Those who have been following the House ACES bill will have noted that greenhouse gas offset credits play a key role in meeting compliance obligations. Indeed, the bill appears to allow up to a billion tons of offset credits from domestic sources to be used for compliance with another billion (or more, under certain circumstances) of offset credits from international sources. This week we begin a multi-part series on "carbon offset credits," why they are important in the cap and trade legislation, what they are, and who stands to benefit from their inclusion.  

Carbon offset credits are important to the industries whose greenhouse gas emissions will be regulated and to those parties who are not likely to be regulated but can take actions to reduce, avoid, or sequester emissions of greenhouse gases. The "cap and trade" mechanisms in the ACES bill and other leading proposals provide a framework for transactions to occur between these broad categories of stakeholders. Those who need to cut emissions have the option of meeting their “cap” by using offsets created by another party to achieve a net reduction in emissions.

The principal appeal of offsets is that they are expected to significantly lower the overall economic cost of limiting greenhouse gas emissions. Economic modeling of the effect of greenhouse gas regulatory proposals has consistently shown the beneficial impact of using offsets as part of the regulatory structure. In one leading study, the cost of greenhouse gas allowances - assuming they would be auctioned by the government but without the availability of offsets - was estimated at $77 per ton. But with offsets available in substantial quantities, the price of allowances dropped to about $11 per ton. More recent economic modeling estimated the price of allowances in a regulatory system without offsets would be double the price of allowances in a system where offsets are included.

Defining the kinds of activities that can qualify for offsets is a vitally important challenge, so that offsets recognized in a trading scheme represent real decreases in emissions and are not simply the results of "business as usual" or otherwise required by law or regulation. Creating new forests, not cutting down existing forests for new development, controlling methane from animal feeding operations, older landfills or abandoned mines are a few of the scores of activities which can create offsets, when properly documented and monitored.

The leading global method for recognizing offsets is the Clean Development Mechanism created under the Kyoto Protocol. That procedure has adopted over 100 offset categories, and is now generating over 500 million tonnes of offset credits, called Certified Emission Reductions, per year, and is projected to generate over one billion tonnes of emission reductions per year by 2012. Those CERs are being purchased almost exclusively by entities with compliance obligations under the EU's Emission Trading System. In the US, several different entities have been recognizing and creating offsets in recent years. The best-known and largest in terms of quantities transacted is the Chicago Climate Exchange, The Climate Action Reserve, (formerly known as the California Climate Action Registry), and the Voluntary Carbon Standard are two others, among nearly a dozen offset validators, who have recognized nearly 100 million tonnes of offset credits thus far in the US. More on those in our next edition.