Alberta offset supply tightens as new rules kick in

By Valerie Volcovici, from PointCarbon.com

Changes to Alberta’s offset program that will take force in April will curtail supply in the province’s already-tight carbon credit market, market participants said.

After the 2011 compliance period ends on March 31, the 90-100 emitters that must comply with Alberta’s carbon intensity reduction targets will no longer be able to use “historic” credits generated from projects undertaken as far back as 2002.

Regulators’ shift toward accepting only “go-forward” credits will have a major impact on no-till farming projects, whose credits have supplied the bulk of offsets that have been used for compliance over the past few years.

In the 2010 compliance period, tillage offsets, which enable farmers to earn offsets from storing carbon in their soil, accounted for 41 percent of retired offsets. 

“This past compliance year, which is ending this month, there have been some big programmatic changes taking place, which will affect how supply is going to look going forward,” said Jonathan Burnston, an environmental markets broker at Karbone.

Burnston said Alberta’s market has been “fundamentally” short of credits since it began in 2007, and will get even shorter with the loss of its most prolific supply source and other changes to the program’s rules. 

“It is going to be even tougher going forward.” 

In 2012, Alberta regulators will also require the verification process for offset projects to be more stringent and require better data, which could mean that numerous projects currently on the books that may fail to get approval.

Under the western province’s climate change law, facilities that emit more than 100,000 tonnes of greenhouse gases a year must reduce their emissions intensity by 12 percent.

In addition to buying Alberta-based carbon offsets, companies have three other choices to comply with the law: make improvements to their facilities, buy emission performance credits (a type of emission permit) or pay into a clean technology fund. 

PRICE CAP 

Companies that opt to pay into the fund must pay C$15 ($14.96) for every tonne they emit over the limit into a government fund that will help commercialize new technologies, such as carbon capture and storage.

The fund’s C$15 fee has served as a de facto price cap for offsets in Alberta’s carbon program.

Phil Cull, director of Sourcing at Canadian offset retailer Offsetters, said carbon offsets have been selling in the range of C$10-C$14.

The range of prices cited for Alberta offsets is higher than the average price of U.N.-issued carbon credits, which are fetching around 4.50 euros ($5.90) in the secondary market and California-compliant offsets, which fetch under $10/t on average.

Cull said despite 2012’s offset supply being lower than previous years, prices cannot spiral out of control due to the C$15 technology fund fee.

“If this were a cap-and-trade market, it would lead to a spike in the price, but as this has the tech fund price as the release value, it will do little to the pricing,” he said.

Ogho Ikhalo, a spokesman for Alberta Environment – the province’s environment ministry – said although the province supports raising the price of carbon for emitters, it will not do so unless other provinces adopt comparable regulations.

“Our challenge is to ensure we make adjustments that encourage long-term reductions while keeping Alberta on a level playing field,” he said. 

NEW PROJECTS

The offset rule changes are likely to give rise to new offset project types that will be feasible to develop at under C$15 per tonne, now that the low-hanging fruit – namely no-till – is gone, experts said.

Cull cited transportation and energy efficiency as project types “that make sense at C$15.”

He added that offset projects with “directly measured parameters,” such as landfill gas, biomass fuel switch and wind, are likely to be most attractive to buyers because they have the lowest risk under the greater scrutiny to be imposed in the Alberta system.

Karbone’s Burnston said that in addition to traditional renewable energy projects, industrial energy efficiency projects have strong potential for demand.

He added that with over 30 offset protocols “at some stage of acceptance” in Alberta’s program, only half have been used, providing ample opportunity for project developers to deliver new credits.

“Whoever can figure out how to really operate and monetize those protocols that are not seeing any action would take a step in the right direction for filling that supply gap,” he said.