Greenhouse gas credit trading in Colorado

A few key terms used in credit trading programs include:

Carbon dioxide equivalent, or CO2e: A standardized unit of measurement that compares the global warming potential of different greenhouse gases. CO2e converts other greenhouse gases, such as methane and nitrous oxide, to an equivalent amount of carbon dioxide based on their respective global warming potentials over a specific time period, usually 100 years. This allows scientists and regulators to analyze greenhouse gas impacts through a standard unit.

Credit: A credit represents a reduction of one metric ton of CO2e beyond the emissions limit that a company is required to achieve. 

• Note: In Colorado, all credits must represent reductions that have already happened. The state reviews the accuracy of reported data before issuing credits to a company that they can buy, sell, or retire early for compliance in a trading program. Credits differ from allowances and offsets, which are defined below. 

Allowances: An allowance represents the right of a facility to emit a certain amount of greenhouse gases. 

• Note: Colorado does not issue allowances. Allowances are different from credits. Allowances are used in the cap-and-trade programs of some other jurisdictions. 

Offsets: An offset allows a company to invest in offsite greenhouse gas removal projects. The company can then count the emissions removed from the atmosphere through these projects towards its own emissions limit. Offsets projects can take place in other states or even other countries. 

• Note: Colorado does not allow offsets in its credit trading programs. Not using offsets in Colorado helps ensure greenhouse gas reductions occur within Colorado and protect the air quality of Colorado’s communities. 

Bank: A company can bank, or or hold on to, credits earned through onsite reductions in Colorado. 

• Note: In Colorado, companies can bank credits for up to three years after those credits were first generated. At the end of the banking period, credits expire and may go toward the company’s individual emissions limit or remain unused. Unused credits, meaning credits not counted towards a company’s emissions limit, essentially represent more emissions reductions beyond what a company was required to achieve.

Carbon leakage: This term refers to when a company moves its operations out of the state to jurisdictions with less stringent environmental regulations. Carbon leakage can worsen overall climate impacts, cause job loss, and possibly increase the prices of products for consumers. Colorado aims to prevent carbon leakage through its policies and regulations, while still ensuring ambitious greenhouse gas reductions in the state and protecting clean air in local communities. 

Real: Real greenhouse gas emissions reductions are those that:

• Result from an action or set of actions that can be shown or proven; and 
• Are quantified using appropriate, accurate, and conservative methodologies.

Additional: Greenhouse gas emissions reductions that go beyond any reductions required by law, regulation, or legally binding mandate. In other words, additional reductions are more than required. This is also known as additionality.

Quantifiable: Greenhouse gas emissions reductions must be able to be reliably and accurately measured using numbers. 

Permanent: The priority for permanence is to ensure that any credits awarded represent greenhouse gas emissions reductions that endure over time. Greenhouse gas emissions reductions either:

• Must not be reversible, meaning that they cannot be released back into the atmosphere through natural processes or human activities; or 
• There must be mechanisms to replace any reversed emissions reductions. 

Verifiable: The division can objectively certify that any reported emission reductions at a regulated source tied to greenhouse gas credits are well documented and transparent. This means that the Division can verify the emissions reductions are real and occurred for the relevant compliance year.

Enforceable: All participants and credits are subject to and must comply with the legal requirements of the credit trading program rules with oversight by the entity administering the program, in this case, the State of Colorado.

There are two main types of credit trading programs:

• Baseline-and-credit.
• Cap-and-trade.

Baseline-and-credit

Colorado follows a baseline-and-credit approach. This approach provides credits to companies only if they lower their onsite emissions below their specific emissions limit established in statute or regulation. In other words, companies can only earn credits by doing more than required by law.

Companies can then sell credits earned to other companies in the sector. The companies buying credits are typically those that cannot fully achieve their emissions limits through onsite emissions reduction measures.

By using credit trading programs within specific sectors instead of across the entire economy, Colorado ensures that greenhouse gas reductions happen within each regulated sector. This targeted approach means communities affected by emissions from these sectors will see more locally focused efforts to reduce pollution, leading to better air quality. 

Cap-and-trade

Colorado does not follow a cap-and-trade approach. This approach allocates or auctions a certain amount of allowances to companies equal to the number of metric tons of carbon dioxide equivalent the companies are allowed to emit. If a company’s emissions exceed its allowances, it must purchase additional allowances equal to its excess emissions. Companies must then surrender allowances equal to their total emissions during the compliance period. Some markets that use this approach recognize offsets as a compliance mechanism for regulated entities.