The Role of Offsets in a Greenhouse Gas Emissions Cap-and-Trade Program: Potential Benefits and Concerns

Congressional research reportMay 18, 2009

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Prepared for Members and Committees of Congress

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If Congress establishes a greenhouse gas (GHG) emissions reduction program (e.g., cap-and-trade

system), the treatment of GHG emission offsets would likely be a critical design element. If

allowed as part of an emissions program, offsets could provide cost savings and other benefits.

However, offsets have generated concern.

An offset is a measurable reduction, avoidance, or sequestration of GHG emissions from a source

not covered by an emission reduction program. If allowed, offset projects could generate

“emission credits,” which could be used by a regulated entity (e.g., power plant) to comply with

its reduction requirement. Offsets could include various activities:

•

agriculture or forestry projects: e.g., conservation tillage or planting trees on

previously non-forested lands;

•

renewable energy projects: e.g., wind farms;

•

energy efficiency projects: e.g., equipment upgrades;

•

non-CO2 emissions reduction projects: e.g., methane from landfills.

Including offsets would likely make an emissions program more cost-effective by (1) providing

an incentive for non-regulated sources to generate emission reductions and (2) expanding

emission compliance opportunities for regulated entities. Some offset projects may provide other

benefits, such as improvements in air or water quality. In addition, the offset market may create

new economic opportunities and spur innovation as parties seek new methods of generating

offsets.

The main concern with offset projects is whether or not they represent real emission reductions.

For offsets to be credible, a ton of CO2-equivalent emissions from an offset project should equate

to a ton reduced from a covered emission source, such as a smokestack or exhaust pipe. This

objective presents challenges because many offsets are difficult to measure. If illegitimate offset

credits flow into an emissions trading program, the program would fail to reduce GHG emissions.

Another concern is whether the inclusion of offsets would send the appropriate price signal to

encourage the development of long-term mitigation technologies. Policymakers may consider a

balance between price signal and program costs.

If eligible in a U.S. program, international offsets are expected to dominate in early decades

because they would likely offer the lowest-cost options. Domestic sectors, such as agriculture and

forestry, might benefit if international offsets are excluded. Some object to the use of international

offsets due to concerns of fairness: the low-cost options would be unavailable to developing

nations if and when they establish GHG emission targets. However, some offset projects may

promote sustainable development. On the other hand, international offsets may serve as a

disincentive for developing nations to enact laws or regulations controlling GHG emissions

because many projects would no longer qualify as offsets.

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Introduction ..................................................................................................................................... 1

Offsets: An Overview ...................................................................................................................... 2

Offset Types and Examples....................................................................................................... 3

Biological Sequestration ..................................................................................................... 3

Renewable Energy Projects ................................................................................................ 4

Energy Efficiency ............................................................................................................... 5

Non-CO2 Emissions Reduction........................................................................................... 5

Potential Benefits of Offsets............................................................................................................ 7

Cost-Effectiveness..................................................................................................................... 7

Potential Co-Benefits ................................................................................................................ 9

Potential Benefits to Developing Nations ................................................................................. 9

Other Potential Domestic Benefits...........................................................................................11

Potential Concerns......................................................................................................................... 12

Integrity Concerns................................................................................................................... 12

Additionality ..................................................................................................................... 12

Measurement..................................................................................................................... 14

Double-Counting .............................................................................................................. 14

Permanence....................................................................................................................... 15

Leakage............................................................................................................................. 15

Delay of Technology Development......................................................................................... 16

Transaction Costs .................................................................................................................... 16

Concerns in Developing Nations............................................................................................. 17

Considerations for Congress.......................................................................................................... 17

Figure 1. Emission Allowance Price at Three Offset Scenarios Under Framework of S.

2191.............................................................................................................................................. 8

Figure 2. CERs Issued to Data by Project Type (as of May 1, 2009).............................................11

Figure 3. 2012 Projections for CERs by Project Type (as of May 1, 2009) ...................................11

Table 1. Comparison of Offset Treatment in GHG Emission Control Proposals in the

111th Congress ............................................................................................................................ 20

Table 2. Comparison of Offset Treatment in GHG Emission Control Proposals from the

110th Congress ............................................................................................................................ 21

Table 3. Comparison of Offset Treatment in GHG Emissions Reduction Initiatives in the

U.S. States .................................................................................................................................. 26

Table 4. Comparison of Offset Treatment in International Emissions Trading Programs............. 28

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Author Contact Information .......................................................................................................... 30

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A variety of efforts to address climate change are currently underway or being developed on the

international, national, and sub-national levels (e.g., individual state actions or regional

partnerships).1 These efforts cover a wide spectrum, from climate change research to mandatory

greenhouse gas (GHG) emissions reduction programs.2 In the 110th Congress, Members have

introduced a number of proposals that would establish a national GHG emissions reduction

regime.

GHG emissions reduction programs, both ongoing and proposed, vary considerably. The primary

variables are scope and stringency: which emission sources are covered by the program and how

much emission reduction is required.3 These factors largely determine the impacts of an emissions

reduction program, but other design details can have substantive effects.

One such design element is the treatment of offsets. An offset is a measurable reduction,

avoidance, or sequestration of GHG emissions from a source not covered by an emission

reduction program. If a cap-and-trade program includes offsets, regulated entities have the

opportunity to purchase them to help meet compliance obligations.4

Offsets have generated debate and controversy in climate change policy. If Congress establishes a

federal program to manage or reduce GHG emissions, whether and how to address offsets would

likely be an important issue. Because most current and proposed programs allow offsets (see

tables at the end of the report), offset projects will probably play some part in an emissions

reduction program.

The first section of this report provides an overview of offsets by discussing different types of

offset projects and describing how the offsets would likely be used in an emission reduction

program. The next section discusses the supply of offsets that might be available in an emission

trading program. The subsequent sections examine the potential offset benefits and the potential

concerns associated with offsets. The final section offers considerations for Congress. In addition,

the report includes a table comparing the role of offsets in selected emission reduction programs:

proposals in the 111th and 110th Congresses, U.S. state initiatives, and international programs.

In 1992, the United States ratified the United Nations Framework Convention on Climate Change (UNFCCC), which

called on industrialized countries to initiate GHG reduction. The UNFCCC defines GHGs to include carbon dioxide

(CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), hydrofluorocarbons (HFC), and

perfluorocarbons (PFC).

See CRS Report RL33826, Climate Change: The Kyoto Protocol, Bali “Action Plan,” and International Actions, by

(name redacted) and (name redacted); CRS Report RL31931,

Climate Change: Federal Laws and Policies Related to

Greenhouse Gas Reductions, by (name redacted) and (name redacted); CRS Report RL33812, Climate Change: Action

by States to Address Greenhouse Gas Emissions, by (name redacted).

See CRS Report RL30024, U.S. Global Climate Change Policy: Evolving Views on Cost, Competitiveness, and

Comprehensiveness, by (name redacted) and (name redacted).

In this way, offsets would complement the more traditional emissions trading that can occur between two covered

sources. For example, a covered source (e.g., power plant) can make reductions beyond its compliance obligations and

then sell these reductions as credits to other covered sources. This type of transaction represents the “trade” component

of a cap-and-trade program.

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Offsets are sometimes described as project-based because they typically involve specific projects

or activities whose primary objective is to reduce, avoid, or sequester emissions. Because offset

projects can involve different GHGs, they are quantified and described with a standard form of

measure: either metric tons of carbon-equivalents (mtC-e) or metric tons of CO2-equivalents

(mtCO2-e).5

To be credible as offsets, the emissions reduced, avoided, or sequestered must be additional to

business-as-usual (i.e., what would have happened anyway). This concept is often called

“additionality.” If Congress establishes a GHG emission cap-and-trade program, only sources not

covered by the cap could generate offsets.6 Emission reductions from regulated sources (e.g.,

coal-fired power plants) would either be required or spurred by the emissions cap.7 In contrast, if

agricultural operations were not covered under an emissions cap, a project that collects methane

emissions from a manure digester would likely be an additional GHG emission reduction.

If offsets are allowed as a compliance option in an emissions trading program, eligible offset

projects could generate “emission credits,” which could be sold and then used by a regulated

entity to comply with its reduction requirement.8 This approach is part of the European Union’s

(EU) Emission Trading Scheme (ETS), which EU members use to help meet their Kyoto Protocol

commitments.9 Under the EU ETS, regulated entities can purchase emission credits that are

created from approved offset projects.10 Regulated entities can then apply the credits towards their

individual emission allowance obligations.11 For example, a regulated entity may consider

purchasing offsets if the offsets are less expensive than making direct, onsite emission reductions.

Assuming the offset is legitimate—i.e., a ton of carbon reduced, avoided, or sequestered through

An emissions cap might require only CO2 emission reductions, but still allow CO2-e offsets from projects that involve

non-CO2 GHGs.

Although Congress could address GHG emissions with alternative policies—e.g., by enacting a carbon tax or setting

emission limits for each source type (“command-and-control)—the option to use offsets is generally discussed in the

context of a cap-and-trade regime. Offsets could be a component of a carbon tax framework (e.g., as tax credits), but

that discussion is beyond the scope of this report.

