Offset trading platform will be built around strict baseline and certification requirements, in an effort to bring greater integrity to the emerging emissions markets.

California is making significant progress in solidifying the emerging market for certified emissions offsets. The most recent advance in this area comes from the California Climate Action Registry (the Registry) which announced on January 25, 2008, that a new platform for registering and trading certified emissions reductions could be online as early as mid-February 2008. Called the Climate Action Reserve, this new trading platform is a promising development for environmentalists and investors alike because the program has been specifically built around a stringent set of eligibility requirements and verification procedures that are designed to ensure the integrity of the new offset market.

The Registry is a non-profit, quasi-private organization established by the California legislature to provide companies, individuals and other interested entities with a simple and cost-effective method for recording and managing their greenhouse gas emissions. At the heart of the new system is the registry itself, a limited-access database that aims to become a central repository for the greenhouse gas emissions statistics of each of its members. To gain access to the database for the purpose of making contact with the Registry’s other members, prospective participants must first agree to report their greenhouse gas emissions from all direct and indirect sources in California, or nationwide if the applicant desires. These emissions must then be “certified” by a qualified third-party auditor who will verify each applicant’s baseline emissions profile according to strict standards established by the Registry. The offsets that will be potentially tradable through the Climate Action Reserve will be measured against each participant’s certified baseline to ensure that greenhouse gas reductions are accurate, genuine and voluntary.

Offset exchanges and the market for carbon credits generally have struggled for legitimacy among both environmentalists and investors because of the “additionality” problem. Under the current unregulated regime, most sources of greenhouse gases are not required to limit or even record their emissions related activity. Accordingly, determining which reductions are actually additional and therefore worthy of the financial and social capital granted to bona fide emissions offsets is often debatable, even long after an offset is sold and retired. This question has resulted in persistent skepticism over whether the emissions reductions that are offered for sale actually represent a change from the status quo that justifies each offset’s price.

Through the Climate Action Reserve program, the Registry hopes to overcome such skepticism and doubt by building its trading platform on a foundation of stringent standards and market principles. In addition to the certification requirements, the Registry will also promote transparency in its own operations and those of its participating members. By closely regulating the types of projects that can be recorded and traded through the Registry’s database in an open and easily scrutinized manner, the Climate Action Reserve hopes to avoid the claims of double-counting and phantom credits that have dogged other similar endeavors.

As with any climate related project, some degree of uncertainty is inescapable without some form of industry consensus or government standards. Many climate change proposals, including the leading cap-and-trade schemes currently being considered in Congress, provide for some amount of credit for early emissions reductions that are registered and tracked through a qualifying system, but there is no guarantee that participants in the Climate Action Reserve will be eligible for those as yet undefined credits. Investors now faced with multiple competing offset exchanges may become overwhelmed by the options, and fearing to make a commitment to a losing institution, may choose instead to commit to none. Under this scenario, the system as a whole may fail to realize its full potential without some central, organizing force that has yet to emerge from Washington, D.C, or elsewhere.

Despite the potential challenges that lie ahead, the Registry and its Climate Action Reserve are positive steps toward a strong, liquid and sound new environmental market. Perhaps more importantly, the demand for such a market is, at least within certain sectors of the economy, surging. By promising more transparent standards and greater accountability, the Climate Action Reserve may become the missing link to the business of innovation needed to make progress happen.