California Leading: New Thinking on Carbon Accounting

For four years California has been quietly developing a set of greenhouse gas emission accounting standards and a climate registry. Now it has come up with ideas on how to measure and account for the climate impact of forests. This work could one day have repercussions on carbon trading across the US and the world. The Ecosystem Marketplace takes a closer look. With Europe's newfound emphasis on carbon markets, with the impending entry into force of the Kyoto Protocol, and with the launch of the European Union's Emissions Trading System (ETS) in January of 2005, it comes as a bit of a surprise that some fundamental developments relating to the establishment of carbon markets appear to be coming from a country -the US- that steadfastly refuses to sign the Kyoto accord, and a state -California- that does not yet have (and is not currently planning) an emissions trading system. Although the US has been characterized as a climate laggard by many observers, there is a little-known initiative in California -the California Climate Action Registry- that has for three years been providing leading-edge thinking on issues of carbon accounting and emissions registries; issues that will likely prove instrumental in the creation of emissions trading regimes like those being put in place in Europe, Japan, Australia, and many other countries around the world. Indeed, on at least one issue -forest-related carbon and sequestration- the Registry has already begun to have an impact far beyond California's borders. In US politics, California has a history of instigating back-door revolutions: the sort of political change that happens when and from whence it is least expected. After all, the state is so big, and its approach to a variety of issues (especially environment) so progressive, that the California tail often wags the US dog: witness emissions standards for automobiles, anti-tobacco legislation, among others. So perhaps it isn't all that surprising that California, through the Climate Action Registry, should also be providing leadership on climate change. Still, for those interested in environmental markets, understanding the California Registry and its achievements is a worthwhile undertaking.

History of the Registry

The California Climate Action Registry was established by California law as a non-profit voluntary registry for greenhouse gas (GHG) emissions with a view to protecting and rewarding any early action companies might take in reducing greenhouse gas emissions. Diane Wittenberg, the Registry's President, puts it rather simply: "We are," she says, "a voluntary but rigorous registry that can help companies and others establish greenhouse gas emissions baselines against which any future reduction requirements may be applied. Additionally, all our registered emissions are third party certified and made publicly available through our web site (www.climateregistry.org)." The idea for the registry, she explains, started at the grassroots (or, if you prefer, at the point source) when a few companies in California went to the state government in 2000 saying they wanted to reduce their carbon emissions, but that, before doing so, they wanted some assurances from the state that their actions would not harm them down the line if a climate regulatory regime was established. Specifically, they said they wanted the state to protect their baselines and give them some sort of credit -should a regulatory system be put in place- for their early actions. They also wanted the state to help them gain recognition for their actions. The result of these requests was a law, California Senate Bill 1771 (SB 1771), and its amendments (e.g. SB 527) which were approved at the end of 2001. Together, these laws establish the California Registry and charge it with the following functions and responsibilities:

• To enable the voluntary recording of GHG (greenhouse gas) emissions in a consistent certified format;
• To qualify third-party organizations that have the capability to certify reported baseline emissions;
• To maintain a record of all certified GHG emissions baselines and emissions results;
• To adopt industry-specific reporting metrics;
• To encourage voluntary actions to increase energy efficiency and reduce GHG emissions;
• To provide participants with referrals to approved providers for technical assistance and advice on programs to monitor, estimate, calculate, report, and certify GHG emissions; establish emissions reduction goals; and improve energy efficiency;
• To recognize, publicize, and promote participants;
• To recruit broad participation from all economic sectors and regions of the state; and
• To provide additional services for participants such as workshops, training seminars, and "best practices" exchanges.

From the point of view of business, what is interesting about the law is that, in return for participation in the Registry, the state of California undertakes to "offer its best efforts to ensure that participants receive appropriate consideration for early actions in the event of any future state, federal or international greenhouse gas regulatory scheme." In short, California promises to throw its considerable political weight behind carbon market leaders; not to mention provide them with some level of environmental recognition.

