Power utilities regulated by California’s Cap and Trade program routinely purchase and retire California Carbon Offsets (CCOs) to satisfy compliance obligations. Under certain circumstances, these CCO’s can be invalidated after they have been retired. When CCO’s are invalidated, the entity that retired the CCOs must replace them at their own cost.

CCOs are priced according to perceived invalidation risk.  The discount from California Carbon Allowances (CCAs) at which CCOs transact is intended to be based on invalidation risk.  Unfortunately, the market largely underestimates invalidation risk of individual projects.

The market has historically relied on project operators, verifiers, and high-level internal reviews to assess and quantify invalidation risk.  Project operators are incentivized to minimize perceived risk of offsets they generate in order to command high prices.  Verifiers do not assess validation risk.  Internal reviews are ineffective because capped entities do not have the knowledge, experience, or time to perform due diligence at a sufficient depth or breadth.

ECC has compiled a database of offsets projects based on thousands of documents sourced through public and proprietary channels.  In order to process our findings into meaningful results, we developed a systematic process to evaluate projects and quantify CCO invalidation risk.  Our findings suggest that nearly 20% of CCOs have a high invalidation risk.

ECC’s risk work goes beyond risk quantification.  Our services include development of risk mitigation plans, implementation of mitigation measures, and developing strategies for entities with unavoidable exposure to invalidation risk.