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  An Introduction to Climate Change Legislation

Table of Contents | Foreword | Preface | Executive Summary | Overview |
Contributors | Participants and Staff 

Offsets: Incentivizing Reductions While Managing Uncertainty and Ensuring Integrity

Daniel S. Hall

Summary

Most market-based regulatory proposals to limit greenhouse gas (GHG) emissions include provisions that allow market participants to seek reductions outside the regulated system. These reductions are typically referred to as offsets. Offsets are attractive because they can expand the available pool of low-cost reduction options, particularly in the near future. Many potential offset projects, however, present challenges because the emissions reductions they generate are difficult to measure or carry risks of impermanence. How can an offset program be designed to incentivize reductions while also ensuring their integrity?

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Offsets: Incentivizing Reductions While Managing Uncertainty and Ensuring Integrity


  • This memo briefly describes what offsets are, which sectors they are in, and how they have been used in other regulatory programs. We then discuss policy design features and options for addressing risks and uncertainties associated with low-quality offsets. In broad terms, the results of this exploration suggest that an offset program can be used to generate incentives for reductions that would be difficult to motivate or mandate in other ways, but creative approaches will be needed to manage offsets with uncertain environmental benefits.

  • Offsets should be real, additional (beyond what would have happened anyway), permanent, and verifiable. These are the commonly accepted criteria for determining the quality and eligibility of offset projects.

  • Offsets can be used to achieve emissions reductions in some sectors and for some activities that are difficult to regulate directly. Examples include biological sequestration of carbon; destruction of fugitive methane emissions from sources such as landfills or coal mines; or changes in agricultural soil management practices to reduce nitrous oxide emissions. Offsets can also enhance the dissemination of advanced technologies for reducing carbon dioxide (CO2) emissions, particularly in developing countries.

  • There is a fundamental tension between generating a large supply of low-cost offsets and ensuring they are high quality. Broadly speaking, two approaches can be used to mitigate—but not eliminate—this tension. The first is to simplify registration and crediting procedures for offset projects that generate emissions reductions which can be verified with a high degree of confidence. The second, complementary approach is to design offset programs that limit the consequences of potentially over-crediting projects in cases where the environmental benefits are less certain. Policymakers will have to decide how to balance trade-offs between minimizing transaction costs and ensuring the environmental integrity of offsets.

  • Mechanisms that can minimize the administrative complexity and cost of offset programs include two-step registration procedures that determine project eligibility before developers commence projects, positive lists of pre-approved offset project types, and tiered systems that use defined crediting levels for different types of projects.

  • Policies to address projects with uncertain environmental benefits include credit limits and set-asides that specify a maximum aggregate level of offsetting reductions that can be used for compliance. These effectively place an upper bound on the risk from uncertain or difficult-to-verify projects. Non-uniform crediting can be used to discount certain project types, presumably on a risk basis. Rental credits can be used to limit exposure to offsets from projects that may not produce permanent emissions reductions.

  • Policy choices for offset programs must be evaluated holistically. In designing such programs, policymakers should decide first what the overarching goal of the offset program is: generating the maximum number of offsets, minimizing transaction costs for project developers, ensuring environmental benefits, or some combination of these objectives. Designing an offset program will entail making choices about which suite of policy tools will function together to accomplish the goal.

 

 

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