Attorneys in Beveridge & Diamond’s San Francisco office recently helped the largest developer of greenhouse gas (GHG) offset credits in the U.S., Environmental Credit Corp. (ECC), secure a favorable determination from the California Air Resources Board (CARB) with respect to its investigation of GHG offsets generated at the Clean Harbors facility in El Dorado, Arkansas.

CARB was initially poised to invalidate 231,154 GHG offsets issued for the destruction of ozone depleting substances (ODS) at the Clean Harbors facility, including 142,199 offsets developed by ECC, on the basis that the Clean Harbors facility had allegedly been in violation of the federal Resource Conservation and Recovery Act (RCRA) during the time that the ODS destruction projects took place.  In CARB’s Final Determination, issued on November 14, 2014, CARB went ahead with the invalidation of 88,955 credits developed by another offset developer, but reversed its initial decision to invalidate ECC’s credits because ECC proved that its ODS destruction project took place at the Clean Harbors facility several hours after the alleged RCRA violation was cured.

Background – Offset Credits and ODS Destruction

Pursuant to its Cap and Trade Regulation, CARB issues GHG offsets to project developers that create and document GHG reductions according to the strict requirements of CARB’s “Offset Project Protocols.”  CARB has issued several different protocols for a variety of offset projects, including ODS destruction projects.  ODS projects help mitigate climate change by facilitating the destruction of potent ozone-depleting substances, such as refrigerants like chlorofluorocarbons (CFCs).  Once offset credits are issued by CARB for a given project, the project developer may then sell the credits to entities subject to California’s cap-and-trade program, and the credits can be used by those entities to meet a certain percentage of their compliance obligations under the program.

Consistent with CARB’s ODS Protocol, ECC has facilitated several ODS destruction projects by purchasing used CFC gasses and arranging to have them destroyed at the Clean Harbors facility.  CARB issued ECC offset credits for those projects, and has always recognized that the GHG reductions created by those projects are real, additional, and verifiable.

The Investigation of the Clean Harbors Facility

In April of 2014, Clean Harbors entered into a Consent Agreement and Final Order (CAFO) with the U.S. Environmental Protection Agency (EPA) to resolve alleged RCRA violations at the facility.  Consistent with its state-issued RCRA permit, Clean Harbors had for many years sold brine generated at the facility as a byproduct of chemical incineration.  In 2012, EPA informed Clean Harbors that it viewed the sale of brine byproduct as a violation of RCRA, and Clean Harbors ceased selling the brine shortly thereafter.  In entering into the CAFO, Clean Harbors did not agree that it had violated RCRA, and no formal finding of violation was ever made.

On May 29, 2014, CARB seized approximately 4.3 million offset credits that had been issued for ODS destruction at the Clean Harbors facility pending an investigation of the alleged RCRA violation.  On October 8, 2014, CARB issued its “Preliminary Determination” in the investigation, in which it indicated that 231,154 offsets should be invalidated because they were issued for ODS destruction projects that took place at Clean Harbors after the facility had been notified of EPA’s view that the sale of brine was RCRA violation, but before Clean Harbors ceased selling the brine.  CARB cited the “regulatory compliance requirement” in the ODS Protocol, which requires that the facility in which the project takes place meet all federal, state, and local environmental and safety regulations.  CARB allowed a brief period for public comment on its Preliminary Determination before issuance of its Final Determination.

Response to CARB’s Investigation and Preliminary Determination

CARB’s investigation and Preliminary Determination attracted significant attention among offset project developers and entities regulated by California’s cap–and-trade program, as it was CARB’s first attempt to invalidate offsets that had already been issued and sold into the compliance market.  In comment letters, members of the regulated community criticized CARB’s conduct during its investigation and the reasoning in its Preliminary Determination as contributing to significant regulatory uncertainty.  Industry representatives commented that:

• CARB based its investigation on an alleged violation, not a formal finding;

• The alleged RCRA violations at Clean Harbors did not concern the project operations, but rather the management of downstream waste by the facility, and were beyond the control of the project developers;

• As CARB acknowledged, the alleged RCRA violations did not bear on the additionality of the GHG reductions associated with the credits;

• None of the ODS destruction projects at issue contributed to the actual brine that was sold by Clean Harbors, and;

• CARB seized 4.3 million offset credits before it actually determined that invalidation was appropriate.

In addition to these general points, ECC noted in its comments that CARB had mistakenly asserted that CFCs are always “listed hazardous wastes” under RCRA, when in fact used CFCs are not listed hazardous wastes.  ECC warned that, unless CARB corrected this error, the viability of ODS projects could be in jeopardy.  ECC also argued that its own ODS destruction project at Clean Harbors began several hours after the last tanker truck of brine left the Clean Harbors facility and should therefore not be impacted by the alleged violation.

CARB’s Final Determination

On November 14, 2014, CARB issued its Final Determination, in which it exempted ECC’s credits from invalidation because ECC’s project had begun after the alleged RCRA violation was cured.  CARB also concurred with ECC’s view of the treatment of CFCs under RCRA, acknowledging that used CFCs are not “listed hazardous wastes.”

Implications

While CARB’s decision was favorable for ECC, and while only 88,955 credits were ultimately invalidated of the 4.3 million originally seized, CARB’s decision is nonetheless likely to have a negative impact on the offsets market.  CARB has displayed a willingness to invalidate offset credits on the basis of a mere allegation by EPA of a violation unrelated to the offset project.  Many offset projects take place within complex facilities that face a broad array of federal, state and local environmental and health and safety requirements.  If a part of the facility unrelated to an offset project falls into non-compliance with any of these regulations, the offsets may be subject to future invalidation at the broad discretion of CARB.  This regulatory uncertainty may have a chilling effect on the market for offsets.

The offsets industry would benefit from CARB-issued guidance clarifying how project developers can ensure regulatory compliance.  For example, ODS project developers could seek guidance from CARB or EPA to clarify how to determine the status of ODS under RCRA, and otherwise attain full regulatory compliance.  In addition to pushing CARB for additional clarification, project developers and offset purchasers should consider how they can best allocate the liability of retroactive invalidation by contract.