is not too great – or rather just mixed.  From the international view, there was no clear signal of what to expect for them.  Although, despite the ambiguity for those operating outside of the US and North American markets, Mr. Streck thinks there is potential for the legislation to create more demand in forest carbon markets and putting offsets more into the main stream.

While this may leave forest fans a bit wanting, there is still a general optimism, albeit, perhaps a bit muted.  The REDD part may be a bit disappointing – and more support of REDD would be very openly welcomed by both domestic and international entities – but the possibilities are still seen as open.  There was hope for clearer signals, but it is also well understood that we’re not out of the woods yet.

The end of the Beginning

The legislation, if passed, will still have to go through the reconciliation process with the House bill proposed last year; however, a general road map seems to be forming, and for those that have been anticipating such legislation to pass, it will be a very welcome arrival. 

Conversely, it is seen more as a point of interest for those outside of the US market, and not something that is seen that will have any direct or major effect on participants, for example, in the European markets.  As the European market for forest carbon is largely pure voluntary – with a more general interest in “charismatic offsets” – and the US is predominately pre-compliance, the two regions may seem to somewhat operate in “parallel universes.”

Forests and REDD were a rallying point in Copenhagen and has been declared immensely important and a non-partisan issue, by people on both sides of the Aisle.  Now, the Kerry-Lieberman bill appears to be receiving generally favorable remarks, and is being perceived as generally positive for the forest sector.  It is seen as lacking in regards to international REDD, and could use some tweaking on that front to be more of catalyst toward that end.  Although, even with that acknowledgement made, this bill is seen as an imperfect but necessary step in the right direction.  Furthermore, as public opinion about needing something to be done on both energy and climate change is high, the time seems opportune for such legislation addressing these cross-cutting issues and intergenerational concerns.

One reason often cited for the current inability to come to an international climate agreement is the lack of (legislative) commitment by the United States toward taking steps of reducing carbon emissions and combating climate change.  Perhaps now, while still a ways down the road, more steps have been taken toward much needed climate and energy legislation in the United States, and with forests as a pivotal component.