For instance, if a covered source reduced its emissions beyond its compliance obligation, the source could sell the

reductions as “credits” to other sources subject to the cap. This financial opportunity would create the incentive for

sources to find and make reductions beyond their compliance obligations. These type of exchanges represent the

foundation of the cap-and-trade system.

For comparison purposes—e.g., estimating the quantity of offsets and potential offset benefits—this report generally

assumes that emission sources and sequestration activities will either not be regulated in any fashion or they will

qualify as offsets. However, there are alternative means of addressing emission sources and sinks that are often

considered good candidates for offsets. See the Text Box on p. 8: Policy Alternatives to Offsets.

For more information, see CRS Report RL34150, Climate Change and the EU Emissions Trading Scheme (ETS):

Kyoto and Beyond, by (name redacted).

The credits are called “certified emission reductions” (CERs) or “emission reduction units” (ERUs), depending on

whether they originate from the Clean Development Mechanism (CDM) or from Joint Implementation projects,

respectively. The CDM is the Kyoto Protocol compliance mechanism, which has been used widely in the EU-ETS, that

allows for developing nations to generate offsets and sell them to regulated sources in developed nations. The CDM

was established by Article 12 of the Kyoto Protocol. For more information on the Kyoto Protocol’s “flexible

mechanisms,” see http://unfccc.int/kyoto_protocol/mechanisms/items/1673.php.

Although the credits are equivalent to allowances in environmental and economic terms, they are not

interchangeable. For more on the EU ETS, see CRS Report RL33581, Climate Change: The European Union’s

Emissions Trading System (EU-ETS), by (name redacted).

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an offset project equates to a ton reduced at a regulated source—the objective to reduce GHG

emissions is met. From a global climate change perspective, it does not matter where or from

what source the reduction occurs: the effect on the atmospheric concentration of GHGs would be

the same.

Offsets increase emission reduction opportunities. When offsets are not allowed, incentives to

reduce emissions or sequester carbon are limited to the covered sources, and there is little

motivation to improve mitigation technologies for non-covered sources. Including offsets in a

cap-and-trade program would expand these incentives

Voluntary Offsets

Although this report focuses on the use of offsets in a mandatory GHG emissions reduction program, offsets are

generating interest and debate in other contexts. In the United States and around the world, a growing number of

businesses, interest groups, and individuals are purchasing offsets and claiming that all or part of their GHG-emitting

activities (e.g., travel or specific events) are “carbon neutral.” The motivation for these purchases can vary. Some

businesses may be seeking to enhance their public image; others may hope to take credit for the offsets in a future

GHG reduction program. The exchanges represent a voluntary market for offsets because there is no requirement

for the parties to curtail their emissions.

The quality of the offsets in the voluntary market varies considerably, largely because there are no commonly

accepted standards. Some offset sellers offer offsets that comply with the more explicit standards of the Kyoto

Protocol’s Clean Development Mechanism. Other sellers offer offsets that meet the seller’s self-established guidelines,

which may be considered proprietary information, and thus not publicly available.

Due to the lack of common standards, some observers have referred to the market as the “wild west.” This should

not suggest that all offsets are low quality, but that the consumer must adopt a buyer-beware mentality when

purchasing offsets. For more information, see CRS Report RL34241, Voluntary Carbon Offsets: Overview and Assessment,

by name reate.

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Offsets could potentially be generated from an activity that emits GHGs or that would remove or

sequester GHGs from the atmosphere. This section discusses offsets in four categories. Each

category is discussed below with project examples for each group.

Some of the categories and examples listed below may be limited by location. If a U.S. law or

regulation (other than an emissions cap) governs a specific emission source (e.g., methane from

coal mines), that source’s emission reductions would not qualify as domestic offsets, unless the

reductions made went further than the regulations required.12 For example, if the source is

required by law or regulation to reduce methane emissions by 50%, reductions up to this

threshold would not qualify as offsets, but reductions in excess of 50% might qualify as offsets.

As more nations establish mandatory caps or require specific technological controls or practices

at emission sources, the universe of potential offsets would shrink.

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Trees, plants, and soils sequester carbon, removing it from the earth’s atmosphere. Biological

sequestration projects generally involve activities that either increase existing sequestration; or

If the source was subject to an emissions cap, reductions beyond compliance obligations would be sold directly as

emission credits.

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maintain the existing sequestration on land that might otherwise be disturbed and release some or

all of the sequestered carbon. This offset category includes sequestration that results from

agriculture and forestry activities, and is sometimes referred to as land use, land use change and

forestry (LULUCF) projects. Examples of these projects include

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planting trees on previously non-forested land (i.e., afforestation);

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planting trees on formerly forested land (i.e., reforestation);

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limiting deforestation by purchasing forested property and preserving the forests

with legal and enforcement mechanisms;

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setting aside croplands from agricultural production to rebuild carbon in the soil

and vegetation; and

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promoting practices that reduce soil disruption: e.g., conservation tillage and

erosion control.13

Compared to the other offset categories discussed here, biological sequestration projects,

particularly forestry projects, offer the most potential in terms of volume. However, this category

is arguably the most controversial because several integrity issues are typically (or perceived to

be) associated with biological sequestration projects.14 These issues are discussed in more detail

in later sections of this report.

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Historically, renewable energy—e.g., wind, solar, biomass—has been a more expensive source of

energy than fossil fuels.15 A renewable energy offset project could provide the financial support to

make renewable energy sources more economically competitive with fossil fuels. Renewable

energy sources generate fewer GHG emissions than fossil fuels, particularly coal. Wind and solar

energy produce zero direct emissions. Use of renewable sources would avoid emissions that

would have been generated by fossil fuel combustion. These avoided emissions could be sold as

offsets. Potential renewable energy offset projects may include16

•

constructing wind farms to generate electricity;

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adding solar panels;

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retrofitting boilers to accommodate biomass fuels; and

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installing methane digesters at livestock operations.17

For more information on agricultural activities, see CRS Report RL33898, Climate Change: The Role of the U.S.

Agriculture Sector, by (name redacted).

See CRS Report RL34560, Forest Carbon Markets: Potential and Drawbacks, by (name redacted) and (name redact

ed).

This comparison does not account for the externalities associated with fossil fuel combustion: air pollution,

environmental degradation, health problems linked to emissions, etc.

In addition, some may argue that nuclear energy could be considered a renewable energy. This debate is beyond the

scope of this report.

The digesters capture the methane, which can be used for energy purposes.

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Domestic renewable energy projects are not likely to qualify as offsets in a national emissions

reduction program. In a carbon-constrained context, project developers would be hard-pressed to

demonstrate that a renewable energy project would not have happened anyway. In an “economywide” cap-and-trade emissions program, energy sector emissions would likely be capped. The cap

would make fossil fuels more expensive and renewable energy sources more attractive. However,

renewable energy projects may still create credible offsets in nations without GHG emission

controls on their energy sectors.

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A more energy efficient product or system requires less energy to generate the same output.

Improvements in energy efficiency generally require a financial investment in a new product or

system. These capital investments likely pay off in the long run, but the payback period may be

too long or capital financing may be constrained, particularly for small businesses or in

developing nations. Examples of possible energy efficiency offset projects include

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upgrading to more efficient machines or appliances;

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supporting construction of more energy efficient buildings;

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replacing incandescent light bulbs with fluorescent bulbs.

Similar to renewable energy offsets, domestic energy efficiency offset projects would likely face

substantial hurdles in proving their additionality in a carbon-constrained regime. As the price of

carbon increases and raises energy prices—both outcomes expected with an emissions cap—the

incentive to reduce energy use through energy efficiency improvements will increase.

Offset ownership is another potential challenge regarding some energy efficiency offsets. Energy

efficiency improvements may occur at a different location than the actual reduction in emissions.

For example, a business that runs its operations with purchased electricity will use less electricity

if energy efficiency improvements are made, but the actual emission reductions will be seen at a

power plant. Thus, the reductions may be counted twice: first as an energy efficiency offset and

second as a direct reduction at the power plant. One way to address this potential dilemma is to

restrict energy efficiency projects to only those that reduce or avoid on-site combustion of fossil

fuels. This approach is used in the few congressional proposals that specifically allow energy

efficiency offsets.

As with renewable energy projects, there could be energy efficiency projects in nations that do

not limit GHG emissions.

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Multiple sources emit non-CO2 greenhouse gases. These emissions are often not controlled

through law or regulation. These sources—primarily, agricultural, industrial, and waste

management facilities—emit GHGs as by-products during normal operations. In many cases, the

individual sources emit relatively small volumes of gases. However, there are a large number of

individual sources worldwide, and many of the gases emitted have greater global warming

potential (GWP) than carbon dioxide.18 Offset projects in this category would generally provide

GWP is an index of how much a GHG may contribute to global warming over a period of time, typically 100 years.

(continued...)

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funding for emission control technology to reduce these GHG emissions. Examples of emission

reduction opportunities include the following:

•

methane (CH4) emissions from landfills, livestock operations, or coal mines

(GWP = 25)

•

nitrous oxide (N2O) emissions from agricultural operations or specific industrial

processes (GWP = 298)

•

hydrofluorocarbon (HFC) emissions from specific industrial processes, such as

HFC-23 emissions from production of a refrigerant gas (GWP of = 14,800)

•

sulfur hexafluoride (SF6) from specific industrial activities, such as

manufacturing of semiconductors (GWP = 22,800)

This offset category is broad, as it involves many different industrial activities. As such, some

offset types in this category are generally considered high quality, and others that have generated

controversy. For example, methane reduction from landfills or coal mines has a reputation as a

high quality offset. These projects are relatively easy to measure and verify, and in many cases

would likely not occur if not for the financing provided by an offset market. Therefore, the

challenge of proving additionality is easier to overcome.

