by: Derek Six | Chief Business Officer | June 29, 2021

November 1, 2021, is the compliance deadline for emitters covered under the California and Quebec Cap-and-Trade programs. By November 1st, emitters are required to submit the compliance instruments representing their full triennial (2018-2020) emissions. One of the simplest compliance cost-saving strategies is for entities to take full advantage of their ability to substitute offsets for up to 8% of their total obligation. However, for the previous compliance period covering 2015-2017, California entities surrendered only 6.36% of the possible 8% offsets, and Quebec entities surrendered only 3.5% of the possible 8% offsets. Why did emitters leave so much potential savings on the table? With offsets currently selling at a historically large discount to allowances, will entities again leave substantial savings on the table, or will they utilize new offset buying options to help them realize all of the possible savings? 


Missing Out on Potential Savings 

Allowances (permits for one metric ton of CO2e) are currently priced at approximately US$21.77.  Offsets are currently priced between US$13.00 and US$15.00, depending on type and risk profile, providing emitters a discount of 30-40%. It should be hard to ignore such significant cost savings, but there may be a few possible reasons emitters would choose not to maximize their savings: 

1. In previous compliance periods, information about offsets may have not been available or widely understood 
   
   
2. Market access to offsets may have been limited 
   
   
3. Perceived risks may have prevented buyers from utilizing offsets
   

While the first two explanations may have been valid in the past as emitters became accustomed to the program, we suspect that it is the last possibility of perceived risks that had the greatest impact on offset utilization. Would-be buyers of offsets may have been dissuaded by the complexity of California’s invalidation rules, and their accounting departments may have warned them about the difficulty of accounting for the possibility of invalidation.  While less than 0.1% of California-issued offsets have been invalidated, such a possibility may have outweighed the cost savings for some buyers.


Understanding the Risk 

Before emitters consider a solution, it is important for them to understand the various types of offset buying options that currently exist in the market: 

1. Quebec-issued Offsets:  these offsets do not have buyer liability, but because Quebec has issued only 1.05 million offsets, this category is not an available buying choice. 
   
   
2. California CCO-8s:  when initially issued, California has regulations that would allow them to invalidate offsets for up to 8 years if a regulatory compliance violation is later discovered. 
   
   
3. California CCO-3s:  offsets whose invalidation period has been reduced to 3 years. 
   
   
4. California GCCOs:  offsets exposed to invalidation risk but sold by a seller offering to replace them if they are ever invalidated. 
   
   
5. California CCO-0s:  offsets whose invalidation period has expired. 
   

Confusing, no doubt, and definitely likely to dissuade many buyers. However, one option in this list is relatively new to buyers that offers no risk and a simple transaction.


Consider California CCO-0s 

California CCO-0s, the final category in our list above, are California compliance offsets that are not exposed to the possibility of invalidation because their invalidation period has expired.  CCO-0s are the most expensive of the quality levels, currently at US$15.00 or a 30% discount to allowances, but they cannot be invalidated.  Because the risk period has expired, there is no need to enter into complicated GCCO (Golden/Guaranteed California Compliance Offset) contracts where the buyer relies on the contractual promises of the seller and the quality of the seller’s financial credit.  CCO-0 purchase contracts are simple and easy to execute. 

Some buyers will find that the price savings of purchasing CCO-8s or CCO-3s outweigh the risks, but the CCO-0 offsets represent an exciting new opportunity to reduce upcoming compliance costs for many emitters. 

If you would like to learn more about your options or purchase CCO-0s, please feel free to contact us.  We are happy to help and currently have CCO-0s available for purchase.

About the Author

Derek Six serves as Chief Business Officer at ClimeCo, where he leads the company’s cross-cutting business functions, the firm’s ODS management program, and a private equity fund ClimeCo manages. He holds an MBA in Investment Management and Portfolio Analysis from Pennsylvania State University’s Smeal College of Business.