The Role of Offsets in a Greenhouse Gas Emissions Cap-and-Trade Program: Potential Benefits and Concerns

The Role of Offsets in a Greenhouse Gas
Emissions Cap-and-Trade Program:
Potential Benefits and Concerns
Updated September 22, 2008
Jonathan L. Ramseur
Analyst in Environmental Policy
Resources, Science, and Industry Division

The Role of Offsets in a Greenhouse Gas Emissions
Cap-and-Trade Program:
Potential Benefits and Concerns
If Congress establishes a greenhouse gas (GHG) emissions reduction program
(e.g., cap-and-trade system), the treatment of GHG emission offsets would likely be
a critical design element. If allowed as part of an emissions program, offsets could
provide cost savings and other benefits. However, offsets have generated concern.
An offset is a measurable reduction, avoidance, or sequestration of GHG
emissions from a source not covered by an emission reduction program. If allowed
— Table 1 compares offset treatment in proposals from the 110th Congress,
including S. 2191, S. 1766, and S. 3036 — offset projects could generate “emission
credits,” which could be used by a regulated entity (e.g., power plant) to comply with
its reduction requirement. Offsets could include various activities:
!agriculture or forestry projects: e.g., conservation tillage or planting
trees on previously non-forested lands;
!renewable energy projects: e.g., wind farms;
!energy efficiency projects: e.g., equipment upgrades;
!non-CO2 emissions reduction projects: e.g., methane from landfills.
Including offsets would likely make an emissions program more cost-effective
by (1) providing an incentive for non-regulated sources to generate emission
reductions and (2) expanding emission compliance opportunities for regulated
entities. Some offset projects may provide other benefits, such as improvements in
air or water quality. In addition, the offset market may create new economic
opportunities and spur innovation as parties seek new methods of generating offsets.
The main concern with offset projects is whether or not they represent real
emission reductions. For offsets to be credible, a ton of CO2-equivalent emissions
from an offset project should equate to a ton reduced from a covered emission source,
such as a smokestack or exhaust pipe. This objective presents challenges because
many offsets are difficult to measure. If illegitimate offset credits flow into an
emissions trading program, the program would fail to reduce GHG emissions.
Another concern is whether the inclusion of offsets would send the appropriate price
signal to encourage the development of long-term mitigation technologies.
Policymakers may consider a balance between price signal and program costs.
If eligible in a U.S. program, international offsets are expected to dominate in
early decades because they would likely offer the lowest-cost options. Domestic
sectors, such as agriculture and forestry, might benefit if international offsets are
excluded. Some object to the use of international offsets due to concerns of fairness:
the low-cost options would be unavailable to developing nations if and when they
establish GHG emission targets. However, some offset projects may promote
sustainable development. On the other hand, international offsets may serve as a
disincentive for developing nations to enact laws or regulations controlling GHG
emissions because many projects would no longer qualify as offsets.

In troduction ......................................................1
Offsets: An Overview..............................................2
Offset Types and Examples......................................4
Biological Sequestration....................................5
Renewable Energy Projects..................................5
Energy Efficiency..........................................6
Non-CO2 Emissions Reduction...............................7
Potential Benefits of Offsets.........................................9
Cost-Effectiveness .............................................9
Potential Co-Benefits..........................................10
Potential Benefits to Developing Nations..........................11
Other Potential Domestic Benefits................................12
Potential Concerns................................................13
Integrity Concerns............................................13
Additionality ............................................14
Measurement ............................................14
Double-Counting .........................................15
Permanence .............................................16
Leakage ................................................16
Delay of Technology Development...............................17
Transaction Costs.............................................17
Concerns in Developing Nations.................................18
Considerations for Congress........................................19
List of Figures
Figure 1. Emission Allowance Price at Three Offset Scenarios
under Framework of S. 2191....................................10
Figure 2. CERs Issued to Data by Project Type
(as of September 1, 2008)......................................12
Figure 3. 2012 Projections for CERs by Project Type
(as of September 1, 2008)......................................12

Table 1. Comparison of Offset Treatment in Cap-and-Trade Proposals
in the 110th Congress..........................................21
Table 2. Comparison of Offset Treatment in GHG Emissions Reduction
Initiatives in the U.S. States.....................................27
Table 3. Comparison of Offset Treatment in International Emissions
Trading Programs.............................................29

The Role of Offsets in a Greenhouse Gas
Emissions Cap-and-Trade Program:
Potential Benefits and Concerns
A variety of efforts to address climate change are currently underway or being
developed on the international, national, and sub-national levels (e.g., individual state
actions or regional partnerships).1 These efforts cover a wide spectrum, from climate
change research to mandatory greenhouse gas (GHG) emissions reduction programs.2
In the 110th Congress, Members have introduced a number of proposals that would
establish a national GHG emissions reduction regime.
GHG emissions reduction programs, both ongoing and proposed, vary
considerably. The primary variables are scope and stringency: which emission
sources are covered by the program and how much emission reduction is required.3
These factors largely determine the impacts of an emissions reduction program, but
other design details can have substantive effects.
One such design element is the treatment of offsets. An offset is a measurable
reduction, avoidance, or sequestration of GHG emissions from a source not covered
by an emission reduction program. If a cap-and-trade program includes offsets,
regulated entities have the opportunity to purchase them to help meet compliance

1 In 1992, the United States ratified the United Nations Framework Convention on Climate
Change (UNFCCC), which called on industrialized countries to initiate GHG reduction.
The UNFCCC defines GHGs to include carbon dioxide (CO2), methane (CH4), nitrous oxide
(N2O), sulfur hexafluoride (SF6), hydrofluorocarbons (HFC), and perfluorocarbons (PFC).
2 See CRS Report RL33826, Climate Change: The Kyoto Protocol, Bali ‘Action Plan,’ and
International Actions, by Susan R. Fletcher and Larry Parker; CRS Report RL31931,
Climate Change: Federal Laws and Policies Related to Greenhouse Gas Reductions, by
Brent D. Yacobucci and Larry Parker; CRS Report RL33812, Climate Change: Action by
States To Address Greenhouse Gas Emissions, by Jonathan L. Ramseur.
3 See CRS Report RL30024, U.S. Global Climate Change Policy: Evolving Views on Cost,
Competitiveness, and Comprehensiveness, by Larry B. Parker and John E. Blodgett.
4 In this way, offsets would complement the more traditional emissions trading that can
occur between two covered sources. For example, a covered source (e.g., power plant) can
make reductions beyond its compliance obligations and then sell these reductions as credits
to other covered sources. This type of transaction represents the “trade” component of a
cap-and-trade program.

Offsets have generated debate and controversy in climate change policy. If
Congress establishes a federal program to manage or reduce GHG emissions, whether
and how to address offsets would likely be an important issue. Because most current
and proposed programs allow offsets (see Table 1), offset projects will probably play
some part in an emissions reduction program.
The first section of this report provides an overview of offsets by discussing
different types of offset projects and describing how the offsets would likely be used
in an emission reduction program. The next section discusses the supply of offsets
that might be available in an emission trading program. The subsequent sections
examine the potential offset benefits and the potential concerns associated with
offsets. The final section offers considerations for Congress. In addition, the report
includes a table comparing the role of offsets in selected emission reduction
programs: proposals in the 110th Congress, U.S. state initiatives, and international
Offsets: An Overview
Offsets are sometimes described as project-based because they typically involve
specific projects or activities whose primary objective is to reduce, avoid, or
sequester emissions. Because offset projects can involve different GHGs, they are
quantified and described with a standard form of measure: either metric tons of
carbon-equivalents (mtC-e) or metric tons of CO2-equivalents (mtCO2-e).5
To be credible as offsets, the emissions reduced, avoided, or sequestered must
be additional to business-as-usual (i.e., what would have happened anyway). This
concept is often called “additionality.” If Congress establishes a GHG emission cap-
and-trade program, only sources not covered by the cap could generate offsets.6
Emission reductions from regulated sources (e.g., coal-fired power plants) would
either be required or spurred by the emissions cap.7 In contrast, if agricultural
operations were not covered under an emissions cap, a project that collects methane
emissions from a manure digester would likely be an additional GHG emission

5 An emissions cap might require only CO2 emission reductions, but still allow CO2-e
offsets from projects that involve non-CO2 GHGs.
6 Although Congress could address GHG emissions with alternative policies — e.g., by
enacting a carbon tax or setting emission limits for each source type (“command-and-
control) — the option to use offsets is generally discussed in the context of a cap-and-trade
regime. Offsets could be a component of a carbon tax framework (e.g., as tax credits), but
that discussion is beyond the scope of this report.
7 For instance, if a covered source reduced its emissions beyond its compliance obligation,
the source could sell the reductions as “credits” to other sources subject to the cap. This
financial opportunity would create the incentive for sources to find and make reductions
beyond their compliance obligations. These type of exchanges represent the foundation of
the cap-and-trade system.

