Climate Bill Report: Carbon Offsets Abroad Likely Greater Than Emissions Reductions at Home

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On Tuesday, a non-partisan government agency released an analysis of the climate change bill being considered by Congress, examining what impact the pending legislation would have on energy markets and the economy.

The Energy Department’s Energy Information Administration (EIA) projected that the American Clean Energy and Security Act would, by 2020, result in an $134 a year increase in an average household’s energy bill. Immediately, both proponents and opponents of the bill began touting the estimate – which projected a modest increase in energy prices through the year 2030 – as bolstering their side’s argument.

ACES proponents said the increase, roughly 23 cents a day, was nominal, while opponents called it an energy tax.

But in the back and forth, an important point was obscured: the report showed wide-ranging uncertainty over how effective the bill will be in meeting one of its primary goals — reducing the emission of greenhouse gases from capped sources of pollution in the United States.

That’s because a safety valve built into the bill – carbon offsets – makes it possible for polluters to pay someone else to reduce emissions instead.

ACES proposes to cut emissions of the greenhouse gases responsible for global warming several ways, including a cap-and-trade program, an improvement in technologies like carbon capture and storage and nuclear energy, and the buying and selling of carbon offsets.

If ACES passes, the amount of carbon dioxide companies can emit will be capped. If they emit more than that limit, they can meet the target by paying for a reduction of greenhouse gases elsewhere, thus offsetting their excess emissions.

But the rules are so complicated that the outcome is actually a big guessing game, even for the EIA.

“Uncertainty with regards to offsets falls into several areas: how much is technically available, how much of the technically available will turn out to be economic, how much and how fast will this potential supply be brought to market, and lastly, how long will it take to set up the required international agreements or arrangements, monitoring, verification, and trading infrastructure needed,” says Alan Beamon, the EIA’s Director of the Office of Integrated Analysis and Forecasting.

The unpredictability of these factors led the EIA to construct six different scenarios constructed around different assumptions. The results differ widely, depending on the scenario. For instance, net emissions in 2020, taking into account actual emissions as well as offsets, could be as low as 5.08 billion metric tons of carbon dioxide equivalent, or as high as 6.79 billion – 33% higher.

But the EIA’s first key finding highlighted the large role that offsets are expected to play if the bill becomes law. 

Given the potential of offsets as a low-cost compliance option, the amount of reduction in covered emissions is exceeded by the amount of compliance generated through offsets in most of the main analysis cases.

In other words, it is most likely that the emissions cap in the ACES bill will be met less by reductions of CO2 at home, and more by paying others abroad to make reductions instead.

Offsets are meant to fund new emissions reduction projects — projects that would not have happened if the offset hadn’t been purchased. But that is easier said than done.

For instance, a company may intend to offset its excess emissions by preventing the chopping down of some trees that were slated to become timber. But, how can the company prove that the owner did intend to chop down the forest? Or, if a company offsets its emissions by planting a forest, should they receive the credits toward their emissions target before the trees grow to absorb the amount of carbon dioxide they are meant to offset? What if the trees die before they reach maturity?

ACES allows for two billion metric tons of carbon offsets annually. It is an amount equivalent to a third of all the energy-related greenhouse gas emissions in 2008. It is also almost six times the projected growth in energy-related emissions through 2030 under a business-as-usual scenario. But will all those offsets really be available?

The EIA analysis, recognizing the uncertainty in offset supply, made projections for six different scenarios. In the rosiest scenario, offsets are implemented easily, but gradually and steadily, in terms of cost, regulation and negotiations with foreign countries. A second possibility is that technology breakthroughs offer companies cheaper ways to reduce emissions than buying offsets, resulting in a less robust domestic and international offsets program. In another scenario, the maximum amount of international offsets is used starting in 2012, reducing the amount of offsets used domestically. And yet another forecast made the assumption that international offsets would be severely limited.

Currently, the nascent offsets industry is struggling to meet demand. A 2008 working paper on international carbon offsets by Stanford University’s Michael Wara and David Victor said,

“In practice, much of the current [carbon offsets] market does not reflect actual reductions in emissions, and that trend is poised to get worse…. Also, the rate at which [carbon offset] credits are being issued today—at a time when demand for such offsets from the European [Emission Trading Scheme] is extremely high—is only one-twentieth to one-fortieth the rate needed just for the current [carbon offset] system to keep pace with the projects it has already registered.”

On the other hand, if enough offsets are readily available and therefore inexpensive, that will remove incentive to actually reduce emissions. Andy Kydes, EIS senior technical advisor to the Office of Integrated Analysis and Forecasting, says that in that instance, “You get to keep more of your coal, because it’s cheap enough in that instance to use more of it, because you can buy cheap international offsets.”

The fear is that offsets could turn out to be a cheap way to allow companies to keep polluting. In most of the EIA scenarios, offsets accounted for a greater reduction in greenhouse gases than cuts in existing emissions from capped sources of pollution. In one scenario, reductions from capped sources of pollution only account for 39% of emissions cuts and in another scenario, they account for only 22%.

The effectiveness of offsets also depends on policy initiatives and market conditions. While the EIA report tried to account for these, it conceded, “Such estimates are naturally subject to a great deal of uncertainty, particularly with regard to international offsets.” Still, international offsets make up the majority of greenhouse gas reductions in four of the six scenarios in the estimate.

Government bureaucracy and negotiations could stall the implementation of an offset trading scheme. The Environmental Protection Agency has yet to negotiate and set up the parameters, definitions and verification systems necessary for a domestic offsets program. International offsets complicate the picture even further: other nations need to establish their offset programs and then international agreements governing offsets need to be negotiated and to take effect.