David L. O’Connor argued in the prior post, Carbon Offsets Reduce Compliance Costs,
that offsets available under the proposed Waxman-Markey cap-and-trade
bill in the US would help reduce the cost of carbon allowances by about
70%, on average, between 2012 and 2050. The Kerry-Boxer version that
emerged out of the Senate in early October has some significant
differences that are worth noting, and have been usefully summarized in a table by Bill Chameides. Although
the bill looks better in terms of the overall cap and the restoration
of authority to EPA, it has a serious gas problem that could bloat the
nominal cap and undermine its effectiveness.
The headline 2020 emission reduction target has been raised slightly
to 20% from 17% (from a 2005, pre-recession baseline, but still only 7
percent below 1990 levels), but most analysts think that this
improvement is largely offset by the elimination of regulatory controls
on methane emissions from natural gas facilities and other sources.
Instead, voluntary efforts to control methane emissions can be used as
offsets, which will provide a relatively cheap and plentiful domestic
source of offsets, at least till 2020 when regulations are meant to
kick in. The overall offset cap remains at 2 billion tons per year,
equivalent to 30% of all U.S. GHG emissions, and the cap on
international offsets has been lowered from 50% to 25%.
Methane accounts for around one-third of the human contribution to global warming and, according to Andrew Revkin and Clifford Krauss in the New York Times last week,
“some three trillion cubic feet of methane leak into the air every
year, with Russia and the United States the leading sources…This amount
has the warming power of emissions from over half the coal plants in
the United States.” Unless controlled, these emissions could grow
rapidly as gas production is expected to soar nearly 50% in the US in
the next 20 years, according to the Department of Energy, will
thousands of miles of new pipelines being laid. Some recent studies by
EPA suggest that emissions from oil wells and other sources might
actually be far higher than previously thought. In fact, global
atmospheric methane levels have resumed a sharp upward trend in the
last couple of years (see graph and discussion of possible reasons).
Yet under industry pressure, the EPA has excluded oil and gas well
methane emissions from the mandatory GHG reporting requirements that
start in 2010.
The carbon arithmetic here is very troubling, to put it mildly. For
compliance purposes, offsets are interchangeable with allowances on the
carbon market. It is critical, therefore, that offsets reflect real GHG
reductions from the fixed 2005 baseline. If we suddenly discover that
methane emissions are much higher than previously thought, and give
offsets to companies that reduce them, we are not cutting emissions
below the baseline. The case is particularly clear for new wells and
gas facilities constructed since 2005. Moreover, because it is
relatively cheap to control these emissions, the price of carbon
allowances will be low, reducing the incentive for investments in
low-carbon technologies and products (see Carbon Markets to Serve the Planet).
The mechanisms for defining offsets have not yet been spelled out in
detail in the 800+ pages of the Senate bill. International offsets from
sources such as the Clean Development Mechanism (CDM) are generally NOT
real reductions from a baseline. This point cannot be emphasized
strongly enough. Even in the best circumstances, offsets are reductions
below “business as usual”. A new facility that beats some average
“performance standard” can claim credits that feed into the offset
market, but still generate incremental new emissions compared.
The Kerry-Boxer bill keeps the price collar on the price on carbon,
one of the better features of Waxman-Markey, as it reduces the
uncertainty that plagues potential investors in low-carbon
technologies. Nevertheless, the starting floor price of $11/ton, even
with a 5% annual escalator (which is only 2-3% in real terms), is far
too low to have any real impact on carbon emissions for at least 15
years. For industries with a very long time horizon, of course, the
expectation of a higher price in the future will have some effect.
Perhaps the most important change in Kerry-Boxer is that it retains
EPA’s authority to regulate GHG emissions, which was superceded in the
Waxman-Markey version. This is critical, because in the absence of an
adequate carbon price signal, EPA officials know that they must move
more directly to regulate emissions from major sources, particularly
automobiles, buildings, and power generation.
Link to original post