US Compliance Schemes: Scheme Overview and Eligible Projects

Our latest product, the VCM-Compliance Credit Tracker, empowers users to identify voluntary carbon market credits that qualify for fulfilling compliance obligations within hybrid carbon markets. 

In this edition of our newsletter, we will provide an overview of how the VCM/Compliance Tracker can be used to analyse three of the most significant carbon pricing schemes in the United States: California Compliance Offset Program, RGGI Offset Program, and Washington State.

The VCM/Compliance Convergence

The convergence between the compliance and voluntary carbon markets (VCM) is the result of regulatory authorities' efforts to integrate the voluntary carbon market within their national, subnational, or regional carbon pricing mechanisms.

In these hybrid schemes, regulated entities under Emissions Trading Schemes (ETSs) or Cap-and-trade schemes may have the option to purchase carbon credits if they exceed the cap, or fail to meet the given baseline. Similarly, entities subject to a carbon tax can potentially reduce their taxable base or the owed amount by acquiring carbon credits. 

Projects in the VCM must meet specific requirements imposed by each scheme for their credits to be used by regulated entities to fulfill compliance obligations.

Our VCM-Compliance Credit Tracker 

Our VCM-Compliance Credit Tracker, primarily, enables stakeholders to easily identify projects that qualify for one or more compliance schemes, including carbon pricing frameworks such as carbon tax schemes and emissions trading schemes. 

Additionally, it facilitates price discovery for these credits, providing insights into various revenue streams per project and how compliance carbon rates influence VCM prices across different project attributes like project type, methodology, and sector. This initiative aligns with our broader mission of categorizing credits eligible for multiple mitigation purposes, including Article 6, CORSIA, and NDCs.

Drawing from our extensive database of over 29,000 projects, we've identified 537 projects eligible for the California Cap and Trade Scheme, 52 for the RGGI Scheme, and 20 likely eligible for the Washington Scheme.

Source: AlliedOffsets

Scheme overviews

California Cap-and-Trade Program

The Cap-and-Trade Program is a key element of California’s strategy to reduce greenhouse gas emissions. For each year of the program, California Air Resources Board (CARB) generates vintage allowances equal to the cap and after allocating to cost-containment reserves, industrial facilities, and utilities, the remaining State-owned allowances (blue) are made available for sale at auction. 

Covered entities may use the following compliance instruments to meet their compliance obligations: 

• Allowances issued by the CARB.
• ARB Offset Credits.
• Allowances, offset credits or sector-based credit issued by an approved external GHG ETS. California’s Cap-and-Trade Program is currently linked with the Cap-and-Trade System of Québec (as of 2014). 
• ARB offset credits issued for purposes of early action. Although the early action program has ended, ARB offset credits that were issued pursuant to the early action program continue to be valid for compliance in the Cap-and-Trade Program.
• ARB sector-based offset credits. CARB has not approved any sector-based crediting programs to date.

From January 1st 2021 up until December 31st of 2025, entities under the cap-and trade scheme are able to meet up to 4% of their compliance obligations through surrendering of offset credits issued by either the California GHG ETS (ARB offsets credits) or an approved external GHG ETS (Cap-and-Trade System of Québec).

ARB offset credits are exclusively generated from offset projects registered in an ARB-approved Offset Project Registry (ACR, CAR, VCS), located in the United States or its territories, and compliant with Article 5 of the "California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms”. 

Our database provides comprehensive information on carbon offsets in California and projects eligible for the California Cap-and-Trade Program.

At present, we have 160 million ARB Offset credits available in the market: 119 million of those credits are coming from projects from the Forestry and Land Use sector, 32.9 million credits from Chemical Processes and Industrial Manufacturing sector, and 7.8 million credits from the Agriculture sector.

Source: AlliedOffsets

AlliedOffsets is tracking emissions disclosure legislation, with California being the most recent example following their passing of Assembly Bill AB1305 (Voluntary Carbon Market Disclosures). This development is expected to drive increased demand for offsets. California's regulatory landscape regarding emissions disclosure is rapidly evolving, as evidenced by the complementary Senate Bill 1036. Similar to the vetoed SB390, which aimed to impose stricter penalties for credit suppliers, SB 1036 seeks to enhance regulatory clarity and transparency around offsetting of ARB offsets. SB 1036 is currently under review by the Senate Environmental Quality and Judiciary Committees before being voted on in the Senate.

RGGI Scheme

RGGI is the first market-based, cap-and-invest regional initiative in the United States. The RGGI participating states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Pennsylvania.

It is worth mentioning that Pennsylvania's involvement in RGGI came under scrutiny when, in 2023, the Commonwealth Court determined that the Trading Program Regulation is a tax that has been imposed in violation of the state's constitution. The Shapiro administration appealed the decision and the state’s Supreme Court is yet to review the appeal. 

The RGGI CO2 cap establishes a regional limit on carbon dioxide emissions from the power sector and each RGGI state has the statutory authority to issue CO2 offset allowances to sponsors of projects that reduce or prevent CO2 emissions. The use of these allowances is restricted to 3.3 percent of a power plant's overall compliance obligation during a control or interim control period.

