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Far-Reaching Decision: Appeals Court Finds Carbon Offsets Ensure Integrity

In a recent decision by a California Appeals court, the appellant, (Our Children’s Earth Foundation; (Appellant)), challenged the State Air Resources Board’s (Board) use of carbon offsets within its Cap-and-Trade program and more specifically, its method for establishing that the offsets achieve the requirement of “additionality.” That’s a loaded sentence so let’s start from the top.

In a sophisticated Cap-and-Trade system like California’s, regulated entities are given a number of options for meeting emission reductions targets. Offsets are one such option. Instead of undertaking on-site emission reduction projects within the emissions cap, emitters may choose to purchase emissions reduction credits generated by projects undertaken outside of the emissions cap. The design of such policy works because emissions—regardless of whether they are released by a coal-fired power plant in Ohio or through the cutting of timber in Indonesia—all enter the same global atmosphere. Therefore, a reduction of emissions made by a wind turbine in Maine can be equivalent in global climate impact to emission reductions made by a solar array in Arizona. Because of this, a power plant in California could chose to purchase emissions reduction credits from an afforestation project in Massachusetts, while maintaining the integrity of the emissions cap based in its home state. But the catch is that the carbon reduction represented by each offset credit must have integrity. And that’s the heart of this suit.

The Appellant in this matter argued that the offsetting mechanism designed by the Board to ensure offsets maintain their integrity is flawed. First, Appellants argue that the Board lacked the authority to design an offsetting system that employs performance-based standards for groups of projects rather than a case-by-case evaluation. Appellants also argue the Board’s offsetting mechanism fails to ensure that the reduction of emissions satisfy the most challenging of the six requirements: “additionality.” (The Board mandates that offset projects satisfy six requirements; projects must be “real,” “additional,” “quantifiable,” “permanent,” “verifiable,” and “enforceable.”) They argue the mechanism does not ensure the reductions would not have taken place under a “business as usual” scenario or to use legal-speak, the offset incentive may not have been the “but for” cause of the project.

The Appeals Court roundly rejected all of the Appellant’s claims. It held that the Board had reasonably interpreted its legislative mandate and that the mandate provided it with the authority to design a standard-based offsetting mechanism. The Court deferred to the Board’s policy expertise and refused to venture into a debate concerning specific choices. (It should be noted that the lower court compared a standard-based approach to a case-by-case approach and found the former to be sound.) Finally, the Court concluded that to require unequivocal proof of “additionality” for each project would impose an unattainable threshold—a standard few if any projects could satisfy and to argue this was the intent of the legislature is purely “pedantic.”

In a strict legal sense, the controlling authority of this decision is limited; however, it may have far-reaching impacts. First, project-based offsets may be located anywhere within the lower 48 States, and the countries of Canada and Mexico. A ruling for the Appellants could have chilled or frozen what is widely seen as a young and fertile market. Moreover, an adverse decision would have likely spawned additional litigation against the Regional Greenhouse Gas Initiative (RGGI) which employs a similar offsetting mechanism. Finally, offsets are likely to play a significant role in the design of many states’ implementation plans for EPA’s Carbon Regulations under Section 111(d) of the Clean Air Act. This decision can be and likely will be pointed to as legal validation for standard-based offsetting—and more broadly—carbon offsetting in general.

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