If offsets are allowed as a compliance option in an emissions trading program,
eligible offset projects could generate “emission credits,” which could be sold and
then used by a regulated entity to comply with its reduction requirement.8 This
approach is part of the European Union’s (EU) Emission Trading Scheme (ETS),
which EU members use to help meet their Kyoto Protocol commitments.9 Under the
EU ETS, regulated entities can purchase emission credits that are created from
approved offset projects.10 Regulated entities can then apply the credits towards their
individual emission allowance obligations.11 For example, a regulated entity may
consider purchasing offsets if the offsets are less expensive than making direct, onsite
emission reductions. Assuming the offset is legitimate — i.e., a ton of carbon
reduced, avoided, or sequestered through an offset project equates to a ton reduced
at a regulated source — the objective to reduce GHG emissions is met. From a
global climate change perspective, it does not matter where or from what source the
reduction occurs: the effect on the atmospheric concentration of GHGs would be the
Offsets increase emission reduction opportunities. When offsets are not
allowed, incentives to reduce emissions or sequester carbon are limited to the
covered sources, and there is little motivation to improve mitigation technologies for
non-covered sources. Including offsets in a cap-and-trade program would expand
these incentives.

8 For comparison purposes — e.g., estimating the quantity of offsets and potential offset
benefits — this report generally assumes that emission sources and sequestration activities
will either not be regulated in any fashion or they will qualify as offsets. However, there
are alternative means of addressing emission sources and sinks that are often considered
good candidates for offsets. See the Text Box on p. 8: Policy Alternatives to Offsets.
9 For more information, see CRS Report RL34150, Climate Change: The EU Emissions
Trading Scheme (ETS) Gets Ready for Kyoto, by Larry Parker.
10 The credits are called “certified emission reductions” (CERs) or “emission reduction
units” (ERUs), depending on whether they originate from the Clean Development
Mechanism (CDM) or from Joint Implementation projects, respectively. The CDM is the
Kyoto Protocol compliance mechanism, which has been used widely in the EU-ETS, that
allows for developing nations to generate offsets and sell them to regulated sources in
developed nations. The CDM was established by Article 12 of the Kyoto Protocol. For
more information on the Kyoto Protocol’s “flexible mechanisms,” see [
kyoto_protocol/mechanisms /items /1673.php].
11 Although the credits are equivalent to allowances in environmental and economic terms,
they are not interchangeable. For more on the EU ETS, see CRS Report RL33581, Climate
Change: The European Union’s Emissions Trading System (EU-ETS), by Larry Parker.

Voluntary Offsets
Although this report focuses on the use of offsets in a mandatory GHG
emissions reduction program, offsets are generating interest and debate in other
contexts. In the United States and around the world, a growing number of
businesses, interest groups, and individuals are purchasing offsets and claiming
that all or part of their GHG-emitting activities (e.g., travel or specific events) are
“carbon neutral.” The motivation for these purchases can vary. Some businesses
may be seeking to enhance their public image; others may hope to take credit for
the offsets in a future GHG reduction program. The exchanges represent a
voluntary market for offsets because there is no requirement for the parties to
curtail their emissions.
The quality of the offsets in the voluntary market varies considerably, largely
because there are no commonly accepted standards. Some offset sellers offer
offsets that comply with the more explicit standards of the Kyoto Protocol’s Clean
Development Mechanism. Other sellers offer offsets that meet the seller’s
self-established guidelines, which may be considered proprietary information, and
thus not publicly available.
Due to the lack of common standards, some observers have referred to the
market as the “wild west.” This should not suggest that all offsets are low quality,
but that the consumer must adopt a buyer-beware mentality when purchasing
offsets. For more information, see CRS Report RL34241, Voluntary Carbon
Offsets: Overview and Assessment, by Jonathan L. Ramseur.

Offset Types and Examples
Offsets could potentially be generated from an activity that emits GHGs or that
would remove or sequester GHGs from the atmosphere. This section discusses
offsets in four categories. Each category is discussed below with project examples
for each group.
Some of the categories and examples listed below may be limited by location.
If a U.S. law or regulation (other than an emissions cap) governs a specific emission
source (e.g., methane from coal mines), that source’s emission reductions would not
qualify as domestic offsets, unless the reductions made went further than the
regulations required.12 For example, if the source is required by law or regulation to
reduce methane emissions by 50%, reductions up to this threshold would not qualify
as offsets, but reductions in excess of 50% might qualify as offsets. As more nations
establish mandatory caps or require specific technological controls or practices at
emission sources, the universe of potential offsets would shrink.

12 If the source was subject to an emissions cap, reductions beyond compliance obligations
would be sold directly as emission credits.

Biological Sequestration. Trees, plants, and soils sequester carbon,
removing it from the earth’s atmosphere. Biological sequestration projects generally
involve activities that either increase existing sequestration; or maintain the existing
sequestration on land that might otherwise be disturbed and release some or all of the
sequestered carbon. This offset category includes sequestration that results from
agriculture and forestry activities, and is sometimes referred to as land use, land use
change and forestry (LULUCF) projects. Example of these projects include:
!planting trees on previously non-forested land (i.e., afforestation);
!planting trees on formerly forested land (i.e., reforestation);
!limiting deforestation by purchasing forested property and
preserving the forests with legal and enforcement mechanisms;
!setting aside croplands from agricultural production to rebuild
carbon in the soil and vegetation; and
!promoting practices that reduce soil disruption: e.g., conservation
tillage and erosion control.13
Compared to the other offset categories discussed here, biological sequestration
projects, particularly forestry projects, offer the most potential in terms of volume.
However, this category is arguably the most controversial because several integrity
issues are typically (or perceived to be) associated with biological sequestration
projects.14 These issues are discussed in more detail in later sections of this report.
Renewable Energy Projects. Historically, renewable energy — e.g., wind,
solar, biomass — has been a more expensive source of energy than fossil fuels.15 A
renewable energy offset project could provide the financial support to make
renewable energy sources more economically competitive with fossil fuels.
Renewable energy sources generate fewer GHG emissions than fossil fuels,
particularly coal. Wind and solar energy produce zero direct emissions. Use of
renewable sources would avoid emissions that would have been generated by fossil
fuel combustion. These avoided emissions could be sold as offsets. Potential
renewable energy offset projects may include:16
!constructing wind farms to generate electricity;
!adding solar panels;

13 For more information on agricultural activities, see CRS Report RL33898, Climate
Change: The Role of the U.S. Agriculture Sector, by Renee Johnson.
14 See CRS Report RL34560, Forest Carbon Markets: Potential and Drawbacks, by Ross
W. Gorte and Jonathan L. Ramseur.
15 This comparison does not account for the externalities associated with fossil fuel
combustion: air pollution, environmental degradation, health problems linked to emissions,
16 In addition, some may argue that nuclear energy could be considered a renewable energy.
This debate is beyond the scope of this report.

!retrofitting boilers to accommodate biomass fuels; and
!installing methane digesters at livestock operations.17
Domestic renewable energy projects are not likely to qualify as offsets in a
national emissions reduction program. In a carbon-constrained context, project
developers would be hard-pressed to demonstrate that a renewable energy project
would not have happened anyway. In an “economy-wide” cap-and-trade emissions
program, energy sector emissions would likely be capped.18 The cap would make
fossil fuels more expensive and renewable energy sources more attractive. In fact,
none of the congressional proposals (see Table 1) that allow offsets specifically
allow the use of renewable energy offsets. However, renewable energy projects may
still create credible offsets in nations without GHG emission controls on their energy
Energy Efficiency. A more energy efficient product or system requires less
energy to generate the same output. Improvements in energy efficiency generally
require a financial investment in a new product or system. These capital investments
likely pay off in the long run, but the payback period may be too long or capital
financing may be constrained, particularly for small businesses or in developing
nations. Examples of possible energy efficiency offset projects include:
!Upgrading to more efficient machines or appliances;
!Supporting construction of more energy efficient buildings;
!Replacing incandescent light bulbs with fluorescent bulbs.
Similar to renewable energy offsets, domestic energy efficiency offset projects
would likely face substantial hurdles in proving their additionality in a carbon-
constrained regime. As the price of carbon increases and raises energy prices — both
outcomes expected with an emissions cap — the incentive to reduce energy use
through energy efficiency improvements will increase.
Offset ownership is another potential challenge regarding some energy
efficiency offsets. Energy efficiency improvements may occur at a different location
than the actual reduction in emissions. For example, a business that runs its
operations with purchased electricity will use less electricity if energy efficiency
improvements are made, but the actual emission reductions will be seen at a power
plant. Thus, the reductions may be counted twice: first as an energy efficiency offset
and second as a direct reduction at the power plant. One way to address this potential
dilemma is to restrict energy efficiency projects to only those that reduce or avoid on-
site combustion of fossil fuels. This approach is used in the few congressional
proposals that specifically allow energy efficiency offsets.
As with renewable energy projects, there could be energy efficiency projects in
nations that do not limit GHG emissions.

