The Use of Offsets to Reduce Greenhouse Gases

August 3, 2009

Today CBO released a brief that discusses how activities with emissions that are not subject to limits in a cap-and-trade program might lower the burden of reducing the concentration of greenhouse gases (GHGs) in the atmosphere. Both existing climate policies, such as the European Unions Emission Trading System, and policies under consideration, such as the American Clean Energy and Security Act (ACESA) of 2009, which was recently passed by the House of Representatives, have recognized the potential for actions such as disposing of waste in different ways, changing methods of farming, and reducing deforestation 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 offsetswhich can be defined as reductions in GHGs from activities not subject to limits on emissionsare less expensive than reductions from limiting the use of fossil fuels, they can reduce the overall economic cost of meeting a target for emissions. But the difficulty of ensuring that offset activities result in verifiable, permanent and incremental reductions in global emissions raises concerns about whether the specified emissions 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, preliminary 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 confidence that the use of offsets represents true incremental reductions in GHGs. CBO estimates that the average annual savings from offsets could be about 70 percent under ACESA. Of course the intended environmental benefit would be fully realized only if the offsets provided the full reduction in global emissions of GHGs for which they are credited.