Offsets involving abatement of HFC-23 emissions from production of a common refrigerant19

have spurred controversy. Of the offset types certified through the Kyoto Protocol’s Clean

Development Mechanism (CDM), HFC-23 offsets represent the greatest percentage: 50% of the

certified emission reductions (CERs) have come from HFC-23 abatement projects.20 Controversy

has arisen because the production facilities can potentially earn more money from the offsets

(destroying HFC-23 emissions) than from selling the primary material.21 This creates a perverse

incentive to produce artificially high amounts of product to generate a more lucrative by-product.

(...continued)

GWPs are used to compare gases to carbon dioxide, which has a GWP of 1. For example, methane’s GWP is 25, and is

thus 25 times more potent a GHG than CO2. The GWPs listed in this report are from: Intergovernmental Panel on

Climate Change, Climate Change 2007: The Physical Science Basis (2007), p. 212.

Chlorodifluoromethane, referred to as HCFC-22.

Of the CERs expected to be issued by 2012, the percentage drops to 22% (still the highest percentage by offset type).

See the United Nations Environment Programme (UNEP), CDM Pipeline data, at http://cdmpipeline.org/index.htm.

This calculus depends on the market price for offsets. See Michael Wara, Measuring the Clean Development

Mechanism’s Performance and Potential, Working Paper #56, Stanford Center for Environmental Science and Policy

(2006).

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Policy Alternatives to Offsets

Policymakers have alternative methods of addressing the emission sources and sinks that are often considered to be

candidates for offsets.

Emissions Cap. Congress could expand the scope of the emissions cap to include emission sources that were

previously excluded. The rationale for initially excluding these sources is that they are large in number, and they

individually generate a relatively small quantity of emissions. Therefore, an offset program is arguably a more costeffective means of achieving reductions from these sources. However, including certain sources, while excluding

others, may raise issues of fairness. For example, some may question why specific sources are capped, while other

sources can generate financial gain through the offset market. This discussion is beyond the scope of this report.

Emissions Standards. Instead of allowing offsets from non-capped sources, Congress could establish sector-specific

emission performance standards or technological requirements. This approach is sometimes described as “commandand-control.” Such a policy could be applied to both emission sources and sequestration activities. If Congress sets a

baseline requirement, reductions or sequestration beyond the minimum requirement could qualify as offsets.

Set-Aside Allowances. One possible design element of an emission control program is for policymakers to allot a

specific percentage of emission allowances (“set-asides”) from the overall emissions cap to non-regulated entities (i.e.,

parties not subject to the emissions cap). In a carbon-constrained context, the set-aside allowances are essentially

currency because they could be sold to regulated facilities to help meet compliance obligations. Set-asides can be

allocated to parties to promote various objectives, including support for activities that reduce, avoid, or sequester

emissions. The allowances may also be distributed for other purposes, such as transition assistance to specific

economic sectors or financial support to low-income households. These groups may pay proportionately higher costs

in an emission reduction regime.

Although both set-aside allowances and offsets would address emissions in sectors not subject to the cap, their

impacts on regulated sources would differ substantially. Set-aside allowances are within the emissions cap. Offsets

represent compliance options from sources outside of the cap. Neither offsets nor set-asides would alter the GHG

reduction goal of the program: the cap would remain the same. However, offsets would increase the emission

reduction opportunities available to regulated sources; set-aside allowances would not.

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The inclusion of offsets in a cap-and-trade program could potentially provide multiple benefits.

Perhaps the primary benefit would be improved cost-effectiveness. The ability to generate offsets,

which could be sold as emission credits, would provide an incentive for non-regulated sources to

reduce, avoid, or sequester emissions. The inclusion of offsets could expand emission mitigation

opportunities, likely reducing compliance costs for regulated entities. Many offset projects have

the potential to offer environmental benefits, as well. Developing countries, in particular, may

gain if the United States includes international offsets in a GHG emission program. In addition,

the offset market may create new economic opportunities and spur innovation as parties seek new

methods of generating offsets. These issues are discussed below in greater detail.

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A central argument in support of offsets is that their use makes an emissions reduction program

more cost-effective. A wide range of activities could be undertaken that would generate offsets.

Many of these individual activities would likely generate a relatively small quantity of offsets (in

terms of tons), but in the aggregate, their climate change mitigation potential is substantial.

Arguably, direct regulation of these sources—either through a cap-and-trade program or

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regulatory command-and-control provisions22—may not be cost-effective because of the

administrative burden.

By allowing these sources to generate offsets and sell the offsets (as emission credits) to regulated

entities, several benefits are achieved. First, emissions are reduced, avoided, and/or sequestered at

sources that may not have otherwise occurred.23 Second, the offsets generated increase the

compliance options for regulated entities: covered facilities can either make direct, onsite

reductions or purchase emission credits generated from offsets. The increased reduction

opportunities provided by offsets are expected to lower the cost of compliance. This impact

ultimately affects consumers because they are expected to bear the majority of an emission

program’s costs.

A 2008 EPA study analyzed the economic impacts of the Lieberman-Warner Climate Security Act

of 2008 (S. 2191), a cap-and-trade proposal that would allow covered sources to use domestic and

international credits to each satisfy 15% allotments of their allowance submission.24 As with other

economic models of climate change regulation, the modelers necessarily make many

assumptions. Thus, the relative differences between different scenarios are perhaps more useful

than the absolute estimates. EPA’s study demonstrated a dramatic difference between the offset

scenarios. The study found that if offsets are not allowed, the price of carbon would be

substantially higher (e.g., 192% higher in 2015) than if offsets could be used as prescribed by the

bill (Figure 1).

. Emission Allowance Price at Three Offset Scenarios

Under Framework of S. 2191

Figure 1

$400

$300

$200

$100

S. 2191 (as written)

Source:

(2008).

Unlimited Offsets

2050

2048

2046

2044

2042

2040

2038

2036

2034

2032

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

Allowance Price ($/mtCO 2-e)

$500

No Offsets

Prepared by CRS with data from EPA, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008

A command-and-control program may require, for example, that certain technologies be installed to control

emissions from landfills or animal waste, or that specific practices (e.g., conservation tillage) be performed in

agricultural operations.

If they would have occurred, they would not be additional (to business-as-usual), and thus, not qualify as offsets.

EPA, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008 (2008).

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The study also found that international offsets would play a large role, especially in the beginning

decades of the program, because there are generally more low-cost offset opportunities in other

nations. In later years (as the carbon price rises), domestic offset types, particularly forestryrelated offsets, play a larger role.

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Offset projects may produce benefits that are not directly related to climate change. For example,

many of the offset projects that promote carbon sequestration in soil (e.g., conservation tillage)

improve soil structure and help prevent erosion.25 Erosion control may reduce water pollution

from nonpoint sources,26 a leading source of water pollution in U.S. waterbodies.27

Depending on a project’s specific design and how it is implemented, other agriculture and

forestry offset projects could potentially yield positive environmental benefits. However, there is

some concern that certain projects may produce undesirable impacts, such as depleted soil

quality, increased water use, or loss of biodiversity.28 Many agriculture and forestry offset projects

would likely involve land use changes, such as converting farmlands to forests or biofuel

production.29 Determining whether the change imparts net benefits may be a complex evaluation,

depending upon, among other things, the current and proposed species of plants and/or trees.

Policymakers would likely encounter projects that offer trade-offs: for example, they offset GHG

emissions, while imposing an unwanted outcome, such as increased water use, reducing

availability downstream.30 EPA found that the more aggressive offset opportunities—afforestation

and biofuels production—are more likely to present the most distinct trade-offs.31

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Most observers would agree that developing nations are unlikely to limit and reduce GHG

emissions on a schedule on par with developed nations. With less-regulated emission sources, the

universe of eligible offset opportunities would be much larger in developing nations. Offset types,

such as renewable energy and/or energy efficiency projects, which could face substantial hurdles

to qualify as offsets in the United States, would be eligible offsets from developing nations. These

Intergovernmental Panel on Climate Change, Climate Change 2007: Mitigation. Contribution of Working Group III

to the Fourth Assessment Report (2007), p. 526.

Nonpoint source pollution is caused by rainfall or snowmelt moving over and through the ground. As the runoff

moves, it picks up and carries away natural and human-made pollutants, finally depositing them into lakes, rivers,

wetlands, coastal waters, and even underground sources of drinking water. See EPA’s Nonpoint Source Pollution

website, at http://www.epa.gov/owow/nps/qa.html.

See CRS Report RL33800, Water Quality Issues in the 110th Congress: Oversight and Implementation, by (name re

dacted).

Intergovernmental Panel on Climate Change, Climate Change 2007: Mitigation. Contribution of Working Group III

to the Fourth Assessment Report (2007), pp. 529-530.

In fact, these activities are often categorized, particularly in international contexts, as land use, land use changes, and

forestry (LULUCF) projects.

