Realizing the Benefits Of Greenhouse Gas Offsets

A portion of the Executive Summary Offset programs can help to control costs and maintain economic competitiveness. An offset is distinct from an emissions allowance (or a permit), which represents a government-sanctioned right to emit, and is issued to.

Some of the potential benefits that well-designed offset programs can provide include: 1) cost control by enabling sources in a GHG program (i.e. “covered sources”) to access lower-cost reductions from a broad array of sectors across geographic locations; 2) incentivizing investment and innovation in sectors not covered by a GHG program, thus providing environmental benefits that may not occur otherwise; 3) avoiding costly premature retirement of economic assets before the end of their useful lives; and 4) allowing time to develop lower carbon-emitting technologies (by providing covered sources with access to low-cost compliance options in the near term).

There are challenges in effectively designing an offset program. For example, in order for the environmental integrity of a GHG program to be maintained, offsets should only be provided to activities that are “additional” to business as usual (BAU). To address this concern, offset programs incorporate “additionality” requirements to ensure that offset credits are issued only for reductions that go beyond those that would have occurred in the absence of the project. If emission reductions from a project are not “additional,” there is a risk that these credits could undermine an emissions cap and lead to increased emissions compared to a case in which no offsets are allowed. Finally, offset programs may incorporate other provisions to address environmental concerns, including provisions to restrict the creation or use of certain types of offsets, provisions to ensure that emission reductions from offsets are permanent, and provisions to ensure that emission reductions are adequately monitored and verified.

An offset program must effectively address environmental integrity concerns. However, to be successful in creating affordable emission reductions, an offset program also must enable developers to mobilize private capital to finance projects and activities that create offsets. It must provide incentives to stimulate investment in projects, and provide as much certainty as possible to project developers as they plan and undertake a project activity. If investors determine that the risks to offset creation are significant, offset programs cannot succeed. Risks that can discourage investment in offset projects include project eligibility risk, offset eligibility/value risk, offset quantity risk, and offset permanence risk.

Unfortunately, in many offset programs, the policy design elements that are intended to address environmental risks also impose investor risks. Thus, the dilemma faced by 5 policy makers is how to balance the real environmental concerns associated with offsets with the need to provide certainty for investors. This paper provides additional details on different types of investor and environmental integrity risks and proposes an approach for balancing these two sets of considerations.

The paper reviews offset programs that have been planned or implemented to date and concludes that they have generally not been successful in achieving environmental or economic objectives due to a failure to address environmental integrity risk in a manner that maintains economic incentives for developers.