Climate Solutions Group

CSG’s New Offset Product Offering

CSG Product Offering


Jun 2017


The Climate Solutions Group Limited has created a structured offset product that will represent a proportionate share of the deliveries from a portfolio of offset contracts to be used by emitters to assist in satisfying compliance obligations in an efficient and economical manner. The offsets will be usable, as chosen by the GHG emitter, in Alberta or the linked Western Climate Initiative jurisdictions (soon to include Ontario). The structured product is designed to exhibit the invalidation and delivery risk characteristics of an offset backed by an investment grade balance sheet. This is an attractive product for emitters who want to minimize compliance costs and optimize carbon risk exposure. Let’s break down this product further.

To start, we’ll give a brief overview of the two main types of risk of concern to emitters – invalidation risk and delivery risk – and explain how CSG mitigates these risks in our product offering. Let’s begin with invalidation risk.

Invalidation Risk

Invalidation is the risk that an offset credit created by an offset project will be cancelled upon review by a regulator. Invalidation risk applies to offsets that are created in California. In Quebec and Ontario, invalidation risk is partially mitigated by a buffer pool (proposed) in which 3% of offsets are set aside in case an offset project is invalidated.

Invalidation can occur in California if the Air Resources Board (ARB) determines that an offset project has any one of the following characteristics laid out in ARB guidance:
• Overstatement of GHG Reductions or Removal Enhancements
• Double Issuance for GHG Reductions or Removal Enhancements
• Non-Compliance with Laws and Regulations

In California, three different grades of California Carbon Offsets (CCOs) are used to refer to the invalidation risk of an ARB issued offset credit[1].

CCO GradeExplanation Illustrative Price[2]
CCO-8Offset projects that have been verified once and carry the potential for invalidation by the Air Resources Board over the next 8 years$10.12
CCO-3 Offset projects that have been verified a second time by a different approved verifier and are eligible for invalidation by the Air Resources Board over the next 3 years$10.44
CCO-GoldenOffset projects that have a replacement cost offer guaranteed by an investment grade balance sheet which ensures the offset is replaced if invalidated$11.50

Notice that the price of the different CCO grades rise with a decreased risk of invalidation. Golden CCOs are, of course, the most attractive option for regulated emitters because they are a compliance instrument that will be replaced if invalidated. The replacement offer is backed by an investment grade balance sheet, hence carrying a very low risk of default. But Goldens come at a higher price. If an emitter wants to cut carbon compliance costs by purchasing lower CCO grades, they become exposed to some level of invalidation risk.

CSG mitigates invalidation risk though a number of processes including the careful oversight of the project registration and issuance processes. The result is a portfolio of offsets that have risk characteristics that are similar to a Golden CCO. Two components of the CSG’s Active Risk Management (ARMTM) process are (i) the requirement of due diligence by qualified entities and (ii) registration in an approved registry that requires proof of singular sales. Another device that CSG uses to mitigate invalidation risk is our reserve margin of compliance instruments that allows us to replace invalidated offset credits. The reserve margin is explained further below.

Delivery Risk

Delivery risk is the risk that a project will fail to deliver the full amount of compliance instruments (carbon offsets) set out in a contract, or the risk that the offsets don’t get delivered to the emitter. This risk can arise at the project level but also in the transactions that transfer the offsets to the emitter after issuance. Delivery risk arises from factors such as:
• Counter-party risk
• Regulatory risk
• Project Operations Risk
• Finance and Economics Risk
• Emission Reduction Production Risk

Categories within these risk factors have varying weights on how the overall risk is quantified and weighted. Emitters and even offset project developers may be limited in their ability to understand the complexities and interrelatedness of these risks. That’s where CSG comes in.

Active Risk Management (ARMTM) at The Climate Solutions Group

CSG overcomes both invalidation and delivery risk through their carbon offset structured product offering. How? CSG has developed a highly effective risk management process called Active Risk Management (ARMTM). At the heart of ARM is our proprietary Carbon Offset Risk Evaluation (CORETM) tool that quantifies the probability of delivery risk. Each individual risk category is broken down, analyzed, and rated to predict expected P97 values and standard deviation. This level represents a 97% probability that the volume set out in each offset contract will be delivered.

In addition to the high probability of delivery, CSG reduces risk in three ways:
1. Diversification: CSG’s portfolio of offsets projects is diversified across counter-parties, projects and geographies. Portfolio diversification is well understood to further reduce delivery risk.

2. Reserve margin: The CSG portfolio has a “reserve margin” of compliance instruments. This reserve ensures contracts are fulfilled in the event that offsets are not delivered.

3. Options: CSG structures contracts with offset developers to ensure we have access to a large volume of offset purchase options.

All together, the high probability of delivery from a contract, the diversified portfolio, the reserve margin and the offset options mean that we believe the CSG structured product carries lower delivery risk than an offset backed by an investment grade balance sheet. CSG’s portfolio has an extra volume of compliance instruments on tap to ensure it can replace any invalidated offsets that may occur.

Creating Value

In addition to our robust risk management processes, CSG has also developed proprietary tools to determine the value of the offset stream from carbon offset projects. This allows CSG to determine which projects will enhance our carbon asset portfolio and how much project development capital the portfolio can provide to the developer of any particular project.

CSG’s new offset product offering creates value for emitters, offset developers, and investors. This product accelerates the capital deployment that is critical for reducing greenhouse gas emissions. The time for profitable low carbon investments is now.

If you are interested in the Climate Solutions Group’s offset product, contact one of our principals.

[1] California Air Resources Board Offset Credit Regulatory Conformance and Invalidation Guidance (2015). Retrieved from:
[2] Offset Price (2017) California Carbon. Retrieved on May 29, 2017 from

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