Cantwell-Collins Calls the Question on Offsets

Summary

Until just recently, carbon offsets appealed to environmentalists, polluting firms, farmers, timber interests, and development agencies alike because they promised to hold down the cost of reducing greenhouse gas emissions while promoting sustainable development. But things that seem too good to be true usually are, and the awareness that offsets all-too-often do not represent real emissions reductions has now been recognized by both a new alternative cap and trade proposal (Cantwell-Collins) in the Senate and by the World Resources Institute.

Rather than resolving the political and economic tradeoffs inherent in reducing emissions, offsets obscured them. Such was the case with Waxman-Markey cap and trade legislation, which passed the House last year. The bill's heavy reliance upon offsets obfuscated the fact that Waxman-Markey would not require emissions reductions by regulated firms for the first decade or two of the program. Thus, the bill would not result in the radical technological transformation required to make clean energy cheap and reduce emissions globally.

Green groups like World Resources Institute (WRI) were complicit in the obfuscation, and major media outlets including The New York Times followed their lead, duly reprinting WRI's graph showing that the legislation would reduce emissions reductions 17 percent by 2020, even though all of those reductions could be purchased as offsets.

But late last year, Senators Maria Cantwell and Susan Collins called the question on offsets, introducing climate legislation that does not count greenhouse gas mitigation efforts outside of the capped sector of the economy as emissions reductions in the way that Waxman-Markey does. Nor does the bill, known as the CLEAR Act, use offsets as a tool to contain costs. Instead it contains costs transparently through a price cap on the maximum cost of pollution permits.

The Cantwell-Collins CLEAR legislation thus created a dilemma for green groups. CLEAR would actually mandate greater emissions reductions in capped sectors of the U.S. economy than Waxman-Markey, and thus revealed Waxman-Markey's real bottom line. Despite the rhetoric, green groups were in effect backing climate legislation that would allow emissions in capped sectors of the U.S. economy to continue to rise at business as usual rates for the better part of two to three decades.

Breakthrough Analysis: An apples to apples analysis shows that CLEAR requires firms in capped sectors of the U.S. economy to actually reduce their own emissions over the next two decades while Waxman-Markey does not.

WRI Analysis: By assuming activities underwritten by offsets allowed under Waxman-Markey represented 100 percent real and verified emissions reductions while the very same activities, authorized and underwritten through a different mechanism in Cantwell-Collins, do not, WRI produced analysis purporting to show CLEAR would result in lower emissions reductions than Waxman-Markey.

But rather than conducting a true apples to apples comparison of the emissions reductions that Waxman-Markey and Cantwell-Collins would mandate respectively, WRI doubled down on the obfuscation, releasing an analysis purporting to show that CLEAR would result in lower emissions reductions than Waxman-Markey (which WRI helped create) -- even though CLEAR required firms to actually reduce their own emissions over the next two decades while Waxman-Markey does not (see the two graphics above). Doing so required that WRI assume activities underwritten by offsets allowed under Waxman-Markey represented 100 percent real and verified emissions reductions while the very same activities, authorized and underwritten through a different mechanism in Cantwell-Collins, did not.

The question now is whether policymakers, green groups and reporters will be able to continue representing offsets as real emissions reductions, and whether they will in the future continue to use them to mask two of the most unpopular elements of emissions trading legislation: higher energy costs and wealth transfers from consumers in developed nations to businesses in developing ones.

1. Green Groups Obscured the Role of Offsets for Reporters, Policymakers, and their Members

Should offsets and similar non-carbon emission mitigation measures be considered equivalent to cap-mandated emissions reductions? We criticized WRI for producing analyses that treated such mitigations differently in Waxman-Markey than in CLEAR.

As noted in our first post on this subject, WRI simply noted in a footnote that offsets were assumed to represent verifiable emissions reductions and also conveniently went forward with analysis that showed Waxman-Markey requiring a 17% reduction in U.S. greenhouse gas emissions by 2020 and 80% by 2050.

The problems with this analysis and representation of Waxman-Markey were pointed out by us and others at the time. The offsetting allowed by Waxman-Markey was so great that the cap would not require any reduction of emissions in capped sectors of the U.S. economy until well after 2020. Given the well-documented "additionality" problems associated with offsets, and the reality that developing nations were clearly not going to agree to legally binding caps for their own economies, the large quantity of allowable offsets, assumed by WRI to represent real and verifiable emissions reductions were unlikely to constitute either.

Unfortunately, these problems were largely ignored by The New York Times and other mainstream media outlets, which occasionally noted concerns about the verifiability of offsets but consistently and routinely followed the WRI analysis in describing Waxman-Markey as legislation that would mandate a 17% reduction in U.S. greenhouse gas emissions by 2020.

WRI's John Larson has a long blog post on their website responding to our criticism. In it, Larson acknowledges that it is difficult, if not impossible, to calculate the actual emissions reductions impact of offsets.

"The variability in the quality and quantity of offsets used is difficult to account for in a technical analysis like this as it is largely uncertain what shape offsets or offset-like projects would take in the United States under different proposals with different legislative language."

