NCEP Study Finds Volume of International Carbon Offsets Too Uncertain in Early Years to Reliably Contain U.S. Costs

Commission Urges Streamlined Approach on Domestic AG Offsets and Complementary Cost Containment Measures

Contact: 

Paul Bledsoe
(202) 637-0400
pbledsoe@energycommission.org
Tuesday, September 15, 2009

Washington, DC - The bipartisan National Commission on Energy Policy (NCEP) today released a new study finding that international offsets will not be available in sufficient quantities in the early years of a cap and trade program to effectively control costs to the US economy.

The NCEP study, “Forging the Climate Consensus: Domestic and International Offsets” notes that successful domestic and international offsets systems are vital to reducing domestic and global emissions. But the paper finds that an effective cost containment mechanism—likely a permit price floor and ceiling-- in US cap and trade legislation would ease the pressure for a short-term reliance on international offsets as the primary mechanism for containing overall program costs. NCEP argues in the paper that without effective, additional cost containment provisions there will be a tendency to push large quantities of offset credits into the system, which could lack environmental integrity, especially in the early years of the program when markets have not matured.

The paper also notes that while the House-passed climate legislation would allow as many as 1.5 billion tons of international offsets, in the early program years there will likely be only 300 million tons of international offset credits available for US purchase, further necessitating additional cost containment until the capacity to make more tons with clear environmental integrity available develops.

NCEP also argues that domestic offsets should contain both an offset market and “set-asides” of from 2 to 5 percent of total allowances for agricultural greenhouse gas sequestration practices, in an effort to streamline the program and allow environmentally valuable practices to qualify that might not meet stringent offset market standards.

“Domestic and international offsets are both critical to effective efforts to reduce greenhouse gas emissions,” said Jason S. Grumet, Executive Director of NCEP, and President of the Bipartisan Policy Center. “But in the early years there will not be enough environmentally sound international offsets available to reliably control U.S. costs, so additional cost containment will be needed. Effective cost containment and an environmentally-sound offsets market must go hand in hand. Domestically, NCEP believes a streamlined approach that insures the legitimacy of offsets is important to allow for greater agricultural reductions. “

Key Recommendations in today’s paper include:

  • Offsets can and should play a critical role in a U.S. climate policy. However, an offsets program, by itself, is unlikely to provide an adequate mechanism for managing economic risks in the critical early years of a cap-and-trade program.
  • It is impossible to predict with accuracy how many offsets will be available in the early years of a U.S. cap and trade program. This is particularly true for international offsets. The number of these offsets used for compliance will depend on a variety of factors, including rules for “additionality,” administrative procedures for reviewing projects, policies in host countries, and the ability to negotiate agreements for broader, sectoral offsets. Based on past experience with offset programs, however, we would expect the international offset market to ramp up slowly compared to some of the more optimistic estimates associated with House climate legislation. We therefore believe that it is unlikely that U.S. purchases of international offsets would be greater than 300 million tons per year during the first several years of the program.
  • The inclusion of a price ceiling or a robust allowance auction reserve would ease the pressure for a short-term reliance on international offsets as the primary mechanism for managing program-related economic risks. This, in turn, should make it less likely that there will be design and implementation decisions that prioritize quick approval of large quantities of offset credits over the objectives of maintaining environmental integrity and promoting the strategic engagement of developing countries.
  • Regarding domestic offsets, we believe there should be a “set-aside” program that dedicates a percentage of allowances—say 2 percent to 5 percent—to reward certain agricultural sequestration practices. Using emission permits to, in essence, “insure” new and innovative sequestration activities, will make it possible to create a more streamlined approach than under a traditional offset regime. The set-aside program would be used to reward those projects and practices that might not meet the more stringent standards of the offset program, but which have environmental value. Depending on the type of project, farmers would be able to apply for credit under either the domestic offset or the set-aside provision. We believe that having this set-aside option available for soil carbon sequestration in addition to a domestic soil carbon offset provision would ensure that activities that received domestic soil carbon offsets would be evaluated more rigorously.
  • By reducing the pressure to process huge numbers of offsets in the early years of a cap and trade program, the cost containment mechanisms and soil carbon set aside discussed above will help preserve the integrity, and ultimately the viability of international and domestic offset provisions. Similarly, rigorous monitoring and baseline rules will ensure that offsets can be an enduring mechanism to address longer-term costs of a climate program. Past offset programs have shown that even a small number of imperfectly documented offset credits could significantly undermine confidence in the emerging offset market. There is every reason to expect continued controversy, critical media attention and a high degree of scrutiny by NGO’s and oversight bodies. This dynamic has the potential to stifle innovation and slow the learning that will be necessary to build the technical foundation and experience needed to realize the full potential of domestic and international offsets. Ultimate if, and only if these types of safeguards are in place, the Commission would support removing quantity limits on offsets during the first decade of a cap and trade program.
  • In addition to reducing costs, an international offsets program should engage developing countries and induce more significant commitments on greenhouse gas emissions. The Commission believes that the development of sectoral offset programs and “offset aggregator” institutions are potentially important innovations and should be explored as part of a U.S. climate program. At the same time, these approaches raise a number of questions and may take time to develop. Thus, we don’t support an approach that would rely solely on these types of mechanisms at the beginning of the program and believe that a robust project-based offset program should go forward while sectoral or aggregated offset options are being developed.
  • Finally, the Commission recommends that Congress establish guidelines for an international offsets program and authorize the appropriate federal agencies to periodically review and, if necessary, modify the details of program design and implementation to be responsive to evolving economic, policy, and diplomatic developments.