For example, certain evergreen plantations (tree farms) generally have higher water use than the land they replace.

Intergovernmental Panel on Climate Change, Climate Change 2007: Mitigation. Contribution of Working Group III to

the Fourth Assessment Report (2007), p. 530.

EPA, Greenhouse Gas Mitigation Potential in U.S. Forestry and Agriculture (2005), p. 8-8.

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types of projects would likely provide environmental benefits beyond GHG emission reduction—

improvements in local air quality—by displacing or avoiding combustion of fossil fuels.

Offset projects in developing nations have the potential to promote sustainable development, such

as creation of an energy infrastructure that is less carbon-intensive and more energy efficient. In

fact, this was one of the objectives in establishing the Clean Development Mechanism (CDM).

Whether this objective is being met is a subject of debate. However, recent projections suggest

that offset activities that promote sustainable development will account for a larger percentage of

emissions credits in the coming years.

As a comparison between Figure 2 and Figure 3 indicates, the proportion of renewable energy

and energy efficiency projects in the CDM is expected to more than double by 2012. This

projected shift would likely improve support for sustainable development objectives. However,

offset projects—primarily, HFC and N2O reduction from industrial activities—that provide few

sustainable development benefits are still expected to account for a considerable proportion of

emission credits issued.

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Figure 2. CERs Issued to Data by Project Type

(as of May 1, 2009)

Energy

Efficiency, 4%

Fuel

Switching, 1%

Forestry and

Agriculture,

Other, 2%

Landfills, coal

mines,

cement, 3%

Renewable

Energy, 13%

HFCs and

N2O, 76%

Figure 3. 2012 Projections for CERs by Project Type

(as of May 1, 2009)

Forestry and

Agriculture,

Fuel Switching,

Other, 3%

Energy

Efficiency,

13%

HFCs and

N2O, 27%

Landfills, coal

mines,

cement, 16%

Renewable

Energy, 39%

Prepared by CRS with data from United Nations Environment

Programme, Capacity Development for the Clean Development Mechanism (“CDM Pipeline”), at

http://cd4cdm.org/index.htm.

Source for Figure 2 and Figure 3:

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A federal cap-and-trade emission program that allows offsets as a compliance option may provide

economic benefits to particular sectors of the U.S. economy. However, there may be trade-offs,

depending on which types of offsets are eligible and whether or not international offsets are

allowed. If international offset projects are included in the program, some U.S. business sectors

may benefit from the transfer of technology and/or services to support projects in other nations. If

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international offsets, generally the lowest-cost options, are excluded, the offset projects from the

domestic agriculture and forestry sectors would likely gain a greater share of the offsets market,

thus generating business opportunities in these sectors.32

Another potential benefit that is often highlighted is the ability of an offset market to encourage

innovation. As the carbon price provides an incentive for regulated entities to find onsite emission

reductions (e.g., through efficiency improvements or development of new technologies), the

offset market may spur parties to find new ways to reduce, avoid, or sequester emissions from

non-regulated sources. However, there is some concern that the drive to find creative offset

methods may encourage offset projects that yield unknown, unintended, and possibly harmful,

environmental effects. A frequently cited example in this regard is ocean fertilization, which

seeks to stimulate phytoplankton growth (and ultimately improve CO2 sequestration) by releasing

iron into certain parts of the surface ocean. 33

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Although offsets have the potential to provide benefits under an emissions trading program,

several issues associated with offsets have generated concern and some controversy. Perhaps the

primary concern regarding offsets is their integrity. To be credible, an offset should equate to an

emission reduction from a direct emission source, such as a smokestack or exhaust pipe. This

issue is critical, if offsets are to be used in an emissions trading program. However, implementing

this objective would likely present challenges. This and other concerns are discussed below.

Supplementarity

Supplementarity refers to the idea that the role of offsets in an emission reduction program should be secondary to

reduction efforts at regulated emission sources. The term comes from the text of the Kyoto Protocol, which states

that emissions credits (or offsets) must be “supplemental to domestic actions for the purpose of meeting quantified

emission limitations and reduction commitments.... ” (Article 17, emphasis added).

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If offsets are to be included in an emissions trading program, offset integrity—i.e., whether or not

the offsets represent real emission reductions—is critical. Several issues need to be addressed

when evaluating offsets. Some of these issues may present implementation challenges, which if

not overcome, could damage the integrity of the offset. These issues are discussed below.

¢ȱ

Additionality means that the offset project represents an activity that is beyond what would have

occurred under a business-as-usual scenario. In other words, would the emission reductions or

sequestration have happened anyway? Additionality is generally considered to be the most

significant factor that determines the integrity of the offset. In the context of an emissions control

As discussed above, the inclusion of international offsets would lower the emission allowance price, which would

benefit regulated entities and ultimately consumers.

See Ken O. Buesseler, et al., “Ocean Iron Fertilization—Moving Forward in a Sea of Uncertainty,” Science Vol. 319

(2008), 162.

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program, a test of additionality would examine whether the offset project would have gone

forward in the absence of the program. An additionality determination would likely consider the

following questions:

•

Does the activity represent a common practice or conforms to an industry

standard?

•

Is the offset project required under other federal, state, or local laws?

•

Would the project generate financial gain (e.g., be profitable) due to revenues

from outside the offset market?34

Offset credits allow regulated entities to generate GHG emissions above individual compliance

obligations. If project developers are able to generate emission credits for projects that would

have occurred regardless (i.e., in the absence of the trading program), the influx of these credits

into the program would undermine the emissions cap and the value of other, legitimate offset

projects.

Additionality is at the crux of an offset’s integrity, but applying the additionality criterion may

present practical challenges. For instance, it may be impossible to accurately determine “what

would have happened anyway” for some projects. Assessing a project’s additionality may involve

some degree of subjectivity, which may lead to inconsistent additionality determinations.

“Stackability” and Additionality

The concept of “stackability” is typically discussed in the context of biologicial sequestration offset projects. In

addition to decreasing atmospheric concentrations of GHGs, biological sequestration projects may provide nonclimate-related ecosystem services, such as improved water quality and wildlife habitat enhancement. Proponents of

“stackability” argue that offset project developers should be able to market these services separately and earn distinct

financial benefits for each ecosystem service (assuming a funding source exists that would support each service).

Under this reasoning, the financial rewards for different ecoystem services would be “stackable,” and the receipt of

funding from one source (e.g., buyers in the offset marketplace) would not preclude the receipt of funding from

another source (e.g., government grant program). For example, some argue that a soil sequestration project should

be able to generate offset credits for its GHG sequestration services and a Conservation Reserve Program (CRP)

payment for the project’s ability to provide erosion control.

Allowing an offset project to accrue stackable benefits may raise concerns of additionality. If non-climate-related

incentive programs or ecosystem service markets could provide financial support for a particular offset project,

observers may question whether the project would have happened anyway. In some situations, an additionality

assessment may be relatively straightforward. If the non-climate-related incentives stimulate activities that would

mitigate GHG emissions (as a secondary effect) without the support of the offset market, the activity would not likely

qualify as additional in terms of carbon offsets. On the other hand, some offset projects may not be economically

viable without multiple sources of funding—combining a payment from the offset market with grants from nonclimate-related government programs. Thus, in some situations a determination of additionality may entail a degree of

subjectivity.

See, World Resources Institute, The Greenhouse Gas Protocol for Project Accounting (2005), at

http://www.ghgprotocol.org.

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Reliable GHG emissions data are a keystone component of any climate change program. If

Congress allows offsets as a compliance option, offset data (emissions reduced, avoided, or

sequestered) should arguably be as reliable as data from regulated sources. From a practical

standpoint, however, achieving this objective may be difficult.

It is generally much simpler to measure and quantify an emission reduction from a direct source

than from an offset project. Indeed, the more difficult measurement may be the main reason such

reductions are not required by a control program. Regulated sources determine their compliance

by comparing actual GHG emissions data against their allowed emissions.35 In contrast, project

developers determine offset emission data by comparing the expected reduced, avoided, or

sequestered GHG emissions against a projected, business-as-usual scenario (sometimes referred

to as a counter-factual scenario).

To accomplish this task, offset project managers must establish an emissions baseline: an estimate

of the “business-as-usual” scenario or the emissions that would have occurred without the project.

If project managers inaccurately estimate the baseline, the offsets sold may not match the actual

reductions achieved. For example, an overestimated baseline would generate an artificially high

amount of offsets. Baseline estimation may present technical challenges. In addition, project

developers have a financial incentive to err on the high side of the baseline determination because

the higher the projected baseline, the more offsets generated. Requiring third-party verification

(as some proposals do) would potentially address this specific concern.

Biological sequestration offset projects may present particular challenges in terms of

measurement. The carbon cycle in trees and soils is only partially understood.36 Variations exist

across tree species, ages, soil conditions, geographic locations, and management practices.37

Estimates of carbon uptake and storage are frequently considered imprecise or unreliable. Further,

changes in vegetation cover may have non-emission effects on climate, such as how much of the

Sun’s energy is reflected or absorbed by the Earth. A recent study in the Proceedings of the

National Academy of Sciences stated, “Latitude-specific deforestation experiments indicate that

afforestation projects in the tropics would be clearly beneficial in mitigating global-scale

warming, but would be counterproductive if implemented at high latitudes and would offer only

marginal benefits in temperate regions.”38

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To be credible, when an offset is sold, it should be retired and not sold again or counted in other

contexts. However, opportunities for double-counting exist. For example, a regulated entity may

purchase offsets generated through the development of a wind farm in a nation that has not

established GHG emissions targets. The U.S. buyer would count the offsets, which may have

The emissions data may not be a direct measurement, but an estimate calculated by using related data, such as fuel

consumption.

