Offsets and Climate Policy: EPA Perspectives

Dina KrugerDirector, Climate Change DivisionU.S. Environmental Protection AgencyMay 30, 2008

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Offsets Defined

• Offsets are emissions reductions from non-capped source categories– Done right, they will

• lower the costs of the overall program to regulated sources• require moderate administrative procedures to implement

• create incentives for reductions in non-capped sectors – Done wrong, they will

• impose a substantial administrative drag on both the government and regulated entities

• pose a risk that the reductions aren’t real, thus, effectively increasing the overall cap and negatively impacting the environmental integrity of the overall system

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Importance of Additionality

Landfill Emissions (without methane

collection/combustion)

Power plant Emissions (no

cap)

Landfill Reduction (with methane

collection/combustion)

Power plant Emissions (with

cap)

No Offset/No Cap

Offset/Cap

Cap

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Offsets and Climate Policy

EPA Perspectives Informed by

• Programmatic experience in the offset sectors

• Economic analysis of sectoral mitigation options

• Economic analysis of legislative proposals

5

On-the-ground Experience

• Domestic and international programs to reduce methane and high-GWP gases

• Provide technical assistance– Identifying candidate sites– Conducting feasibility studies– Bringing partners together

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Demonstrated Results

• Total US Methane Emissions in 2005 were more than 11% lower than emissions in 1990, in spite of economic growth over that time period.

Changes in U.S. Methane Emissions and Economic Growth 1990 - 2005

520

560

600

640

1990

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

MM

TCO

2E

6000

8000

10000

12000

Bill

ion

$

Methane Emissions GDP

• Methane to Markets− US is leveraging significant

investment and engagement from the private sector

− Projects initiated through 2006 are expected to achieve annual emission reductions of almost 10 MMTCO2E

Cumulative Total U.S. Government Funding and

Leveraged Funding

$262,089,623

$18,102,638

$0 $100,000,000 $200,000,000 $300,000,000

Total U.S.

Government

funding

Leveraged funding

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Applying Program Knowledge to Economic Analysis

• EPA reports on mitigation opportunities and costs for non-CO2 gases and agriculture and forestry– Engineering cost curves– U.S. and Globally– Gas by gas, sector by sector

• EPA data integrated into most climate economic models

• Substantial improvement in analytical ability– How many tons are available?– At what cost?– In what sectors and regions?

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Offset Provisions of Bills Analyzed by EPA• “Lieberman-Warner Climate Security Act of 2008” (S. 2191)

– Domestic offsets may be used to meet 15% of compliance obligation– International credits may be used to meet 15% of compliance obligation– Set-asides for agriculture and forestry sequestration as well as landfill and

coal mine CH4

• Bingaman-Specter, “Low Carbon Economy Act” (S. 1766)– Unlimited specified domestic offsets can be used to meet the emission cap

level– Specified offset project categories include CH4 from landfills, coal mines,

and animal waste, and SF6 from electric power systems

• For other offset project categories, the President may distribute less than 1 credit for each ton of greenhouse gas emissions reduced or sequestered.

• Our analysis assumes that only offsets from specified project categories are allowed.

– The President can implement an international offset program, allowing not more than 10% of compliance to be met through this program

– Set-asides for agriculture sequestration

• Lieberman-McCain, “Climate Stewardship and Innovation Act” (S. 280)– Domestic offsets & international credits can be used to meet up to 30% of

compliance obligation

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Offset Provisions of S. 2191 (L-W) Significantly Influence Costs

• 2030 Allowance price in core S. 2191 Scenario: $61 - $83

• Range of 2030 Allowance prices in all scenarios: $24 - $160

• Scenario 2 from EPA’s analysis of S. 2191: S. 2191 as written (15% of compliance obligation from domestic offsets, 15% from international credits), assumes 150% increase in nuclear power between now and 2050, assumes CCS available after 2015.

• Provisions for Nitrous Oxide/Methane set aside allowance dropped in the Substitute Amendment to S2191; the 15% limit on offsets is now applied to the annual overall quantity of emissions allowances rather than individual compliance obligations.

Marginal Cost of GHG Abatement in 2030 - Sensitivity Cases

82%

31%

34%

0%

-26%

-71%

93%

-100% -75% -50% -25% 0% 25% 50% 75% 100%

Nuclear and Biomass Constrained, No CCS before 2030

Nuclear and Biomass Constrained to Reference

No Domestic Offsets or International Credits

15% Domestic Offsets, No International Credits

Core: 15% Domestic Offsets, 15% International Credits

Unlimited Domestic Offsets, 15% International Credits

Unlimited Domestic Offsets and International Credits

% Change from Core S. 2191 Scenario*

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S. 2191 – Sources of Domestic Offsets (Cumulative 2012-2050)

Ag Soils17%

Afforestation38%

Forest Management

18%

CH4 from landfills

12%

CH4 from coal mines

CH4 from the

natural gas sector

Other Ag CH4 & N2O

Animal Waste CH4

• The total quantity of abatement from domestic offsets is limited to 15% of allowance submissions in each year.

• The quantity of abatement from international credits is similarly limited to 15% of allowance submissions in each year.

• The quantity of abatement from allowance set-asides is prescribed by the bill, 4% of allowances in each year are set aside for Ag/Forestry abatement projects, and 1% are set aside for landfill and coal mine CH4 abatement projects.

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Quantity of Offsets Under S. 2191

• 10’s of Coal Mine Methane Projects

• 100’s of Landfill Methane Projects

• 10,000,000’s of acres of ag / forestry projects

Offsets, International Credits, and Allowance Set-Asides

MtCO2ePayments

(Billion '05$)Domestic Offsets 2030 2030

Ag / Forestry 476 $12Landfill / Coal Mine CH4 93 $2

Other Offsets 27 $1

Domestic Offset Total 596 $15

Allowance Set-AsidesAg / Forestry 193 $16

Landfill / Coal Mine CH4 39 $3

Allowance Set-Aside Total 232 $19

International CreditsInternational Credits Total 596 $12

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Observations

• Offsets reduce the cost of policy implementation.• Effective program implementation is key to

ensuring the benefits of offsets.• Key elements include:

– Efficient project certification/processing– Assessment of environmental integrity

• If the tons are additional, offsets provide the same level of climate protection.

• If not, costs are reduced but environmental integrity is compromised.

• Set-asides may increase costs, as compared to offsets, but additionality is not an issue (because the tons used for crediting come from under the cap).

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Contact Information

Dina KrugerDirector, Climate Change Division

U.S. Environmental Protection AgencyE-mail: Kruger.Dina@epa.gov

Telephone: 202-343-9039

www.epa.gov/climatechange