 

Today’s paper is the latest in a series of specific NCEP recommendations on key issues designed to provide way forward for Congress to pass mandatory climate change legislation during the 111th Congress that President Obama can sign into law.

NCEP recommendations on cost containment have already been released. Additional papers on climate legislation provisions dealing with state-federal roles, market oversight, and international participation and U.S. competitiveness will follow in coming weeks. The Commissions provides an overview of these topics in its “Forging the Climate Consensus” paper released in June 2009. Today’s papers and others in the series are available at: http://www.bipartisanpolicy.org/projects/national-commission-energy-policy

The Members of the National Commission on Energy Policy are:

William K. Reilly Co-Chair, Senior Advisor, TPG, Inc.; Former Administrator, U.S. Environmental Protection Agency

John W. Rowe Co-Chair, Chairman and CEO, Exelon Corporation

Susan Tierney Co-Chair, Managing Principal, The Analysis Group; former Assistant Secretary of Energy

Philip R. Sharp Congressional Chair, President, Resources for the Future; former U.S. Representative, IN

Marilyn Brown Visiting Distinguished Scientist, Oak Ridge National Laboratory; Professor, School of Public Policy, Georgia Institute of Technology

John E. Bryson Chairman, President and Chief Executive Officer Edison International and Chairman, Southern California Edison

Ralph Cavanaugh Senior Attorney and Co-Director, Energy Program, Natural Resources Defense Council

Erroll B. Davis Jr. Chancellor of the University System of Georgia

Senator Rodney Ellis State Senator, TX

Leo W. Gerard International President, United Steelworkers of America

Robert E. Grady Managing Partner, Carlyle Venture Partners, The Carlyle Group and former Executive Associate Director of the OMB

F. Henry Habicht Managing Partner, SAIL Venture Partners, LLC; Former Deputy Administrator of the U.S. Environmental Agency

Richard A. Meserve President of the Carnegie Institution and former Chairman of the U.S. Nuclear Regulatory Commission (NRC)

Mario Molina Professor, University of California, San Diego

Sharon L. Nelson Chair, Board of Directors, Consumers Union; Former Chief, Consumer Protection Division, Washington Attorney General's Office

Richard L. Schmalensee Howard W. Johnson Professor of Economics and Management and John C Head III Dean, Emeritus, Sloan School of Management, Massachusetts Institute of Technology

Norm Szydlowski President and Chief Executive Officer of Colonial Pipeline

R. James Woolsey Vice President, Booz Allen, Hamilton; former Director of Central Intelligence

Martin B. Zimmerman Clinical Professor of Business, Ross School of Business, University of Michigan; Group Vice President, Corporate Affairs, Ford Motor Company (2001 - 2004)

Jason S. Grumet, Executive Director of the National Commission on Energy Policy, and President and Founder of the Bipartisan Policy Center.

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