Impact of 'Offsets' to Limit Emissions Is Uncertain

Tool for Firms to Avoid Cutting Ouput Through 'Green' Investments Elsewhere Involves Political, Practical Hurdles

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A big question hanging over the wide-ranging greenhouse-gas proposals in Congress is whether they will reduce emissions as much as advertised without significantly raising energy bills.

One tool for achieving that goal, central to the House climate legislation, is the use of "offsets" that allow companies to avoid cutting their own greenhouse-gas emissions by investing in activities elsewhere that take carbon dioxide out of the atmosphere. That could mean planting trees in Brazil or encouraging corn farmers in Iowa to adopt better environmental practices.

The Environmental Protection Agency estimates the price of emitting a ton of carbon under the House's Waxman-Markey bill would be 89% higher if it didn't allow companies to buy offsets overseas. Partly because of all the offsets the bill allows, the agency projects that conventional coal-power generation in the U.S. will fall only slightly during the program's initial phase, to 1,950 terawatt hours in 2020 from 1,992 terawatt hours in 2005, the baseline year set for measuring progress.

"The way emissions-trading systems operate is that you make decisions on how much work you want to do at home, and how much you want to shift overseas," said Michael Wara, a law professor at Stanford University who has studied Europe's use of offsets. Because the Waxman-Markey bill is "extremely dependent" on offsets to deliver reductions and keep down costs, Mr. Wara said, "we're not going to know with much certainty the quantity of emissions reductions delivered."

[carbon offsets]

Many scientists and environmentalists endorse the logic behind offsets, reasoning that eliminating a ton of carbon emissions from a Brazilian forest or an Iowa farm benefits the climate just as much as cutting a ton of greenhouse-gas emissions from a coal plant in Ohio -- and typically at much less cost.

But there also are problems with relying on offsets, particularly international ones.

One is political: Democrats are promoting the climate bill as a way to drive a "clean energy transformation" that creates lots of new "green jobs" in the U.S. Another problem is practical. As the Government Accountability Office said in a study last December, it is nearly impossible to ensure that international offset projects reduce greenhouse gases more than would have happened without subsidies. The agency said its own review of Europe's use of offsets found that such projects had an uncertain effect on carbon emissions.

What alarms many environmentalists about the Waxman-Markey bill is the scale of offsetting it would allow. Offset projects could account for as much as two billion tons of the planned emissions reductions each year; total U.S. emissions in 2007, in carbon-dioxide equivalent, were 7.15 billion tons. Half the offsets would be sourced domestically and half overseas, though the bill allows international credits to reach three-quarters of the total in the event that the U.S. market falls short.

As a practical matter, it is unclear whether U.S. companies will be able to take full advantage of all these offsets, partly because it will take years to negotiate agreements with developing countries over which projects qualify.

That raises another problem: the fewer the offsets, the higher the bill's costs will be, as companies will have to either cut emissions themselves or buy emissions permits from one another. If the price of those permits rises too high, major businesses are bound to demand a loosening of the bill's cap on emissions, and there could be a voter backlash against high energy costs.

One way the Waxman-Markey bill tries to guard against bogus offsets is to delegate decisions on what kinds of activities qualify to the EPA and an "Offsets Integrity Advisory Board," composed of scientific experts. But that just shifts the lobbying elsewhere.

Farm groups and their congressional allies won a deal to put the Department of Agriculture -- rather than the EPA -- in charge of determining which domestic agricultural activities qualify as offsets. That is great news for farmers who stand to make money from the bill, but a source of anxiety for environmentalists.

"We expect them to be somewhat farmer-friendly," Rep. Collin Peterson (D., Minn.), chairman of the House Agriculture Committee, said of the USDA.

In the end, it is probably unrealistic to think any offset system Congress designs will be perfect. The real question facing the Waxman-Markey bill's supporters is how imperfect the system will be.

Write to Stephen Power at stephen.power@wsj.com

Printed in The Wall Street Journal, page A2

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