Waxman-Markey: Carbon Offsets

On Tuesday, March 31, House Energy and Commerce Committee Chairman Henry Waxman (D-CA) and Rep. Edward Markey (D-MA) released a “discussion draft” of the American Clean Energy and Security Act of 2009 – a climate change bill that will serve as the starting point for long-delayed congressional action on the world’s most pressing environmental program. CPRBlog asked several Center for Progressive Reform Member Scholars to examine different aspects of the 648-page Waxman-Markey bill. This entry, by Victor Flatt, looks at the offsets for carbon emissions that would be permitted under the measure.

The Waxman-Markey draft bill treads some familiar ground with respect to the use of offsets to meet greenhouse gas reduction requirements, but also introduces some new innovations. In departing from other drafts and bills, the offsets provision may be most controversial in its limited examination of the environmental effects of offsets, and its use of offset management to try and address international competitiveness issues.

Like most other bills, and consistent with recommendations from economists, the Waxman-Markey bill assumes the use of offsets to provide greenhouse gas reductions in lieu of surrendering emission allocations. Interestingly, the bill provides that offset reductions of a ton of CO2 equivalent are not as valuable as an emissions reduction of the same amount under the established cap. A regulated entity must provide 1.25 offset credits to meet the obligations of one emissions reduction credit. While this might be somewhat desirable given uncertainties surrounding offsets, the bill ostensibly addresses and disallows losses from such uncertainties in other provisions. This may be something of a “safety net” and recognizes the deep suspicion with which American policymakers still view offsets in a comprehensive federal scheme. To the extent that offsets do provide more cost-effective reductions, this will have the effect of reducing that efficiency, but the cost differential could also accelerate real reductions.

This limitation is countered somewhat by the generous amount of offsets that can be used to meet the reduction obligation. Based on a somewhat complex formula that varies based on the total annual cap, the bill would vary the amount of offsets that could be used from 20 percent up to 70 percent or more. This is an unusual innovation that seems to recognize that as the cap on emissions is reduced, sources will have to rely more and more on offsets in order to meet the goals.

The Waxman-Markey bill recognizes the now familiar requirements that all offsets must be “additional” (which includes a minimum of leakage), “verifiable,” and “permanent.” These terms of art officially exist to ensure that offsets are not fraudulent. The bill instructs the administrator to determine methodologies to demonstrate that these requirements have been met. Unlike the Lieberman-Warner-Boxer Climate Security Act of 2008, this bill does not require continued annual verification of offset integrity. Instead, it provides for a generous reserve amount and insurance to promote offset integrity. It also limits offset duration to five to ten years (with the exception of forestry), meaning that it doesn’t have to worry about long-term verification, unless the party comes before the Administrator for approval again.

The bill does allow the use of international offsets, if they meet the same provisions as domestic ones. However, the EPA may waive some of the requirements if it does not “undermine” the integrity of the system. With respect to international offsets, the Waxman-Markey provision also creates a system whereby in certain higher developing countries, economic sectors must be certified and offsets must fit into those sectors. This seems to be designed to both assist with verification at high volumes and to focus attention on reductions in countries that may compete with the United States.

One of the more problematic aspects of the offset provisions of the bill is its failure to examine the full environmental impacts of offsets. Though the bill does require that environmental effects (as well as social, human, and health effects) be considered in determining what types of offset projects should be recognized, it only requires an examination of environmental effects for forestry projects. This is narrower than the Lieberman-Warner-Boxer bill and diverges from the requirements in California’s AB 32. While the need to examine environmental effects in forestry is certainly important, negative (and positive) environmental effects can also accompany a myriad of other offsets, such as deployment of alternative energies and the generation of hydropower, to land use changes. The bill should be amended so that environmental effects are reviewed for all offset projects.

Perhaps one reason that this environmental review was narrowed is the daunting administrative load that the offset provisions would establish. The Waxman-Markey bill requires the EPA to review all offset proposals for approval, in addition to the rulemaking required. This would put the EPA in the position of the Clean Development Mechanism Executive Board at the United Nations, which fell behind in its review when applications for CDM offsets were at a high level. The U.S. market for offsets will dwarf anything that we have seen in the international arena and lawmakers need to be aware of the significant load that will be placed on the EPA, and consider this in funding and staffing.