This is the fifth in a short seriesof posts that explain some important but often overlooked policy issues in the Western Climate Initiative—the West’s regional cap-and-trade system.

“Offsets” are surely one of the most contentious issues in cap and trade. That’s because they could improve the cost-effectiveness of cap and trade while bringing substantial side-benefits for free. Or they could also gut cap and trade, making it a sham. The devil is in the details.

Offsets are reductions in emissions that are legally or geographically outside the cap but that are honored like carbon allowances under the cap. For example, an electric utility in the Northwest might buy a 1-ton carbon offset—for one ton of CO2 removed permanently from the atmosphere—from a Northwest forest land owner who put a legally binding (and permanent) conservation easement on her land and thereby soaked up and sequestered, or stored, 1 ton of CO2. Alternatively, an oil company in the Northwest might buy 100 offsets from a coal-fired power plant in China that shut down one of its generators and replace the power through conservation programs. To use the offsets under cap and trade, the electric utility or oil company would present public officials with documentation of the offsets as a substitute for an equal number of carbon allowances.

WCI’s July 2008 draft proposal contemplates allowing companies to include up to 10 percent offsets in their portfolios of carbon allowances. That means that they could use offsets to achieve two-thirds of WCI’s 2020 reduction goal of 15 percent.

We think 10 percent is too much, especially when the entire goal is only 15 percent. Here’s why.

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    • Offsets are triply promising and triply problematic. Offsets’ first big advantage is their ability to tap cost-effective emissions-reduction opportunities wherever they may be, smoothing the transition to climate security. Greenhouse gases are global not local pollutants: it doesn’t matter to the atmosphere whether the CO2 is emitted in India or Indianola (Washington). Their second advantage is their ability to provide substantial side-benefits, such as financing for farm- and forestland restoration. Their third advantage is political: they can bring key constituencies such as rural landowners into the coalition for cap and trade.

    Offsets have countervailing disadvantages. First, verifying that offsets cause emissions reductions that would not have otherwise happened is challenging. Second, outside of cap-and-trade’s geographical boundaries, fuel conservation might have unintended consequences, such as slightly lowering the price of fuel and thereby increasing consumption—and emissions. Third, paying certain landowners and industries to limit (or sequester) emissions through offsets sets a bad precedent: it will make politically difficult the later task of capping their emissions as a matter of law. It will seem unfair to those who are paying substantially for the permission to pollute.

    The case of carbon storage in forests and other ecosystems illustrates both promise and perils. Sequestering carbon by regrowing forests, revegetating ecosystems, and enhancing soils is appealing. It could bring benefits not only for climate security but also for rural landowners’ bank balances and for our natural heritage. Some of the practical obstacles have already fallen away: the California Air Resources Board recently approved an accounting standard for forest-based carbon sequestration. It aims to ensure that the carbon storage claims of forestland owners are real, permanent, and additional to what would have happened anyway; it also requires verification by a third party.

    Still, ecological sequestration of carbon is less reliable than not putting greenhouse gases into the atmosphere in the first place. Forests that re-grow can also burn down or become infected with insects or disease, releasing their carbon content skyward. A cautious, limited use of this approach makes sense, especially at first.

    Plus, it’s worth remembering that there are other reasons why we might like to see actual emissions reductions, rather than offsets in lieu of reductions. Just as there are co-benefits to some offset projects, so reducing carbon pollution frequently brings “co-benefits” along for the ride too. Scale down a polluting coal plant and you also improve local air quality and reduce mercury exposure. Reduce driving and you also reduce the health risks of driving (car crashes are the leading cause of death between ages 2 and 45). And so on. Cap and trade shouldn’t have to do the work of other sensible policies, but it would nice to see multiplying advantages for places that are taking their climate responsibilities seriously.

    Finally, as Sightline’s friend, Jessica Coven at Climate Solutions, points out, offsets may not have much (or any) cost advantage over simply reducing emissions. In the European carbon market, offset prices are relatively high despite the fact that the EU offset program has been notoriously lax. Strengthening the integrity of the offset program to a level acceptable for WCI would presumably reduce the supply of available offsets, hence raising their price. So it’s possible that an offset program might throw a wrench into the works of cap and trade without offering a meaningful cost-savings.

    So what’s the takeway?

    Sightline specifically recommends:

    1. That cap-and-trade systems such as WCI initially allow capped companies to include in their annual portfolio of carbon allowances no more than 1 percent offsets. (Since WCI is aiming for a 15% reduction, that would mean offsets could comprise about 6.7% of the program’s reductions.)
    2. That each cap-and-trade system only recognize offsets that originate within that system’s political boundaries, at least in the early years. This strategy would ensure that the positive side-effects of emissions reductions, such as the concomitant decline in local air pollution, the growth of green-collar jobs, and the resulting benefits to human health and community, accrue to the places that have capped their emissions. (WCI is proposing to allow offset projects throughout Canada, Mexico, and the United States.)
    3. That cap-and-trade systems only allow offsets from emission sources that will probably never be amenable to capping directly, even after several years of effort. For example, methane leaks from landfills, manure piles and sewage lagoons are too difficult to monitor for capping in the next few years. But because they are site-specific emissions sources, we might be able to cap them with some targeted investments in innovative monitoring technology. In contrast, carbon storage in forests and other extensive ecosystems may not be suitable for ongoing greenhouse gas monitoring (although New Zealand has reportedly pioneered some promising techniques). Thus, forest projects are probably better candidates for offsets than methane leaks. (WCI is investigating the possibility of including agriculture, forestry, and waste management as allowable project-types for offsets.)