Purchasing from Compliance Carbon Markets



Summary


Cap-and-trade compliance markets have been around for thirty years and represent a market-based approach to limiting greenhouse gas (GHG) emissions from industries under their regulation (e.g. power generation, transportation). Recently, brokers have emerged that can buy and retire pollution allowances on these markets on behalf of customers looking to “offset” their GHG emissions. Giving Green evaluated these brokers, the markets they participate in, and the underlying industries regulated, and determined that we were not ready to recommend buying and retiring allowances from compliance markets at this time. It was difficult to determine the degree of credit the specific cap-and-trade programs deserve for emissions reductions given potential design weaknesses in these markets related to offsets and leakage. And while some brokers were taking more innovative approaches to engaging in these markets on behalf of customers, their model was too new to determine real world efficacy.


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2021-10 Overview Purchasing from Compliance Markets
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Purchasing Offsets from Compliance Carbon Markets


How it works


Two main categories of carbon offset markets exist – voluntary and compliance markets. Voluntary markets allow for businesses and individuals with voluntary intentions to meet a carbon neutral or net zero claim to purchase carbon offsets from project developers. The compliance market is for offsets associated with regional or international pacts such as the Kyoto accords and national or regional cap-and-trade systems. In the United States, examples include the California Air Resources Board’s (CARB) cap-and-trade system and the Regional Greenhouse Gas Initiative (RGGI). In these kinds of market-based cap-and-trade systems, polluters must purchase an allowance for each ton of CO2 they emit annually.


Offset projects assessed by Giving Green are necessarily part of the voluntary market. However, compliance market brokers have recently emerged to make it possible for those normally limited to buying offsets in voluntary carbon markets to participate in compliance markets. Individuals or businesses can pay a broker to purchase and retire allowances traded on compliance markets to “offset” their greenhouse gas (GHG) emissions. A climate benefit is created by reducing the number of allowances available for polluters to buy (and increasing the price of remaining allowances) and effectively reducing GHG emissions. This section will cover the benefits and risks of intervening in compliance markets in this way. While there may be some immediate climate benefits by restricting allowances to emit GHGs in a sector under a cap-and-trade system, there are features of compliance markets – particularly the fact that compliance markets are not truly capped – that can dilute the impact of these initiatives.


Compliance market brokers


The brokers that have emerged with the ability to participate in compliance markets mostly function the same way. Individuals or businesses can pay these brokers to purchase and retire allowances from compliance markets equal to the volume of GHG emissions they wish to offset. The Adirondack Council retires allowances equal to 1 ton of GHG emissions from the RGGI market for every $25 carbon reduction certificate they sell on their website. Carbon Lighthouse, an NGO, offers a similar service and has retired 90,000 tons of GHGs through the RGGI and California cap-and-trade program. Air to Earth purchases and retires allowances from the RGGI market and then applies a portion of the sales revenue to finance an inhouse direct air capture (DAC) project and to support advocacy organizations working on carbon removal.


A new initiative, Climate Vault, was recently launched with a slightly different approach and the involvement of notable figures like Dr. Ernest Moniz, the former US Secretary of Energy. Like other brokers, Climate Vault purchases allowances on RGGI and California’s cap-and-trade market. They “vault” these allowances, or temporarily retire them, with the intention of eventually selling the allowances back into the relevant compliance market. Climate Vault uses the proceeds from selling allowances back into the market at a later date to buy carbon removal credits from companies that have been vetted by their expert team. For example, the proceeds from buying and selling 10 tons worth of allowances from the RGGI market will be used to buy 10 tons of carbon removals from vetted companies. They claim that their model avoids emissions in the short-term, removes GHGs from the atmosphere in the longer term, and, by selling carbon allowances back into markets, reduces the risk of markets releasing additional allowances to compensate for permanently retired allowances.


Let’s take a closer look at the claims made by actors in this space.


Mechanism


Purchasing and retiring emissions allowances on compliance markets reduces GHG emissions entering the atmosphere, rather than removing existing GHGs, and therefore is considered emissions avoidance. Some brokers, like Climate Vault and Air to Earth, incorporate additional mechanisms of supporting carbon dioxide removal. Air to Earth claims to use the proceeds to support carbon removal advocacy efforts and fund an in-house direct air capture initiative. Climate Vault intends on selling purchased allowances back into compliance markets and using the proceeds to purchase carbon removal credits from vetted companies. Air to Earth’s progress on advancing carbon removal using their proceeds is difficult to verify. Climate Vault has not yet had an opportunity to use proceeds from the sale of allowances to buy carbon removal credits on a one-to-one basis (the organization is planning to undertake this in 2022). These approaches are too new and unvetted for us to assess the efficacy of the approaches pursued by Air to Earth and Climate Vault, and we therefore cannot yet consider them to be carbon removal mechanisms.


