Testimony of Gary Gero, President Senate Select Committee May 2, 2012 Good morning Chairman Correa and Members of the Select Committee. My name is Gary Gero and I am the President of the Climate Action Reserve, formerly known as the California Climate Action Registry. It is my privilege to have been invited here today to speak to you about our knowledge and experience with greenhouse gas offsets. The Climate Action Reserve is the largest offsets registry in North America with nearly 500 offset projects in 44 U.S. states and Mexico. We have certified over 24 million metric tonnes of greenhouse gas emission reductions, and we are widely regarded as the most rigorous offsets program anywhere. As an environmental non‐profit organization, our goal is to help regulators address the serious threat of global climate change by ensuring that there is real validity and environmental integrity to the claims of emission reductions associated with offsets. ‐ 1 ‐ Senate Select Committee on California–Mexico Cooperation Testimony of Gary Gero, Climate Action Reserve Let me start with a definition of an offset so that we are approaching this topic with a common understanding. In general, an offset is a verified emission reduction that is used to mitigate or compensate for an emission that occurs elsewhere. At the Reserve, we have developed strict standards and impose a variety of tests ‐ which I will describe in a moment ‐ to ensure this integrity. In a regulatory program, an offset certificate may be issued by the regulator and used by a company to meet its compliance obligation if the emission reduction meets these same strict tests and if it conforms to the regulator’s own program rules. So, let’s talk about these tests which we have long applied, which the California legislature has enshrined within AB 32, and which the ARB has now embedded in their regulations. May 2, 2012 ‐ 2 ‐ Senate Select Committee on California–Mexico Cooperation Testimony of Gary Gero, Climate Action Reserve The first test is that the emission reduction is REAL. This means that the emission reduction has actually occurred and that it can be quantified to a very high degree of accuracy; there is no offset credit granted for emission reductions that might occur in the future. Additionally, we consistently apply the principle of conservative accounting so that where some quantification uncertainty exists, we provide the least amount of credit to the project within the uncertainty range. The second test is that the project is ADDITIONAL. ‘Additional’ means that the emission reduction is not required by law AND it would not have occurred but for the incentive provided by the carbon market. Sometimes this is referred to as beyond business as usual. At the Reserve, we set performance standards for assessing whether projects are ‘additional’. The third test is that the project activity and its emission reductions are VERIFIABLE. Here, we impose very prescriptive requirements on how a project is to be assessed so that any May 2, 2012 ‐ 3 ‐ Senate Select Committee on California–Mexico Cooperation Testimony of Gary Gero, Climate Action Reserve independent third party ‐ be it a verification company, a regulatory agency, or the public ‐ can have a common and consistent approach to measuring the emission reductions such that they are independently verifiable. Fourth, activities must be ENFORCEABLE which means that there are clear standards for the property rights related to the emission reductions. Not only does this avoid double‐counting, but it also identifies a responsible party upon which the offset standards and program rules can be enforced. Finally, emission reductions must be PERMANENT. Because emitted greenhouse gases remain in the atmosphere for a long time, any offset used to mitigate those emissions must ensure that the emission reduction is similarly removed from the atmosphere for a very long time. In practice, this has been defined to be at least 100 years. May 2, 2012 ‐ 4 ‐ Senate Select Committee on California–Mexico Cooperation Testimony of Gary Gero, Climate Action Reserve Now that we have defined an offset, let me turn to the role of offsets in market‐based systems. First, offsets provide an equivalent (if not a greater) reduction in greenhouse gas emissions at a lower cost. Since the cost of compliance with environmental regulation is ultimately passed on to consumers, having a market‐based system with a sufficient supply of offsets works to ensure that we reduce emissions in the most cost effective manner possible, thereby minimizing the economic impacts to consumers while still ensuring that we meet our emission reduction requirements. Offsets also create emission reductions at sources that are hard to regulate or that are not traditionally seen as part of the regulatory system, such as forests and farms. In a market program, these sectors are encouraged to voluntarily reduce emissions by the financial incentive of offsets. And, this is particularly important because it brings a much broader May 2, 2012 ‐ 5 ‐ Senate Select Committee on California–Mexico Cooperation Testimony of Gary Gero, Climate Action Reserve segment of our society and our economy into the fight against global climate change. Offset projects also create other environmental co‐benefits. For example, urban trees are known to improve local air quality, reduce the urban heat island effect, and provide storm water retention benefits. Finally – and this