Waxman-Markey; Ensuring the Quality of Domestic Offsets and Tackling Emissions from Uncapped Sectors

The much-anticipated ''American Clean Energy and Security Act of 2009'' (a.k.a., Waxman-Markey) was finally released this past Tuesday (full draft is available here). Here's a quick look at one of the potentially thornier elements of the proposal: the role of offsets.

Because offsets typically represent lower cost abatement, their inclusion in a cap-and-trade program is one of several mechanisms that can help contain costs. However, since offsets allow capped firms to increase their emissions, an offset must deliver environmental benefits equal to reducing a ton of pollution from a smokestack or a tailpipe or risk "breaking the cap". By setting an offsets limits of 2 billion tons (split evenly between domestic and international offsets), Waxman-Markey allows for considerable cost-containment.  However, the draft bill discounts offset credits relative to pollution permits or "allowances", requiring capped firms to submit five offset credits for every four tons of carbon they are offsetting. While only 2 billion offsets per year can be tendered, 2.5 billion can potentially be generated. Assuming offset quality is ensured, this 1:25 to 1 ratio is intended to generate a net climate benefit in each offset transaction, striking a balance between environmental integrity and offset producer profitability.

Nevertheless, concerns remain about offset "quality". The good news is that the draft bill takes concrete steps to ensure quality - i.e. that each offset will be real and additional, meaning it will deliver environmental benefits above-and-beyond business-as-usual, as well as verifiable and permanent, and will not have major adverse effects on human health or the environment. While many regulatory details will necessarily be left to the post-legislative process, the draft sets the rules of the game in a way that helps make certain these criteria will be met. Five specific provisions stand out.

First, the draft bill does not presume that any particular kinds of projects qualify as offsets - it includes no pre-established list of qualifying project types. Instead, that work is appropriately left to the Environmental Protection Agency, with key input from an independent Offsets Integrity Advisory Board, a nine person team of experts comprised primarily of scientists. Putting science first in this way is a big step in the right direction, both for the environment and market participants. Under the draft, recommendations by the Advisory Board - both with respect to which project types are eligible to generate offsets and how projects should be certified and monitored - will be made according to the best available scientific and technical expertise, giving a seal of good quality to qualifying offset project types and an important boost to the value of the offsets market.

Second, the list of eligible project types is subject to periodic review. Every five years, the Advisory Board must conduct a transparent, scientific review of the list of eligible project types, offset methodologies, monitoring practices, policies for mitigating potential project reversals and other accountability measures, and make recommendations for changes to the program accordingly. Project types for which rigorous methodologies are not yet well-developed or which still carry substantial measurement uncertainty may have to sit it out at first, but these regular reviews - during which project types can be added or removed from the eligibility list - mean we can constantly take advantage of new practices, new science and improvements in measurement techniques to keep our offsets regulations as rigorous, current and flexible as possible. It is likely, of course, that these reviews will generate quite a bit of lobbying by groups pushing to get certain project types approved, but term limits for Advisory Board members and a transparent process throughout should help ensure that the Board maintains its independence over time and the process remains sound. In addition, if the process establishes a track record of ensuring high quality, then the producers of high-quality offsets will help defend strong standards, as it is in their interest to keep "junk" offsets from flooding the market and driving down prices.

Third, the draft bill establishes a commitment to assuring environmental performance. In addition to regular reviews of offset eligibility, protocols and measurement methodologies, the bill establishes regular evaluations of the impacts of live offset projects on actual net greenhouse gas emissions at 5-year intervals, regularly asking and answering the question: are offsets delivering their intended emissions reductions and, if not, what can be done better? It also includes annual randomized performance audits of offset projects, offset credits and the auditors themselves, creating essential accountability for environmental integrity in the offset market.

Fourth, the draft bill acknowledges the need to tackle emissions from uncapped stationary sources using policies other than offsets. Although offsets are one way to generate emission reductions in the uncapped sectors, offset-driven reductions do not add to the reductions required by the cap, which does not cover all U.S. emissions - only about 85%. In other words, they do not help us achieve our economy-wide targets. Because the cap won't reduce total national emissions, we need complementary policies to generate substantial reductions in the uncapped portions of the national emissions inventory. To address this need, the draft bill provides for setting performance standards for uncapped stationary sources of emissions producing more than 10,000 tons of CO2 equivalent per year (and that, together account for at least 20% of total uncapped emissions), as well as uncapped sources responsible for at least 10% of uncapped methane emissions, such as manure lagoons in large confined animal feeding operations (CAFO's). Performance standards also apply to those uncapped industrial sources that together with capped industrial sources constitute at least 95 percent of industrial sector emissions.

Finally, the draft bill includes specific language requiring rigorous certification and crediting standards for offsets. The draft emphasizes the need for standardized methodologies (as opposed to case-by-case review) to address concerns about additionality, measurement, leakage accounting and discounting for uncertainty. It also calls for conservative estimates of business-as-usual practices so that we do not credit actions that would have taken place anyway. Importantly, it also addresses the need to assign liability for carbon sequestration activities (like growing forests) that are subject to reversal (for example, if the forest burns or is cut down). The draft provides means of compensating the environment on a ton-per-ton basis for such reversals, either through offset reserves, offsets insurance, or other appropriate mechanisms.

Setting these strong standards is the single best way to simultaneously guarantee environmental integrity in the offsets market and raise profitability for high-quality offset producers.

Overall, the draft bill moves the conversation about offsets regulation in the right direction and sends the right signals about the overarching need to protect the soundness of the cap. It puts forth specific principles about the types of standards necessary to ensure that certified offsets represent real emissions reductions - and establishes the rules of the game for creating those standards - but appropriately leaves room for the details to be filled in by experts through a rigorous, transparent and scientific process.

For our full series of blogs related to the just released Waxman-Markey draft climate and energy (ACES) proposal go to: http://switchboard.nrdc.org/energyandclimate.php