Outside The Cap: Opportunities and Limitations of Greenhouse Gas Offsets

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.

Conclusions and Recommendations

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.