He goes on to offer a series of explanations for analytical choices made in the two analyses. But the basic point has already been conceded. Indeed, Larson's response, intended to justify the WRI analysis and methodology, offers as clear an explanation as one could hope for as to why non-carbon emissions mitigation measures ought not to be conflated with cap mandated emissions reductions.

2. In Combining Various Greenhouse Gases in a Single Product, Offsets Complicated Regulatory Efforts

From the beginning, the cap and trade framework reflected in both the international Kyoto framework and domestic proposals such as Waxman-Markey intentionally conflated a range of global warming mitigation strategies. Carbon dioxide, the most predominant and long lasting greenhouse gas is treated the same as less common, more potent, but short-lived greenhouse gases such as methane. Since methane has, in theory, much greater short-term warming potential, a ton of methane is considered equivalent to 25 tons of CO2 for mitigation and trading purposes under Waxman-Markey. Similarly, the theoretical emissions reduction potential of activities such as tree-planting are calculated and considered equivalent to reducing actual emissions of CO2.

Creating a single greenhouse gas currency of sorts that would allow regulated industries and carbon traders to trade methane emitted by flatulent cows against carbon dioxide emissions emanating from coal fired power plants simplified the greenhouse gas mitigation effort, but at a price: the technological transformation needed to capture or reduce methane emissions is starkly different from generating electricity without creating pollution, and a uniform approach to both was bound to run into trouble.

3. Offsets Are Used in Kyoto and Cap and Trade Proposals to Hide Wealth Transfer and Energy Cost Increases

At the same time, conflating domestic emissions reductions with overseas reductions, reductions of CO2 with methane and other greenhouse gases, and emissions reductions with tree-planting and other measures that do not directly constrain industrial emissions of carbon was quite useful for environmental advocates: doing so obscured the true costs of achieving deep reductions of U.S. carbon emissions, promising firms flexibility to find a range of low cost substitutes in lieu of actually reducing their own emissions.

It also obscured the enormous transfer of technology and resources from U.S. consumers and firms to developing nations that was a central element of the Kyoto framework. Allowing firms to purchase cheap offsets in developing economies allowed for such transfers to occur without requiring the assent of Congress or the American public to what would amount to hundreds of billions of dollars in technology transfer and development aid for developing economies.

But such obfuscations have a political cost. As cap and trade proposals evolved from largely academic theory to actual legislative proposals and, in the European Union, into policies, the contradictions inherent to the approach became apparent.

4. Offsets Proved to Be a Poor Means to Control Energy Cost Increases Under Cap and Trade

Congressional cap and trade proposals, under pressure to appease industry concerns about the costs of complying with carbon caps, allowed enormous quantities of offsetting in lieu of forcing firms to reduce their own emissions. These measures succeeded in dramatically lowering the estimated cost of complying with the proposed caps. EPA and CBO estimated that the carbon price associated with the Waxman-Markey proposal would have been three or four times higher -- $30 to $50 per ton of carbon without offsets versus $10 to $15 per ton with them. But the result of such a heavy reliance on offsets was that the proposed legislation would have very little impact upon U.S. carbon emissions for the first two decades of its implementation.

At the same time, offsets purchased by European firms to comply with the European Union's Emissions Trading Scheme (ETS) were proving highly suspect, with corruption rampant and most offsets purchased proving to finance mitigation efforts that would have happened in any event. Over the course of a decade, European firms poured billions of euros in purchased offsets into the United Nations Clean Development Mechanism (CDM) to little discernable effect. Meanwhile, European emissions continued largely unabated with little evidence that Europe's cap and trade program was driving any shift towards a low carbon energy economy.

5. Offsets Undermined Claims that a "Cap" Provided Guaranteed Emissions Reductions

Such realities were proving increasingly difficult to reconcile with the long standing rhetoric of environmental advocates, who had long insisted that legally binding emissions caps were the sine qua non of climate policy and attacked alternative climate proposals, be they carbon taxes or technology investments, for failing to guarantee certain emissions reductions.

Yet the heavy reliance upon offsetting, both in uncapped sectors of the U.S. economy and in developing nations that were not subject to legally binding caps gave the lie to such claims. Environmental groups like WRI, after years of attacking alternative approaches to addressing greenhouse gas emissions for not providing certainty of emissions reductions, had thrown their support behind a legislative proposal that offered little certainty of actual emissions reductions.

6. Offsets Enriched Elites in Poor Nations Without Reducing Emissions or Accelerating Ecological Development

It is in this context that WRI's curious analytical choices and Larson's highly legalistic defense of them, must be understood. Offsets, which in theory offered the prospect of cheap emissions reductions while helping poor countries develop sustainably, in practice functionally gutted domestic emissions caps while offering little by way of either assured emissions reductions or real development benefits, sustainable or otherwise.

Policing offsets sourced from dozens of developing nations while consistently proving "additionality" - e.g. that the emissions reductions would not have occurred had it not been for the funding provided by the sale of offsets - presented numerous challenges that tax any effort at regulatory oversight. At the same time, demand will be strongest for the cheapest offsets, providing perverse incentives for offset providers to cut corners or flat out game the system.

