There is a range of options that can provide additional flexibility for covered entities in an ETS to comply with the system. Temporal flexibility provisions, such as banking and borrowing, can provide the option to take advantage of mitigation options outside established compliance periods, whereas other credits such as offsets expand mitigation options beyond covered regions and/or sectors covered by an ETS.

Banking or borrowing provisions can help address market fluctuations through time due to developments such as economic fluctuations, abnormal weather, or technological developments. “Banking” provisions allow entities to hold surplus allowances from previous trading periods, when mitigation may have been easier, and to surrender them in future compliance periods, when it may be more expensive. Alternatively, if future mitigation costs are lower, for example through new technology, entities may “borrow” allowances to surrender in the present, which are then deducted from their future budgets. In both cases, it is important that emissions remain under the cap across various trading periods. 

The location and sector where GHGs are emitted are irrelevant for climate change on the global level. The costs of mitigation actions, however, may be lower in regions or sectors not covered by the cap. Therefore, offering covered entities the opportunity to contribute to emission reduction projects outside the sectoral or geographic scope of an ETS may reduce compliance costs without compromising environmental integrity. Existing international mechanisms that some ETS-jurisdictions have decided to recognize as offset credit providers (to various extents) are Joint Implementation (JI) and the Clean Development Mechanism (CDM) established under the Kyoto Protocol. Other systems have developed their own offset options focusing on domestic mitigation.  Important criteria for offsets are their additionality, permanence, and leakage: offsetting must demonstrate actual emission reductions compared to what would have otherwise happened, ensure emissions are not simply released at a later date, or are displaced elsewhere. 

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Offsets and credits Banking and borrowing
Canada - Nova Scotia

Nova Scotia’s cap-and-trade legislation includes the possibility for an offset system. Further consultations will be undertaken, and a study was completed in 2020 to explore offset potential in the province’s carbon market.

Nova Scotia’s cap-and-trade program does not allow for banking or borrowing across compliance periods.

Canada - Québec Cap-and-Trade System

QUANTITATIVE LIMIT: Up to 8% of each entity´s compliance obligation.

QUALITATIVE LIMIT: Currently, Québec’s offset program has five offset protocols:

• CH4 destruction from covered manure storage facilities;
• CH4 destruction from landfill sites;
• Destruction of ozone-depleting substances contained in insulating foam or used as refrigerant gases removed from domestic appliances in Canada;
• CH4 destruction from drainage systems at active coal mines; and
• CH4 destruction from ventilation systems of active underground coal mines.

Québec has developed an offset protocol for afforestation and reforestation projects in private lands in the province, which is expected to be finalized and adopted in 2021. In addition, Québec is working to assess or develop other new protocols in order to increase offset supply, some of which may also be adopted in 2021, including biomethanation, fuel switching in the marine transport sector, conversion of refrigeration systems, and improvements in the application of agricultural fertilizers.

Québec offset credits are recognized as compliance instruments by jurisdictions linked with Québec, and similarly for offset credits issued by linked jurisdictions.

Québec offset credits are 100% guaranteed. This means that in cases where offset credits issued for a project are later deemed illegitimate by the regulator, the offset promoter is required to replace them. If credit recovery is not possible, an equivalent number of credits will be retired from the minister’s environmental integrity account. That account is funded by the automatic withholding of 3% of issued offset credits from all offset projects.

Banking is allowed, but the emitter is subject to the general holding limit on allowances to which all entities in the system are held. The holding limit declines based on the year’s annual allowance budget.

While borrowing is not allowed, some allowances from future vintages are offered at each auction and may be traded but not used for compliance until the compliance date for the vintage year.

China - Beijing pilot ETS

QUANTITATIVE LIMIT: Domestic project-based carbon offset credits—Chinese Certified Emission Reduction (CCER) credits—are allowed. In addition, Beijing also has introduced its local offset programs focusing on carbon sinks, low-carbon transport, and energy saving. Offset use is limited to 5% of the annual allocation. The limit has been increased to 20% since 2019 only for the local low-carbon transport offsets.

QUALITATIVE LIMIT: CCERs from energy conservation projects and forestry carbon sink projects are allowed, whereas credits from hydropower, HFC, PFC, N2O, and SF6 projects are not eligible. CCERs must come from projects that began operation after the beginning of 2013 (with exceptions for carbon sink projects, for which the date is February 2005).