17 The digesters capture the methane, which can be used for energy purposes.
18 See CRS Report RL33846, Greenhouse Gas Reduction: Cap-and-Trade Bills in the 110th
Congress, by Larry Parker and Brent D. Yacobucci.

Non-CO2 Emissions Reduction. Multiple sources emit non-CO2
greenhouse gases. These emissions are often not controlled through law or
regulation. These sources — primarily, agricultural, industrial, and waste
management facilities — emit GHGs as by-products during normal operations. In
many cases, the individual sources emit relatively small volumes of gases. However,
there are a large number of individual sources worldwide, and many of the gases19
emitted have greater global warming potential (GWP) than carbon dioxide. Offset
projects in this category would generally provide funding for emission control
technology to reduce these GHG emissions. Examples of emission reduction
opportunities include the following:
!Methane (CH4) emissions from landfills, livestock operations, or
coal mines (GWP = 25)
!Nitrous oxide (N2O) emissions from agricultural operations or
specific industrial processes (GWP = 298)
!Hydrofluorocarbon (HFC) emissions from specific industrial
processes, such as HFC-23 emissions from production of a
refrigerant gas (GWP of = 14,800)
!Sulfur hexafluoride (SF6) from specific industrial activities, such as
manufacturing of semiconductors (GWP = 22,800)
This offset category is broad, as it involves many different industrial activities.
As such, some offset types in this category are generally considered high quality, and
others that have generated controversy. For example, methane reduction from
landfills or coal mines has a reputation as a high quality offset. These projects are
relatively easy to measure and verify, and in many cases would likely not occur if not
for the financing provided by an offset market. Therefore, the challenge of proving
additionality is easier to overcome.
Offsets involving abatement of HFC-23 emissions from production of a20
common refrigerant have spurred controversy. Of the offset types certified through
the Kyoto Protocol’s Clean Development Mechanism (CDM), HFC-23 offsets
represent the greatest percentage: 50% of the certified emission reductions (CERs)
have come from HFC-23 abatement projects.21 Controversy has arisen because the
production facilities can potentially earn more money from the offsets (destroying
HFC-23 emissions) than from selling the primary material.22 This creates a perverse

19 GWP is an index of how much a GHG may contribute to global warming over a period
of time, typically 100 years. GWPs are used to compare gases to carbon dioxide, which has
a GWP of 1. For example, methane’s GWP is 25, and is thus 25 times more potent a GHG
than CO2. The GWPs listed in this report are from: Intergovernmental Panel on Climate
Change, Climate Change 2007: The Physical Science Basis (2007), p. 212.
20 Chlorodifluoromethane, referred to as HCFC-22.
21 Of the CERs expected to be issued by 2012, the percentage drops to 22% (still the highest
percentage by offset type). See the United Nations Environment Programme (UNEP), CDM
Pipeline data, at [].
22 This calculus depends on the market price for offsets. See Michael Wara, Measuring the
Clean Development Mechanism’s Performance and Potential, Working Paper #56, Stanford

incentive to produce artificially high amounts of product to generate a more lucrative
Policy Alternatives to Offsets
Policymakers have alternative methods of addressing the emission sources
and sinks that are often considered to be candidates for offsets.
Emissions Cap. Congress could expand the scope of the emissions cap to include
emission sources that were previously excluded. The rationale for initially
excluding these sources is that they are large in number, and they individually
generate a relatively small quantity of emissions. Therefore, an offset program is
arguably a more cost-effective means of achieving reductions from these sources.
However, including certain sources, while excluding others, may raise issues of
fairness. For example, some may question why specific sources are capped, while
other sources can generate financial gain through the offset market. This
discussion is beyond the scope of this report.
Emissions Standards. Instead of allowing offsets from non-capped sources,
Congress could establish sector-specific emission performance standards or
technological requirements. This approach is sometimes described as
“command-and-control.” Such a policy could be applied to both emission sources
and sequestration activities. If Congress sets a baseline requirement, reductions
or sequestration beyond the minimum requirement could qualify as offsets.
Set-Aside Allowances. One possible design element of an emission control
program is for policymakers to allot a specific percentage of emission allowances
(“set-asides”) from the overall emissions cap to non-regulated entities (i.e., parties
not subject to the emissions cap). In a carbon-constrained context, the set-aside
allowances are essentially currency because they could be sold to regulated
facilities to help meet compliance obligations. Set-asides can be allocated to
parties to promote various objectives, including support for activities that reduce,
avoid, or sequester emissions. The allowances may also be distributed for other
purposes, such as transition assistance to specific economic sectors or financial
support to low-income households. These groups may pay proportionately higher
costs in an emission reduction regime.
Although both set-aside allowances and offsets would address emissions in
sectors not subject to the cap, their impacts on regulated sources would differ
substantially. Set-aside allowances are within the emissions cap. Offsets represent
compliance options from sources outside of the cap. Neither offsets nor set-asides
would alter the GHG reduction goal of the program: the cap would remain the
same. However, offsets would increase the emission reduction opportunities
available to regulated sources; set-aside allowances would not.

22 (...continued)
Center for Environmental Science and Policy (2006).

Potential Benefits of Offsets
The inclusion of offsets in a cap-and-trade program could potentially provide
multiple benefits. Perhaps the primary benefit would be improved cost-effectiveness.
The ability to generate offsets, which could be sold as emission credits, would
provide an incentive for non-regulated sources to reduce, avoid, or sequester
emissions. The inclusion of offsets could expand emission mitigation opportunities,
likely reducing compliance costs for regulated entities. Many offset projects have the
potential to offer environmental benefits, as well. Developing countries, in
particular, may gain if the United States includes international offsets in a GHG
emission program. In addition, the offset market may create new economic
opportunities and spur innovation as parties seek new methods of generating offsets.
These issues are discussed below in greater detail.
A central argument in support of offsets is that their use makes an emissions
reduction program more cost-effective. A wide range of activities could be
undertaken that would generate offsets. Many of these individual activities would
likely generate a relatively small quantity of offsets (in terms of tons), but in the
aggregate, their climate change mitigation potential is substantial. Arguably, direct
regulation of these sources — either through a cap-and-trade program or regulatory
command-and-control provisions23 — may not be cost-effective because of the
administrative burden.
By allowing these sources to generate offsets and sell the offsets (as emission
credits) to regulated entities, several benefits are achieved. First, emissions are
reduced, avoided, and/or sequestered at sources that may not have otherwise
occurred.24 Second, the offsets generated increase the compliance options for
regulated entities: covered facilities can either make direct, onsite reductions or
purchase emission credits generated from offsets. The increased reduction
opportunities provided by offsets are expected to lower the cost of compliance. This
impact ultimately affects consumers because they are expected to bear the majority
of an emission program’s costs.
A 2008 EPA study analyzed the economic impacts of the Lieberman-Warner
Climate Security Act of 2008 (S. 2191), a cap-and-trade proposal that would allow
covered sources to use domestic and international credits to each satisfy 15%
allotments of their allowance submission.25 As with other economic models of
climate change regulation, the modelers necessarily make many assumptions. Thus,
the relative differences between different scenarios are perhaps more useful than the
absolute estimates. EPA’s study demonstrated a dramatic difference between the

23 A command-and-control program may require, for example, that certain technologies be
installed to control emissions from landfills or animal waste, or that specific practices (e.g.,
conservation tillage) be performed in agricultural operations.
24 If they would have occurred, they would not be additional (to business-as-usual), and thus,
not qualify as offsets.
25 EPA, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008 (2008).

offset scenarios. The study found that if offsets are not allowed, the price of carbon
would be substantially higher (e.g., 192% higher in 2015) than if offsets could be
used as prescribed by the bill (Figure 1).
Figure 1. Emission Allowance Price at Three Offset Scenarios
under Framework of S. 2191