See CRS Report RL34059, The Carbon Cycle: Implications for Climate Change and Congress, by (name redacted).

See CRS Report RL34560, Forest Carbon Markets: Potential and Drawbacks, by (name redacted) and (name redact

ed).

Govindasamy Bala, et al., “Combined climate and carbon-cycle effects of large-scale deforestation,” Proceedings of

the National Academy of Sciences, Vol. 104 (2007): 6550-6555.

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been purchased to negate increased, onsite emissions at the regulated source. In addition, the

nation, in which the wind farm is located, would likely see an emissions reduction due to the

wind farm. If this decrease is reflected in the nation’s GHG emissions inventory, the offset project

(wind farm) might replace other reduction activities that the nation might have taken to meet its

target.

Some may argue that double-counting is less of a problem if the offset project occurs in a nation

with only a voluntary target (as opposed to a nation subject the Kyoto Protocol). However, the

impact would be the same if the nation eventually establishes a mandatory target and takes credit

for the earlier reductions associated with the offset project. By taking credit for an earlier

reduction, the nation might need to make fewer reductions to be in compliance with the new

mandatory program.

A tracking system could help avoid such double-counting.39 Most would agree that a domestic

tracking system would be simpler to establish and monitor than a system that follows

international offset trading. The latter would require, at a minimum, cooperation with the nations

hosting the offset projects.

With some offset projects there may be a concern that the emission offsets will be subsequently

negated by human activity (e.g., change in land use) or a natural occurrence (e.g., forest fire,

disease, or pestilence). This issue is most pertinent to biological sequestration projects,

specifically forestry activities. Although many observers expected forestry offsets to play a large

role in the CDM, this has not been observed in practice. This result is partially due to concerns of

offset permanence in developing nations.40

Offset buyers need some assurance that the land set aside for forests (and carbon sequestration)

will not be used for a conflicting purpose (e.g., logging or urban development) in the future.

Although natural events (fires or pests) are hard to control, human activity can be constrained

through legal documents, such as land easements. In addition, an offset could come with a

guarantee that it would be replaced if the initial reduction is temporary. Permanence may be more

difficult to monitor at international projects.

In the context of climate change policy, GHG emissions leakage generally refers to a situation in

which an emissions decrease from a regulated (i.e., capped) source leads to an emissions increase

from an unregulated source. EPA states that leakage “occurs when economic activity is shifted as

a result of the emission control regulation and, as a result, emission abatement achieved in one

location that is subject to emission control regulation is [diminished] by increased emissions in

unregulated locations.”41

See Anja Kollmuss, “Carbon Offsets 101,” World Watch (2007).

Frank Lecocq and Philippe Ambrosi, “The Clean Development Mechanism: History, Status, and Prospects,” Review

of Environmental Economics and Policy (Winter 2007), pp. 134-151.

See Environmental Protection Agency (EPA), Office of Air and Radiation, Tools of the Trade: A Guide To

Designing and Operating a Cap and Trade Program For Pollution Control (2003), Glossary.

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Leakage scenarios may involve emission sources from the same economic sector, but located in

different countries. Many voice concern that if the United States were to cap emissions from

specific domestic industries (e.g., cement, paper), these industries would relocate to nations

without emission caps and increase activity (and thus emissions) to compensate for the decreased

productivity in the United States. Thus, global net emissions would not decrease, and affected

domestic industries would likely see employment losses.

In the context of offsets, leakage may occur in an analogous fashion. The opportunity for leakage

exists when an offset project decreases the supply of a good in one location, leading to greater

production of the good somewhere else. Compared to other offset types, forestry projects,

particularly those that sequester carbon by curbing logging, likely present the greatest risk of

leakage.42 For example, an offset project that restricts timber harvesting at a specific site may

boost logging at an alternative location, thus reducing the effectiveness of the offset project.43

Preventing or accounting for leakage from these projects poses a challenge.

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As discussed above, the inclusion of offsets would likely lower the overall cost of compliance.

Although many consider this a desired outcome, some contend that the price of carbon needs to

reach levels high enough to promote the long-term technological changes needed to mitigate

climate change.

Offsets also can delay key industries’ investments in transformative technologies that are

necessary to meet the declining cap. For instance, unlimited availability of offsets could lead

utilities to build high-emitting coal plants instead of investing in efficiency, renewables, or

plants equipped with carbon capture and storage.44

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Transaction costs generally refer to the costs associated with an exchange of goods or services. In

an offset market, transaction costs may encompass the following:

•

searching for offset opportunities;

•

studying and/or measuring offset projects;

•

negotiating contracts;

•

monitoring and verifying reduced, avoided, or sequestered emissions;

•

seeking regulatory approval;

Nicholas Institute for Environmental Policy Solutions, Harnessing Farms and Forests in the Low-Carbon Economy:

How to Create, Measure, and Verify Greenhouse Gas Offsets, Zach Wiley and Bill Chameides, eds. (2007), pp. 18-19.

Similarly, forest sequestration projects could shift demand to substitute products (e.g., steel or aluminum studs to

replace wood studs in homebuilding) whose production requires more energy, and thus releases more carbon. See CRS

Report RL31432, Carbon Sequestration in Forests, by (name redacted).

Testimony of David Hawkins, Climate Center, Natural Resources Defense Council, before the Senate Committee on

Environment and Public Works, November 13, 2007, at http://docs.nrdc.org/globalwarming/glo_07111301A.pdf.

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•

obtaining insurance to cover risk of reversal (i.e., non-permanence).45

Depending on the price of carbon in the offset market, transaction costs may represent a

substantial percentage of the value of the offset. Several studies have examined offset projects in

an effort to estimate transaction costs. Generally, the studies’ results include a transaction cost

range that varies by offset type and project size. For example, a study by the Lawrence Berkeley

National Laboratory (LBL) found a transaction cost range of $0.03/mtCO2-e to $4.05/mtCO2 -e.46

Overall, the various studies found that smaller offset projects (measured by tons of CO2-e) may

be at a disadvantage because they would likely face proportionately higher transaction costs: the

LBL study found that the mean transaction cost for small projects was $2.00/mtCO2-e, but only

$0.35/mtCO2-e for the largest projects.

The transaction costs may hinder innovation by serving as an obstacle to small, but promising

offset projects. However, transaction costs are inherent in an emissions program that requires

project developments to meet certain provisions—additionality, measurement, verification,

monitoring—to maintain the integrity of the offset allowed as compliance alternatives.

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Some argue that offset use, particularly unlimited access to international offset opportunities,

raises questions of fairness. Most of the world’s GHG emissions (especially on a per capita basis)

are generated in the developed nations, while most of the lower-cost offset opportunities are in

developing nations. Many observers expect the developing nations to establish mandatory GHG

reduction programs several years (if not decades) after developed nations’ emission programs are

underway. The developed nations are likely to initiate the lower-cost projects and retire the

offsets, thus removing the “low-hanging fruit.” If and when the developing nations subsequently

establish GHG emission caps, the lower-cost compliance alternatives would not be available to

them.47 Some have described this as a form of environmental colonialism.48

Another concern is that international offsets may serve as a disincentive for developing nations to

enact laws or regulations limiting GHG emissions. For instance, if a developing nation

established emission caps or crafted regulations for particular emissions sources, reductions from

these sources would no longer qualify as offsets. Developing nations may be hesitant to forego

the funding provided by offset projects.

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From a climate change perspective, the location of an emission activity does not matter: a ton of

CO2 (or its equivalent in another GHG) reduced in the United States and a ton sequestered in

These are the costs assessed in the following study: Camille Antinori and Jayant Sathaye, Assessing Transaction

Costs of Project-Based Greenhouse Gas Emissions Trading (2007), Ernest Orlando Lawrence Berkeley Laboratory.

Ibid.

See e.g., David M. Driesen, 1998, “Free Lunch or Cheap Fix?: The Emissions Trading Idea and the Climate Change

Convention,” Boston College Environmental Affairs Law Review 26:1-87; see also Emily Richman, 2003, “Emissions

Trading and the Development Critique: Exposing the Threat to Developing Countries,” New York University School of

Law Journal of International Law and Politics 36:133-176.

See e.g., Ross Gelbspan, “Toward A Global Energy Transition,” Foreign Policy In Focus (2004).

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another nation would have the same result on the atmospheric concentration of GHGs. Moreover,

unlike many air pollutants—e.g., acid rain precursors sulfur dioxide and nitrogen oxide,

particulate matter, and mercury—a localized increase or decrease of CO2 emissions does not

directly impart corresponding local or regional consequences. This attribute of CO2 emissions, the

primary GHG, allows for offset opportunities.49

If allowed as part of an emissions reduction program, offsets have the potential to provide various

benefits. The ability to generate offsets may

•

provide an incentive for non-regulated sources to reduce, avoid, or sequester

emissions (where these actions would not have occurred if not for the offset

program);

•

expand emission mitigation opportunities, thus reducing compliance costs for

regulated entities;

•

offer environmental co-benefits for certain projects;

•

support sustainable development in developing nations; and

•

create new economic opportunities and spur parties to seek new methods of

generating offsets.

