PDF _ RL34436 - The Role of Offsets in a Greenhouse Gas Emissions Cap-and-Trade Program: Potential Benefits and Concerns
22-Sep-2008; Jonathan L. Ramseur; 32 p.

Update: Previous Editions:
September 22, 2008

Abstract: 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 — Table 1 compares offset treatment in proposals from the 110th Congress, including S. 2191, S. 1766, and S. 3036 — 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:

  • renewable energy projects: e.g., wind farms;
  • energy efficiency projects: e.g., equipment
  • 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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Topics: Air, Energy, Economics & Trade

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