$400O 2-e
$300/m t C
( $
$100ce P
a n
$0lo w
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050A
S. 2191 (as written)Unlimited OffsetsNo Offsets
Source: Prepared by CRS with data from EPA, EPA Analysis of the Lieberman-Warner
Climate Security Act of 2008 (2008).
The study also found that international offsets would play a large role, especially
in the beginning decades of the program, because there are generally more low-cost
offset opportunities in other nations. In later years (as the carbon price rises),
domestic offset types, particularly forestry-related offsets, play a larger role.
Potential Co-Benefits
Offset projects may produce benefits that are not directly related to climate
change. For example, many of the offset projects that promote carbon sequestration
in soil (e.g., conservation tillage) improve soil structure and help prevent erosion.26
Erosion control may reduce water pollution from nonpoint sources,27 a leading source
of water pollution in U.S. waterbodies.28
Depending on a project’s specific design and how it is implemented, other
agriculture and forestry offset projects could potentially yield positive environmental
benefits. However, there is some concern that certain projects may produce
26 Intergovernmental Panel on Climate Change, Climate Change 2007: Mitigation.
Contribution of Working Group III to the Fourth Assessment Report (2007), p. 526.
27 Nonpoint source pollution is caused by rainfall or snowmelt moving over and through the
ground. As the runoff moves, it picks up and carries away natural and human-made
pollutants, finally depositing them into lakes, rivers, wetlands, coastal waters, and even
underground sources of drinking water. See EPA’s Nonpoint Source Pollution website, at
[ h t t p : / / www.e p a . go v/ owow/ nps / q a .ht ml ] .
28 See CRS Report RL33800, Water Quality Issues in the 110th Congress: Oversight and
Implementation, by Claudia Copeland.

undesirable impacts, such as depleted soil quality, increased water use, or loss of
biodiversity.29 Many agriculture and forestry offset projects would likely involve
land use changes, such as converting farmlands to forests or biofuel production.30
Determining whether the change imparts net benefits may be a complex evaluation,
depending upon, among other things, the current and proposed species of plants
and/or trees. Policymakers would likely encounter projects that offer trade-offs: for
example, they offset GHG emissions, while imposing an unwanted outcome, such as
increased water use, reducing availability downstream.31 EPA found that the more
aggressive offset opportunities — afforestation and biofuels production — are more
likely to present the most distinct trade-offs.32
Potential Benefits to Developing Nations
Most observers would agree that developing nations are unlikely to limit and
reduce GHG emissions on a schedule on par with developed nations. With less-
regulated emission sources, the universe of eligible offset opportunities would be
much larger in developing nations. Offset types, such as renewable energy and/or
energy efficiency projects, which could face substantial hurdles to qualify as offsets
in the United States, would be eligible offsets from developing nations. These types
of projects would likely provide environmental benefits beyond GHG emission
reduction — improvements in local air quality — by displacing or avoiding
combustion of fossil fuels.
Offset projects in developing nations have the potential to promote sustainable
development, such as creation of an energy infrastructure that is less carbon-intensive
and more energy efficient. In fact, this was one of the objectives in establishing the
Clean Development Mechanism (CDM). Whether this objective is being met is a
subject of debate. However, recent projections suggest that offset activities that
promote sustainable development will account for a larger percentage of emissions
credits in the coming years.
In general, renewable energy and energy efficiency projects contribute more to
sustainable development than the offset projects that have dominated the CDM so far
(Figure 2). As a comparison between Figure 2 and Figure 3 indicates, the
proportion of renewable energy and energy efficiency projects in the CDM is
expected to more than double by 2012. This projected shift would likely improve
support for sustainable development objectives. However, offset projects —
primarily, HFC and N2O reduction from industrial activities — that provide few

29 Intergovernmental Panel on Climate Change, Climate Change 2007: Mitigation.
Contribution of Working Group III to the Fourth Assessment Report (2007), pp. 529-530.
30 In fact, these activities are often categorized, particularly in international contexts, as land
use, land use changes, and forestry (LULUCF) projects.
31 For example, certain evergreen plantations (tree farms) generally have higher water use
than the land they replace. Intergovernmental Panel on Climate Change, Climate Change
2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report
(2007), p. 530.
32 EPA, Greenhouse Gas Mitigation Potential in U.S. Forestry and Agriculture (2005), p.


sustainable development benefits are still expected to account for approximately 50%
of emission credits issued.
Figure 2. CERs Issued to Data by Project Type
(as of September 1, 2008)
Forestry and Energy Fuel Switching,
Agriculture, Efficiency, 1%
Other, 3%Landfills,
coal mines,
cement, 4%
Energy, 12%
HFCs and
N2O, 74%
Figure 3. 2012 Projections for CERs by Project Type
(as of September 1, 2008)

Forestry and
Other, 3%Agriculture,
Fuel 2%
Switching, 7%
HFCs and Energy
N2O, 28%Efficiency,
Landfills, coal
mines, cement,
Energy, 33%
Source for Figure 2 and Figure 3: Prepared by CRS with data from United Nations Environment
Programme, Capacity Development for the Clean Development Mechanism (CDM Pipeline”), at
[ http ://cd 4 c d m.o r g/ind e x. htm] .
Other Potential Domestic Benefits
A federal cap-and-trade emission program that allows offsets as a compliance
option may provide economic benefits to particular sectors of the U.S. economy.
However, there may be trade-offs, depending on which types of offsets are eligible

and whether or not international offsets are allowed. If international offset projects
are included in the program, some U.S. business sectors may benefit from the transfer
of technology and/or services to support projects in other nations. If international
offsets, generally the lowest-cost options, are excluded, the offset projects from the
domestic agriculture and forestry sectors would likely gain a greater share of the
offsets market, thus generating business opportunities in these sectors.33
Another potential benefit that is often highlighted is the ability of an offset
market to encourage innovation. As the carbon price provides an incentive for
regulated entities to find onsite emission reductions (e.g., through efficiency
improvements or development of new technologies), the offset market may spur
parties to find new ways to reduce, avoid, or sequester emissions from non-regulated
sources. However, there is some concern that the drive to find creative offset
methods may encourage offset projects that yield unknown, unintended, and possibly
harmful, environmental effects. A frequently cited example in this regard is ocean
fertilization, which seeks to stimulate phytoplankton growth (and ultimately improve
CO2 sequestration) by releasing iron into certain parts of the surface ocean. 34
Potential Concerns
Although offsets have the potential to provide benefits under an emissions
trading program, several issues associated with offsets have generated concern and
some controversy. Perhaps the primary concern regarding offsets is their integrity.
To be credible, an offset should equate to an emission reduction from a direct
emission source, such as a smokestack or exhaust pipe. This issue is critical, if
offsets are to be used in an emissions trading program. However, implementing this
objective would likely present challenges. This and other concerns are discussed
Supplementarity refers to the idea that the role of offsets in an emission
reduction program should be secondary to reduction efforts at regulated emission
sources. The term comes from the text of the Kyoto Protocol, which states that
emissions credits (or offsets) must be “supplemental to domestic actions for the
purpose of meeting quantified emission limitations and reduction commitments....”
(Article 17, emphasis added).
Integrity Concerns
If offsets are to be included in an emissions trading program, offset integrity —
i.e., whether or not the offsets represent real emission reductions — is critical.

33 As discussed above, the inclusion of international offsets would lower the emission
allowance price, which would benefit regulated entities and ultimately consumers.
34 See Ken O. Buesseler, et al.,”Ocean Iron Fertilization — Moving Forward in a Sea of
Uncertainty,” Science Vol. 319 (2008), 162.

Several issues need to be addressed when evaluating offsets. Some of these issues
may present implementation challenges, which if not overcome, could damage the
integrity of the offset. These issues are discussed below.
Additionality. Additionality means that the offset project represents an
activity that is beyond what would have occurred under a business-as-usual scenario.
In other words, would the emission reductions or sequestration have happened
anyway? Additionality is generally considered to be the most significant factor that
determines the integrity of the offset. In the context of an emissions control program,
a test of additionality would examine whether the offset project would have gone
forward in the absence of the program. An additionality determination would likely
consider the following questions:
!Does the activity represent a common practice or conforms to an
industry standard?
!Is the offset project required under other federal, state, or local laws?
!Would the project generate financial gain (e.g., be profitable) due to
revenues from outside the offset market?35
Offset credits allow regulated entities to generate GHG emissions above
individual compliance obligations. If project developers are able to generate
emission credits for projects that would have occurred regardless (i.e., in the absence
of the trading program), the influx of these credits into the program would undermine
the emissions cap and the value of other, legitimate offset projects.
Additionality is at the crux of an offset’s integrity, but applying the additionality
criterion may present practical challenges. For instance, it may be impossible to
accurately determine “what would have happened anyway” for some projects.
Assessing a project’s additionality may involve some degree of subjectivity, which
may lead to inconsistent additionality determinations.
Measurement. Reliable GHG emissions data are a keystone component of
any climate change program. If Congress allows offsets as a compliance option,
offset data (emissions reduced, avoided, or sequestered) should arguably be as
reliable as data from regulated sources. From a practical standpoint, however,
achieving this objective may be difficult.
It is generally much simpler to measure and quantify an emission reduction from
a direct source than from an offset project. Indeed, the more difficult measurement
may be the main reason such reductions are not required by a control program.
Regulated sources determine their compliance by comparing actual GHG emissions
data against their allowed emissions.36 In contrast, project developers determine
offset emission data by comparing the expected reduced, avoided, or sequestered
GHG emissions against a projected, business-as-usual scenario (sometimes referred
to as a counter-factual scenario).

