Mike Pomorski Offsets – one of the least exciting (and potentially most important) parts of climate legislation

EPA released its analysis of S. 1733 (Kerry-Boxer) last Friday.   Much media coverage (for example, this article in the New York Times) has focused on EPA’s finding that the legislation would have a small ($100 per year) financial impact on families.

The $100 impact, from page 19 of the analysis, is all well and good, but policymakers would do well to read page 20 also, specifically the section titled “Sensitivities to Offset Availability.”

One big reason why costs are contained is EPA’s belief that offsets will be widely available at reasonable prices.  EPA writes that “all analyses that have looked at the issue have shown that the availability of offsets is one of the most important factors influencing allowance prices.”

Offset availability requires their processing and verification.  Regarding the United States’ ability to process and verify these offsets, EPA writes that “there are many institutional design issues, including the measurement, monitoring, reporting and verification requirements, surrounding estimates of offset availability.”

That is quite an understatement.  In Kerry-Boxer, these “institutional design issues” occupy almost 70 pages in Sections 731-744, and include (but are not limited to) the creation of an offset registry, quantitative modeling of additionality, leakage, reversals, a petition and approval process (including an appeals process), third party verification requirements, and a significant amount of inter-agency cooperation.  These 70 pages do not determine which offset projects themselves are viable; they only describe the process to determine whether they are viable.

The offset process is an essentially brand new government function, for which EPA simply “assumes that the institutions are put in place to process the domestic and international offsets needed to realize reductions on the magnitude shown in the analysis.”  All of the political, bureaucratic, and quantitative complexity of offset verification is assumed away.

If offsets are not available or are significantly delayed we can expect much higher costs.  EPA cites an MIT study and writes that “the allowance price in the medium offsets case was 193% higher than the allowance price in the full offsets case.”  These types of quantifications do not lend themselves to newspaper (or blog!) headlines, but there they are.

So remember, when you hear a low-cost estimate for Kerry-Boxer (or any other climate bill), ask yourself what is required for costs to be contained and whether those assumptions are realistic.

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