Carbon Accounting Standards

From the point of view of markets, what is interesting about the law and California's Registry is that early on, its creators realized that in order to give credit to the State's "climate leaders", they needed to set up the accounting systems, the reporting mechanisms, and the certification/verification mechanisms that would enable them to ensure that emissions were being, in fact, reduced, and to compare these reductions to those of others; to, in other words, differentiate between the apples and the lemons. As a result, since the passage of that law, the California Registry has spent a considerable amount of time and technical expertise to establish a set of protocols that enable companies to measure, report, and certify their emissions. These have recently been supplemented by two industry-specific emissions reporting and certification protocols: one for the power/utility industry sector, and one for the forestry sector. According to Peter Miller -a Senior Scientist at the Natural Resources Defense Council and a member of the Registry Board- what California's registry is trying to do is essentially establish the generally agreed accounting principles for carbon; the sort of ability to measure and verify emissions that will ultimately enable those emissions to be freely traded and marketed. "The closest analogy I can think of for the Registry," he says, "is the Financial Accounting Standards Board (FASB) which establishes the standards by which all company finances in the US are judged." It is these standards, he adds, that allow companies to be analyzed, understood, and ultimately traded. In a similar fashion, he expects that the standards being developed and tested by California's Climate Action Registry will ultimately enable not only carbon trading mechanisms, but also effective greenhouse gas regulatory regimes. "After all," he says, "you can't manage what you can't count." To which one might add: neither can you trade what you can't count.

The Benefits of Being Voluntary

The work that the California registry is undertaking may be innovative, but what makes it even more interesting is how this work is being undertaken. For instance, while the negotiations surrounding the Kyoto Protocol have been largely governmental (with NGOs and companies, it is true, working in the background and/or shouting from the sidelines), the California registry involves industry, government, and non-profits as integral parts of their work. To give but a few examples: representatives of government, industry, and NGOs all sit on the Registry's Board, have largely equal powers, and participate actively in the development of protocols, standards, and workplans. Additionally, the Registry has a membership structure that includes companies like Pacific Gas and Electric, Eastman Kodak, and BP, as well as NGOs like the Union of Concerned Scientists, the Natural Resources Defense Council, and Environmental Defense, together with local governments such as the City of San Francisco, the City of Los Angeles, and the City of San Diego. Wendy Puling, Director of Environmental Policy for Pacific Gas and Electric (PG&E), one of the State's largest power companies, says that from the perspective of a large company, the registry process has been a success. "We are a charter member of the Registry," she says, "and have been supportive of the concept since its inception." She explains that PG&E joined the registry for a variety of reasons, including: to get a better sense of their own emissions, to better understand how the measurement protocols work, to prepare for a more carbon-constrained future, and to influence the development of emissions protocols for the power sector. Puling continued: "We believe there will be some sort of regulatory structure on carbon in place in the US within the next 10 years. Now our crystal ball isn't any better than anyone else's, but we think this is the direction we are headed in, and if and when that happens, we want to be ready." She further explains that PG&E supports market based solutions to the carbon problem and has therefore been very happy with the way the Registry has allowed them to understand and experiment, in a non-threatening way, with the sorts of information they will need to provide as climate change regulations develop worldwide. "Being voluntary," says NRDC's Miller, "does have its benefits. If the process was too legal, we wouldn't be able to focus on doing just what is right. As it is, we've been showing that large companies, cities, and environmental groups can work together in reasonable and effective ways to address the climate problem." He notes that to the extent that the Registry has been successful, it has been largely due to the fact that it conducts its business "in an atmosphere that is open and not highly politicized or charged."