is the key point here today – offsets can be used as the common currency that link market‐based programs together, as long as the rules are consistent and rigorous. This is particularly important as we begin to consider how California and Mexico may work together to address climate change. Next, let me say a few words about how an offset program is designed to ensure integrity. As an organization, we are solely focused on three things: First is the crafting of strong protocols that address the key tests I have described. May 2, 2012 ‐ 6 ‐ Senate Select Committee on California–Mexico Cooperation Testimony of Gary Gero, Climate Action Reserve The second element is to ensure that protocol rules are actually followed. To do that, it is very important to spend a great deal of time training and testing verifiers and providing very close oversight of their work to ensure quality and accuracy. This is a part of the Reserve about which we are relentless; quality assurance and control is absolutely vital to a successful offsets program. And third, we have designed and implemented a public registry system that provides clarity of ownership to the emission reductions, limits owning credits on behalf of third parties, contains security systems to prevent fraud or other abuses, and which provides open and public access to our work so that this market operates with full transparency. So, let’s turn to ARB cap‐and‐trade program and it offsets elements. Four Climate Action Reserve offset protocols have formed the basis for the protocols adopted by ARB for use in the California cap‐and‐trade program, and much of the May 2, 2012 ‐ 7 ‐ Senate Select Committee on California–Mexico Cooperation Testimony of Gary Gero, Climate Action Reserve program design I have just described served to inform the ARB in it is own design. The first of the four protocols is the Forest Project Protocol which provides credit for offset projects in three categories: reforestation, avoided conversion of forests, and improved forest management – and it requires that these forests increase and maintain carbon storage over the long term. Similarly, the Urban Forest Protocol provides rules for the crediting of urban tree planting programs. I will note that Forestry is also an area that the Reserve is very actively working on in Mexico today to help create an operational standard for crediting forest activities on lands in Mexico. May 2, 2012 ‐ 8 ‐ Senate Select Committee on California–Mexico Cooperation Testimony of Gary Gero, Climate Action Reserve The Livestock Project Protocol provides credit at farms when the methane generated by dairy operations is captured and destroyed rather than emitted into the atmosphere. Methane is a significant greenhouse gas and so these activities are particularly valuable in addressing climate change. We have adopted a Mexican version of this protocol and today the Climate Action Reserve has a number of Mexico livestock projects in our system. We are very proud that we recently issued our first Mexican offset credits to a livestock waste digester project in the Yucatan. And finally, the ARB has adopted our Ozone Depleting Substances Protocol that provides credits for the collection and destruction of the very potent greenhouse gases found in refrigeration appliances and foams. By using the offset market, there is now a strong financial incentive to destroy these gases rather than put them back into older equipment where they leak out into the atmosphere. May 2, 2012 ‐ 9 ‐ Senate Select Committee on California–Mexico Cooperation Testimony of Gary Gero, Climate Action Reserve The Reserve also has a version of this protocol that allows for gasses sourced from Mexico to be eligible for credits if they are destroyed in a regulated facility in the U.S. and we have several projects today using this protocol. As you can see, the Climate Action Reserve is already very active in Mexico, having adopted numerous protocols and currently deeply engaged with Mexican stakeholders in crafting standards for forestry projects. Additionally, we are now working on a study to determine the potential for developing protocols for renewable energy and for energy efficiency, focusing first on industrial and commercial boilers. Finally, we are considering additional opportunities for both the adaptation of our existing protocols as well as for new offset categories specific to Mexico. May 2, 2012 ‐ 10 ‐ Senate Select Committee on California–Mexico Cooperation Testimony of Gary Gero, Climate Action Reserve Our work in Mexico is helping to ensure that the same high level of environmental integrity, transparency and rigor that has gone into our U.S. protocols and that form the foundation of the ARB’s offset program is also being applied in Mexico. And indeed, by having a set of strong and consistent standards for use in Mexico and by demonstrating the environmental benefit and integrity in using those standards, we are helping to provide an opportunity for the State of California to consider emission reduction activities in Mexico for use in the California cap‐and‐trade program. We firmly believe that there is a significant opportunity for Mexico to generate real, high‐quality offsets thereby advancing climate change solutions by building a large and liquid North American carbon market. I thank you for inviting me here today and thank you for your attention. I would be pleased to answer any questions you may have. May 2, 2012 ‐ 11 ‐