1. Offsets: A U.S.
Perspective
Brian C. Murray
Director for Economic Analysis
Nicholas Institute, Duke University
Presented at
EPA Ireland
Workshop on Offsets
Dublin, Ireland
July 15, 2010

2. DISCLAIMER
The views expressed herein give A
perspective from someone
observing and – when asked -
advising U.S. policy development,
but not THE U.S. perspective
i.e., I am not a U.S. government official

3. What is “A U.S. Perspective” ?
• Primarily … the role, scope, scale, and rules for offsets that
have evolved in U.S. federal climate legislative proposals to
date
• But also views
– At state level (where subnational regulation is occurring)
– Internationally
– Of various stakeholder groups
• Ultimately, why offsets matter to various U.S constituencies
– Industrial entities
– Farmers
– Environmental groups
– Market watchdog groups
• A view on where things appear to be headed

4. What is an offset?
Mitigation of emissions outside the
compliance cap that can be used by
a capped entity to offset its own
emissions

5. Why are offsets needed?
• Provide added flexibility for compliance
• Lowers cost by bringing in lower cost
mitigation and early supply (bridge)
• Provides market liquidity
• Brings in additional players to the mitigation portfolio (e.g.,
US forestry, Brazil, methane capture,…)
• Possible environmental co-benefits

6. Salient issues
• Offset availability has enormous impact on allowance price
projections
• Largest share of domestic offsets in U.S. would likely be
generated by agriculture and forestry
• Market infrastructure exists and (I think) is readily
expandable
• Many stakeholders do not trust offsets
– Escape route for “real” reductions
– Worry about environmental co-effects
• From offsets directlty (especially forest plantations)
• Indirectly by allowing covered sources to emit more CO2 and other
pollutants
– Do not see CDM as a shining example
– Not too keen on sending a lot of money “overseas” for
international offsets

7. Who likes offsets?
• Regulated entities covered by the cap
• In the US, farmers…
– Though they do not generally like the cap-and-trade
that goes with it
• Offset project developers
• Carbon market traders
• Politicians looking for assurances, that…
– Allowance prices will not go too high
– Uncapped sector constituents receiving offset payments
• Some (not all) environmental groups

8. Offset challenges
• Monitoring, reporting and verification
(MRV)
• Accounting for “real” reductions
– Additionality
– Leakage
– Permanence
• Generating offsets in early years of
the program

9. Cap-and-Trade Legislation in U.S. Congress
• 2005-2008 several cap-and-trade bills proposed
• 2009 (June) – Waxman-Markey passed House of
Representatives: 219-212
• 2010
– May – Kerry-Lieberman draft bill introduced to Senate
• Just after BP oil disaster in Gulf of Mexico
• Graham (R) pulled support at last moment
– July (this week)
• Kerry-Lieberman introduced new bill – utility-sector only
• Bingaman floating utility-sector only (industry opt-in) bill
• Vote planned at end of month
– November – mid-term elections

10. Key features (until this week)
Feature Description
Sectors covered Electric Power, Industrial
(manufacturing,…), transportation ~
85% of emissions
Targets 2013: 4.5% below 2005
2020: 17% below
2050: 83% below
Offsets Up to 2 billion tons/year (~40% of
cap)
Domestic favored over international
- long list of project types
International – special focus on REDD
- movement toward crediting
performance to national baselines
Carbon reserve “Soft” price collar – try to contain
allowances prices in between floor
and ceiling

11. Domestic offset project types
• Forestry
– Afforestation/Reforestation
– Forest management
– Avoided deforestation
• Agriculture
– Soil management
– Crop Rotation
– Fertilizer management
– Biochar
– GHG Intensity improvements
• Methane collection at mines, landfills, and natural gas systems
• Manure and effluent management
• Carbon, Capture and Storage of uncapped emissions

12. Economic Potential from Ag/Forestry Offsets - US
~300
~550
~775

13. Offsets cut allowance prices

14. Offset Implementation Issues
• Generating an initial supply (~2013)
– Standards develop/review/approve
– Project investment
– Market/trading infrastructure
• Allow in “early offsets”?
– Generated before the program starts
– Projects starting as far back as 2001?
• Program oversight
– EPA – overall oversight of cap-and-trade program
– US Department of Ag – oversees domestic forest/ag offsets
• Program review – ensuring offsets generating real
reductions

15. Latest developments (this week)
• Last ditch effort for 2010? Narrower
coverage
– Kerry-Lieberman II: Utility only
– Bingaman
• Utility plus phase-in/opt-in of industrials
• Lower offset limits
– Any way, reduced scope and scale reduce the
role of offsets
• Pure scale effect
• Limits
• Cheaper reduction sources (electric power) may need
fewer offsets in relative terms.

16. Federal action is not the only game
Other state/regional programs
• Western Climate Initiative
• Midwest Governors
Voluntary Carbon Market

17. Other semi-random thoughts
• Investment will be slow to materialize if uncertainty about protocols,
standards, what’s in/out persists
• EPA vs USDA for offset oversight is a big political issue
• Significant uncertainty about some key offset categories
– agricultural soil carbon
– REDD
• Permanence of terrestrial carbon sinks
– How long is permanent?
– How to assign and manage carbon liability for reversal
• Leakage can be a big problem if sector/country coverage is scattered
• Crediting periods - How often should project baselines be updated?
• REDD requirements/challenges
– Respecting local rights
– Mandating zero net deforestation in 20 years
• Do offsets create “systemic risk” for cap-and-trade?