Going Beyond California

Miller further believes that the impact of the California registry will go -indeed has already gone- well beyond the state's boundaries. Already, he says, the Registry is working closely with the World Economic Forum on their on their global greenhouse gas registry, and he believes that ultimately the principles established by the California registry will be adopted and adapted by other US states, by other countries, and possibly even lead to creation of national and international carbon accounting standards sometime in the future. Agreeing with PG&E's Puling, he predicts: "Eventually, the US will have a regulatory regime for greenhouse gases. It may not be as broad or as good as some might wish, but I think it will inevitably involve some sort of trading. When and if that happens, the standards being developed in California will become increasingly important." Wittenberg agrees and points out that the Registry is already working closely with states that are exploring regulatory approaches to climate change in both the Northeast and Northwest of the US. "I could easily see California's work on the Registry," she says, "have an impact at the national level across the US." She also explains that some of the Registry's participants are not limiting themselves to only reporting on their emissions in California, but are also using the Registry's protocols to report on their national, or even global, emissions. "Kodak," she says, "is an example of a company that recently joined the Registry and is planning on using our protocols to report on its global emissions." One area where the Registry's work is already having national -and maybe even international- repercussions is in the measurement of carbon emissions and reductions from forestry projects.

The Forestry Protocols

As anyone involved with the Kyoto negotiating process will tell you, the issue of how (or even whether) emissions reductions credits from forests should be included in any carbon trading scheme is exceedingly difficult and contentious (see overviews of the case for and against forest sinks at https://ecosystemmarketplace.com/news/article.feat.027.php and https://ecosystemmarketplace.com/news/article.feat.018.php respectively). But while the Kyoto crowd continues to endlessly debate the whys, wherefores, and hows of forestry projects and their relationship to carbon emissions, the California Climate Action Registry recently approved a series of protocols and standards that go a long way towards resolving many of the long-standing disputes surrounding this issue. According to Michelle Passero, Director of Policy Initiatives at the Pacific Forest Trust, a non-profit environmental group that was closely involved in the preparation of the forestry protocols, the decision to look at the carbon implications of forests was actually taken by the government of California in law SB 812. This law, which was enacted in January of 2003, called on the Registry to "adopt procedures and protocols, including specified criteria, for the monitoring, estimating, calculating, reporting, and certifying of carbon stores and carbon emissions resulting from the conservation and conservation-based management of native forest reservoirs in California." After an exhaustive process that took over a year and a half and involved consultations and reviews with a wide range of experts, non-profits, other stakeholders, and even a series of public reviews, the Registry's Board approved the new protocols in October of 2004. "Addressing the issue of forests and their relation to climate change is important," says Passero, "because forests are the world's second largest source of anthropogenic greenhouse emissions; largely through deforestation. In other words, they are a part of the problem and so should also be a part of the solution." The idea behind the protocols, she adds, has always been to provide incentives for landowners in California to protect, maintain, or enhance forest cover. "We wanted," Passero explains, "for California's forests to provide both climate benefits, as well as benefits to biodiversity and to the people on the ground."

Key Provisions on Forests

Like all of the Registry's protocols, the Forestry protocols are quite thorough and rigorous. Indeed they are composed of three different protocols: (i) the Forest Sector Protocol which helps forest companies measure and report on their emissions of greenhouse gases from biological sources at the entity level (the aptly-named General Reporting Protocol looks at non-biological emissions at the entity level); (ii) the Forest Project Protocol which looks at the biological emissions of GHGs at the project, as opposed to entity, level; and (iii) the Forest Certification Protocol, which explains how information provided on biological emissions of GHGs from forestry entities and projects is to be verified and certified (all these protocols are available at http://www.climateregistry.org/PROTOCOLS/ ). Some of the key provisions of the forest protocols attempt to address many of the contentious issues related to sequestration that have come up during the Kyoto negotiations, including:

• Additionality: For carbon stocks or emissions to be registered in the California Registry, the underlying forest activities must go beyond existing legal requirements, and they must truly be new. At the same time, anyone wishing to register emissions reductions from a forestry project must first have registered their emissions at the company or entity-wide level.
• Permanent risk mitigation: According to the protocol, all eligible forestlands will have to be dedicated to forest use permanently through a deed restriction that is granted in perpetuity – i.e. through a conservation easement.
• Net carbon stocks: The protocols set out a series of models to establish a baseline of carbon storage, and then provide steps that need to be taken to more precisely track the net gains and losses to the system. The Registry argues that their protocols provide a practical methodology that makes economic sense for landowners, while reliably reflecting the benefits to the atmosphere of proper forest management.
• Native forests: Registration of forest carbon stocks and emissions must promote and maintain native forest types.

