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Use of Offsets to Reduce Greenhouse Gases 1 (August 2009)

handle is hein.congrec/cbo8874 and id is 1 raw text is: A series ofissue summaries from the Congressional Budget Office AUGUST 3, 2009 The Use of Offsets to Reduce Greenhouse Gases Discussions about reducing greenhouse gases often focus on limiting the use of fossil fuels to generate electricity or power cars and trucks, yet a variety of other actions- including disposing of waste in different ways, changing methods of farming, and lessening deforestation-could also reduce the concentration of greenhouse gases (GHGs) in the atmosphere. Both existing climate poli- cies, such as the European Union's Emission Trading Sys- tem, and policies under consideration, such as the Ameri- can Clean Energy and Security Act (ACESA) of 2009, which was recently passed by the House of Representa- tives, have recognized the potential for such actions to offset the extent to which the use of fossil fuels must be reduced to meet a chosen target for total GHG emissions. If such offsets-which can be defined as reductions in GHGs from activities not subject to limits on emis- sions-are less expensive than reductions from limiting the use of fossil fuels, they can reduce the overall eco- nomic cost of meeting a target for emissions. Yet the diffi- culty of verifying offset activities raises concerns about whether the specified target will actually be met; those concerns may be especially acute when, as under ACESA, allowable offsets include actions taken outside of the country setting the target for emissions. Although experience with offsets is not extensive, prelim- inary evidence suggests that they can significantly lower the economic cost of a cap-and-trade program, even after accounting for the costs of steps taken to increase confi- dence that offsets represent true incremental reductions in GHGs. However, estimates of the savings that would result from including offsets in a cap-and-trade program are imprecise and depend importantly on policy design. Potential Benefits of Offsets The cap-and-trade program established by ACESA would set an annual limit, or cap, on emissions for each year between 2012 and 2050 and would distribute allow- ances, or rights to produce emissions. After the allow- ances were distributed, regulated entities-those that generate electricity or refine petroleum products, for example-would be free to trade them, so entities that could reduce their emissions at lower costs could sell allowances to others facing higher costs. The legislation would also allow a regulated entity to meet a portion of its compliance obligation by purchasing domestic and international offsets instead of using allowances. Those offsets have the potential to reduce the total cost of cap- ping GHG emissions by substituting less expensive emis- sion reductions from entities not subject to the cap for more expensive reductions from entities subject to the cap. More generally, including offsets in a cap-and-trade program need not affect the total amount by which greenhouse gases were reduced but would change the mix of activities undertaken to achieve a specified reduction. In principle, a comprehensive cap could apply to all sources of GHGs. In practice, however, policies currently in effect and being considered by the Congress cap only emissions from significant sources of GHGs that can be easily and reliably measured. The electric power industry, for example, which produces over one-third of all U.S. GHGs, can use systems that continuously monitor emis- sions (such as methods currently required under the Acid Rain program) to accurately measure the release of car- bon dioxide (C02). In contrast, entities whose emissions are much less significant or more difficult to monitor sys- tematically are generally excluded from existing and pro- posed caps. Nonetheless, some of those entities may be able to reduce GHGs more cheaply than the electric power industry or other industries whose emissions are subject to the cap. Owners of livestock are one example. When livestock waste decomposes, methane (which is more damaging to the climate on a per-ton basis than C02) is produced. However, manure can be collected and processed with special bacteria in airtight holding tanks or covered lagoons that allow operators to trap and recover methane. If capturing methane was cheaper than reducing CO2 emissions from other sources by an

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