35 See, World Resources Institute, The Greenhouse Gas Protocol for Project Accounting
(2005), at [].
36 The emissions data may not be a direct measurement, but an estimate calculated by using
related data, such as fuel consumption.

To accomplish this task, offset project managers must establish an emissions
baseline: an estimate of the “business-as-usual” scenario or the emissions that would
have occurred without the project. If project managers inaccurately estimate the
baseline, the offsets sold may not match the actual reductions achieved. For
example, an overestimated baseline would generate an artificially high amount of
offsets. Baseline estimation may present technical challenges. In addition, project
developers have a financial incentive to err on the high side of the baseline
determination because the higher the projected baseline, the more offsets generated.
Requiring third-party verification (as some proposals do) would potentially address
this specific concern.
Biological sequestration offset projects may present particular challenges in
terms of measurement. The carbon cycle in trees and soils is only partially
understood.37 Variations exist across tree species, ages, soil conditions, geographic
locations, and management practices.38 Estimates of carbon uptake and storage are
frequently considered imprecise or unreliable. Further, changes in vegetation cover
may have non-emission effects on climate, such as how much of the Sun’s energy is
reflected or absorbed by the Earth. A recent study in the Proceedings of the National
Academy of Sciences stated, “Latitude-specific deforestation experiments indicate
that afforestation projects in the tropics would be clearly beneficial in mitigating
global-scale warming, but would be counterproductive if implemented at high
latitudes and would offer only marginal benefits in temperate regions.”39
Double-Counting. To be credible, when an offset is sold, it should be retired
and not sold again or counted in other contexts. However, opportunities for double-
counting exist. For example, a regulated entity may purchase offsets generated
through the development of a wind farm in a nation that has not established GHG
emissions targets. The U.S. buyer would count the offsets, which may have been
purchased to negate increased, onsite emissions at the regulated source. In addition,
the nation, in which the wind farm is located, would likely see an emissions reduction
due to the wind farm. If this decrease is reflected in the nation’s GHG emissions
inventory, the offset project (wind farm) might replace other reduction activities that
the nation might have taken to meet its target.
Some may argue that double-counting is less of a problem if the offset project
occurs in a nation with only a voluntary target (as opposed to a nation subject the
Kyoto Protocol). However, the impact would be the same if the nation eventually
establishes a mandatory target and takes credit for the earlier reductions associated
with the offset project. By taking credit for an earlier reduction, the nation might
need to make fewer reductions to be in compliance with the new mandatory program.

37 See CRS Report RL34059, The Carbon Cycle: Implications for Climate Change and
Congress, by Peter Folger.
38 See CRS Report RL34560, Forest Carbon Markets: Potential and Drawbacks, by Ross
W. Gorte and Jonathan L. Ramseur.
39 Govindasamy Bala, et al., “Combined climate and carbon-cycle effects of large-scale
deforestation,” Proceedings of the National Academy of Sciences, Vol. 104 (2007):


A tracking system could help avoid such double-counting.40 Most would agree
that a domestic tracking system would be simpler to establish and monitor than a
system that follows international offset trading. The latter would require, at a
minimum, cooperation with the nations hosting the offset projects.
Permanence. With some offset projects there may be a concern that the
emission offsets will be subsequently negated by human activity (e.g., change in land
use) or a natural occurrence (e.g., forest fire, disease, or pestilence). This issue is
most pertinent to biological sequestration projects, specifically forestry activities.
Although many observers expected forestry offsets to play a large role in the CDM,
this has not been observed in practice. This result is partially due to concerns of
offset permanence in developing nations.41
Offset buyers need some assurance that the land set aside for forests (and carbon
sequestration) will not be used for a conflicting purpose (e.g., logging or urban
development) in the future. Although natural events (fires or pests) are hard to
control, human activity can be constrained through legal documents, such as land
easements. In addition, an offset could come with a guarantee that it would be
replaced if the initial reduction is temporary. Permanence may be more difficult to
monitor at international projects.
Leakage. In the context of climate change policy, GHG emissions leakage
generally refers to a situation in which an emissions decrease from a regulated (i.e.,
capped) source leads to an emissions increase from an unregulated source. EPA
states that leakage “occurs when economic activity is shifted as a result of the
emission control regulation and, as a result, emission abatement achieved in one
location that is subject to emission control regulation is [diminished] by increased
emissions in unregulated locations.”42
Leakage scenarios may involve emission sources from the same economic
sector, but located in different countries. Many voice concern that if the United
States were to cap emissions from specific domestic industries (e.g., cement, paper),
these industries would relocate to nations without emission caps and increase activity
(and thus emissions) to compensate for the decreased productivity in the United
States. Thus, global net emissions would not decrease, and affected domestic
industries would likely see employment losses.
In the context of offsets, leakage may occur in an analogous fashion. The
opportunity for leakage exists when an offset project decreases the supply of a good
in one location, leading to greater production of the good somewhere else. Compared
to other offset types, forestry projects, particularly those that sequester carbon by

40 See Anja Kollmuss, “Carbon Offsets 101,” World Watch (2007).
41 Frank Lecocq and Philippe Ambrosi, “The Clean Development Mechanism: History,
Status, and Prospects,” Review of Environmental Economics and Policy (Winter 2007), pp.


42 See Environmental Protection Agency (EPA), Office of Air and Radiation, Tools of the
Trade: A Guide To Designing and Operating a Cap and Trade Program For Pollution
Control (2003), Glossary.

curbing logging, likely present the greatest risk of leakage.43 For example, an offset
project that restricts timber harvesting at a specific site may boost logging at an
alternative location, thus reducing the effectiveness of the offset project.44 Preventing
or accounting for leakage from these projects poses a challenge.
Delay of Technology Development
As discussed above, the inclusion of offsets would likely lower the overall cost
of compliance. Although many consider this a desired outcome, some contend that
the price of carbon needs to reach levels high enough to promote the long-term
technological changes needed to mitigate climate change.
Offsets also can delay key industries’ investments in transformative technologies
that are necessary to meet the declining cap. For instance, unlimited availability
of offsets could lead utilities to build high-emitting coal plants instead of
investing in efficiency, renewables, or plants equipped with carbon capture and45
Transaction Costs
Transaction costs generally refer to the costs associated with an exchange of
goods or services. In an offset market, transaction costs may encompass the
!searching for offset opportunities;
!studying and/or measuring offset projects;
!negotiating contracts;
!monitoring and verifying reduced, avoided, or sequestered
!seeking regulatory approval;
!obtaining insurance to cover risk of reversal (i.e., non-46
Depending on the price of carbon in the offset market, transaction costs may
represent a substantial percentage of the value of the offset. Several studies have
examined offset projects in an effort to estimate transaction costs. Generally, the

43 Nicholas Institute for Environmental Policy Solutions, Harnessing Farms and Forests in
the Low-Carbon Economy: How to Create, Measure, and Verify Greenhouse Gas Offsets,
Zach Wiley and Bill Chameides, eds. (2007), pp. 18-19.
44 Similarly, forest sequestration projects could shift demand to substitute products (e.g.,
steel or aluminum studs to replace wood studs in homebuilding) whose production requires
more energy, and thus releases more carbon. See CRS Report RL31432, Carbon
Sequestration in Forests, by Ross W. Gorte.
45 Testimony of David Hawkins, Climate Center, Natural Resources Defense Council, before
the Senate Committee on Environment and Public Works, November 13, 2007, at
[ gl obalwarmi ng/glo_07111301A.pdf].
46 These are the costs assessed in the following study: Camille Antinori and Jayant Sathaye,
Assessing Transaction Costs of Project-Based Greenhouse Gas Emissions Trading (2007),
Ernest Orlando Lawrence Berkeley Laboratory.