The main concern with offset projects is whether or not they produce their stated emission

reductions. To be credible, an offset ton should equate to a ton reduced from a direct emission

source, such as a smokestack or exhaust pipe. If offset projects generate emission credits for

activities that would have occurred anyway (i.e., in the absence of the emission trading program),

these credits would not satisfy the principle of additionality. For many offset projects,

determining additionality will likely pose a challenge. Other offset implementation issues—

baseline estimation, permanence, accounting, monitoring—may present difficulties as well. If

illegitimate offset credits flow into the trading program, the cap would effectively expand and

credible emissions reductions would be undermined. The program would fail to meets its ultimate

objective: overall GHG emissions reductions.

Offset projects vary by the quantity of emission credits they could generate and the

implementation complexity they present. For instance, domestic landfill methane projects are

comparatively simple to measure and verify, but offer a relatively small quantity of offsets. In

contrast, biological sequestration activities, particularly forestry projects, offer the most offsetgenerating potential, but many of these projects pose multiple implementation challenges. This

may create a tension for policymakers, who might want to include the offset projects that provide

the most emission reduction opportunities, while minimizing the use of offset projects that pose

more implementation complications.50 Addressing these challenges may require independent

auditing and/or an appreciable level of oversight and administrative support from government

This attribute also creates critical challenges for policymakers. For instance, if one nation invests in emission

reductions, any resulting benefits (e.g., decreased atmospheric GHG concentration) would be shared by all nations,

including those that continue to increase their emissions. This dynamic has led some to refer to climate change as the

“ultimate global commons pollution problem” because it discourages unilateral emission reduction. See Henry Lee,

2001, “U.S. Climate Policy: Factors and Constraints,” in Climate Change: Science, Strategies, & Solutions (Eileen

Clausen, editor).

For a discussion of the potential supply of offsets in a cap-and-trade program, see CRS Report RL34705, Potential

Offset Supply in a Cap-and-Trade Program, by (name redacted).

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agencies. A report from the National Commission on Energy Policy stated, “Proposals that expect

to achieve significant (> 10 percent) compliance through offsets in the near term will be obligated

to create a substantial enforcement bureaucracy or risk an influx of illegitimate credits.”51

If concerns of legitimacy can be resolved, the next question for policymakers may be whether the

potential benefits provided by offsets would outweigh any potential harm. One debate may

involve whether including offsets would send the appropriate price signal to encourage the

development and deployment of new technologies, such as carbon capture and storage.

Policymakers may consider striking a balance between sending a strong price signal and reducing

the costs of the emissions reduction program.

Another debate may focus on the possible effects of offsets in the developing world (assuming

international offsets are allowed in a federal program). On one hand, many of the offset projects

may offer significant benefits—more efficient energy infrastructure, improved air quality—to

local communities. On the other hand, some maintain that if developed nations use all of the lowcost offsets in developing nations, the developing nations will face higher compliance costs if and

when they establish GHG emission reduction requirements. Moreover, there is some concern that

international offsets may serve as a disincentive for developing nations to enact laws or

regulations limiting GHG emissions because they would lose funding from the offset market.

Whether to include international offsets in a federal program raises other considerations as well.

The ability to use international offsets for compliance purposes would substantially expand

emission reduction opportunities, compared to only allowing domestic offsets. The more emission

mitigation opportunities available, the lower the carbon price. This highlights the debate over the

balance between overall program costs and price signal for technological development.

If eligible in a U.S. program, international offsets from countries without binding reduction

targets are likely to dominate in early decades because of their comparatively lower costs. Certain

domestic economic sectors, primarily agriculture and forestry (if eligible as offsets), would

benefit if international offsets are excluded. However, the inclusion of international offsets may

benefit other U.S. economic sectors through the transfer of technology and services to support the

projects. Moreover, as noted above, the more offset opportunities, the lower the overall costs of

the cap-and-trade program.

National Commission on Energy Policy, 2007, Energy Policy Recommendations to the President and the 110th

Congress.

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. Comparison of Offset Treatment in GHG Emission Control Proposals in the 111th Congress

Table 1

GHG Reduction

Program

System

of Verifying Integrity

of Offsets

Offset Types Allowed

or Prohibited

Offset Quantity

Limitation

Acceptable Locations

of Offset Projects

Offsets are not included in

the bill

Offsets are not included in the

bill

Offsets are not included in the

bill

Offsets are not included in the bill

(Doggett)

H.R. 1862

(Van Hollen)

Offsets are not included in

the bill

Offsets are not included in the

bill

Offsets are not included in the

bill

Offsets are not included in the bill

H.R. 2454

(Waxman/Markey)

Eligible domestic offset types

to be determined through

EPA rulemaking process

International offsets may be

generated (1) on project-byproject basis (subject to

certain conditions), but

allowable projected not

identified; (2) on a sectoral

basis; and (3) from avoided

deforestation efforts

H.R. 1666

In 2012, approximately 30% of

Domestic and international

Directs the EPA to develop regulations to

an entity’s allowance

implement offset program; EPA is to

obligation can be satisfied with

develop methodologies—protocols for

offsets; this percentage

additionality, measurement, etc.—for each

increases to 67% by 2050; if

offset type that the agency deems eligible;

all entities maximized their

EPA must establish policies for addressing

use of offsets, the aggregate

reversals;

annual number of submitted

Offset project developers to submit a

offsets would total 2 billion

petition to EPA and receive approval of

tons

project; offset projects must then be

Half of an entity’s offsets can

reviewed by an accredited third-party,

come from domestic sources

who submits report to EPA for approval;

and half from international

EPA is to conduct periodic audits of offset

sources (e.g., 15% domestic

projects

and 15% international in

2012); EPA can increase the

allowable percentage for

international offsets, if the

agency determines use of

domestic offsets will not be

maximized in a particular year

In 2018, international offsets

are discounted: 1.25 offsets

equals 1 emission allowance

Note: Other GHG emission control programs introduced in the 111th Congress would use a price-control approach (e.g., carbon tax) to reduce GHG emissions. Tax

credits (somewhat analogous to offsets in a cap-and-trade program) for emission reduction/sequestration projects from non-covered sources are not included in these

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proposals. For more details regarding these proposals and the proposals listed above, see CRS Report R40556, Market-Based Greenhouse Gas Control: Selected Proposals in the

111th Congress, by name redacted, name redacted, and name redacted.

. Comparison of Offset Treatment in GHG Emission Control Proposals from the 110th Congress

Table 2

GHG

Reduction

Program

Offset Types Allowed

or Prohibited

Offset Quantity

Limitation

(Lieberman)

Specifically allows for agricultural and

conservation practices; reforestation; forest

preservation; directs EPA to determine

other offset types

S. 309

(Sanders)

Offsets are not included in the bill

Up to 30% of allowances can come

from domestic or international

offsets; if offsets account for 15%

of allowances, at least 1.5% must

come from agricultural

sequestration

Offsets are not included in the bill

S. 317

(Feinstein)

(Covers

utilities)

No specific prohibitions; specifically allows

biological sequestration, including

agricultural and forestry activities, and

emission reductions from various industrial

operations;a EPA may allow further types at

its discretion

S. 485

(Kerry)

Offsets are not included in the bill

S. 280

ȬŘŗȱ

A regulated source can use

domestic offsets to cover 100% of

its allowances; up to 25% of

allowances (50% for new sources)

can come from eligible

international offsets; this limit

increases to 50% if allowance

prices reach a level that would

cause “significant harm” to the

economy (as determined by EPA

and Secretary of Treasury)

Offsets are not included in the bill

Acceptable

Locations of

Offset Projects

System

of Verifying Integrity

of Offsets

Domestic or

international

projects accepted

Directs the EPA Administrator, in

coordination with the Secretaries of

Commerce, Energy, and Agriculture, to

set standards

Offsets are not

included in the bill

Offsets are not included in the bill

Directs EPA to implement emissions

reduction program; directs Secretary

of Agriculture, in coordination with

EPA, to develop standards for

biological sequestration

Directs Secretary of Agriculture, in

coordination with EPA, to develop

standards for biological sequestration

offsets; directs EPA to craft standards

for other project types

Domestic and

international

projects allowed

Offsets are not

included in the bill

Offsets are not included in the bill

Directs Secretary of Agriculture, in

coordination with EPA, to develop

standards for biological sequestration

ȱȱȱȱȱȱ ȱ ȱȱȬȬȱȱ

GHG

Reduction

Program

S. 1168

(Alexander)

(CO2

reduction

from utilities)

S. 1177

(Carper)

(CO2

reduction

from utilities)

S. 1201

(Sanders)

(CO2

reduction

from utilities)

S. 1554

(Collins)

(CO2

reduction

from utilities)

S. 1766

(Bingaman)

