On November 14, 2014, the California Air Resources Board (CARB) released a final determination invalidating almost 89,000 previously-issued offset credits due to CARB’s conclusion that the facility at issue failed to comply with a permit issued under the Resource Conservation and Recovery Act (RCRA).[1]  CARB reached this conclusion even though it determined that “the [GHG] emission reductions represented by the offsets at issue here are real, quantified, and verified reductions.”[2]  CARB’s decision comes following a months-long investigation, and leaves open a number of questions about how California will exercise its discretion to investigate and invalidate offsets in the future.

As we reported in a Clean Energy Law Report blog posting published on October 9, 2014[3] and in our November 2014 Air and Climate Forecast,[4] CARB issued a preliminary determination on October 8, 2014 which proposed to invalidate over 230,000 credits due to alleged RCRA noncompliance at the Clean Harbors ozone depleting substances (ODS) incineration facility in El Dorado, Arkansas.  CARB asserted that Clean Harbors’ Feb. 2, 2012 receipt of a U.S. EPA Region 6 inspection report describing potential RCRA violations – i.e., not treating calcium chloride brine material generated by the facility as a hazardous waste – triggered noncompliance for purposes of California’s offset program.  CARB further indicated that noncompliance ended the next day (Feb. 3, 2012) when Clean Harbors ceased treating the calcium chloride brine material as nonhazardous waste under RCRA – i.e., when it sent a final shipment of calcium chloride brine material for use in oil and gas production.[5]  Taking into account this alleged two-day period of potential noncompliance, CARB proposed invalidating offset projects with reporting periods covering those days.  Two such projects were identified in the preliminary determination – one generating 88,955 credits (Project CAOD0018-A) and the other 142,199 credits (Project CAOD0006-C).

CARB’s final determination is largely consistent with its preliminary determination, with one notable exception: CARB concluded that the ODS destruction for Project CAOD0006-C did not commence until approximately four hours after Clean Harbors’ final alleged noncompliant shipment of calcium chloride brine.[6]  Consequently, CARB elected to not invalidate the credits association with Project CAOD0006-C.  In all other substantive respects, CARB’s final determination was unchanged – thereby establishing a troubling precedent which could complicate regulated entities’ compliance obligations and ultimately undermine the efficacy of the offset system.  CARB appears to take the position that even a notice of potential noncompliance triggers a facility’s obligation to immediately achieve compliance (or risk losing its credits).  By failing to recognize that perfect facility-wide compliance is rarely achieved in complex industrial operations, CARB has arguably created an unattainable “zero-tolerance” EH&S compliance policy.  This would be true even where the integrity of the offset at issue is not in question, and there is no reasonable nexus between the noncompliance and the GHG reductions.  Moreover, CARB’s position could deprive facilities of the ability to challenge a regulatory authority’s proposed determination/findings, or even to enter into a dialogue to resolve an issue.  This position will be particularly troublesome where there are ambiguities in the laws or regulations – as here, where both the state and the company thought that the disposal method complied with RCRA.  As a result, offset providers could face the unenviable choice of spending significant resources to achieve vague – or even flatly incorrect – compliance mandates or risk losing their GHG offsets.  Finally, CARB’s zero-tolerance standard will put additional due diligence demands on offset purchasers who, under California’s cap-and-trade system, bear the risk of offset invalidation.  Such demands have the potential to unnecessarily raise compliance costs and ultimately undermine the cap-and-trade program. 

The repercussions of CARB’s decision remain to be seen.  Clean Harbors is reportedly considering a lawsuit against CARB, with a source from the company indicating that “‘none of the credits should have been invalidated, and we’re perplexed at the logic CARB utilized to reach the final decision.’”[7]  The source reportedly also stated that Clean Harbors has “withdrawn from any activities to generate offset credits for California's cap-and-trade program as a result of CARB's investigation.”[8]  Market participants will be closely observing how Clean Harbors addresses these matters going forward.