In addition to the above, the Registry's protocols go far beyond the current Kyoto thinking (and well beyond what the CDM currently allows), by accepting GHG reductions from three distinct types of forest projects:

1. Conservation-based Forest Management: Forest projects that are based on the commercial or noncommercial harvest and regeneration of native trees and employ natural forest management practices;
2. Reforestation: Forest projects that are based on the restoration of native tree cover on lands that were previously forested, but have been out of tree cover for a minimum of ten years; and
3. Conservation: Forest projects that are based on specific actions to prevent the conversion of native forests to a non-forest use, such as agriculture or other commercial development.

Balancing Accuracy and Cost

Although NRDC's Miller believes that the above provisions make the Registry's Forestry Protocols extremely innovative -he in fact believes they are the first attempt by any organization anywhere to provide a rigorous yet practical system for measuring not just emissions of CO2 from forests, but also their role in sequestration- he does admit that in order to make the protocols workable, some shortcuts needed to be taken. For instance, he explains, the protocols do not address issues of "below-ground" CO2, the carbon dioxide that can be stored or emitted in forest soils. And this is no small omission, for he says that there can be twice as much carbon in the soils as in the atmosphere. "The problem," he says, "is that there is no easy or manageable way to measure these things. They are extremely heterogeneous and measurement/studies can be extremely expensive." He also says that the Protocols could have required registrants to certify reductions every year (instead of every five as the Protocols require) and to sample every tree every year, but he believes such onerous restrictions would have been counter-productive. "In other words," he explains, "we were constantly struggling with the issue of how much accuracy to require at what cost. In the end, I think we struck the right balance." So what now? Miller says the registry is currently in discussions with a number of forest companies about pilot projects that use the forest protocols, so these should be put to the test shortly. The Forest Trust's Passero, for her part, says that she would like to see other organizations take advantage of the Registry's work on forestry, particularly within the US. She adds that the protocols are very compatible with existing systems and are easily replicable. In other words, she believes they can export well. "Although the protocols were designed for California," she says, "95% of them can carry to other states and countries." Indeed, in a recent move, the Chicago Climate Exchange -a US-based carbon trading system- announced that as of November, 2004 it would accept emissions and reductions calculated using the Registry's forestry protocols for trading on its market, and added that it was in discussions with the Registry to further harmonize the two organization's reporting and certification requirements. It is also worth noting that the announcement was in fact made at the most recent meeting of the International Emissions Trading Association (IETA) in Zurich, Switzerland, so clearly the California Climate Action Registry is developing a solid international, as well as national, profile.

In Praise of Standards

This was to be expected. After all, it is precisely as a result of the growing interest in environmental markets worldwide, that people are beginning to pay closer attention to carbon metrics and accounting standards. As markets spread, people are coming to the realization that all markets -be they environmental or not- rely heavily on trust, standardization, and verification for their effective operation. Markets just can't function if people don't know what they are buying, if they can't measure what is being traded, and if there is no third party verification and certification of quality. So, again, in retrospect and with the benefit of hindsight, perhaps it should come as no surprise that players in the global carbon markets are beginning to gravitate towards the California Climate Action Registry and its set of coherent standards for measuring, reporting, and verifying emissions of greenhouse gases. That such standards are to be found in a perceived climate laggard such as the US matters less than the fact that they exist and that they are perceived as rigorous, credible, and most importantly, workable. Accountants and accounting standards may be much maligned, but they are nonetheless essential; even -or perhaps especially- when it comes to environmental markets. Ricardo Bayon is the Managing Editor of the Ecosystem Marketplace. He can be reached at [email protected].