Climate Bill Analysis, Part 4: Emissions "Cap" May Let U.S. Emissions Continue to Rise Thr

May 20, 2009 | Jesse Jenkins,

[Updated 6/18/09 to more clearly explain and depict the potential banking of offsets.]

At the heart of the nearly thousand page long climate change and clean energy bill being debated in the U.S. House of Representatives this week is a "cap and trade" mechanism aimed at limiting greenhouse gas emissions that contribute to global warming.

However, a provision in the bill, known as the American Clean Energy and Security Act (H.R. 2454 or "ACES"), allows polluting firms in the U.S. to finance emissions reductions overseas in lieu of reducing their own global warming pollution and may allow American emissions to continue to rise for up to twenty years, according to new analysis from the Breakthrough Institute.

The provision allows power plants, oil refiners, and other polluters regulated under the bill's cap and trade program to use up to one billion tons of international emissions reductions, or "offsets," to be used instead of reducing their own emissions each year. The bill also allows up to one billion tons of additional offsets each year, sourced from sectors of the U.S. economy that do not fall under the pollution cap, such as forestry and agriculture. If a suitable supply of domestic emissions offsets are unavailable, the limit on the use of international offsets may be raised to 1.5 billion tons annually at the discretion of the Administrator of the U.S. Environmental Protection Agency (EPA).

The extensive use of these international and domestic offsets would effectively allow U.S. firms in capped sectors to continue emitting global warming pollution at levels well above the reductions supposedly driven by the emissions cap. New analysis from the Breakthrough Institute reveals that if fully utilized, the offset provisions in the ACES bill would allow continued business as usual growth in U.S. greenhouse gas emissions until 2030. Emissions in supposedly sectors of the economy supposedly "capped" by ACES could continue to grow at BAU rates until as late as 2037.

While the bill intends to reduce economy-wide U.S. greenhouse gas emissions 20% below historic 2005 levels by 2020, 42% by 2030 and 83% by 2050, analysis from the Breakthrough Institute illustrate how the use of offsets would actually allow U.S. emissions to continue to grow at business as usual rates for years or even decades ahead.

The following graphics illustrate the effect of the offset provisions. Click any of them to enlarge.

The first graphic illustrates total legally permitted emissions in sectors of the economy covered by the ACES cap and trade regulations if offsets are available at the full levels permitted by the legislation (up to 2 billion tons per year). As this graphic illustrates, offsets could create a major oversupply of emissions allowances during the first years or even decades of the cap and trade program. This oversupply would either collapse the market value of emissions allowances or allow significant quantities of emissions permits to be banked for future compliance years (ACES allows unlimited banking of unused allowances) -- or both.

Max_Offsets_Covered_Sectors.jpg


It's obvious that firms would not opt to increase their emissions above BAU simply because emissions permits are available. However, firms are likely to bank any excess permits in early years for future compliance periods since excess permits implies a slack market and lower prices than would be expected in future compliance years. Rational firms with available capital would therefore opt to purchase excess low-cost offsets and bank them for future years when prices are expected to rise. This second graphic illustrates the potential range of emissions if any excess permits are banked, allowing continued BAU emissions growth as long as supplies of current vintage year permits and banked permits remain adequate.

Max_Offsets_Covered_Sectors_Banking.jpg


As this graphic illustrates, emissions in supposedly capped sectors could continue to grown at business as usual rates through 2030 and beyond. In fact, if offsets are available at the full 2 billion tons legally permitted by the bill, emissions in covered sectors could continue to rise at BAU rates until 2037 before any emissions reductions would be required. We of course note that this is not a projection of likely outcomes under ACES, but it is the maximum emissions scenario that is legally permitted by ACES.

The next two charts illustrates the range of potential emissions across the entire U.S. economy allowed by the ACES bill if international emissions offsets are utilized at the levels permitted by the legislation (1 billion tons in normal circumstances; up to 1.5 billion tons if domestic offsets are unavailable in significant quantities). Again, the first graphic shows emissions that would be legally allowed if each year's permit supply was fully utilized, while the second graphic shows the total emissions that would occur if excess permits are banked.

Max_Offsets_Economy_Wide_Full_Use.jpg


Max_Offsets_Economy_Wide_Banking.jpg


At 1 billion tons of international offsets per year, emissions would be legally permitted to continue growing at BAU rates until 2025. If 1.5 billion tons of international offsets are utilized each year, emissions could continue to grow at business as usual rates until 2030.

(Compare the above graphics with this analysis from the World Resources Institute, which does not consider the impact of international offsets on U.S. emissions levels.)

Again, these are not projections, but illustrate the range of potential emissions scenarios that would be legally permitted by ACES. If extensive offsets are utilized, the supposed "cap" on regulated sectors of the economy will essentially be lifted for years or even decades after the start of the cap and trade program. The result will be very little pressure to shift practices in capped sectors as long as affordable offsets are available for purchase.

