Carbon offsets: Money-saving, but difficult

The US Cogressional Budget Office has published a brief on how carbon offsets might work under the Waxman-Markey bill’s regime. Like the European Union scheme, Waxman-Markey proposes to allocate a set amount of allowances to polluters covered by the bill, but those who exceed over their limit could, in addition to buying allowances from other organisations, also pay for offsets – emissions reduction projects either in the US or overseas.

This would be somewhat cheaper than paying for extra allowances, and would in turn reduce pressure on the price of allowances themselves.

Sounds simple, but offsets are one of the most controversial aspects of the proposed scheme. Even the New York Times took aim at them in an editorial last month.

The CBO’s conclusion? Well, unsurprisingly they say it is difficult to calculate, but that it could reduce the costs quite a lot. In fact, from estimates the costs in 2030 of ‘various’ carbon reductions schemes, the cost reduction could be quite considerable:

It’s a somewhat fuzzy set of numbers – though we can’t blame the CBO for that – but it’s fascinating to see that the higher the reduction targets, the more offsets could make a different to costs.

(Note that this is the per-metric ton of CO2 equivalent price; bigger reductions would mean tighter caps which would in turn mean higher total costs, which are not shown here. But reducing the effective price of greenhouse gas emissions would no doubt make a big difference.)

So yes, carbon offsets represent a huge saving, and this is why the Waxman-Markey/ACES bill relies on them so extensively. But they also raise all sorts of difficulties which have seen them attract a great deal of criticism: what if the ‘reductions’ that are paid and accounted for would be undertaken anyway? What paying for an offset simply moves the emissions some place else?

The CBO papers identifies four key areas of offsets that must be verified:

- Offsets would need to bring about additional reductions in GHGs. That is, they would need to result in reductions that would not have occurred in the absence of the program that grants credit for offsets.

- Offsets would need to be quantifiable so that any reductions in GHGs could be reliably measured.

- Offsets would need to be permanent rather than simply delay the release of GHGs into the atmosphere.

- Offsets would need to be credited in a way that accounted for leakage in the form of higher emissions in other locations or sectors of the economy as a result of the offset activity.

On the difficult question of additionality, they note, the carbon development mechanism (CDM) scheme mandated by the UN and used in the EU’s carbon reduction scheme use three of the ‘simple’ measures:

Simple strategies include accepting only activities that are not mandated by other laws, activities that reduce GHGs after a specified date, and activities that are not common practice.

In addition, the CDM requires projects prove they could not be implemented without the CDM.

As we’ve noted before, proving this is complicated and can go wrong: a large verifier of CDM schemes was suspended by the UN last year (and subsequently reinstated) over questions about its own auditing.

And all this auditing is costly: the CBO estimates about $5 per ton goes into the verification. International verification is considered more difficult than that of domestic projects: The Waxman-Markey bill, as it stands now, requires international offsets to reduce 1.25 tons of greenhouse gases to be counted as one ton under the scheme.

But a reduction in emissions is a reduction, no matter where it takes place, and concern over costs weighs so heavily in the debate over cap-and-trade that it’s difficult to see the scheme going ahead without it.

Related links:

Carbon offsets and the problem of additionality (FT Energy Source)

Energy Source is no longer updated but it remains open as an archive.

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