December 3, 2009
Today CBO's Assistant Director for Microeconomic Studies, Joseph Kile, testified before the House Agriculture Committee's Subcommittee on Conservation, Credit, Energy, and Research on the use of agricultural offsets as part of a cap-and-trade program for reducing 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 actionsincluding changing methods of farming and lessening deforestationcould also reduce the concentration of greenhouse gases in the atmosphere. Those activities, which would not be subject to limits on emissions under a cap-and-trade program, would have the potential to "offset" the burden of reducing emissions and reduce the net cost of achieving the environmental objective. This testimony draws upon CBO's August 2009 brief on the use of offsets as well as our analysis of H.R. 2454, the American Clean Energy and Security Act of 2009, which was passed by the House of Representatives.
H.R. 2454 would set an annual limit, or cap, on greenhouse-gas emissions for each year between 2012 and 2050 and would distribute "allowances," or rights to produce those emissions. After the allowances were distributed, regulated entitiesthose that generate electricity or refine petroleum products, for examplewould be free to trade them, so entities that could reduce their emissions at lower costs would sell allowances to others facing higher costs.
The provisions of H.R. 2454 reflect the fact that a variety of other actions such as changing agricultural practices can also reduce the concentration of greenhouse gases in the atmosphere. Those actions have the potential to lessen the extent to which more costly actions would have to be undertaken to meet a chosen target for total greenhouse-gas emissions. Under the bill, regulated entities would be allowed to use offsets in lieu of reducing their emissions or purchasing allowances. Yet the difficulty of verifying offsets raises concerns about whether the specified overall limit on emissions would actually be met. Such concerns may be especially acute when, as under H.R. 2454, allowable offsets include actions taken outside the United States.
The testimony makes the following key points:
- Researchers have concluded that a cap-and-trade program that allowed for offsetssuch as those that might be generated by changes in agricultural practices and forestrycould reduce greenhouse gases more cheaply than a cap-and-trade program that did not include offsets, but instead relied on reducing the consumption of fossil fuels.
- Because of concerns that the use of offsets could undermine the environmental goals of a cap-and-trade program, four challenges would have to be addressed if offsets are to play a meaningful role in reducing the concentration of greenhouse gases in the atmosphere. In particular, offsets would have to bring about reductions in greenhouse gases that (1) would not have otherwise occurred; (2) could be quantified; (3) were permanent rather than merely a delay in the release of greenhouse gases into the atmosphere; and (4) accounted for "leakage," that is, higher emissions elsewhere or in different sectors of the economy as a result of the activities producing the offsets.
- On the basis of data from the Environmental Protection Agency, CBO expects that, under the provisions of H.R. 2454, most offsets would be generated by changes in forestry and agricultural practices. Of the offsets from those sectors, fewer than half would be produced domestically in most years, and only about 10 percent of the domestically produced offsets would be from changes in agricultural practices. The remaining offsets from those sectors would come from international sources and would be more evenly split between agriculture and forestry.
- CBO estimates that the savings generated by offsets under H.R. 2454 would be substantialreducing the price of allowances and the net cost of the program to the economy by about 70 percent. By CBO's estimates, regulated entities would use offsets for about 45 percent of the total emission reductions that they would be required to make over the 2012-2050 period covered by the policy.
- Any assessment of the use of offsets is subject to many uncertainties, which are inherent in the models used, about such things as the types of activities that would be eligible to generate offsets and the amount of offsets supplied by those activities, the prospects for concluding agreements with other nations to allow the use of international offsets, and the cost of ensuring that activities generating offsets actually reduce greenhouse gases.