Out of the 5% limit, at least 50% must come from projects within the jurisdiction of the city of Beijing. Among non-Beijing CCERs, priority is given to those with regional climate or pollution control cooperation agreements (e.g., Hebei and Tianjin).

Banking is allowed.

Borrowing is not allowed.

China - Chongqing pilot ETS

QUANTITATIVE LIMIT: Domestic project-based carbon offset credits—CCERs—are allowed up to 8% of the compliance obligation.

QUALITATIVE LIMIT: Reductions must be achieved after 2010 with the exception of carbon sink projects. Credits from hydro projects are not allowed.

Banking is allowed.

Borrowing is not allowed.

China - Fujian pilot ETS

QUANTITATIVE LIMIT: Domestic project-based carbon offset credits (CCERs) and Fujian Forestry Certified Emission Reduction credits (FFCER) are allowed. The use of CCER credits is limited to 5% of the annual compliance obligation. The limit is increased to 10% for companies that use both FFCER and CCER credits.

QUALITATIVE LIMIT: Eligible offsets are restricted to those generated in Fujian province, from CO2 or CH4 projects. Hydropower-related credits are not eligible. FFCER projects, with three project types (afforestation, forest management, and bamboo management) are eligible if implementation took place after 16 February 2005 and if the project developers have independent legal personality.

Banking is allowed.

Borrowing is not allowed.

China - Guangdong pilot ETS

QUANTITATIVE LIMIT: The use of offsets is limited to 10% of covered entities’ annual emissions. Chinese Certified Emissions Reductions (CCERs) are allowed. As a mechanism that encourages the public to reduce carbon emissions, Pu Hui Certified Emission Reductions (PHCER) are also allowed since compliance year 2017. In addition to the quantitative limit applied to individual entities, Guangdong sets an upper limit to the total volume of offsets allowed. In 2019, entities were allowed to use up to 1.5 million offsets (CCER and PHCER) towards compliance obligations, with the priority given to the province’s CCERs and PHCERs first; then, other offsets will be allowed in accordance with the order of enterprises’ written applications until this limit is reached. The number for 2020 has not yet been announced.

QUALITATIVE LIMIT: At least 70% of offsets used by each regulated entity must come from within Guangdong province. This rate is adjusted to 60% if offsets are generated in certain priority regions within Guangdong, as identified by the government (e.g., poor and ethnic minority group areas). Pre-CDM credits are not eligible. Credits from hydro and from most fossil fuel projects are also not eligible. Credits generated in other Chinese ETS pilot regions are not eligible. To be eligible, projects must relate primarily (i.e., more than 50%) to the reduction of CO2 and CH4 emissions.

Banking is allowed.

Borrowing is not allowed.

China - Hubei pilot ETS

QUANTITATIVE LIMIT: The use of domestic project-based carbon offset credits (CCERs) is limited to 10% of the annual initial allocation for each entity.

QUALITATIVE LIMIT: CCERs must come from rural biogas or forestry projects in the key counties under the national or provincial poverty alleviation plan in urban agglomeration areas of the middle reaches of the Yangtze River (within Hubei). CCERs must have been generated between 1 January 2013 and 31 December 2015.

Banking is allowed, but only for allowances that were traded at least once. 

Borrowing is not allowed.

China - Shanghai pilot ETS

QUANTITATIVE LIMIT: Domestic project-based carbon offset credits—CCERs—are allowed. For compliance year 2019, the use of CCER credits was limited to 3% of the verified emissions, of which up to 2% was for credits generated outside the Yangtze River Delta region*. Between 2016 and 2018, the use of CCER credits was limited to 1% of the annual allocation. Between 2013 and 2015, the limit was 5%.

QUALITATIVE LIMIT: Credits for reductions that were realized before January 2013 cannot be used for compliance. Credits from hydro projects are not allowed.

*This region covers Shanghai, Jiangsu, Zhejiang, and Anhui.

Banking is allowed both within and across trading periods, with some restrictions for the latter. For banked allowances from the first trading period (2013-2015), only one-third could be used per year between 2016 and 2018 by compliance entities; allowances are fully bankable for institutional investors.

Borrowing is not allowed.