To qualify for CO2 offset allowances, offset projects must be situated in a RGGI State or any state with a cooperating regulatory agency that has established a memorandum of understanding with the relevant regulatory bodies of all participating states. Additionally, these projects must fall into one of the following categories:

• Landfill methane capture and destruction
• Sequestration of carbon through reforestation, improved forest management, or avoided conversion
• Avoided methane emissions from agricultural manure management operations

Currently, we estimate that there are 21.9 million VCM projects which would qualify as RGGI Offset credits, with 19.4 million originating from projects in the Forestry and Land Use sector and 2.4 million credits from the Waste Disposal sector.

Source: AlliedOffsets

Project developers seeking CO2 offset allowances from a RGGI participating state must navigate a three-step process:

1. Account Setup: Initially, developers must establish a general account in the RGGI CO2 Allowance Tracking System (RGGI COATS), register the proposed project as a project sponsor and obtain an offsets project ID.
2. Consistency Application: Subsequently, project sponsors are required to submit a Consistency Application to the relevant state regulatory agency where the offset project is located to allow the state to evaluate whether the project is eligible in accordance with state regulations.
3. Monitoring and Verification: Upon receiving a consistency determination from the state regulatory agency, project sponsors must furnish a periodic Monitoring and Verification Report to the same agency. This report demonstrates the CO2-equivalent emissions reductions or carbon sequestration achieved by the approved project during the reporting period.

Upon approval of the Monitoring and Verification Report, the state regulatory agency will issue one CO2 offset allowance for every short ton of demonstrated CO2e emissions reduction or CO2 sequestered.

Projects found to be eligible for both the California and RGGI schemes

Through our VCM/Compliance Eligibility Tracker, companies under either of the schemes would be able to offset using credits from any of the 9 active projects we’ve found to be eligible for both the California and RGGI schemes.

Source: AlliedOffsets

Washington Cap-and-Invest Program

The cap-and-invest program of the State of Washington roughly covers 75% of statewide emissions. The State sets a cap of carbon emissions and requires businesses to obtain allowances equal to their covered greenhouse gas emissions. These allowances can be obtained through quarterly auctions hosted by Ecology, or bought and sold on a secondary market.

In the first four-year compliance period, January 2023 through December 2026, emitters can generally cover 5% of their emissions with offset credits and an additional 3% with credits from projects on federally recognized tribal lands.

The Climate Commitment Act (CCA) requires that offset projects must result in greenhouse gas reductions that are real, permanent, quantifiable, verifiable, enforceable and additional. Washington adopted four offset "protocols" from California's program developed by the California Air Resources Board (U.S. Forestry, Urban Forestry, Livestock Projects, and Ozone Depleting Substances) and approved two registries: Climate Action Reserve and American Carbon Registry.

Projects found to be eligible for both the California and Washington schemes

There are signs that linkages between these schemes will continue in the future. For example, last month Washington and California agreed on a bill to provide guardrails to link between the new schemes to drive down the cost of compliance. 

Through our VCM/Compliance Eligibility Tracker, companies under either of the schemes would be able to offset using credits from any of the 4 active projects we’ve found to be eligible for both the California and Washington schemes.

Source: AlliedOffsets

In December 2023, the Washington Department of Ecology (ECY) issued the first carbon offsets under the cap-and-invest program. American Carbon Registry issued voluntary Registry Offset Credits (ROCs) to ACR902, and ACR 892 projects, which were then converted into Ecology Offset Credits (EOCs) for use under the scheme. Tradewater has recently had issuances under a second project be accepted by the program, under ACR918. 

Projects from the Ecology Offset Credit Issuance Table

Source: AlliedOffsets

We have located 18.6 million credits which are likely eligible for the Washington Offset scheme, currently in the market. 18.1 million credits from projects coming from the Forestry and Land Use sector, and around 500 thousand credits from the Agriculture sector.

Source: AlliedOffsets

Before listing an offset project with an Ecology-approved offset project registry, entities must complete the CITSS registration process. Then, the process is complete through a series of forms such as the Offset Verification Statement issued by the approved verification body to both the Offset Project Registry (OPR) and the Offset Project Operator (OPO) or Authorised Project Designee (APD) and the Request of Issuance of Ecology Offsets for the Offset Project Operator (OPO) or Authorised Project Designee (APD) to request issuance of Ecology offset credits. Washington is considering developing new protocols or revising existing ones, and adding more forms as they are developed.

Conclusion

Within hybrid carbon markets, regulated entities have the opportunity to utilize offset credits from the VCM to fulfill a portion of their compliance obligations. To ensure the suitability of these credits for this purpose, VCM projects must adhere to specific requirements set by each scheme. These requirements encompass factors such as location, methodologies, approved registries, and more.

Our latest product, the VCM-Compliance Credit Tracker, empowers users to identify voluntary carbon market credits that meet compliance obligations within hybrid carbon markets, such as those in RGGI, California, and Washington. Additionally, it facilitates price discovery for these credits, providing insights into revenue streams per project and how compliance carbon rates impact VCM prices across different project attributes.