ȬŘŘȱ

Acceptable

Locations of

Offset Projects

System

of Verifying Integrity

of Offsets

No quantity limitations

Any U.S. state that

has signed

memorandum of

understanding

(MOU) with EPA

Legislation includes specific standardsb

for the five offset types allowed;

directs EPA to develop standards for

other potential project types, including

agricultural offsets

No limits; directs EPA to develop

regulations regarding use of offsets

Directs EPA to

develop standards

for domestic and

international

locations

Directs EPA to develop regulations and

coordinate with Department of

Agriculture regarding biological

sequestration offset standards

Offsets are not included in the bill

Offsets are not

included in the bill

Offsets are not included in the bill

Offsets are not

included in the bill

Four specific project types shall have

streamlined standards: (1) landfill methane;

(2) animal waste or municipal wastewater

methane; (3) sulfur hexafluoride reductions

from transformers; and (4) coal mine

methane; the President may add further

types

Unlimited use of domestic offsets

with identified standards;

international offsets limited to 10%

of a regulated entity’s emissions

target

Domestic and

international

Offsets are not included in the bill

Directs EPA to implement emissions

reduction program; directs Secretary

of Agriculture, in coordination with

EPA, to develop standards for

biological sequestration

Offsets are not included in the bill

Directs EPA, in coordination with

Department of Agriculture, to help

develop procedures for verifying

biological sequestration projects

Directs the President to develop offset

verification system; directs Secretary of

Agriculture to establish agricultural

sequestration standards

Offset Types Allowed

or Prohibited

Five offset types allowed:

1) landfill methane reduction

2) sulfur hexafluoride (SF6) reductions from

industrial activities

3) afforestation projects

4) energy efficiency projects yielding

reductions or avoidance of CO2 from

natural gas, oil or propane combustion

5) avoided methane from manure

management practices

Identifies 11 eligible types, including

agricultural and forestry management

practices; authorizes EPA to develop

standards for additional types

Offset Quantity

Limitation

ȱȱȱȱȱȱ ȱ ȱȱȬȬȱȱ

GHG

Reduction

Program

Acceptable

Locations of

Offset Projects

System

of Verifying Integrity

of Offsets

Domestic offsets can satisfy 15% of

allowance submission

In addition, “international emission

allowances obtained on a foreign

GHG emissions trading market”

can satisfy 15% of submissionc

Domestic

Indirect access to

international

offsets through

purchase of

international

“emission

allowances”c

Same as S. 2191

Directs the EPA, in consultation with

Secretary of Agriculture, to develop

regulations to implement offset

program; requires offset project

developers to submit a petition to EPA

and receive approval of project; offset

projects must then be reviewed by an

accredited third-party, who submits

report to EPA for approval; reversal

certifications must be submitted

annually to EPA

Same as S. 2191

Specifically allows for agricultural and

conservation practices; reforestation; forest

preservation; no limits on other types

Up to 15% of allowances can come

from domestic and/or international

offsets; if offsets account for 15%

of allowances, at least 1.5% must

come from agricultural

sequestrationd

Offsets are not specifically

addressed in the bill

Domestic or

international

Directs EPA—in coordination with the

Secretaries of Commerce, Energy, and

Agriculture—to develop verification

methods and standards

Offsets are not

specifically

addressed in the

bill

Domestic or

international

Offsets are not specifically addressed in

the bill; EPA is to ensure that

allowances are accurately tracked,

reported, and verified

Directs EPA, in coordination with the

Secretaries of Agriculture, Energy, and

Commerce, to issue regulations that

establish comprehensive measurement

and verification methods

Directs the EPA to develop program

for reviewing international offset

projects

Offset Types Allowed

or Prohibited

Offset Quantity

Limitation

S. 2191

(Lieberman)

Reported by

the Senate

Committee

Environment

and Public

Works May

20, 2008

Specifically allows certain agricultural and

forestry-related offsets: agricultural land

management practices; afforestation;

reforestation; forest management; manure

management; other offset types may be

later allowed by EPA through regulations

S. 3036

(Boxer)

H.R. 620

(Olver)

H.R. 1590

(Waxman)

Offsets are not specifically addressed in the

bill

H.R. 4226

(Gilchrest)

Specifically allows biological sequestration,

which can include agricultural and

conservation practices; reforestation; forest

preservation; production of cellulosic

biomass crops; and other methods

determined by EPA; allows for use of other

offset projects if approved and added to

national registry; no restrictions on

international offset types that are approved

on case-by-case basis

ȬŘřȱ

Alternative compliance

mechanisms, which can include

domestic and international offsets,

can account for up to 15% of

allowance submission; if these

alternatives account for 15% of

allowances, at least 1.5% must

come from registered

sequestration in agricultural soils

ȱȱȱȱȱȱ ȱ ȱȱȬȬȱȱ

GHG

Reduction

Program

H.R. 6186

(Markey)

ȬŘŚȱ

Offset Types Allowed

or Prohibited

Offset Quantity

Limitation

Domestic projects limited to:

(1) agricultural activities (excluding those

covered by performance standards, such as

animal feeding operations);

(2) afforestation and reforestation;

(3) petroleum and natural gas system

emissions;

(4) coal mine emissions (excluding those

covered by performance standards—i.e.,

mines emitting over 10,000 mtCO2 per

year)

International offsets exclude

(1) land use, land use change, and forestry

activities; and

(2) destruction of hydrofluorocarbons

Domestic offsets can meet up to

15% of a covered entity’s allowance

submissions;

International emission allowances,

international offsets, or some

combination thereof can satisfy

another 15% of an entity’s

allowance submission

Acceptable

Locations of

Offset Projects

System

of Verifying Integrity

of Offsets

Domestic or

international

International

offsets can only

come from nations

that

(1) have taken

comparable

emission reduction

action;

(2) emitted less

than 0.5% of global

GHG emissions in

most recent year;

Directs EPA to implement offset

program through regulatory process;

EPA may require offset project

developers to submit a petition to EPA

and receive approval of project; offset

projects must be reviewed by an

accredited third-party, who submits

report to EPA for approval

(3) identified by

United Nations as

among the least

developed of

developing

countries

ȱȱȱȱȱȱ ȱ ȱȱȬȬȱȱ

GHG

Reduction

Program

Offset Types Allowed

or Prohibited

Offset Quantity

Limitation

Acceptable

Locations of

Offset Projects

System

of Verifying Integrity

of Offsets

Domestic offsets may include:

Domestic offsets limited to 10% of

Domestic and

Directs EPA, in coordination with the

allowance submission; agriculture

international

Secretary of Agriculture, to develop

(1) emissions from animal feeding

projects limited further per NAS

regulations to implement offset

operations;

International

review;

program, including procedures for

forestry offsets

project initiation and approval and

(2) afforestation and reforestation;

International forest allowances

only eligible from

third-party verification

limited to 10% of allowance

nations that meet

(3) petroleum and natural gas system

submission;

specified

emissions;

conditions

Combined limitation of 25% of

(4) coal mine emissions; and

allowance submission from foreign

(5) other agricultural activities approved by

allowances, international forest

a National Academy of Sciences (NAS)

allowances, and domestic offsets

review

International offsets include forest carbon

activities: afforestation, reforestation, and

avoided deforestation

a. These projects would become ineligible if subsequent legislation required emissions reductions from these sectors (S. 317 only covers power plants).

b. Offset standards similar to those required by the Regional Greenhouse Gas Initiative (RGGI), a partnership of 10 states from the Northeast and Mid-Atlantic regions.

Unlike RGGI standards, S. 1168 does not require third-party verification for offset projects.

c. The proposal does not define “international emission allowance.” EPA is directed to develop regulations concerning their use.

d. The legislation states that if an entity uses offsets to satisfy 15% of its allowances, “it shall satisfy up to 1.5 percent of its total allowance submission [with agricultural

sequestration offsets].... ” (Section 144(b)). This language is arguably unclear as to whether it limits (“up to”) agricultural sequestration offsets to only 1.5% or requires

that (at least) 1.5% of offsets come from agricultural sequestration activities.

H.R. 6316

(Doggett)

ȬŘśȱ

ȱȱȱȱȱȱ ȱ ȱȱȬȬȱȱ

. Comparison of Offset Treatment in GHG Emissions Reduction Initiatives in the U.S. States

Table 3

GHG

Reduction

Program

Regional

GHG

Initiative

(RGGI)

(CO2

reduction

from

utilities)

Offset Types Allowed

or Prohibited

Offset Quantity

Limitation

Acceptable Locations

of Offset Projects

Five offset project types allowed:a

1) landfill methane reduction

2) Sulfur hexafluoride (SF6)

reductions from industrial activity

3) Afforestation projects

4) Energy efficiency projects

yielding reductions or avoidance of

CO2 from natural gas, oil or

propane combustion

5) Avoided methane from manure

management practices

RGGI was designed to

require that 50% of emission

reductions come from

regulated sources; offsets can

be used to achieve the

remaining 50% of required

reductions;b to apply this

objective, offsets are limited

to 3.3% of a source’s

emissions; the limit increases

to 5% if the market price of

an allowance exceeds $7 (in

2005 dollars, adjusted

annually); if price exceeds $10

(in 2005 dollars, adjusted

annually), the limit increases

to 10%b

Not specified in statute;

details deferred to CARB

The CARB Scoping Plan

indicates that CARB will

impose a quantity limitation

on offset use; similar to the

RGGI limitation, CARB will

allow offsets and allowances

from other programs to

account for no more than

49% of emission reductionsg

1) RGGI states;

2) non-RGGI states that have their

own GHG reduction program or

have signed a memorandum of

understanding (MOU) with a RGGI

state;

3) international projects (e.g., CDM

certified emission credits) allowed if

carbon price exceeds $10

System

of Verifying Integrity

of Offsets

Standards Approach: each project

must meet general standards and

standards specific to the project

type; each project must be certified

by a third-party

Not specified in statute; details

deferred to CARB

deferred to California Air

deferred to CARB

Resources Board (CARB);

Most MAC members rejected

MAC recommended adopting a

geographic limitations

The Market Advisory Committee

standards-based approach

(MAC)e recommended starting

The Scoping Plan indicates that

The Scoping Plan did not provide

with a small number of project

CARB

supports

the

use

both

further detail; the offset system will

types, such as those allowed under

international

and

domestic

offset

be developed through a regulatory

RGGI

projects.

process

The CARB Scoping Planf did not

provide further details. Project

types will be determined through a

regulatory process.