China - Shenzhen pilot ETS

QUANTITATIVE LIMIT: Domestic project-based carbon offset credits (CCERs) are allowed. The use of CCER credits is limited to 10% of the annual compliance obligation.

QUALITATIVE LIMIT: Credits from hydro projects are not eligible, and additional geographic restrictions apply to the use of certain CCERs.

Banking is allowed.

Borrowing is not allowed.

Unlike some other pilots, Shenzhen releases its annual allowances before the compliance date of the previous vintage. Nevertheless, entities are not allowed to use alloweanes of the following year for the purpose of previous vintage compliance.

China - Tianjin pilot ETS

QUANTITATIVE LIMIT: Domestic project-based China Carbon Offset Credits (CCERs) are allowed as well as Tianjin regional forestry offsets. The use of CCER credits is limited to 10% of the annual compliance obligation. For the 2019 compliance year, at least 50% of the credits must originate from Beijing, Tianjin, or Hubei.

QUALITATIVE LIMIT: Credits must stem from CO2 reduction projects, excluding hydro. They must be realized after 2013.

Banking is allowed.

Borrowing is not allowed.

China National ETS

The National Measures allow for the use of China Certified Emissions Reduction (CCER) already from 2021 onwards: covered entities can use offsets for up to 5% of their verified emissions from CCER projects in renewable energy, carbon sinks, methane utilization, and others.

The CCER offset program was developed in China alongside the development of the regional ETS pilots. In 2012, the NDRC issued the ‘Interim Measures for the Management of Voluntary GHG Emission Reduction Transactions’ (short form: Interim Measures), which provide guidelines for the issuance of CCERs. Further details on the development of CCER projects and the acceptance of CCERs in the national ETS are expected to be regulated through a revision of the Interim Measures and/or through the development of an ‘Administration Measure of Offset Scheme for National ETS.’

Rules on banking and borrowing are not yet specified in the published policy documents. The system is expected to allow for banking but not for borrowing.

EU Emissions Trading System (EU ETS)

PHASE ONE (2005-2007): Unlimited use of Clean Development Mechanism (CDM) credits and Joint Implementation (JI) credits was provided for in the directive. In practice, no credits were used in Phase 1.

PHASE TWO (2008-2012): Qualitative Limits: Most categories of CDM/JI credits were allowed; no credits from LULUCF and nuclear power sectors were allowed. Strict requirements for large hydro projects exceeding 20 MW.

Quantitative Limits: In Phase 2, operators were allowed to use JI and CDM credits up to a certain percentage limit determined in the respective country’s National Allocation Plans. Unused entitlements were transferred to Phase 3 (2013-2020).

PHASE THREE (2013-2020):
Qualitative Limits: Newly generated (post-2012) international credits had to originate from projects in least developed countries. Credits from CDM and JI projects from other countries were eligible only if registered and implemented before 31 December 2012. Projects from industrial gas credits (projects involving the destruction of HFC-23 and N2O) were excluded regardless of the host country. Credits issued for emission reductions that occurred in the first commitment period of the Kyoto Protocol were no longer accepted after 31 March 2015.

Quantitative Limits: The total use of credits for Phase 2 and Phase 3 was capped at 50% of the overall reduction under the EU ETS in that period (~1.6 Gt CO2e).

PHASE FOUR (2021-2030): Based on the current legislation, the use of offsets is not envisaged.

Unlimited banking has been allowed since 2008.

Borrowing is not allowed. However, implicit borrowing within trading periods is allowed, i.e., the use of allowances allocated in the current year for compliance in the previous year.

German National Emissions Trading System

No offsets will be allowed in Phase 1.

Banking is not allowed during the fixed price phase, but will be allowed in the auctioning phase.

Japan - Saitama Target Setting Emissions Trading System

Credits from five offset types are allowed in the Saitama ETS.

SMALL AND MID-SIZE FACILITY CREDITS: Emissions reductions from non-covered small and medium-sized facilities in Saitama Prefecture.
Quantitative limits: None.

OUTSIDE SAITAMA CREDITS: Emission reductions achieved from large facilities outside of Saitama Prefecture. Large facilities are those with an energy consumption of 1,500kL of crude oil equivalent or more in a base year, and with base-year emissions of 150,000t or less.
Quantitative Limits: Credits are issued only for the reduction amount that exceeds the compliance factor. These credits can be used for compliance for up to one-third of offices’ reduction obligations. Factories can use up to 50%.

