May 28, 2009
This is a joint post with Matt Hoffman.Carbon offsets -- granting rights to emit greenhouse gases beyond a stated ceiling in exchange for contributions to cutting emissions elsewhere -- are an important part of the Waxman-Markey cap and trade bill now making its way through the U.S. Congress. Offsets have plenty of appeal, but in practice they have a poor track record. And there are less risky, lower cost ways to achieve similar goals. Offsets make sense in theory. Because emissions cuts in developing countries can be cheaper than equivalent reductions at home, developing country offsets could reduce the cost of a cap and trade bill. As recent negotiations in the U.S. House have demonstrated, cap and trade is unlikely to pass unless the price of emissions permits is held in check. Moreover, helping developing countries to cut their own greenhouse gases is in everybody’s interest. As CGD research has shown, disastrous climate change is inevitable unless developing countries substantially cut emissions.Waxman-Markey allows for two billion tons in offsets, one billion tons for international allocation and one billion tons in the U.S. itself. One billion tons would be a significant reduction of developing country emissions, but the experience with offsets so far is not encouraging.Stanford’s Michael Wara and David Victor recently studied the Kyoto Protocol’s Clean Development Mechanism (CDM) -- the largest international offset system--and found “an urgent need for reform.” They determined that between a third and two-thirds of CDM offsets do not achieve actual cuts in emissions. The U.S. Government Accountability Office (GAO) has also analyzed the CDM and reached three critical conclusions:
- The CDM may be less cost-effective than a program of direct investments in emissions reduction.
- Ineffective offsets may undermine the integrity of the U.S. cap and trade system by giving polluters an “easy out.”
- Although proposed reforms may improve the CDM, it will remain hobbled by its requirement that offsets be measured against counterfactual, business-as-usual scenarios that can never be verified. As Harvard’s Robert Stavins put it in Tuesday’s Washington Post: "Who knows what you would have done?"
- First, the bill’s international component should focus on the overriding objective: driving clean technologies toward cost-competitiveness with carbon-intensive technologies in developing countries, thereby empowering private investors to lead a rapid transition to low-carbon development.
- Second, offsets are simply too risky to play a prominent role in cap and trade legislation.
- Third, the bill can expand political support by providing further insurance against unacceptable price spikes for emissions permits.
Disclaimer
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.