Note: Other states have recently enacted legislation to reduce GHG emissions, and a number of states have signed regional agreements that call for GHG reduction.

However, these programs are relatively new, and the design details (in particular, offset treatment) have not yet been officially specified. Thus, they are not listed in the

above table. For more information, on these programs, see CRS Report RL33812, Climate Change: Action by States to Address Greenhouse Gas Emissions, by name redact

ed.

a. More projects may be added in the future.

California’s

Statewide

Emission

Programc

ȬŘŜȱ

ȱȱȱȱȱȱ ȱ ȱȱȬȬȱȱ

See RGGI Staff Working Group, Analysis Supporting Offsets Limit Recommendation, at http://www.rggi.org/documents.htm.

c. The RGGI Memorandum of Understanding describes this increase in the use of offsets as a “safety-valve.” Unlike a traditional safety-valve, the cap would be maintained

because additional allowances cannot be purchased at a threshold price. The RGGI “safety-valve” would effectively allow regulated parties to meet the majority (at the

5% limit) or possibly all (at the 10% limit) of their reduction requirements through offsets: the RGGI cap is projected to require regulated sources to reduce their

annual emissions by about 7% on average (based on RGGI Offsets Limits Analysis data at http://www.rggi.org/documents.htm.) The cost protection provided by RGGI’s

safety-valve will depend on the offset market. For example, if the supply of acceptable RGGI offsets cannot meet demands, the offset price may increase such that the

safety-valve is negated. An assessment of offset supply and demand conducted by RGGI officials suggests that this outcome seems unlikely (Evaluation of Offsets Supply

and Potential Demand, at http://www.rggi.org/documents.htm.)

d. California Governor Schwarzenegger signed “The Global Warming Solutions Act” (AB32) into law September 27, 2006. AB32 creates a mandatory GHG emissions

target: return to 1990 levels by 2020. The statute authorizes, but does not require, the use of market-based mechanisms. The California Air Resources Board (CARB)

is responsible for crafting most of the logistical details, including offsets. For more information on AB32 see CRS Report RL33962, Greenhouse Gas Reductions: California

Action and the Regional Greenhouse Gas Initiative, by name reate.

e. The MAC recommendations are included in the table for comparison purposes because the regulations are being developed. Per California Executive Order S-20-06,

the Market Advisory Committee was formed to develop recommendations regarding design details for a market-based emissions reduction program. The Committee

includes national and international experts with backgrounds in economics, environmental policy, regulatory affairs, and energy technologies. See Market Advisory

Committee, 2007, Recommendations for Designing a Greenhouse Gas Cap-and-Trade System for California.

In December 2008, the California Air Resources Board (CARB) approved a Scoping Plan, which was required by AB32 and outlines the activities that CARB will

undertake to meet the GHG emission goals of AB32. The Scoping Plan may indicate the direction of future regulations, but each component of the plan will be

developed through a regulatory rulemaking process, and thus is subject to change. The Scoping Plan and related documents are available at http://www.arb.ca.gov/cc/

scopingplan/document/scopingplandocument.htm.

g. Although this number may appear relatively high compared to federal cap-and-trade proposals, limiting offsets by percentage of reductions is different from limiting

offsets as a percentage of allowance submissions (as many federal proposals would do). This 49% limitation is similar to recommendation made by the Western

Climate Initiative. See Western Climate Initiative, Design Recommendations for the WCI Regional Cap-and-Trade Program (September 2008), at

http://www.westernclimateinitiative.org/.

ȬŘŝȱ

ȱȱȱȱȱȱ ȱ ȱȱȬȬȱȱ

. Comparison of Offset Treatment in International Emissions Trading Programs

Table 4

GHG

Reduction

Program

Kyoto

Protocol

Offset Types Allowed

or Prohibited

Clean Development

Mechanism (CDM) projects

Offset Quantity

Limitation

CDM and JI: “Supplementarity”

projects judged individually; wide

range of types have been accepted;

prohibits use of reductions

generated from nuclear facilities;a

land use, land use changes, and

forestry (LULUCF) offset projects

limited to reforestation and

afforestationb

Joint Implementation (JI)

projects: may allow a broader

constraint: offsets must be

“supplemental to domestic action

and that domestic action shall

thus constitute a significant

element of the effort made by

each Party ... ” (emphasis added);c

but no specific quantity limitations

CDM: Reforestation and

afforestation projects limited to

1% of party’s baseline emissions

Acceptable Locations of

Offset Projects

: developed

nations finance projects in

developing nations

JI projects: developed nations

finance projects in other

developed nations; both nations

must be parties to the Kyoto

Protocol

CDM projects

array of project types than the

CDM, and would include

revegetation, forest management,

cropland management and grazing

land management; JI projects may

be limited by a host country’s

emission control regulations

European

Union’s

Emissions

Trading

System

Kyoto Protocol limitations listed

above;

Additional limitations: regulated

sources cannot use offsets from

land use, land use changes, and

forestry (LULUCF) projects;

offsets from hydroelectric power

projects must satisfy certain

conditions

ȬŘŞȱ

Case-by-case approval process,

including a test of

“additionality”d

CDM: each project must have

letter of approval from both

buyer and seller’s governments;

must be evaluated and

approved by an Executive

Board (EB);e independent third

party (accredited by EB)

determines the certified

emissions reductions (CERs)

JI: Track 1 - eligible host

country may approve projects

and assign emission reduction

units (ERUs); Track 2 - Joint

Implementation Supervisory

Committee (JISC) approves

project and assigns ERUs

CDM/JI offsets follow Kyoto

Protocol verification process

(described above)

: no

limits for offsets from CDM, but

no JI projects;

Second phase (2008-2012) EU

members set own limits for

offsets from CDM or JI projects,

but limit must fall within range set

by the European Commission

(EC):h at minimum EU states must

allow regulated sources to use

offsets to cover 10% of their

allowances; at a maximum, offsets

can cover up to 50% of the

reductions required by cap (in

some EU states this equates to

20% of allowances)i

UNFCCC, 2001, Conference of the Parties, Sixth Session, Decision Five.

System

of Verifying Integrity

of Offsets

First phase (2005-2007)

CDM projects: developing

nations

JI projects: other EU nations

Domestic offset projects

(DOPs) not allowedj

ȱȱȱȱȱȱ ȱ ȱȱȬȬȱȱ

UNFCCC, 2001, Conference of the Parties, Seventh Session (“Marrakesh Accords”), Decision 11. Afforestation involves planting trees on previously non-forested

land; reforestation involves planting trees on formerly forested land.

c. UNFCCC, 2006, Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol on its first session, held at Montreal from 28 November to 10 December

2005, Decision 2/CMP1.

d. “Additionality” is a critical component of the environmental integrity of an offset. The concept refers to whether the offset project would have gone forward on its

own merits (e.g., financial benefits) without the support of an offset market or the impetus to comply with a legal requirement. In other words, would the offset

project have happened anyway? If the project would have occurred, the project is not additional, and should not qualify as an offset.

e. The EB is composed of 10 members from parties to the Kyoto Protocol; the members’ terms are limited.

f. The JISC is composed of 10 members from parties to the Kyoto Protocol; the members’ terms are limited.

g. Although private parties subject to the ETS cap cannot purchase LULUCF offsets, EU governments can purchase eligible LULUCF offsets—i.e., from afforestation or

reforestation projects—up to 1% of their state’s base year (1990) emissions each year (See European Union Directive 2004/101/EC (October 27, 2004); Kyoto

Protocol, Decision 17/CP.7 (November 2001)). The World Bank reported that global transactions of LULUCF offsets have only accounted for 6% of this allowable

limit.

h. European Commission Communication (COM/2006/725), November 29, 2006.

i. If EU state governments purchase offsets (e.g., to sell as allowances for new sources), these offsets will reduce the percentage of offsets that can be used as allowances

by affected sources within that state.

j. This issue has received interest in recent months, and some EU members support including domestic offset projects. See European Climate Change Programme

Working Group, 2007, Report of the First Meeting (March 8-9, 2007).

ȬŘşȱ

ȱȱȱȱȱȱ ȱ ȱȱȬȬȱȱ

ȱȱ ȱ

(name redacted)

Analyst in Environmental Policy

[redacted]@crs.loc.gov

, 7-....

ȱȱȱ

řŖȱ

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