RENEWABLE ENERGY CREDITS: Renewable energy credits generated under the Saitama ETS encompass the following types: Environmental Value Equivalent, Renewable Energy Certificates, and New Energy Electricity, generated under the Renewable Portfolio Standard Law. Credits from solar (heat, electricity), wind, geothermal, or hydro (under 1,000kW) electricity production for use under the Saitama ETS were converted to 1.5 times the value of regular credits until the end of the second compliance period. From the third compliance period, they are converted on a 1 to 1 basis. Credits from biomass (biomass rate of 95% or more, black liquor is excluded) are also converted with factor 1.
Quantitative limits: None.

TOKYO CREDITS (VIA LINK):
• Excess Credits: Emissions reductions from facilities with base-year emissions of 150,000 tonnes or less. Issuance of credits from FY2015.
• Small and mid-size Facility Credits: Issued by Saitama Prefecture. Issuance of credits from FY2012.
Quantitative limits: None.

FOREST ABSORPTION CREDITS: Credits from forests inside Saitama Prefecture are counted at 1.5 times the value of regular credits. Others are converted with the factor 1.

Quantitative limits: None

All offsets must be verified by verification agencies.

Banking is only allowed between two consecutive compliance periods.

Borrowing is not allowed.

Japan - Tokyo Cap-and-Trade Program

Credits from four offset types are permitted, to complement emissions reduction credits issued to facilities covered by the Tokyo ETS whose emissions fall below their baseline.


SMALL AND MID-SIZE FACILITY CREDITS: Emissions reductions from non-covered small and medium-sized facilities in Tokyo.

Quantitative limits: None.


OUTSIDE TOKYO CREDITS: Emissions reductions achieved from large facilities outside of the Tokyo area. Large facilities are those with an energy consumption equivalent to at least 1,500kL of crude oil in a base year and with base-year emissions of 150,000 tonnes or less.

Quantitative limits: Credits are issued only for the reduction amount that exceeds the compliance factor. These credits can be used for compliance for up to one-third of facilities’ reduction obligations.

RENEWABLE ENERGY CREDITS: Renewable energy credits generated under the Tokyo ETS encompass the following types: Environmental Value Equivalent, Renewable Energy Certificates, and New Energy Electricity, generated under the Renewable Portfolio Standard Law. Credits from solar (heat, electricity), wind, geothermal, or hydro (under 1,000kW) electricity production for use under the Tokyo ETS were converted to 1.5 times the value of regular credits until the end of the second compliance period. From the third compliance period, they are converted on a 1 to 1 basis. Credits from biomass (biomass rate of 95% or more, black liquor excluded) are also converted with factor 1.

Quantitative limits: None.


SAITAMA CREDITS (VIA LINK):
·       Excess Credits: Emissions reductions from facilities in Saitama with base-year emissions of 150,000 tonnes or less. Issuance of credits from FY2015.
·       Small and Mid-Size Facility Credits issued by Saitama Prefecture. Issuance of credits from FY2012.
Quantitative limits: None.

All offsets must be verified by verification agencies.


QUALIFYING FOR ADDITIONAL EMISSIONS REDUCTIONS THROUGH USE OF RENEWABLE ELECTRICITY

(1) Low Carbon Electricity: In order to evaluate the energy efficiency efforts of the covered facilities, CO2 emission factors of the supply side (electricity and others) are fixed during each compliance period. If covered facilities procure electricity from TMG-certified suppliers with lower emission factors (0.37 [t-CO2/1,000 kWh] or less), they can reduce the difference between these emission factors from their emissions to be reported to the TMG.

(2) If covered facilities generate electricity from renewable sources for their own use, they can deduct this amount of electricity from the total energy usage of the facility to be reported to the TMG.

(3) During the third compliance period, covered facilities can deduct emissions to be reported to the TMG if electricity with a higher renewable energy source rate (30% or higher) is procured (additional grant).

Banking is allowed only between consecutive compliance periods.

Borrowing is not allowed.

Kazakhstan Emissions Trading Scheme

Qualitative Limits: Domestic offsets in all economic sectors (GHG reduction or absorption activities), except for emissions reductions at the installations covered by the ETS. Project applicants can submit their projects for consideration to the Ministry of Ecology, Geology and Natural Resources in order to obtain approval and gain offset credits. The approval of carbon offsets and the provision of offset credits are carried out in accordance with IPCC methodologies and the rules developed and approved by the Ministry of Ecology, Geology and Natural Resources.

