California investigating validity of 4.3 mln carbon offset credits

SAN FRANCISCO, June 4 (Reuters) - California is reviewing half of the offset credits it has issued for its carbon market while regulators investigate whether wrongdoing at an incineration facility in Arkansas rendered those credits out of compliance with the cap and trade program's rules.

The California Air Resources Board (ARB), which polices the market, notified carbon account holders late last week that the credits would be frozen while it examines 4.3 million credits issued for the destruction of ozone depleting substances (ODS), primarily CFC refrigerants recovered from old refrigeration and air conditioning equipment, which are powerful greenhouse gases.

ODS has been the most popular offset type in the nascent California market, which allows businesses to surrender lower-priced offset credits instead of carbon emissions permits to meet up to 8 percent of their compliance obligation.

If the credits are invalidated it would do little to already weak carbon prices in the short term but would be a blow to a key mechanism designed to keep prices low over the long term.

At issue is a violation levied in April by the Environmental Protection Agency against the Clean Harbors Incineration Facility in El Dorado, Arkansas, where the majority of U.S. ODS destruction has occurred.

The EPA said the facility improperly disposed of brine generated by the facility's incinerator in violation of its operating permit and fined Clean Harbors $581,236.

That prompted ARB to launch an investigation into whether that violation undermined the integrity of the credits.

Owners of the credits have 25 days to comment to ARB on the situation. The regulator then has 30 days to make a final determination on whether to invalidate the credits or return them to their owner's accounts.

One ODS offset project developer said he was confident that none of the credits would be revoked.

"The brine byproduct and its subsequent handling had no impact on ODS destruction and isn't relevant to the ODS destruction project's activities," said Jeff Cohen, a senior vice president at EOS Climate, the largest producer of ODS credits for the market.

"I expect that the ARB will ultimately conclude that too, and all the credits will remain valid," he said.

Demand for California offset credits has been virtually non-existent in recent months amid an oversupply of emissions permits in the market.

"This hasn't done anything to prices because there are no prices," one carbon broker said on Wednesday.

"The market will remain frozen until ARB provides some clarity," he said.

(Reporting by Rory Carroll; Editing by Ken Wills)