While ROI forecasts that the supply of spot offsets in the 2013 to 2020 period will be about 71 million tons, these offsets will be encumbered, that is, facing buyers’ liability, meaning that they are not one –to- one substitutable with allowances. The spot offsets which have not been subjected to two verifications and passed at least the three year (and some cases the eight year) vulnerability period will carry substantial risk and therefore are not fully substitutable for an California issued allowance carrying no risk. Note that even though the probability of an offset being invalidated because of some fault is low, the monetary risk could be high as a replacement offset must be secured as a replacement. The price of the offset purchased could be very high perhaps over $40 per ton. This unknown monetary risk is a substantial encumbrance to the retirement of an offset that has not passed the three or some cases eight year hurdle.
If we take into account that only a golden spot offset (one that is not encumbered by buyers’ liability) is truly substitutable for an allowance then the supply picture changes substantially. Risk adjusted the 2013-2020 supply of golden spot offsets is projected to be 33 million tons with a standard deviation of 4 million tons.
Note that Golden offsets are being offered by some trading houses but these offsets are essentially secondary guaranteed offsets with trading house or other creditworthy seller taking the risk. At some point, the contracts will either need to be filled physically by an offset that has passed through the buyers’ liability window or monetarily. At the true up date, compliance obligations will need to be satisfied by unencumbered offsets and allowances.