studies’ results include a transaction cost range that varies by offset type and project
size. For example, a study by the Lawrence Berkeley National Laboratory (LBL)
found a transaction cost range of $0.03/mtCO2-e to $4.05/mtCO2 -e.47 Overall, the
various studies found that smaller offset projects (measured by tons of CO2-e) may
be at a disadvantage because they would likely face proportionately higher
transaction costs: the LBL study found that the mean transaction cost for small
projects was $2.00/mtCO2-e, but only $0.35/mtCO2-e for the largest projects.
The transaction costs may hinder innovation by serving as an obstacle to small,
but promising offset projects. However, transaction costs are inherent in an
emissions program that requires project developments to meet certain provisions —
additionality, measurement, verification, monitoring — to maintain the integrity of
the offset allowed as compliance alternatives.
Concerns in Developing Nations
Some argue that offset use, particularly unlimited access to international offset
opportunities, raises questions of fairness. Most of the world’s GHG emissions
(especially on a per capita basis) are generated in the developed nations, while most
of the lower-cost offset opportunities are in developing nations. Many observers
expect the developing nations to establish mandatory GHG reduction programs
several years (if not decades) after developed nations’ emission programs are
underway. The developed nations are likely to initiate the lower-cost projects and
retire the offsets, thus removing the “low-hanging fruit.” If and when the developing
nations subsequently establish GHG emission caps, the lower-cost compliance
alternatives would not be available to them.48 Some have described this as a form of
environmental colonialism.49
Another concern is that international offsets may serve as a disincentive for
developing nations to enact laws or regulations limiting GHG emissions. For
instance, if a developing nation established emission caps or crafted regulations for
particular emissions sources, reductions from these sources would no longer qualify
as offsets. Developing nations may be hesitant to forego the funding provided by
offset projects.

47 Ibid.
48 See e.g., David M. Driesen, 1998, “Free Lunch or Cheap Fix?: The Emissions Trading
Idea and the Climate Change Convention,” Boston College Environmental Affairs Law
Review 26:1-87; see also Emily Richman, 2003, “Emissions Trading and the Development
Critique: Exposing the Threat to Developing Countries,” New York University School of
Law Journal of International Law and Politics 36:133-176.
49 See e.g., Ross Gelbspan, “Toward A Global Energy Transition,” Foreign Policy In Focus

Considerations for Congress
From a climate change perspective, the location of an emission activity does not
matter: a ton of CO2 (or its equivalent in another GHG) reduced in the United States
and a ton sequestered in another nation would have the same result on the
atmospheric concentration of GHGs. Moreover, unlike many air pollutants — e.g.,
acid rain precursors sulfur dioxide and nitrogen oxide, particulate matter, and
mercury — a localized increase or decrease of CO2 emissions does not directly
impart corresponding local or regional consequences. This attribute of CO250
emissions, the primary GHG, allows for offset opportunities.
If allowed as part of an emissions reduction program, offsets have the potential
to provide various benefits. The ability to generate offsets may
!provide an incentive for non-regulated sources to reduce, avoid, or
sequester emissions (where these actions would not have occurred
if not for the offset program);
!expand emission mitigation opportunities, thus reducing compliance
costs for regulated entities;
!offer environmental co-benefits for certain projects;
!support sustainable development in developing nations; and
!create new economic opportunities and spur parties to seek new
methods of generating offsets.
The main concern with offset projects is whether or not they produce their stated
emission reductions. To be credible, an offset ton should equate to a ton reduced
from a direct emission source, such as a smokestack or exhaust pipe. If offset
projects generate emission credits for activities that would have occurred anyway
(i.e., in the absence of the emission trading program), these credits would not satisfy
the principle of additionality. For many offset projects, determining additionality
will likely pose a challenge. Other offset implementation issues — baseline
estimation, permanence, accounting, monitoring — may present difficulties as well.
If illegitimate offset credits flow into the trading program, the cap would effectively
expand and credible emissions reductions would be undermined. The program would
fail to meets its ultimate objective: overall GHG emissions reductions.
Offset projects vary by the quantity of emission credits they could generate and
the implementation complexity they present. For instance, domestic landfill methane
projects are comparatively simple to measure and verify, but offer a relatively small
quantity of offsets. In contrast, biological sequestration activities, particularly
forestry projects, offer the most offset-generating potential, but many of these
projects pose multiple implementation challenges. This may create a tension for

50 This attribute also creates critical challenges for policymakers. For instance, if one nation
invests in emission reductions, any resulting benefits (e.g., decreased atmospheric GHG
concentration) would be shared by all nations, including those that continue to increase their
emissions. This dynamic has led some to refer to climate change as the “ultimate global
commons pollution problem” because it discourages unilateral emission reduction. See
Henry Lee, 2001, “U.S. Climate Policy: Factors and Constraints,” in Climate Change:
Science, Strategies, & Solutions (Eileen Clausen, editor).

policymakers, who might want to include the offset projects that provide the most
emission reduction opportunities, while minimizing the use of offset projects that
pose more implementation complications. Addressing these challenges may require
independent auditing and/or an appreciable level of oversight and administrative
support from government agencies. A report from the National Commission on
Energy Policy stated, “Proposals that expect to achieve significant (> 10 percent)
compliance through offsets in the near term will be obligated to create a substantial
enforcement bureaucracy or risk an influx of illegitimate credits.”51
If concerns of legitimacy can be resolved, the next question for policymakers
may be whether the potential benefits provided by offsets would outweigh any
potential harm. One debate may involve whether including offsets would send the
appropriate price signal to encourage the development and deployment of new
technologies, such as carbon capture and storage. Policymakers may consider
striking a balance between sending a strong price signal and reducing the costs of the
emissions reduction program.
Another debate may focus on the possible effects of offsets in the developing
world (assuming international offsets are allowed in a federal program). On one
hand, many of the offset projects may offer significant benefits — more efficient
energy infrastructure, improved air quality — to local communities. On the other
hand, some maintain that if developed nations use all of the low-cost offsets in
developing nations, the developing nations will face higher compliance costs if and
when they establish GHG emission reduction requirements. Moreover, there is some
concern that international offsets may serve as a disincentive for developing nations
to enact laws or regulations limiting GHG emissions because they would lose
funding from the offset market.
Whether to include international offsets in a federal program raises other
considerations as well. The ability to use international offsets for compliance
purposes would substantially expand emission reduction opportunities, compared to
only allowing domestic offsets. The more emission mitigation opportunities
available, the lower the carbon price. This highlights the debate over the balance
between overall program costs and price signal for technological development.
If eligible in a U.S. program, international offsets from countries without
binding reduction targets are likely to dominate in early decades because of their
comparatively lower costs. Certain domestic economic sectors, primarily agriculture
and forestry (if eligible as offsets), would benefit if international offsets are excluded.
However, the inclusion of international offsets may benefit other U.S. economic
sectors through the transfer of technology and services to support the projects.
Moreover, as noted above, the more offset opportunities, the lower the overall costs
of the cap-and-trade program.

51 National Commission on Energy Policy, 2007, Energy Policy Recommendations to the
President and the 110th Congress.

Table 1. Comparison of Offset Treatment in Cap-and-Trade Proposals in the 110th Congress
ReductionOffset Types Allowed orAcceptable Locations ofSystem of Verifying
ProgramProhibitedOffset Quantity LimitationOffset ProjectsIntegrity of Offsets
S. 280Specifically allows forUp to 30% of allowances canDomestic or internationalDirects the EPA
(Lieberman)agricultural and conservationcome from domestic orprojects acceptedAdministrator, in
practices; reforestation; forestinternational offsets; if offsetscoordination with the
preservation; directs EPA toaccount for 15% of allowances,Secretaries of Commerce,
determine other offset typesat least 1.5% must come fromEnergy, and Agriculture, to
agricultural sequestration set standards
S. 309Offsets are not included in theOffsets are not included in theOffsets are not included in theOffsets are not included in
(Sanders)billbillbillthe bill
iki/CRS-RL34436Directs EPA to implement
g/wemissions reduction
s.orprogram; directs Secretary of
Agriculture, in coordination
://wikiwith EPA, to develop
httpstandards for biological
S. 317No specific prohibitions;A regulated source can useDomestic and internationalDirects Secretary of
(Feinstein)specifically allows biologicaldomestic offsets to cover 100%projects allowedAgriculture, in coordination
sequestration, includingof its allowances; up to 25% ofwith EPA, to develop
(Coversagricultural and forestryallowances (50% for newstandards for biological
utilities)activities, and emissionsources) can come fromsequestration offsets; directs
reductions from variousaeligible international offsets;EPA to craft standards for
industrial operations; EPAthis limit increases to 50% ifother project types

may allow further types at itsallowance prices reach a level
discretionthat would cause “significant
harm” to the economy (as
determined by EPA and
Secretary of Treasury)