This all leads one to wonder: where's the cap in the "cap" and trade program?

Note: All of these graphics and the underlying calculations and assumptions can be downloaded here as a .xlsx file.


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See here for the Breakthrough Institute's full collection of ACES analyses (also collected here):


Comments

This climate change is the biggest fraud perpetuated on mankind, and it is going to cost the average consumer a lot of money not to mention a reduction in GDP, a loss of American competiveness, an increase in unemployment. When are the American people going to rise up against this madness?

http://mark24609.blogspot.com/2008/05/students-held-hostage-in-world-gone-mad.html

By Mark Dias on 2009 05 28


You are forgetting a few important points:
1. Regardless of the number of offsets, there would be a CO2 price ... emissions will be lower than the business as usual case. Offsets will NOT cause emissions growth to be faster than it would have been absent a CO2 price.
2. Increasing the number of offsets merely lowers the CO2 price. Political opposition to any CO2 policy is driven by economic fears.
3. Offsets provide environmental insurance. If technologies cannot deploy as fast as we hope, then offsets provide a way to make real emissions reductions from sources outside of the cap.
4. There is no way that the market will provide enough offsets to hit the limit for many years. The involvement of the NGOs has ensured that offsets that might be allowed will be of higher quality -- these are limited.
5. The Avoided Deforestation Partners (ADP) have developed a robust set of principles -- they have significantly addressed many of the underlying problems of one of the largest potential sources of offsets.
6. The CO2 price in the market on any given day drives operating decisions for that day. It is the long term CO2 price projection that drives long term investment decisions. Most models show CO2 prices in the mid to longer term going more than high enough to incentivize the investment in non-emitting technologies.
7. Climate policy will not be set once then forgotten. Like all environmental laws, it will very likely tighten be improved later -- getting the overall framework developed is the hardest part. Once that is enacted and people see the economy hasn't been destroyed (well, more than today) improvements will be easier.
Don't despair!

By Kevin Leahy on 2009 05 27


Dan, thanks for the comment. First, this is far less about domestic offsets than it is about international offsets. If domestic offsets are unavailable at the scale allowed by the bill, then additional international offsets will be permitted, and more international offsets = far less pressure to reduce US emissions.



Second, you can't really disprove anything with a model. It's a model, and the simple fact that you have to rely on fallible models to make this point undermines the "emissions reduction certainty" supposedly offered by a "cap" on carbon (and the central reason people are fighting so hard to get one in place). That was the main point of highlighting the offset provisions: if this degree of offsetting is allowed, the cap is far from certain, and effectively non-binding.



In fact, the offset provisions and the "allowance reserve pool" mechanism (which floods the market with addition allowances if prices get too high, forcing prices back down) mean that rather than providing certainty that emissions will fall, the ACES cap and trade program will only drive emissions reductions IF a number of contingencies prove true. Emissions will only be required to fall in the supposedly

By Jesse Jenkins on 2009 05 26


Come on. The EPA already disproved this notion: their modeling of the bill shows that only 100 million tons of domestic offsets will be in used in the year 2020. Also, Waxman-Markey requires you purchase 5 offsets for every 4 allowances. There is something to be said about the "additionality" of certain offsets, but this is an overly simplistic analysis.

See
http://www.epa.gov/climatechange/economics/pdfs/WaxmanMarkeyExecutiveSummary.pdf
or
http://climateprogress.org/wp-content/uploads/2009/05/epa-domestic-offsets-waxman-markey.gif

By Dan Sanchez on 2009 05 23


Jesse - thank you thank you thank you for putting all of this together.

-Jay

By Jay O’Hara on 2009 05 21


The graphs show the offsets extending all the way out to 2050, and increasing substantially as a percentage of the cap level. This implies that the offset emissions will not be creditable to other countries' GHG regulations, either because other countries do not adopt comparable GHG regulations, or because they are not allowed to take credit for emission reductions that have already been bought by the U.S. and secured by long-term contracts and commercial acquisitions.

If other countries are allowed to later take credit for those offset reductions, then we would have a perverse interest in not having our GHG regulatory policy adopted by others, because we may no longer be able to meet our current compliance obligations (let alone more stringent future regulations) when those offset credits are no longer available. Conversely, if we are able to lock in long-term access to cheap offset credits, then those credits will not satisfy the additionality requirement because our monopolization of low-price compliance options will leave other countries with more expensive options and will deter them from adopting similar regulations.

Moreover, offsets will not necessarily reduce costs for our economy. They will reduce prices, but not costs. Which will cost less: a $10/ton allowance that is freely allocated (or auctioned, with auction revenue being cycled back into the local economy), or a $5/ton allowance, with the entire $5 being exported overseas? Price does not equate to cost. Does anyone in the legislature understand this?

By Ken Johnson on 2009 05 21