Loading...
HomeMy WebLinkAboutStaff Report 8564 City of Palo Alto (ID # 8564) City Council Staff Report Report Type: Consent Calendar Meeting Date: 12/4/2017 City of Palo Alto Page 1 Summary Title: Resolution Approving Mexican Carbon Offset Purchase Title: Adoption of a Resolution Approving the Verified Emission Reduction Agreement (VER Agreement) with the Integrative Organization of Oaxaca Indigenous and Agricultural Communities to Purchase 17,000 tons CO2e for a Total Purchase Price of $136,000 From: City Manager Lead Department: Utilities Recommendation Staff recommends that the City Council (Council): 1. Adopt the attached resolution (Attachment A:) a. approving the Verified Emission Reduction Agreement (VER Agreement) with the Integrative Organization of Oaxaca Indigenous and Agricultural Communities (ICICO), to purchase 17,000 tons CO2e at $8 per ton CO2e, for a total purchase price of $136,000; and b. waiving the application of the investment-grade credit rating requirement of section 2.30.340(c) of the Palo Alto Municipal Code, which applies to energy companies that conduct business with the City; and 2. Delegate to the City Manager, or his designee, the authority to execute on behalf of the City the VER Agreement and the attached confirmation (Attachment B) with ICICO. Executive Summary To implement the Council-approved Carbon Neutral Natural Gas Plan (Resolution 9649), the City must purchase an annual quantity of carbon offsets (a.k.a. Verified Emissions Reductions or VERs) equal to the greenhouse gas emissions caused by natural gas use by City gas utility customers. In August 2017 Council adopted a Standard Form VER Master Agreement (Resolution 9703) (Attachment C) and approved VER Master Agreements with two suppliers (Resolution 9704). In approving the Carbon Neutral Natural Gas Plan, Council approved a rate impact cap of 10 cents per therm; the cost of VERs was anticipated to be $8 per ton CO2e or approximately 4 cents per therm. The City has been working with its sister city Oaxaca, Mexico on a number of sustainability issues, and, through that process learned about a forestry project that has produced high- City of Palo Alto Page 2 quality carbon offsets managed by Integrative Organization of Oaxaca Indigenous and Agricultural Communities (ICICO), a non-governmental organization (NGO). The Council- approved Carbon Neutral Gas Program contemplates the purchase of carbon offsets from U.S. project types approved by the California Air Resources Board (CARB), one of which is a forestry project type. CARB approved offsets may be registered on several registries, one of which is the Climate Action Reserve (CAR). The carbon offsets generated by the Oaxaca forestry project are quite similar to the offsets contemplated by the Carbon Neutral Gas Plan. The Oaxaca forestry project meets CAR’s Mexican forestry protocol which has only minor differences from its U.S.-based forestry protocols. Further, the agreement (Attachment B) proposed to purchase the Oaxaca carbon offsets is substantially similar to the terms and conditions in the City’s Standard Form VER Agreement, with minor changes to accommodate the international transaction. Unlike the VER Master Agreements approved by Council in September, this agreement is specific to one transaction for 17,000 tons CO2e at $8 per ton CO2e,or $136,000, and is not a master agreement for future purchases. The proposed quantity is about 10% of the City’s annual carbon offset needs. The price is consistent with staff estimates for the program, but is $0.30 per ton CO2e (0.159 cents per therm) or 3.9% more than the price of U.S. forestry project carbon offsets purchased by the City for FY 2018. Palo Alto’s $136,000 investment is supporting conservation and restoration activities within 5,900 acres of native forest. Background In December 2016, Council adopted Resolution 9649 approving a Carbon Neutral Natural Gas Plan to achieve carbon neutrality for the gas supply portfolio by FY 2018 using high-quality carbon offsets with a cost cap of no greater than a 10 ₵/therm. Forestry projects are one of 6 projects types approved for use by the City’s program (Staff Report 7533). Implementation of the Carbon Neutral Gas Plan requires executing contracts to enable the City to purchase carbon offsets. In September 2017 Council adopted a Standard Form VER Master Agreement (Resolution 9703) and approved VER Master Agreements with 3Degrees Group, Inc. and Element Markets, LLC (Resolution 9704). Under those agreements, the City has purchased U.S. forestry project carbon offsets for FY2018 at $7.70 per ton CO2e. Discussion Through Neighbors Abroad of Palo Alto, the City learned of a carbon offset program implemented by ICICO, an NGO established in 2012 with the objective to commercialize ecosystem services on behalf of 12 indigenous and agricultural communities near Oaxaca, Mexico, one of Palo Alto’s sister cities. ICICO implements projects located in High Biological Value Zones which contain flora and fauna listed in the Mexican Endangered Species List and the International Union