Kerry-Lieberman Creates Some Added Certainty on Offsets

by Victor Flatt

May 12, 2010

The Kerry-Lieberman bill's provisions on offsets are largely similar to those in the Waxman-Markey and Kerry-Boxer bill, but include a number of changes that make more specific policy choices in the use of offsets.

First, the proposal enumerates a specific lengthy list of eligible offset categories (whereas Waxman-Markey didn't list specific categories, instead giving instruction for a regulatory decision). This change  might assist in providing market liquidity. In terms of offset regulation, there seems to be a complex dance between the EPA and the USDA, which requires consultations between the two in most cases for offset designation and removal.  The USDA is given the primary role over agricultural and forest offset approval while the EPA has a similar role over other offsets; as I've written before, this could be potentially problematic if the USDA is not up to the regulatory task.

Environmental consideration of offsets is still present for sequestration projects, particularly to protect habitat and native species (proposed new CAA 735(h)), and general environmental considerations may even be stronger. For instance, as in both Waxman Markey and Boxer-Kerry, Kerry-Lieberman would create an advisory committee that proposes offsets and offset rules to the regulator.  But in performing this task, the advisory committee is “to avoid or minimize, to the maximum extent practicable, adverse effects on human health or the environment resulting from the implementation of offset projects under this part.” (proposed new CAA 733(a)(2)(D)).

Additionally, the KL proposal specifies that an offset category may be removed if the environmental detriments outweigh the greenhouse gas benefits. (proposed new CAA 734(2)(B)(II)). While a more nuanced version of this part would be welcome, at least it recognizes that offsets can have environmental harm and that this harm should be considered. 

In terms of offset market regulation, there are a few tweaks here and there. Kerry-Lieberman specifies that the risk of loss can be agreed to by the parties to an offset agreement themselves (proposed new CAA 735(b)(3)(B)), rather than stating that the administrator may do what is necessary to make the environmental reversals whole (which could infect the secondary offset market). While this is a major improvement in terms of market stability, it still means that there will be risk to market purchasers, though at least risk with knowledge. That creates a greater complexity in accounting, and the features of the offset contracts will not be identical in all respects, making standardized markets harder. The private sector itself could show such a large preference for requiring the project developer to hold the reversal liability that standardization would occur.

As for whether or not the offsets themselves will represent “real” reductions (a common criticism of offset programs), this bill, like Waxman-Markey and especially Kerry-Boxer, takes offset reversal and verification seriously, much more seriously than the current international program. Indeed, this bill goes further than those two bills by not allowing international offset credits to be received for destruction of hydrochlorofluorocarbons, in response to criticisms of that under the Clean Development Mechanism.

However, it does allow offsets to be considered “additional” even if the activity would receive payment or compensation for another environmental benefit (such as a land use easement for habitat or more likely a prior easement on agricultural land).  (proposed new CAA Sec. 735(f)). This means that many "offset" activities will not be truly additional, presumably a benefit for some existing agricultural interests, and one that would of course lessen GHG reductions. That said, the need to incentivize certain environmentally beneficial projects, including through offsets, is significant and shouldn't be downplayed. But a real analysis of qualifying offsets will be needed to determine whether or not this is environmentally beneficial or simply a large loophole for non-legitimate offsets.

Kerry-Lieberman has reserves and insurance mechanisms for possible offset reversals, just as in prior proposals, though the penalty for an “intentional” reversal is higher (150% as compared to 100%), presumably to provide a disincentive.  (proposed new CAA Sec. 735 (b)).  Otherwise, the proposal in this regard is almost identical to ACES and Kerry-Boxer in requiring the administrator to select a system to ensure environmental integrity with offset reversal; specifically a reserve, insurance provision, or equivalent measure. As we get more information about the business model in offset insurance, these specific provisions deserve more examination. For instance, a CLEAR position paper suggests a combination of insurance and reserves, instead of allowing the administrator to choose either/or, may be necessary to provide a legitimate way to avoid sequestration losses.

Overall, Kerry-Lieberman's language on offests shows a willingness to make hard choices on offset regulatory mechanisms for political, market, and in some cases environmental benefits.  I would have made different choices, but on the whole, the offsets provision provide a reliably cheaper way to GHG reduction, which will generally be legitimate environmentally, and which will work in a cap and trade market.

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