ReductionOffset Types Allowed orAcceptable Locations ofSystem of Verifying
ProgramProhibitedOffset Quantity LimitationOffset ProjectsIntegrity of Offsets
S. 485 (Kerry)Offsets are not included in theOffsets are not included in theOffsets are not included in theOffsets are not included in
billbillbillthe bill
Directs Secretary of
Agriculture, in coordination
with EPA, to develop
standards for biological
S. 1168Five offset types allowed:No quantity limitationsAny U.S. state that has signedLegislation includes specificb
(Alexander)1) landfill methane reductionmemorandum of understandingstandards for the five offset
2) sulfur hexafluoride (SF6)(MOU) with EPAtypes allowed; directs EPA
iki/CRS-RL34436(CO2reductions from industrialto develop standards for
g/wreductionactivitiesother potential project types,
s.orfrom utilities)3) afforestation projectsincluding agricultural offsets
leak4) energy efficiency projects
://wikiyielding reductions oravoidance of CO from natural
http2gas, oil or propane combustion
5) avoided methane from
manure management practices
S. 1177Identifies 11 eligible types,No limits; directs EPA toDirects EPA to developDirects EPA to develop
(Carper)including agricultural anddevelop regulations regardingstandards for domestic andregulations and coordinate
forestry management practices;use of offsetsinternational locationswith Department of
(CO2authorizes EPA to developAgriculture regarding
reductionstandards for additional types biological sequestration
from utilities)offset standards

ReductionOffset Types Allowed orAcceptable Locations ofSystem of Verifying
ProgramProhibitedOffset Quantity LimitationOffset ProjectsIntegrity of Offsets
S. 1201Offsets are not included in theOffsets are not included in theOffsets are not included in theOffsets are not included in
(Sanders)billbillbillthe bill
(CO2Directs EPA to implement
reductionemissions reduction
from utilities)program; directs Secretary of
Agriculture, in coordination
with EPA, to develop
standards for biological
S. 1554Offsets are not included in theOffsets are not included in theOffsets are not included in theOffsets are not included in
iki/CRS-RL34436(Collins)billbillbillthe bill
s.or(CO2Directs EPA, in coordination
leakreductionwith Department of
://wikifrom utilities)Agriculture, to help developprocedures for verifying
httpbiological sequestration
S. 1766Four specific project types shallUnlimited use of domesticDomestic and internationalDirects the President to
(Bingaman)have streamlined standards: (1)offsets with identifieddevelop offset verification
landfill methane; (2) animalstandards; international offsetssystem; directs Secretary of
waste or municipal wastewaterlimited to 10% of a regulatedAgriculture to establish
methane; (3) sulfurentity’s emissions targetagricultural sequestration
hexafluoride reductions fromstandards

transformers; and (4) coal mine
methane; the President may add
further types

ReductionOffset Types Allowed orAcceptable Locations ofSystem of Verifying
ProgramProhibitedOffset Quantity LimitationOffset ProjectsIntegrity of Offsets
S. 2191Specifically allows certainDomestic offsets can satisfyDomesticDirects the EPA, in
(Lieberman)agricultural and forestry-related15% of allowance submissionconsultation with Secretary
offsets: agricultural landIndirect access to internationalof Agriculture, to develop
Reported bymanagement practices;In addition, “internationaloffsets through purchase ofregulations to implement
the Senateafforestation; reforestation;emission allowances obtainedinternational “emissioncoffset program; requires
Committee onforest management; manureon a foreign GHG emissionsallowances”offset project developers to
Environmentmanagement; other offset typestrading market” can satisfycsubmit a petition to EPA and
and Publicmay be later allowed by EPA15% of submissionreceive approval of project;
Works Maythrough regulationsoffset projects must then be
20, 2008reviewed by an accredited
third-party, who submits
iki/CRS-RL34436report to EPA for approval;reversal certifications must
g/wbe submitted annually to
s.or EPA
://wikiS. 3036(Boxer)Same as S. 2191Same as S. 2191Same as S. 2191Same as S. 2191
H.R. 620Specifically allows forUp to 15% of allowances canDomestic or internationalDirects EPA — in
(Olver)agricultural and conservationcome from domestic and/orcoordination with the
practices; reforestation; forestinternational offsets; if offsetsSecretaries of Commerce,
preservation; no limits on otheraccount for 15% of allowances,Energy, and Agriculture —
typesat least 1.5% must come fromdto develop verification
agricultural sequestrationmethods and standards
H.R. 1590Offsets are not specificallyOffsets are not specificallyOffsets are not specificallyOffsets are not specifically
(Waxman)addressed in the billaddressed in the billaddressed in the billaddressed in the bill; EPA is
to ensure that allowances are
accurately tracked, reported,
and verified

ReductionOffset Types Allowed orAcceptable Locations ofSystem of Verifying
ProgramProhibitedOffset Quantity LimitationOffset ProjectsIntegrity of Offsets
H.R. 4226Specifically allows biologicalAlternative complianceDomestic or internationalDirects EPA, in coordination
(Gilchrest)sequestration, which canmechanisms, which can includewith the Secretaries of
include agricultural anddomestic and internationalAgriculture, Energy, and
conservation practices;offsets, can account for up toCommerce, to issue
reforestation; forest15% of allowance submission;regulations that establish
preservation; production ofif these alternatives account forcomprehensive measurement
cellulosic biomass crops; and15% of allowances, at leastand verification methods
other methods determined by1.5% must come from
EPA; allows for use of otherregistered sequestration inDirects the EPA to develop
offset projects if approved andagricultural soilsprogram for reviewing
added to national registry; nointernational offset projects
restrictions on international
offset types that are approved
iki/CRS-RL34436on case-by-case basis
s.orH.R. 6186Domestic projects limited to: Domestic offsets can meet upDomestic or internationalDirects EPA to implement
leak(Markey)(1) agricultural activitiesto 15% of a covered entity’soffset program through
(excluding those covered byallowance submissions; International offsets can onlyregulatory process; EPA
://wikiperformance standards, such ascome from nations thatmay require offset project
httpanimal feeding operations); International emission(1) have taken comparabledevelopers to submit a
(2) afforestation andallowances, internationalemission reduction action;petition to EPA and receive
reforestation; offsets, or some combination(2) emitted less than 0.5% ofapproval of project; offset
(3) petroleum and natural gasthereof can satisfy another 15%global GHG emissions in mostprojects must be reviewed by
system emissions; of an entity’s allowancerecent year; oran accredited third-party,
(4) coal mine emissionssubmission(3) identified by Unitedwho submits report to EPA
(excluding those covered byNations as among the leastfor approval

performance standards — i.e.,developed of developing
mines emitting over 10,000countries
mtCO2 per year)
International offsets exclude
(1) land use, land use change,
and forestry activities; and
(2) destruction of

ReductionOffset Types Allowed orAcceptable Locations ofSystem of Verifying
ProgramProhibitedOffset Quantity LimitationOffset ProjectsIntegrity of Offsets
H.R. 6316Domestic offsets may include:Domestic offsets limited toDomestic and internationalDirects EPA, in coordination
(Doggett)(1) emissions from animal10% of allowance submission;with the Secretary of
feeding operations;agriculture projects limitedInternational forestry offsetsAgriculture, to develop
(2) afforestation andfurther per NAS review;only eligible from nations thatregulations to implement
reforestation; meet specified conditionsoffset program, including
(3) petroleum and natural gasInternational forest allowancesprocedures for project
system emissions; limited to 10% of allowanceinitiation and approval and
(4) coal mine emissions; andsubmission;third-party verification
(5) other agricultural activities
approved by a NationalCombined limitation of 25% of
Academy of Sciences (NAS)allowance submission from
reviewforeign allowances,
international forest allowances,
iki/CRS-RL34436International offsets includeand domestic offsets
g/wforest carbon activities:
s.orafforestation, reforestation, and
leakavoided deforestation
httphese projects would become ineligible if subsequent legislation required emissions reductions from these sectors (S. 317 only covers power plants).
fset standards similar to those required by the Regional Greenhouse Gas Initiative (RGGI), a partnership of 10 states from the Northeast and Mid-Atlantic regions. Unlike RGGI
dards, S. 1168 does not require third-party verification for offset projects.
he proposal does not defineinternational emission allowance.” EPA is directed to develop regulations concerning their use.
he legislation states that if an entity uses offsets to satisfy 15% of its allowances, “it shall satisfy up to 1.5 percent of its total allowance submission [with agricultural sequestration
ets]....” (Section 144(b)). This language is arguably unclear as to whether it limits (up to) agricultural sequestration offsets to only 1.5% or requires that (at least) 1.5% of offsets
e from agricultural sequestration activities.