for Conservation of Nature’s Red List of Threatened Species. The environmental projects have made local residents more aware of the health benefits of a well-maintained ecosystem and have provided opportunities for all community members to become involved, including women and youth. Revenue from the sale of carbon offsets City of Palo Alto Page 3 through ICICO’s program has funded fire protection, tree care, fresh water spring recharge, and transportation and equipment for local schools. The carbon offsets contemplated in the proposed agreement are from a forestry project in San Juan Lachao, Oaxaca and comply with a Mexican Forestry Protocol developed by CAR, a carbon offset registry used by CARB. The U.S. Forestry protocol and the Mexican protocol are similar; the minor differences are outlined in Attachment D. The Carbon Neutral Gas Plan anticipates the purchase of high quality carbon offsets approved by CARB, which includes six project types, one of which is forestry. A preference (with no specified premium) for local projects was also discussed. Sister city projects and international projects were not contemplated. ICICO has available for purchase 17,000 offsets, about 10% of the Palo Alto’s annual need, that have already been generated and certified by CAR. The proposed agreement is substantively the same as the Council-approved Standard Form VER Master Agreement. Minor modifications were made to accommodate the international transaction and restrict the agreement to this specific carbon offset purchase. If Council approves the attached agreement, then staff will implement it by executing the VER Agreement, including the attached confirmation letter, purchase of 17,000 tons CO2e at $8 per ton CO2e, or in amount equal to $136,000.00. City of Palo Alto Municipal Code Section 2.30.340 (c) requires that commodity contracts include the following: (1) governing law shall be the laws of the state of California; (2) choice of venue shall be the county of Santa Clara; and (3) a counterparty shall obtain and maintain during the term of the contract the minimum credit rating established as of the date of award of contract of not less than a BBB- credit rating established by Standard & Poor’s and a Baa3 credit rating established by Moody's Investors Services. The proposed agreement, like the Standard Form VER Master Agreement, includes the first 2 provisions. Since this agreement is for one spot purchase (a purchase for immediate or near-term delivery), like the Standard Form VER Master Agreement, there is no credit risk associated with the one transaction. Thus, the third provision regarding credit worthiness is not included as inapplicable. As such, a waiver of the application of the investment-grade credit rating requirement is requested. The City’s energy Risk Management Counterparty Contractual Guidelines require master agreement counterparties to provide audited financial statements of the counterparty or its parent, and a contract termination provision that does not provide a defaulting party with any termination payment or settlement amount for any product. Since this proposed agreement is for one spot purchase, there is no credit risk associated with this transaction. Thus, these two requirements are not included since they do not apply. Resource Impact City of Palo Alto Page 4 Funding for purchase of carbon offsets was included in the FY 2018 budget. Approval of the recommendation will not impact the FY 2018 budget. Policy Implications Adoption of the proposed resolutions conforms to the Council-approved Energy Risk Management Policy and the Palo Alto Municipal Code. Further, the recommendation is consistent with the Council-approved Carbon Neutral Gas Plan, the Gas Utility Long-term Plan and the Utilities Strategic Plan objective to manage supply cost by negotiating supply contracts to minimize financial risk. Environmental Review Council’s adoption of the attached resolution approving the VER Agreement with ICICO is categorically exempt from CEQA review under CEQA Guidelines sections 15307 and 15308, as an action taken for the protection of natural resources and the environment. Attachments:  Attachment A: Resolution Approving the Verified Emission Reduction Agreement (VER Agreement) with the Integrative Organization of Oaxaca Indigenous and Agricultu  Attachment B: Verified Emission Reduction Agreement with the Integrative Organization of Oaxaca Indigenous and Agricultural Communities  Attachment C: Resolution 9703  Attachment D: Mexican Forestry Protocol Compared to U.S. Forestry Protocol ATTACHMENT A NOT YET APPROVED Resolution No. ____ Resolution of the Council of the City of Palo Alto Approving the Verified Emission Reduction Agreement (VER Agreement) with the Integrative Organization of Oaxaca Indigenous and Agricultural Communities RECITALS A. On December 5, 2016, the Council adopted Resolution 9649 approving a Carbon Neutral Natural Gas Plan to achieve a carbon neutral gas portfolio by fiscal year 2018 with no greater than a 10¢/therm rate impact. B. In accordance with the Carbon Neutral Natural