Climate Bill Analysis, Part 3: Key offset limit eliminated, increasing domestic offset use, lowering allowance prices

The original discussion draft of Waxman-Markey included a key provision that would have required domestic and international offsets to reduce 1.25 tons of carbon dioxide in order to receive one pollution allowance equivalent to 1 ton of carbon dioxide. In other words, the conversion ratio for offsets to carbon allowances was 1:25 to 1.

However, the full version of Waxman-Markey (introduced on Friday) eliminates this provision for all domestic offsets and for international offsets between 2012-2017. The impact, according to new EPA analysis (download PDF), will be an 11% increase in domestic offset use, an unspecified increase in international offsets use during the first five years of the cap and trade program (2012-2017) and a 7% reduction in the price of all pollution allowances every year. The EPA writes:

The offsets provisions in H.R. 2454 differ from the provisions in the draft bill. Domestic offsets in the introduced bill have a one-to-one turn-in ratio (i.e., only one ton of offsets needs to be turned in for every ton of covered sector emissions being offset). International offsets have a one-to-one turn-in ratio for the first five years of the policy. After the first five years, five international offsets must be turned in for every four tons of covered emissions being offset...

As was shown in EPA's modeling of the draft bill, using a one-to-one turn-in ratio for domestic offsets instead of the five-to-four turn-in ratio that was specified in the draft increases the total purchase and use of domestic offsets by 11%... The effect of that change alone is to lower allowance prices by 7% in each year.

The EPA's initial estimate of allowance prices was $13-17 in 2015 and $17-22 in 2020. The combined impact of allowing additional offsets and the weakening of the 2020 emissions reduction target (now 17% vs. 20% in earlier versions) led the EPA to revise downwards their allowance price estimates by 10% or more (more in the case where up to 1.5 billion tons of international allowances are permitted). That would result in an allowance price estimate of $11.70-$15.30 in 2015 and $15.30 to $19.80 in 2020. In more round terms, call it $12-20 per ton of CO2-equivalent between 2015 and 2020.