Climate Bill Analysis, Part 4: Emissions Cap May Let U.S. Emissions Continue to Rise Through 2030

[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.

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.

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.

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.