Quantitative Limits: None.

Banking is allowed within each trading period (one phase). Banking between trading periods is not possible.

Korea Emissions Trading Scheme

Domestic offsets, i.e., Korean Offset Credits (KOCs) were allowed in Phase 1. KOCs and international credits (subject to qualitative criteria) have been allowed since Phase 2. Both domestic and international credits need to be converted to KCUs in order to be used for compliance.

PHASE ONE (2015-2017)
Qualitative Limit: Only domestic credits from external reduction activities implemented by non-ETS entities—and that meet international standards—could be used for compliance in this phase. Domestic CDM credits (CERs), and credits from domestically certified projects (Korean Offset Credits) were allowed. Eligible activities included those eligible under the CDM and Carbon Capture and Storage. However, only activities implemented after 14 April 2010 were eligible.

Quantitative Limit: Up to 10% of each entity’s compliance obligation.

PHASE TWO (2018-2020)
Qualitative Limit: In Phase 2, CERs generated after 1 June 2016 from international CDM projects developed by domestic companies are allowed. CDM projects operated by Korean companies were allowed when:
• at least 20% of the ownership rights, operating rights, or the voting stocks are owned by a Korean company;
• a Korean company supplies the low-carbon technology worth at least 20% of the total project cost; or
• the projects are funded by a Korean company with a national or regional government operating in a UN-designated Least Developed Country or a low-income economy as classified by the World Bank.

Quantitative Limit: Up to 10% of each entity’s compliance obligation (of which up to 5% can be international offset credits).

PHASE THREE (2021-2025): Offsets will continue to be allowed according to the qualitative criteria outlined for Phase 2.

Quantitative Limit: In Phase 3, the share of offsets has decreased to 5% of an entity’s compliance obligation. No separate limit for international credits applies.

Banking is allowed with restrictions across and within phases.

Borrowing is allowed within a single trading phase.

PHASE ONE (2015-2017)
From Phase 1 to Phase 2, banking was limited for each installation to 10% of their annual average allocation at a maximum of 20,000 Korean Allowance Units (KAUs). The amount that exceeds the threshold was deducted from the Phase 2 allocation.

Borrowing in 2015 was limited to 10% of an entity’s obligation and was increased to 20% in 2016 and 2017.

PHASE TWO (2018-2020)
From Phase 2 to Phase 3, banking was initially limited to the higher of two limits: the net annual amount of allowances sold by the entity in Phase 2; or company- and facility-specific limits of 250,000 KAUs and 5,000 KAUs, respectively. Borrowing was limited to 15% of an entity’s obligation in 2018.

Rules on banking and borrowing were adjusted in 2019. The borrowing limit was set by each entity’s past borrowing activity: [Borrowing limit of previous year - (“borrowing ratio” in previous year x 50%)]/entity’s emission volume.

The banking limit for the transition between Phase 2 and Phase 3 has been calculated as follows:
• For allowances from the 2018 vintage (KAU18), entities can bank either three times the net selling amount or 75,000 allowances for companies emitting >125k tCO2e (or 15,000 allowances for companies emitting >25,000 tCO2e) —whichever of the two is higher;
• For KAU19s, the amounts above are reduced by 1/3, i.e., two times the net selling amount or 50,000 for large entities (10,000 for smaller entities) allowances, again whichever is higher;
• For KAU20s, the amount represents a 2/3 reduction compared to the KAU18 rule.

PHASE THREE (2021-2025)
In the first trading year, entities can borrow up to 15% of their compliance obligation. From the second to fourth trading years, the same borrowing formula as for 2019 applies.

Banking in Phase 3:
• In the first and second compliance years (2021-2023), entities can bank up to two times their net amount of allowances (KAUs) and offsets (Korean Credit Units, KCUs) sold on the secondary market.
• In the third and fourth compliance years (2023-2024), entities’ banking limit is equal to their net amount of allowances and offsets sold.
• Phase 3 allowances and offsets can only be carried over to the first compliance year of Phase 4 (2026-2030). The banking limit in the fifth compliance year (2025) is set by an entity’s annual average net sold units (KAU21-KAU25; KCU21-KCU25) on the secondary market during Phase 3.