Causality


Causality is difficult to determine, as the actual GHG reductions caused by these brokers depends on the actions of the bodies that govern these carbon markets and of the individual polluters regulated under them. Compliance markets are not truly capped. Carbon markets can theoretically release more allowances into the market if prices get too high, or they can withhold or eliminate allowances they consider to be surplus after a period of time.


These actions can significantly disrupt the impact claims made by compliance market brokers. For example, if a broker purchases and retires a large quantity of allowances on behalf of their clients, restricting available allowances and increasing prices, markets may simply release more allowances. Some compliance markets, as in Europe’s case, have begun to withhold or eliminate allowances they consider to be surplus. The active participation of brokers buying and retiring credits may result in markets withholding or eliminating surplus allowances more slowly, meaning the cap on emissions from polluters is higher than it would have been without brokers’ purchases. Both of these responses to broker purchases and retirements by compliance markets could significantly dilute the impact claimed by brokers.


However, North American markets, like California’s cap-and-trade program and the RGGI, are more insulated from these changes because decisions around the allowance cap are made years in advance, and price triggers that would result in releasing more allowances are higher than current prices. RGGI’s price trigger to release more allowances is $13 per allowance (increasing by 7% per year) which is approximately 40% higher than RGGI’s current price at $9.30. It is worth noting that prices have increased substantially over the past several auctions, making it possible for the price trigger to be reached. California’s cap-and-trade program’s cap is set to decline by an average of 4% per year until 2030 and by approximately 3% of the 2020 cap per year under RGGI. For this reason, the brokers we reviewed engaged exclusively in North American compliance markets.


The track record of the compliance markets themselves is difficult to ascertain. In California, where the cap-and-trade program covers 85% of the state’s emissions, statewide GHG emissions declined 5.3% between 2013, when the program was formed, and 2017. Under RGGI, power plant emissions reductions in participating states are down 47%, exceeding reductions of power plants in the rest of the United States by 90%. However, it is difficult to establish causality between emissions reductions and specific programs and policies. In the same time these cap-and-trade programs have existed, energy efficiency technologies have improved, renewable energy costs have come down, and other climate policies have come into effect. Critics point out that California’s program has made too many concessions to the oil and gas industry, does not hold individual polluters responsible, and potentially weakens other climate regulations. Polluters have the ability to use carbon offsets towards meeting a small portion of their compliance obligation, which risks diluting the impact of cap-and-trade programs given the challenges seen with forestry offsets in particular. Polluters may also choose to move their polluting activities to non-regulated states to bring their internal costs down, meaning that despite regional decreases in emissions, overall emissions remain the same. For example, under RGGI, electricity imported from outside the participating states has significantly increased in the last 10 years. Research is being done to understand the impact of overlapping climate policies and other unintended consequences of cap-and-trade systems. Establishing a causal link between cap-and-trade programs and actual emissions reductions – especially in an environment of overlapping climate policies, industry loopholes, and lower costs for green technology – can be difficult. As a result, we rate purchasing from compliance carbon markets as low on our causality metric.


Project-level additionality


Because there is not a specific project being supported through these brokers, this metric does not apply.


Marginal additionality


Setting aside broader causality concerns, these purchases do have a high degree of marginal additionality – depending on whether there are surplus allowances in the market. For every ton an individual or business purchases from a broker, one ton is purchased and retired from a compliance market like RGGI.


Marginal additionality is made even harder to ascertain when it comes to claims made about additional climate benefits beyond allowance retirement: for example, Air to Earth’s claim to support an in-house direct air capture project or Climate Vault’s claim to support carbon removal enterprises with the proceeds from the sale of carbon allowances back into compliance markets. These efforts are too new and untested for us to assess the marginal additionality of these approaches.


Overall, we assess the marginal additionality of these brokers as medium given the persistence of surplus allowances in these markets and the potential for brokers to sell allowances from prior year auctions.