Gas Plan, the City must purchase environmental offsets or verified emission reductions equal to the annual emissions from natural gas use by all City of Palo Alto Natural Gas Utility customers. C. By Resolution 9703 approved August 21, 2017, Council approved the standard form Verified Emissions Reduction Master Agreement (Standard Form VER Agreement). D. Oaxaca, Mexico is a sister city of the City of Palo Alto. E. The integrative organization of Oaxaca Indigenous and Agricultural Communities (ICICO) sells environmental offsets from a forestry project in Oaxaca, Mexico (the Oaxaca Project). F. The carbon offsets generated by the Oaxaca Project are substantially similar in type, protocol and price to those contemplated by the Carbon Neutral Natural Gas Plan. G. The proposed Verified Emission Reduction Agreement to be entered into with ICICO to purchase $136,000 of carbon offsets generated by the Oaxaca Project (the Oaxaca VER Agreement) is substantively similar to the Standard Form VER Agreement, with minor changes to reflecting the international transaction. NOW, THEREFORE, the Council of the City of Palo Alto RESOLVES as follows: SECTION 1. The Council hereby approves the Oaxaca VER Agreement with the ICICO to purchase 17,000 tons CO2e at $8 per ton CO2e from the Oaxaca Project, for a total purchase price of $136,000; and SECTION 2. The Council waives the application of the investment-grade credit rating requirement of Section 2.30.340(c) of the Palo Alto Municipal Code, which applies to energy companies that do business with the City; and SECTION 3. The Council hereby delegates to the City Manager, or his designee, the authority to execute the Oaxaca VER Agreement, and confirmation letter, and any documents necessary to administer the Oaxaca VER Agreement that are consistent with the Palo Alto Municipal Code and City Council approved policies; and SECTION 4. Adoption of this Resolution approving the Oaxaca VER Agreement is categorically exempt from CEQA review under CEQA Guidelines sections 15307 and 15308, as an action taken for the protection of natural resources and the environment. INTRODUCED AND PASSED: AYES: NOES: ABSTENTIONS: ABSENT: ATTEST: City Clerk Mayor APPROVED AS TO FORM: APPROVED: Deputy City Attorney City Manager Director of Administrative Services Director of Utilities ATTACHMENT B 170808 jb 6053990  Resolution No. 9703  Resolution of the Council of the City of Palo Alto Approving a  Standard Form Master Agreement for the Purchase and Sale of  Verified Emission Reductions  RECITALS  A. On December 5, 2016, the Council adopted Resolution 9649 approving a  Carbon Neutral Natural Gas Plan to achieve a carbon neutral gas portfolio by fiscal year  2018 with no greater than a 10¢/therm rate impact.  B. In accordance with the Carbon Neutral Plan, the City must purchase  environmental offsets or verified emission reductions equal to the annual emissions from  natural gas use by all City of Palo Alto Natural Gas Utility customers.  C. By Ordinance 5387 adopted August 15, 2016, Council approved changes to  the Municipal Code specifically streamlining the purchase and sale of wholesale utility commodities and services and explicitly allowing for standard form Master Agreements.  D. Negotiated Master Agreements with specific verified emission reduction  gas suppliers will be recommended to Council for approval with maximum expenditure  limits and transaction terms.  NOW, THEREFORE, the Council of the City of Palo Alto RESOLVES as  follows:  SECTION 1.  The Council hereby approves that attached standard form Verified  Emission Reduction Master Agreement.   SECTION 2.  The Council waives the application of the investment­grade credit rating  requirement of Section 2.30.340(c) of the Palo Alto Municipal Code, which applies to energy  companies that do business with the City.   //  //  //  //  DocuSign Envelope ID: EEE7FCF3-601F-4D93-81FC-EBFE75A7C5CB ATTACHMENT C 170808 jb 6053990  SECTION 3. Adoption of this Resolution is not subject to California  Environmental Quality Act (CEQA) review as an administrative governmental activity that will  not result in any direct or indirect physical change to the environment as a result (CEQA  Guidelines section 15378(b)(5)).  INTRODUCED AND PASSED: August 21, 2017 AYES:  DUBOIS, FILSETH, FINE, HOLMAN, KNISS, KOU, TANAKA, WOLBACH  NOES: ABSTENTIONS: ABSENT: SCHARFF ATTEST:  City Clerk Mayor  APPROVED AS TO FORM: APPROVED:  Counsel to the City of Palo Alto City Manager  Director of Administrative Services   Director of Utilities  DocuSign Envelope ID: EEE7FCF3-601F-4D93-81FC-EBFE75A7C5CB ATTACHMENT D September 27, 2017 Climate Action Reserve Mexico Forest Protocol Comparison to ARB Compliance Offset Protocol The Climate Action Reserve (Reserve) adopted Version 1.5 of the Mexico Forest Protocol (MFP) in September 2017. The Reserve initially envisioned that the MFP would be a simple adaption of the Reserve’s Forest Project Protocol, which was adapted in 2011 by the California Air Resources Board (ARB) to be the Compliance Offset Protocol for U.S. Forest Projects. However, due to differences in laws and conditions in Mexico, more than a simple adaptation was required. The Reserve thus modified certain methodologies for Mexico forest projects, while still ensuring that the MFP complies with the Reserve’s rigorous standards for greenhouse gas quantification that ensure that all offsets generated are real, additional, permanent, quantifiable and verifiable. The primary modifications made to the MFP, as compared to the Reserve’s Forest Project Protocol or the ARB’s compliance protocol, are detailed below.  