Mexico

QUALITATIVE LIMITS: Two types of flexibility instruments are foreseen, both of which will generate “offset credits” eligible for use under the Pilot: offsets and early action.

Offsets: SEMARNAT will establish a domestic program for the generation of credits that can be surrendered for compliance in the national ETS. Eligible mitigation projects or activities are domestic projects that have been validated and verified under internationally or domestically recognized protocols (as yet unspecified). Emission reductions related to all GHGs will be eligible, except for those related to direct CO2 emissions.

Early action: For those projects or mitigation activities operating under recognized protocols that receive offsets before the Pilot comes into force, SEMARNAT may issue offset credits if a certificate of cancellation is presented. These projects will be allowed to continue generating offsets during the Pilot.

QUANTITATIVE LIMITS: Participants will be able to meet up to 10% of their compliance obligations with offset or early action credits.

SEMARNAT is currently working on the regulations to operationalize the offset and early action provisions in the Pilot ETS.

If participants are in compliance with their surrender obligations, then their remaining allowances may be banked for use in subsequent compliance periods within the Pilot. Allowances issued in the Pilot will be valid only for the Pilot, although SEMARNAT is tasked to also assess the viability of allowing a share of Pilot allowances to be banked into the national ETS.

Although the possibility of borrowing is not explicitly stated, surrender of allowances for a given compliance period is done after allocation of allowances for the subsequent compliance period takes place.

New Zealand Emissions Trading Scheme

Units from Kyoto Protocol flexible mechanisms were eligible for use in the system with no restrictions until 2015. As of 1 June 2015, international units are not eligible for surrender in the NZ ETS. Access to high-integrity international carbon markets is likely to form part of New Zealand’s strategy for meeting its 2030 target. The government can decide to allow international units as part of the annual unit supply-setting process. However, only units from government-approved sources and those meeting environmental integrity standards would be eligible and would be subject to quantitative limits.

Banking is allowed except for those units that were purchased under the fixed price option (see “Market Stability Provisions” section).

Borrowing is not allowed.

Swiss ETS

QUALITATIVE LIMIT: International offsets were allowed up to 2020, subject to certain criteria. Most categories of credits from CDM projects in least-developed countries were allowed. Credits from CDM and JI projects from other countries were eligible only if registered and implemented before 31 December 2012. Since 2021, offsets can no longer be used to meet compliance obligations.

QUANTITATIVE LIMIT: During 2013-2020, the maximum amount of offsets allowed into the scheme equaled 11% of five times the average emissions allowances allocated in the voluntary phase (2008-2012) minus offset credits used in that same time period.

Industries that entered the Swiss ETS in the second trading period (2013-2020) could surrender offsets to cover up to 4.5% of their emissions. For aircraft operators, the quantitative limit was set at 1.5% of verified CO2 emissions.

Banking within and across phases is allowed without limits. Banked allowances from the EU ETS Phase 3 can equally be used for compliance in the 2021-2030 trading phase.

Valid certificates (CERs, ERUs) from the 2008-2012 phase could be banked into the second trading period and surrendered until April 2015. Certificates from the 2008-2012 phase that were not requested to be carried over within the deadline have been canceled.

Borrowing is not allowed. Implicit borrowing is allowed within trading periods, i.e., using allocated allowances from the current trading year for surrender obligations of the prior year.

United Kingdom

The use of offsets for compliance is not permitted at this time, although the UK government has indicated it is open to reviewing this as the scheme evolves, especially in deciding on how to implement obligations under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) alongside the ETS for aviation.

Banking of allowances is permitted, and allowances remain valid indefinitely.

Limited and implicit borrowing is allowed, i.e., using allowances allocated for free in the current year for compliance in the previous year. Covered entities are not allowed to use allowances left over from their participation in the EU ETS for compliance with the UK ETS.

USA - California Cap-and-Trade Program

QUANTITATIVE LIMIT: For compliance obligations related to 2013-2020 emissions, entities are held to a limit of meeting up to 8% of their obligations for a compliance period through offsets. Starting with their 2021 emissions, entities are subject to new limits that were established by AB 398. The share of offsets that can be used to fulfil the compliance obligation will decrease to 4% per year for 2021-2025 emissions and will increase to 6% starting with 2026 emissions.

