Center for Clean Air Policy September 1999 Verification of Early Reduction Credits Ned Helme, President Center for Clean Air Policy Pew Center Early Action Conference, Sept 1999

Center for Clean Air Policy September 1999 Overview Verifying voluntary emissions reductions –Baselines –Actual emissions Verifying 1605(b) credits An alternative approach to early crediting

Center for Clean Air Policy September 1999 Establishing Baselines Emissions reductions are measured against a “baseline” or “reference case” –e.g., historic emissions levels To prevent gaming, legislation should reward credits for company-wide reductions only –thus baselines must be company-wide –Only significant sources/gases need be included

Center for Clean Air Policy September 1999 Baselines, II Companies should submit inventories documenting base year emissions –Like national inventories: Emissions = Fuel consumption x emissions factor –Direct measurement not needed Key verification issue centers on establishing accurate historic baseline - proxy available w/ fuel consumption record

Center for Clean Air Policy September 1999 Calculating Actual Emissions As with baselines, should be calculated on a company-wide basis by multiplying activity data by emissions factors Both baseline and actual emissions can be converted to emissions/output if necessary - more difficult to choose metric w/ non- electricity sources

Center for Clean Air Policy September 1999 Verifying Reductions Baselines should be certified prior to program inception - voluntary early redux depend fundamentally on this step Actual emissions should be verified annually –Check math, activity data, emissions factors –Check numbers back to invoices, other records

Center for Clean Air Policy September 1999 Private Sector Role in Verifying Reductions May be useful to require third party verification of credits –Could be done by accounting firms (e.g., Big 6), verification firms (e.g., SGS) –Auditors would have to be certified, follow pre- established guidelines –Third party involvement would allow for more comprehensive auditing (as opposed to sampling a la IRS)

Center for Clean Air Policy September 1999 Verifying 1605(b) credits Will be necessary to separate legitimate reductions from others –Limit credit for single projects if company has not reported on company-wide basis Process should be transparent, simple to implement –Not case by case analysis by implementing agency - too costly and time-consuming

Center for Clean Air Policy September 1999 Verifying 1605(b) credits, II One alternative: Reward credits to participants that surpass industry benchmarks –e.g., develop industry average for utility heat rate improvements and reward above that –bulk of redux so far are concentrated in certain industries and sectors - would not require that many benchmarks –cap available credits at 1%

Center for Clean Air Policy September 1999 Problems with Voluntary Approach Even rigorous verification will not ensure that credits are “real” if program is not structured properly –Baselines may be set to allow for non- additional tons –Hard to use rate-based approach in sectors other than power –Participants may shift high-emissions assets elsewhere

Center for Clean Air Policy September 1999 An Alternative Approach to Early Crediting Early mandatory cap-and-trade program with auction (RFF) is preferable alternative beginning in 2002, set overall cap equal to 1996 annual emissions level, auction permits with point of regulation upstream allows “escape hatch” where companies can choose to pay $25/ton carbon in lieu of making full reductions

Center for Clean Air Policy September 1999 Alternative Approach (cont) provides greater environmental benefits –no questions about whether redux are real –less prone to gaming - transfer of assets does not avoid regulation or bolster early credit claims –assists in moving economy more smoothly toward Kyoto compliance

Center for Clean Air Policy September 1999 Alternative Approach (cont) simplifies verification problems –no issues regarding historic baseline –upstream so fewer entities to audit

Center for Clean Air Policy September 1999 Conclusion Verification of emissions should be straightforward if company-wide approach to early crediting is taken –Review activity data, verify emissions factors Even so, the voluntary nature of the program introduces questions about credit quality A mandatory approach to early crediting would be environmentally superior