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.