Permanence


Brokers that purchase and can prove that they have permanently retired allowances (Adirondack Council, Air to Earth, and Carbon Lighthouse) rate highly from a permanence standpoint. This claim is difficult to make for Climate Vault, however, since the company plans to sell allowances back into the market, and thus far has not funded any carbon removal projects that we can assess for permanence. Further, given the high cost and limited supply of permanent carbon removal, it is yet to be determined whether Climate Vault can secure permanent carbon removal credits on a one-to-one basis using proceeds from the sale of allowances.


Cost


The cost to purchase and retire compliance market allowances varies by broker.


  • Adirondack Council offers to permanently retire one ton of emissions allowances from RGGI at a cost of $25/ton.

  • Air to Earth offers multiple subscription packages. Their “Starter Plan” claims to allow buyers to “remove” 4 tons of CO2 every year for $5/month or $60/year - approximately $15/ton of CO2. Air to Earth’s use of the term “remove” in this context refers to the retirement of allowances from a compliance market.

  • Carbon Lighthouse will retire 1 ton of CO2 from RGGI for $12/ton.

  • Climate Vault allows individuals to offset 1 ton of CO2 for $14.78/ton


With costs ranging from $12 to $25/ton, these offsets are comparable with many renewable energy and forestry offsets. The underlying cost of the allowances vary depending on the compliance market used and the vintage of the credit. All of the providers studied purchase and retire allowances from the RGGI market. In its latest auction as of this writing (September 2021), the price of RGGI’s allowances was $9.30/ton, and it was as low as $2.53/ton as recently as June 2017. The price of California’s cap-and-trade program’s allowances in its latest auction (August 2021) was $23.69/ton, up from $10/ton from its first auction (November 2012). In order to keep their actual costs lower than their selling price, brokers can exclusively participate in the RGGI compliance market with a lower allowance cost, diversify across multiple compliance markets, or retire allowances that were purchased from previous auctions at lower prices. What brokers are doing with the premium they are charging can range from supporting local environmental projects to advocacy efforts and in-house projects to fundraising and administrative costs. There is little transparency, however, on the breakdown of how remaining funds are used after allowances are purchased.


At $12 to $25/ton, brokers that purchase and permanently retire allowances from compliance markets perform well from a cost standpoint. Climate Vault’s model, however, necessitates further interrogation since it does not permanently retire allowances. The company claims to use proceeds from the sale of allowances back into markets to buy carbon removal credits from vetted suppliers in the future. Is it better for buyers to support carbon removal providers directly today (like Giving-Green-recommended Climeworks), or bet that handing money to Climate Vault will result in greater carbon removal impact in the near future? While the cost is comparable to other brokers, Climate Vault has not yet made a carbon removal purchase with its allowance proceeds to date, making it difficult to determine the value of buying from Climate Vault instead of purchasing carbon removals directly.


Finally, many of the brokers operating in this space are 501(c)3 entities, meaning proceeds will not be going towards their profits while making purchases potentially tax-deductible.


Co-benefits


The additional benefits of buying from these brokers can be assessed on a broker-level and a market-level. At a broker-level, Adirondack Council, Air to Earth, and Carbon Lighthouse claim to use part of the funds to support climate advocacy efforts or in-house environmental projects. Given the lack of publicly available details on these efforts, we believe the greater co-benefits exist with the revenue received from the cap-and-trade markets themselves. Cap-and-trade markets like RGGI and the California cap-and-trade program were designed to use the proceeds from allowance sales to address jurisdictional climate goals and benefit small businesses and communities. Proceeds from allowance sales go towards financing clean energy projects, direct assistance to bring down the cost of energy for low-income communities, improving air quality, and other environmental priorities for participating states. RGGI estimates its 2019 auctions lowered electricity bills for 260,000 households and 1,400 small businesses and supported projects that will avoid the release of approximately 2.5 million tons of CO2. However, the cap-and-trade programs have come under fire for allowing polluters to meet part of their compliance obligation by buying offsets, and in some cases maintaining or even increasing polluting activities in proximity to low-income communities and communities of color. Given the benefits from investments made with proceeds from allowance sales, the opacity of broker activities with these funds, and the challenge offsetting presents, we assess co-benefits as medium.


Giving Green’s Assessment


While we are intrigued by the model that brokers have used to intervene in compliance carbon markets, we are not ready to pursue recommendations of any of these brokers at this time. This is primarily because it is not clear that the specific cap-and-trade programs involved have been designed in a way to avoid our causality concerns, and the groups that are taking more innovative approaches in this space, like Climate Vault, are too new to have proven out their model. We hope to learn more about the groups assessed here and will update our findings as we continue to monitor their progress.