Permanence: Permanence is defined as a period of 100 years in both ARB’s compliance protocol and the MFP. In order to comply with this principle, the compliance protocol requires that each forest owner sign a contract for 100 years. In Mexico, however, the Agrarian law does not permit communities and ejidos to sign a contract for longer than 30 years. In order to comply with the permanence period of 100 years, the Reserve employed tonne-year accounting, which proportions credits by the amount of time each tonne of carbon is secured by contract proportionate to 100 years and the radiative forcing coefficient for maintaining that tonne out of the atmosphere for each year.  Permitted activities: The ARB compliance protocol permits crediting for improved forest management, reforestation or avoided emissions. Each project under ARB’s compliance protocol must submit the project under one defined activity type. However, the Mexican Norm 173 states that avoided emissions may only be credited under a jurisdictional accounting framework such as REDD or REDD+. For this reason, the MFP only permits crediting for enhanced carbon sequestration, such as improved forest management or reforestation. The MFP further permits each project to implement various carbon enhancing activities under one project.  Baseline: The ARB compliance protocol has different methodologies for establishing the baseline based on the different project types. The improved forest management projects require the use of a common practice, which establishes the average carbon stock for any given region and forest type based on FIA data. A project’s baseline is then established by developing a project-specific 100-year average for forest carbon stocks (taking into account legal and financial feasibility) and comparing this average to common practice. In Mexico, since avoided emissions are not credited at a project level accounting, there was no need to develop the long- term trend for carbon stocks, nor the more complicated common practice values and comparison. Instead, the baseline must pass a risk analysis demonstrating that the forest is at risk of landcover conversion, and if a forest passes this analysis, the baseline for the crediting ATTACHMENT D September 27, 2017 period is calculated as the initial carbon stocks at the time of project initiation. In the MFP, under no scenario can a project receive credits for carbon that was stored prior to the project’s start date.  Social safeguards: The Reserve developed social safeguards for communities and ejidos that implement a forest carbon project. These safeguards ensure free, prior and informed consent, transparency, notification and documentation, and a communal governance structure for the project. The ARB compliance protocol does not have such social safeguards.  GHG Sources, Sinks and Reservoirs: The ARB compliance protocol allows for crediting for carbon stored in in-use forest products; however, the MFP does not allow for any crediting for carbon stored in in-use forest products, maintaining a conservative quantification.  Standardized methodology: The MFP has a standardized inventory methodology designed to reduce costs for project implementation as well as support local employment by promoting the use of local forest technicians to develop and maintain the carbon inventory. The MFP further has a companion access database tool, developed by the Reserve, that project operators must use to manage inventory data, calculate forest carbon based on approved biomass equations, develop project baselines, and grow inventory data with the use of approved growth equations and updated plot data. The use of the approved database tool helps to ensure quality control of project data management as well as reduce costs for project development and verification. The ARB compliance protocol does not have a standardized inventory methodology, nor an approved database tool. The Mexico Forest Protocol maintains rigorous standards for forest management and native species protection through the development of environmental safeguards, which are similar to the Sustainable Harvesting and Natural Forest Management criteria included in the ARB compliance protocol. The MFP further employs similar methodologies for dealing with secondary effects, confidence deductions, and regular monitoring and verification requirements. All of the Reserve’s protocols, including the MFP, are based on the principles of ensuring a complete, consistent, precise, transparent, and conservative accounting.