Repeated examples of project owners being paid for offsets from emissions reduction projects that would have happened anyway are now well documented, as are cases of outright fraud: Chinese chemical plants being paid millions to destroy HFCs they only produced in the first place in order to claim offset credits; revenues flowing to tree planting projects that were never planted, or to protect forests already under conservation easements; landfill operators paid to burn methane they would have had to capture under state law anyway; etc.

Nor have offsets proven to offer much in the way of development benefits. Treating offsets as global development tools obscures their primary purpose: satisfying the demand for a low-cost route to compliance for firms in the developed world subject to emissions caps. Any sustainable development benefit offsets provide is secondary - if not entirely non-existent.

Are sustainable development objectives really served by paying Chinese chemical plants to destroy HFCs? What lasting economic development benefits do offsets used to purchase swathes of Brazilian rainforest have, when demand for forestry products is unabated and deforestation simply moves from one area of the forest to another? And who really benefits when corrupt officials in the Congo receive funds to "protect" rainforest lands?

We have written elsewhere about the magical thinking that has allowed leading environmental organizations to continue to support such efforts even as the evidence of their failure, indeed the impossibility of their success, has become ever more apparent. For WRI, tasked with providing analysis of a legislative approach to climate change that they had long advocated, the solution to these problems, which we described in our original post, was to assume them away.


7. CLEAR Act Breaks From Effort to Hide the Role of Offsets

Whatever its flaws, the introduction of Cantwell's CLEAR proposal has brought the problems with both Waxman-Markey and the WRI analysis of it into much clearer relief. CLEAR has the advantage/disadvantage of being transparent about the means through which it proposes to reduce emissions.

By capping emissions at 2012 levels, requiring that all emissions allowances be auctioned, and dispensing with emissions offsets altogether, CLEAR's author's have chosen not to obfuscate the choices that policy makers must face in taking real action to reduce emissions. Rather than using offsets to contain the costs associated with reducing emissions while pretending that its legislative caps have not been abrogated, CLEAR simply establishes a hard price cap. This has the effect of potentially circumventing the legislated caps, and CLEAR's authors, in contrast to Waxman-Markey, are forthright about that, using revenues generated through the auction of emissions permits to finance additional mitigation efforts outside of the capped sectors of the U.S. economy.

As noted previously, these additional mitigation measures will almost certainly involve many of the very same measures that offsets are intended (but often fail) to underwrite. CLEAR directs the President to use mitigation funds in such a way as to achieve the 20% reduction relative to 2005 levels called for in the legislation. In so doing, CLEAR claims to mandate a 20% reduction in U.S. emissions.

Such claims should, like claimed emissions reductions attributed to offsets, be taken lightly. There are no guarantees that domestic and international mitigation measures taken outside of capped economies or capped sectors of those economies will result in measurable or certain reductions of global greenhouse gas emissions. In this, WRI's analysis of CLEAR correctly absents reductions resulting from CLEAR's additional mitigation measures from its representation of emissions reductions mandated by CLEAR.

8. WRI Continues to Misrepresent Waxman-Markey and CLEAR

The problem with WRI's respective analyses of CLEAR and Waxman-Markey is not the CLEAR analysis -- it is the Waxman-Markey analysis, where WRI represented offsets as 100% real and verifiable. Larson claims that doing so was justifiable, as offsets are allowable means through which firms may comply with mandated emissions reductions under the Waxman-Markey cap while mitigation measures proposed under CLEAR would require future appropriations actions by a future Congress.

In order to make this distinction however, Larson must discount mitigations requiring future congressional appropriations while not discounting rulemaking delegated to future administrations as to the regulation and accounting of offsets. The credibility of offsets as legitimate and additional emissions reductions under Waxman-Markey was in fact delegated to future rulemaking procedures to be undertaken by EPA and the Department of Agriculture in the years following enactment. As such, the credibility of offset associated emissions mitigations is no less subject to the whims of future policy makers than are the CERT related emissions mitigations proposed in CLEAR.

To their credit, the author's of CLEAR have structured their proposal such that the credibility or lack thereof of emissions reduction efforts in uncapped sectors of the U.S. and global economies does not, one way or another, change the obligations of U.S. firms to reduce their own emissions. Whatever the outcome of measures outside the cap, regulated U.S. firms would be obligated to reduce their emissions at a predetermined rate, so long as those reductions can be achieved at a politically acceptable cost.

The same cannot be said for Waxman-Markey, which has vastly different and variable implications for the obligations of U.S. firms and the impact upon U.S. greenhouse gas emissions depending upon the cost and availability of offsets, irrespective of their legitimacy.

Sadly, no good deed goes unpunished in WRI's analyses of climate legislation. For the sin of transparency, CLEAR is represented as mandating less certain and less significant emissions reductions while Waxman-Markey's obfuscations are rewarded with graphs and analyses showing substantially greater emissions reductions that it is unlikely to deliver.