Table 2. Comparison of Offset Treatment in GHG Emissions Reduction Initiatives in the U.S. States
GHGOffset Types Allowed orAcceptable Locations ofSystem of Verifying
ReductionProhibited Offset Quantity LimitationOffset ProjectsIntegrity of Offsets
RegionalFive offset project typesRGGI was designed to require1) RGGI states;Standards Approach: each
GHGallowed:athat 50% of emission2) non-RGGI states that haveproject must meet general
Initiative1) landfill methane reductionreductions come from regulatedtheir own GHG reductionstandards and standards
(RGGI)2) Sulfur hexafluoride (SF6)sources; offsets can be used toprogram or have signed aspecific to the project type;
reductions from industrialachieve the remaining 50% ofmemorandum of understandingeach project must be
(CO2activityrequired reductions;b to apply(MOU) with a RGGI state;certified by a third-party
reduction3) Afforestation projectsthis objective, offsets are3) international projects (e.g.,
from utilities)4) Energy efficiency projectslimited to 3.3% of a source’sCDM certified emission
yielding reductions oremissions; the limit increases tocredits) allowed if carbon price
avoidance of CO2 from natural5% if the market price of anexceeds $10
iki/CRS-RL34436gas, oil or propane combustionallowance exceeds $7 (in 2005
g/w5) Avoided methane fromdollars, adjusted annually); if
s.ormanure management practicesprice exceeds $10 (in 2005
leakdollars, adjusted annually), thec
limit increases to 10%
httpCalifornia’sNot specified in statute; detailsNot specified in statute; detailsNot specified in statute; detailsNot specified in statute;
Statewidedeferred to California Airdeferred to California Airdeferred to California Airdetails deferred to California
EmissiondResources Board;Resources BoardResources BoardAir Resources Board
The Market AdvisoryeMost members of the MACMost MAC members rejectedMAC recommended
Committee (MAC)rejected quantity limitationsgeographic limitationsadopting a standards-based
recommended starting with aapproach
small number of project types,
such as those allowed under
Other states have recently enacted legislation to reduce GHG emissions, and a number of states have signed regional agreements that call for GHG reduction. However, these
rams are relatively new, and the design details (in particular, offset treatment) have not yet been officially specified. Thus, they are not listed in the above table. For more
rmation, on these programs, see CRS Report RL33812, Climate Change: Action by States To Address Greenhouse Gas Emissions, by Jonathan L. Ramseur.
ects may be added in the future.
ee RGGI Staff Working Group, Analysis Supporting Offsets Limit Recommendation, at [].

he RGGI Memorandum of Understanding describes this increase in the use of offsets as a safety-valve.” Unlike a traditional safety-valve, the cap would be maintained because
itional allowances cannot be purchased at a threshold price. The RGGIsafety-valve” would effectively allow regulated parties to meet the majority (at the 5% limit) or possibly
at the 10% limit) of their reduction requirements through offsets: the RGGI cap is projected to require regulated sources to reduce their annual emissions by about 7% on average
ed on RGGI Offsets Limits Analysis data at [].) The cost protection provided by RGGIs safety-valve will depend on the offset market. For
ple, if the supply of acceptable RGGI offsets cannot meet demands, the offset price may increase such that the safety-valve is negated. An assessment of offset supply and demand
ucted by RGGI officials suggests that this outcome seems unlikely (Evaluation of Offsets Supply and Potential Demand, at [].)
alifornia Governor Schwarzenegger signed “The Global Warming Solutions Act (AB32) into law September 27, 2006. AB32 creates a mandatory GHG emissions target: return
evels by 2020. The statute authorizes, but does not require, the use of market-based mechanisms. The California Air Resources Board (CARB) is responsible for crafting
t of the logistical details, including offsets. For more information on AB32 see CRS Report RL33962, Greenhouse Gas Reductions: California Action and the Regional Greenhouse
nitiative, by Jonathan L. Ramseur.
he MAC recommendations are included in the table for comparison purposes because the regulations are being developed. Per California Executive Order S-20-06, the Market
sory Committee was formed to develop recommendations regarding design details for a market-based emissions reduction program. The Committee includes national and
national experts with backgrounds in economics, environmental policy, regulatory affairs, and energy technologies. See Market Advisory Committee, 2007, Recommendations
igning a Greenhouse Gas Cap-and-Trade System for California.


Table 3. Comparison of Offset Treatment in International Emissions Trading Programs
GHGOffset Types Allowed orAcceptable Locations ofSystem of Verifying
ReductionProhibited Offset Quantity LimitationOffset ProjectsIntegrity of Offsets
Clean DevelopmentCDM and JI:CDM projects: developedCase-by-case approval
Mechanism (CDM) projects:“Supplementarity” constraint:nations finance projects inprocess, including a test
projects judged individually;offsets must be “supplementaldeveloping nationsof “additionality”d
wide range of types have beento domestic action and that
accepted; prohibits use ofdomestic action shall thusJI projects: developedCDM: each project
reductions generated fromconstitute a significant elementnations finance projects inmust have letter of
nuclear facilities;a land use,of the effort made by eachcother developed nations; bothapproval from both
land use changes, and forestryParty...” (emphasis added); butnations must be parties to thebuyer and seller’s
iki/CRS-RL34436(LULUCF) offset projectslimited to reforestation andno specific quantity limitationsKyoto Protocolgovernments; must beevaluated and approved
g/wafforestationbCDM: Reforestation andby an Executive Board
s.orafforestation projects limited to(EB);e independent third
leakJoint Implementation (JI)1% of party’s baselineparty (accredited by EB)
Kyotoprojects: may allow a broaderemissionsdetermines the certified
httparray of project types than theemissions reductions
CDM, and would include(CERs)
revegetation, forest
management, croplandJI: Track 1 - eligible
management and grazing landhost country may
management; JI projects mayapprove projects and
be limited by a host country’sassign emission
emission control regulationsreduction units (ERUs);
Track 2 - Joint
Supervisory Committeef
(JISC) approves project
and assigns ERUs

GHGOffset Types Allowed orAcceptable Locations ofSystem of Verifying
ReductionProhibited Offset Quantity LimitationOffset ProjectsIntegrity of Offsets
EuropeanKyoto Protocol limitationsFirst phase (2005-2007): noCDM projects: developingCDM/JI offsets follow
Union’slisted above;limits for offsets from CDM,nations Kyoto Protocol
Emissionsbut no JI projects; verification process
TradingAdditional limitations:Second phase (2008-2012) EUJI projects: other EU nations(described above)
Systemregulated sources cannot usemembers set own limits for
offsets from land use, land useoffsets from CDM or JIDomestic offset projectsj
changes, and forestrygprojects, but limit must fall(DOPs) not allowed
(LULUCF) projects; offsetswithin range set by theh
from hydroelectric powerEuropean Commission (EC):
projects must satisfy certainat minimum EU states must
conditionsallow regulated sources to use
iki/CRS-RL34436offsets to cover 10% of their
g/wallowances; at a maximum,
s.oroffsets can cover up to 50% of
leakthe reductions required by cap
://wiki(in some EU states this equatesto 20% of allowances)i
NFCCC, 2001, Conference of the Parties, Sixth Session, Decision Five.
NFCCC, 2001, Conference of the Parties, Seventh Session (“Marrakesh Accords), Decision 11. Afforestation involves planting trees on previously non-forested land; reforestation
lves planting trees on formerly forested land.
NFCCC, 2006, Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol on its first session, held at Montreal from 28 November to 10 December 2005,
sion 2/CMP1.
Additionality” is a critical component of the environmental integrity of an offset. The concept refers to whether the offset project would have gone forward on its own merits (e.g.,
ncial benefits) without the support of an offset market or the impetus to comply with a legal requirement. In other words, would the offset project have happened anyway? If the
ect would have occurred, the project is not additional, and should not qualify as an offset.
he EB is composed of 10 members from parties to the Kyoto Protocol; the members terms are limited.
he JISC is composed of 10 members from parties to the Kyoto Protocol; the members terms are limited.

lthough private parties subject to the ETS cap cannot purchase LULUCF offsets, EU governments can purchase eligible LULUCF offsets — i.e., from afforestation or reforestation
ects up to 1% of their states base year (1990) emissions each year (See European Union Directive 2004/101/EC (October 27, 2004); Kyoto Protocol, Decision 17/CP.7
ember 2001)). The World Bank reported that global transactions of LULUCF offsets have only accounted for 6% of this allowable limit.
ropean Commission Communication (COM/2006/725), November 29, 2006.
EU state governments purchase offsets (e.g., to sell as allowances for new sources), these offsets will reduce the percentage of offsets that can be used as allowances by affected
ces within that state.
is issue has received interest in recent months, and some EU members support including domestic offset projects. See European Climate Change Programme Working Group, 2007,
of the First Meeting (March 8-9, 2007).