Foreign Carbon Offsets Under California’s AB 32 Cap and Trade Law for Developing Countries and Least Developed Countries

California’s AB32, the State’s groundbreaking Greenhouse Gases control law, allows for the selling and purchase of carbon offsets, which may be used by California businesses and entities to achieve the mandatory carbon emission reductions, avoidances or sequestrations required by the law.

Covered gases include carbon dioxide, hydroflourocarbons and nitrogen dioxide and others

First, approval by the California Air Resources Board (“ARB”) of carbon offsets and trading programs - including Foreign carbon offsets located internationally - will be likely granted per regulations to be adopted by the Board.

Those regulations will be finalized later in 2011 (according to their published schedule), but draft regulations have been prepared and may provide you with some helpful information to get you started on the right course.

Second, under the draft regulations foreign forest and other offset credits will be allowed in “Developing Countries and “Least Developed Countries”, and not just in or from California, Canada, or states which have entered into a Cap and Trade Compact with California.

“Developed Countries” are defined as those which are eligible for assistance under the income guidelines of the Development Assistance Committee of the Organization for Economic Cooperation and Development (“OECD”).

“Least Developed Countries” are those defined by United Nations resolutions 59/208, 59/210 and 60/33 in 2007.

Preference is given to the latter group of countries, but it is possible that there might not initially be many applicants from those countries.

To qualify, an offset program in those countries must be approved by the California Air Resources Board for various types of offsets, including for example, forest offsets.

The country where the offset project is located must enter into a formal Memorandum of Understanding agreement with the State of California whereby the country commits to continuing monitoring and auditing of the offset program, as required by the ARB regulations, so as to insure compliance with the California program for the life of the program, which could be 20-100 years.

The foreign government must establish its own offset credit and monitoring programs for various types of offsets, and then California must approve that program and enter into a “Memorandum of Understanding” with the foreign government for the continued operation of the program, perhaps with the assistance of their local consulates and California local counsel.

As far as the specific offset credits allowed, the proposed regulation now refers to external third-party carbon offset calculation systems which are apparently still in development, and include the CDM under the Kyoto protocol, so the foreign government would need to comply with those requirements to obtain approval of its offset program.

The programs are also subject to independent verification through site visits, etc

Smaller sources of offsets may be aggregated or combined by a private or governmental agency.

California’s auction process for the Cap and Trade provisions of AB 32 are in effect.