Carbon offset credits from California's cap-and-trade program will meet reduced compliance demand next year, while program updates promise to upend market dynamics.
Each carbon offset under the joint California-Quebec carbon market, known as the Western Climate Initiative (WCI) equals 1 metric tonne of greenhouse gas (GHG) emissions from sources not covered by either cap-and-trade program. California and Quebec allow covered entities to use offsets from either program to meet their annual GHG emissions obligations.
But market regulators are eyeing changes for carbon offsets in Quebec that may have wider impacts.
Quebec is considering phasing out carbon offsets by 2030 as part of an ongoing rulemaking for a more-stringent program.
While the province has not shared its final approach, regulators have floated in workshops either limiting offset use to 4pc of overall obligations for 2027-29 or putting offsets under the program's emissions cap.
Quebec's Environment Ministry allows for covered entities to utilize carbon offsets for up to 8pc of outstanding emissions, including from California.
Meanwhile, the California Air Resources Board (CARB) allows for covered entities to use CCOs for 4pc of obligations through 2025 and for 6pc starting in 2026, though at least half must come from projects that provide direct environmental benefits to the state (DEBs).
After 2031, Quebec is mulling transitioning to a government carbon offset purchase-and-retire system, but it remains unclear how that might function — and what it means for the longevity of carbon offset projects in Quebec, said Joey Hoekstra, a policy associate with International Emissions Trading Association (IETA).
"That mechanism and how that is going to look like and what that will be, there has not been a lot of details," he said.
Quebec plans to finalize its program changes early in 2025, with implementation in the spring.
The move away from carbon offsets has implications for California's program, ClimeCo chief operating officer Derek Six said.
"Quebec is an outlet for the non-DEBs credits in California," Six said.
The province issues very few carbon offsets under its own protocols, just under 1.8mn since 2014, according to provincial data published in November.
California, which allows for projects to generate credits in and outside the state, issued nearly 13.8mn CCOs in 2023 alone, with just under 9.6mn from non-DEBs projects.
The CCOs without DEBs are an oversupplied market, said Six, compared with the limited number of projects that generate the more expensive DEBs credits in California.
Argus last assessed California Carbon Offsets (CCOs) seller-guaranteed offsets at $14.60/t, CCOs with a three-year invalidation at $14/t and CCOs with an eight-year invalidation at $13.90/t on 20 December. CCOs with direct environmental benefits to the state (DEBS) currently trade at an $15.50/t premium to non-DEBs CCOs.
In issuances over the past five years, non-DEBs have formed the bulk of credits distributed by CARB, with DEBS-eligible credits only going as high as 42.3pc of total issuances this year.
Covered emitters in Quebec used 13.2mn non-DEBs CCOs to meet their 2021-2023 compliance obligations, along with roughly 75,000 CCOs with DEBS. Provincial entities used just under 366,400 carbon offsets generated in Quebec for compliance.
California emitters utilized 13.2mn non-DEBs CCOs and nearly 13mn DEBs CCOs for their 2021-2023 compliance.
Washington, which hopes to link its cap-and-trade program with the WCI as early as 2026, is unlikely to stopgap the shortfall in demand for non-DEBs credits once it allows outside credits, instead feeding further demand for DEBS CCOs.
The state allows participants to use carbon offsets for 5pc of its emissions and a further 3pc from projects on federally recognized tribal lands over 2024-2026, reduced to 4pc and 2pc, respectively, for 2027-2049. The state's ongoing linkage rulemaking would allow the participants to use offsets from within a linked jurisdiction, which will include CCOs with DEBs and Quebec offsets.
Washington's cap-and-invest, which started in 2023, has generated few offsets of its own so far — just over 310,000t, all from ODS projects.
But that may change in the short term, Six said. Project developers have likely been holding off over this year until voters rejected an effort to repeal the state's program in November.
"I would not be surprised if you all of a sudden see a bit of a flood of project listings from people who had Washington ODS material," he said.
Washington is also conducting a rulemaking to increase the variety of projects resulting in carbon offsets credits. Ecology plans to implement these changes in summer 2025.
But carbon offsets remain unlikely to be much of a cost-saving measure for compliance in Washington, Six said. Washington, unlike California or Quebec, puts them under its annual emissions cap and removes allowances in line with offset use.