QUALITATIVE LIMIT: Currently, six domestic offset types are accepted as compliance units originating from projects carried out according to six compliance offset protocols:

• US Forest Projects
• Urban Forest Projects
• Livestock Projects (methane management)
• Ozone-Depleting Substances Projects
• Mine Methane Capture Projects
• Rice Cultivation Projects.

In addition to setting new quantitative limits on the use of offsets, AB 398 set new limits on the types of units that can fulfil compliance obligations. Starting with 2021 compliance obligations, no more than one half of any entity’s offset usage limit can come from offsets that do not provide direct environmental benefits in the state of California (DEBS). Projects located within California are considered to provide DEBS. Offset projects implemented outside of California may still result in DEBS, based on scientific evidence and project data provided. For example, a forest project outside California has been determined to provide benefits within California by improving the quality of waters flowing through California. Recent regulatory amendments specify the criteria that will be used for determining DEBS.

Offset credits issued by jurisdictions linked with California (e.g., Québec) are eligible to be used to satisfy a California entity’s compliance obligation, subject to the quantitative usage limit.

To ensure environmental integrity, California’s offset program has incorporated the principle of buyer liability. The state may invalidate an offset credit that is later determined to have not met the requirements of an offset protocol because of double counting, over-issuance, or regulatory non-conformance. The entity that surrendered that offset credit for compliance must then substitute a valid compliance instrument for the invalidated offset credit.

Banking is allowed but is subject to the general holding limit on allowances to which all entities in the system are held. The holding limit varies based on the year’s cap. Emitting entities may also be eligible for a limited exemption from the holding limit based on their emissions levels to meet annual compliance obligations or obligations at the end of a three-year compliance period.

Borrowing from future vintage allowances is not allowed.

USA - Massachusetts Limits on Emissions from Electricity Generators

No information available yet.

Banking is allowed, but restrictions apply to guarantee that emissions in any year cannot exceed the emission limit of the prior year. This is done by adjusting the number of auctioned allowances downward to compensate for banked allowances.

Borrowing is not allowed, but the possibility of emergency deferred compliance exists.

USA - Regional Greenhouse Gas Initiative (RGGI)

QUANTITATIVE LIMIT: 3.3% of an entity’s liability may be covered with offsets. This share will remain the same between 2021 and 2030.

QUALITATIVE LIMIT: Currently, the program allows offset allowances from three offset types located in RGGI states:

(1) landfill methane capture and destruction;
(2) sequestration of carbon due to reforestation, improved forest management, or avoided conversion;
(3) avoidance of methane emissions from agricultural manure management operations.

Some states have discontinued specific offset protocols, but all states accept offset allowances issued by any participating state. To date, only one offset project (on landfill methane capture and destruction) has been approved under RGGI.

Banking of allowances is allowed without restrictions, but regulations include adjustments to the cap to address the aggregate bank. This means that the amount of allowances available for auctions in future years is reduced by the amount of allowances not used for compliance in previous control periods (see also “Cap” section).

Borrowing is not allowed.

Colombia
Indonesia
Montenegro
Russian Federation - Sakhalin
Ukraine
USA - Pennsylvania
USA - Transportation and Climate Initiative Program (TCI-P)
USA - Washington
Vietnam
Brazil
Chile
Japan
Pakistan
Philippines
Taiwan, China

The Act stipulates that the use of offset credits should give priority to domestic efforts.

No information available yet.

Thailand
Turkey
USA - New Mexico
USA - New York City
USA - North Carolina
USA - Oregon

Studies

Broekhoff, D. & Zyla, K. (2008) Outside the Cap. Opportunities and Limitations of Greenhouse Gas Offsets. World Resource Institute.

Fankhauser, S. & Hepburn, C. (2009) Carbon Markets in Space and Time. Centre for Climate Change Economics and Policy/ Grantham Research Institute on Climate Change and the Environment.

Neuhoff, K., Schopp, A., Boyd, R., Stelmakh, K., Vasa, A. (2012) Banking of Surplus Emissions Allowances. Does the Volume Matter? Deutsches Institut für Wirtschaftsforschung.

Trotignon, R. (2011) Combining cap-and-trade with offsets: Lessons from the CER use in the EU ETS in 2008 and 2009. Climate Economics Chair Publications.