Memo on H.R. 2454: Offsets

Nicholas Institute Discussion Memo on H.R. 2454, American Clean Energy and Security Act of 2009

Author(s): Lydia P. Olander and Christopher Galik

Published: August 2009

download: memo (.pdf) >

What it does? In cap-and-trade systems, uncapped or unregulated sectors can reduce greenhouse gas emissions or increase carbon sequestration. Voluntary greenhouse gas emission reductions or sequestered carbon by uncapped entities can then be translated into a commodity (i.e., a carbon offset) which capped entities can then purchase to satisfy their emission compliance requirements if making internal reductions is too difficult and/or cost-prohibitive 

Why it is necessary? Generally speaking, the inclusion of offsets in a cap and trade system can allow greater emission reductions at the same cost. They provide mitigation in sectors outside the cap, reduce the overall cost of compliance, engage additional constituencies, and provide additional environmental co-benefits (e.g., habitat and water quality improvement). In the particular case of the Waxman-Markey discussion draft, EPA analysis suggests that including offsets, particularly international offsets, can cutting the allowance price by half.