Consider ERCs For Greenhouse Gas Policy1

Climate Change and the deficit are at the top of the legislative and policy agenda for the country. Some economists and legislators strongly endorse the "carbon tax". Senators Bernie Sanders (I-VT) and Barbara Boxer (D-CA) have proposed the Climate Protection Act of 2013 to impose a tax on fossil fuels and high carbon-intensity products sold in the United States. A recent piece in Environmental Forum outlined "Ten Reasons" to support a carbon tax, including to replace or reduce income and payroll taxes. Tom Friedman's op-ed in the March 18 New York Times advocated for a carbon tax. The Economist's February 18 issue notes that multiple carbon tax proposals exist.

Regardless of which economic tool one favors, a long-standing component of the Clean Air Act ought to be in the mix, because it can promote more benefits at a lower cost and from a variety of sources. Whether or not you are a fan of cap and trade, cap and tax, or a carbon tax, the offsetting programs described in this article deserve consideration.

Emission Reduction Credits (ERCs), ensconced in the 1977 Amendments to the Clean Air Act, may be one of the most critical concepts to balance the need for climate policy against its costs to the economy. ERCs have served industry and the environment well by controlling emissions while allowing technological developments and the deployment of new manufacturing capacity.

The principles of ERCs (permanent, enforceable, real, quantifiable and surplus—aka, PERQS) can be found in a variety of statutes and rules relating to credits for reductions in greenhouse gas. While ERCs began with offsets of traditional criteria--pollutant emissions from new or modified major stationary sources, those principles are prominent in carbon offsets. From the California Air Resources Board's (ARB) cap and trade program, to Alberta's Specified Gas Emitters Regulation,to Australia's Carbon Pricing Mechanism, to the United Nation's Clean Development Mechanism, carbon credits are a tool to control costs while furthering greenhouse gas reductions. Through scores of scientifically validated methodologies, those who are not regulated can create "credits" which can be monetized. Yes, carbon credits are a way to make green while being green.

Innovation and entrepreneurs

These methodologies favor new approaches. By definition, the concept of carbon offsets requires innovation; indeed, entrepreneurs comprise the vast majority of those who are creating offsets. Protocols are only written for actions which are not required by law and are not "business as usual." Favored by US-based registries, the "performance standard" approach identifies categories of actions that are practical, but that are not in use. "Game-changing" or "disruptive" technologies are favored. Indeed, many well thought out options are available to reduce GHG emissions from activities that are not going to be regulated by any government, including:

  • Curbing methane emissions from dairy farms
  • Stopping illegal logging and deforestation
  • Improving forestry management
  • Avoiding the use of HFC foams
  • Destroying chlorofluorocarbons (CFCs) which remain in use to improve rice-growing

The diverse methods that scientifically prove these provide a real benefit are considerable. The project developers pursuing those methods are startups, entrepreneurs and visionaries, as well as many savvy investors, end users and emitters.

But how much innovation does a carbon tax really provide? How well does government deploy tax revenue? What are the environmental results of a carbon tax? In principle, the tax revenues fund research and new technologies. But those are long-range projects with little in the way of near-term environmental benefits. The results are many years into the future, the costs can be daunting and the likelihood that winning technologies or companies will be chosen is unpredictable. Will those tax receipts ever be used for real climate control? Moreover, will that tax burden just be passed on to others, raising prices without reducing GHG emissions? Perhaps a carbon tax will create exactly the right incentives for emission reductions. But that is among the more unlikely scenarios to result from a carbon tax. Indeed, the published information from the Calgary law suggests that all of the documented emission reductions so far have come from measures taken to avoid the tax.

Choice by private markets

This leads to my principal reason to praise carbon offsets as a policy tool: industry can choose among the most effective ways to reduce its exposure to a carbon tax. Whether one wants a tax or some auction of allowances, the presence of an offset opportunity is critically important to get the greatest environmental benefit at the lowest cost.

Setting a price for carbon is clearly the first step. With that price set, then the market for new technologies and projects to produce offsets is made.

The sophisticated private industry can find, fund and, if needed, develop carbon reduction measures that have escaped the attention of the Washington, DC, bureaucracy. The EU, the US and voluntary registries have developed a large number of these tools. Setting a higher value for these reductions will impel more—more farmers, more forest and land owners, more refrigeration companies, more abandoned mines, more rice farmers and the like—to reduce and destroy GHG emissions, and at a far lower cost and with greater efficiency. Indeed, carbon offset projects must pass scrutiny from not only the public, but also from the private parties who fund and who use them--the developer, its investors, the multiple third-party verifiers of the project and the end user. At each stage, there is a scientific validation and an investment validation. Both sellers and buyers have market and policy incentives to reach the most effective combination of benefits and costs, before an offset ever is sold into the market.

Proving a negative

Those who complain about offsets not being real are not those who know the details or the challenges to create a carbon offset credit. Quite frankly, the level of scrutiny given to carbon offset projects constitutes a regulatory model far more exacting and fact-dependent than governmental subsidies and grants, and the persuasiveness of the lobbyists supporting those allocations of resources.

Consider how much evidence is needed to prove that a carbon offset credit is justified.

To qualify, a project must meet exacting proof—after all, you are proving a negative, and since it is a legal concept, one must have boundaries and title. These are reductions which must be based upon a scientifically accepted and publicly reviewed method. The method cannot be required by law or be common practice. It has to be "additional." The projects must then be validated or registered against that protocol. Finally, the execution of the actual activities in the project must be verified. Only then is a credit issued. So a carbon credit goes through at least three levels of proof before it is recognized as real. This is a remarkable level of scrutiny.

This level of proof is even greater than that required of ERCs issued under Title I of the Clean Air Act. Those were often based only on history and seldom verified by a third party. While "shut down" credits were typically not allowed, often little scrutiny was given to that issue. Once documented and applied, the ERCs continued in perpetuity for the new activity—as long as it chose to operate.

Not only are carbon offsets subject to third-party review and validation, they can continue only so long as the offsetting activity continues and is qualified. Thus, the policy around carbon offsets is much more rigorous than that used throughout the Clean Air Act for ERCs.

I do not contend that all carbon offsets will meet the quality requirements that agencies like the California Air Resources Board impose. As noted above, the market dynamics will help ensure that substandard offsets never get to the market. But I would submit that the kind of care and proof that entities such as ARB requires of those participating in its offsets program demonstrates that their emission reductions are real and that they are a critical tool for climate policy. The extent to which investors, industry and entrepreneurs are engaged in the ARB's ongoing stakeholder process further demonstrates the widespread acceptance of offsets as a key tool for GHG mitigation.

Conclusion

Whether one favors a carbon tax, some sort of allowance and trading system, or simply a Title IV-style method that mandates reductions in GHG emissions for a particular sector, using the ERC offset principles from the Clean Air Act will not only achieve more reductions for less cost, but it will also bring in more businesses and people in pursuing a solution.