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Outside The Cap

Opportunities and Limitations of Greenhouse Gas Offsets

by Derik Broekhoff and Kathryn Zyla - December 2008

Carbon offset programs require the application of rigorous quantification, verification, and enforcement criteria in order to ensure that the integrity of greenhouse gas (GHG) caps is not compromised. Some types of climate change mitigation activities---especially those involving soil or forest carbon sequestration---are less likely to meet these criteria than others. It is possible to overcome these challenges, but doing so entails costs that might be avoided if these GHG reductions were achieved through other policies and measures. Deciding which types of GHG reductions to include in a carbon offset program should therefore be part of a broader strategy to achieve economy-wide GHG reductions at the lowest overall cost.

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Key Findings

The analysis presented in this brief is not intended to suggest that entire categories of activities, such as carbon sequestration activities, should be categorically excluded from a U.S. carbon offset program. It does suggest, however, that U.S. policymakers need to carefully consider the various options for achieving GHG emission reductions in “uncapped” sectors of the economy. Carbon offset programs are attractive for many reasons, but they require the application of rigorous quantification, verification, and enforcement criteria. Some types of activities are less likely to meet these criteria than others, and many activities involving soil or forest carbon sequestration are at an inherent disadvantage. Policymakers should look holistically at the range of options for reducing emissions at uncapped sources, and set targets for capped sources as part of an overall suite of climate change policies.

In designing a U.S. carbon offset program, policymakers should:

  • Identify how much uncertainty is acceptable in quantifying the emission reductions (or net sequestration) from offset projects, taking into account measurement uncertainty, baseline uncertainty, and leakage. Although there will be no quantitatively “right” answer, policymakers should decide the maximum level of allowable risk of overstating real, additional emission reductions.
  • Evaluate whether emission reductions (or net sequestration) from specific kinds of projects can be reliably quantified within the acceptable range of uncertainty, taking into account existing protocols.
  • Decide on an appropriate mechanism for insuring against, and compensating for, reversals in carbon sequestration.
  • Evaluate the transaction costs for different kinds of projects associated with meeting acceptable levels of quantification uncertainty, and with insuring against reversals.
  • Decide whether specific types of projects can cost-effectively meet the requirements of a carbon offset program, or whether they should instead be realized through regulations or incentive programs.
  • Consider the level of emissions caps in light of an overall package of policies aimed at both capped and uncapped sources.

Executive Summary

A comprehensive cap-and-trade program requires a number of policy design decisions. These involve setting emissions targets, determining which sources will be regulated under the cap, how pollution permits will be assigned or auctioned, and how to generate emissions reductions from GHG pollution sources not included in the cap. Carbon offsets are reductions from uncapped sectors or sources that are used for compliance with the cap. Offsets are likely to play a crucial role in the design of a U.S. cap-and-trade program for limiting GHG emissions because they can help contain costs and expand compliance options. However, offsets are only one mechanism for achieving reductions at uncapped sources, and should be considered alongside other measures, such as complementary regulations (including GHG performance standards) or subsidies.

In principle, any GHG reductions (or increases in carbon sequestration) that occur at sources or sinks “outside the cap” can be used as offsets within a cap-and-trade system.1 However, not all GHG reductions are easy to certify as offsets. These include GHG reductions from forestry and agriculture activities, which face larger challenges in meeting basic offset certification criteria than activities in other sectors (e.g., projects involving methane capture and destruction). Overcoming these challenges may add costs that could be avoided by using other policies and mechanisms.

Policymakers must therefore confront a tradeoff in deciding whether certain kinds of GHG reductions should count as carbon offsets. Should they seek maximal inclusion of offset options as part of a cap-and-trade package in order to provide the greatest amount of flexibility and cost-containment for capped entities? Or should they think about the most efficient means to achieve GHG reductions, and exclude from an offset program those reductions that could be more cost-effectively achieved through other policy mechanisms? This brief argues the latter. Carbon offsets should be considered as an important element of an overall strategy to achieve national GHG reductions at the lowest cost to the economy, but cost containment should not be viewed only from the perspective of capped entities. The authors review some of the decisions policymakers will need to make as they consider designing the offsets component as part of a cap and trade program. Section I describes the basic criteria for certifying carbon offsets. Section II assesses differences in the ease with which various project types can satisfy these criteria. Section III discusses the implications of these differences for decisions about whether to include certain types of activities in a carbon offset program or address them through other policies. Section IV provides conclusions and recommendations.

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