Climate Change
Observations on the Potential Role of Carbon Offsets in Climate Change Legislation Gao ID: GAO-09-456T March 5, 2009Carbon offsets--reductions of greenhouse gas emissions from an activity in one place to compensate for emissions elsewhere--can reduce the cost of regulatory programs to limit emissions because the cost of creating an offset may be less than the cost of requiring entities to make the reductions themselves. To be credible, however, an offset must be additional--it must reduce emissions below the quantity emitted in a business-as-usual scenario--among other criteria. In the U.S., there are no federal requirements to limit emissions and offsets may be purchased in a voluntary market. Outside the U.S., offsets may be purchased on compliance markets to meet requirements to reduce emissions. The Congress is considering adopting a market-based cap-and-trade program to limit greenhouse gas emissions. Such a program would create a price on emissions based on the supply and demand for allowances to emit. Under such a program, regulated entities could potentially substitute offsets for on-site emissions reductions, thereby lowering their compliance costs. Today's testimony summarizes GAO's prior work examining (1) the challenges in ensuring the quality of carbon offsets in the voluntary market, (2) the effects of and lessons learned from the Clean Development Mechanism (CDM), an international offset program, and (3) matters that the Congress may wish to consider when developing regulatory programs to limit emissions.
In an August 2008 report, GAO identified four primary challenges related to the United States voluntary carbon offset market. First, the concept of a carbon offset is complicated because offsets can involve different activities, definitions, greenhouse gases, and timeframes for measurement. Second, ensuring the credibility of offsets is challenging because there are many ways to determine whether a project is additional to a business-as-usual baseline, and inherent uncertainty exists in measuring emissions reductions relative to such a baseline. Related to this, the use of multiple quality assurance mechanisms with varying requirements may raise questions about whether offsets are fully fungible--interchangeable and of comparable quality. Third, including offsets in regulatory programs to limit greenhouse gas emissions could result in environmental and economic tradeoffs. For example offsets could lower the cost of complying with an emissions reduction policy, but this may delay on-site reductions by regulated entities. Fourth, offsets could compromise the environmental certainty of a regulatory program if offsets used for compliance lack credibility. In a November 2008 report, GAO examined the environmental and economic effects of the CDM--an international program allowing certain industrialized nations to pay for offset projects in developing countries--and identified lessons learned about the role of carbon offsets in programs to limit emissions. While the CDM has provided cost containment in a mandatory emissions reduction program, its effects on emissions are uncertain, largely because it is nearly impossible to determine the level of emissions that would have occurred in the absence of each project. Although a rigorous review process seeks to ensure the credibility of projects, available evidence from those with experience in the program suggests that some offset projects were not additional. In addition, the project approval process is lengthy and resource intensive, which significantly limits the scale and cost-effectiveness of emissions reductions. The findings from these two reports illustrate how challenges in the voluntary offset market and the use of offsets for compliance--even in a rigorous, standardized process like the CDM--may compromise the environmental integrity of mandatory programs to limit emissions and should be carefully evaluated. As a result of these challenges, GAO suggested that, as it considers legislation that allows the use of offsets for compliance, the Congress may wish to consider, among other things, directing the establishment of clear rules about the types of projects that regulated entities can use as offsets, as well as procedures to account and compensate for the inherent uncertainty associated with offset projects. Further, GAO suggested that the Congress consider key lessons from the CDM, including the possibility that, (1) due to the tradeoffs involving cost savings and the credibility of offsets, their use in mandatory programs may be, at best, a temporary solution to achieving emissions reductions, and (2) the program's approval process may not be a cost-effective model for achieving emission reductions.
GAO-09-456T, Climate Change: Observations on the Potential Role of Carbon Offsets in Climate Change Legislation
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Testimony:
Before the Subcommittee on Energy and Environment, Committee on Energy
and Commerce, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 9:30 a.m. EST:
Thursday, March 5, 2009:
Climate Change:
Observations on the Potential Role of Carbon Offsets in Climate Change
Legislation:
Statement of John Stephenson, Director:
Natural Resources & Environment:
GAO-09-456T:
GAO Highlights:
Highlights of GAO-09-456T, a testimony before the Subcommittee on
Energy and Environment, Committee on Energy and Commerce, House of
Representatives.
Why GAO Did This Study:
Carbon offsets”reductions of greenhouse gas emissions from an activity
in one place to compensate for emissions elsewhere”can reduce the cost
of regulatory programs to limit emissions because the cost of creating
an offset may be less than the cost of requiring entities to make the
reductions themselves. To be credible, however, an offset must be
additional”it must reduce emissions below the quantity emitted in a
business-as-usual scenario”among other criteria.
In the U.S., there are no federal requirements to limit emissions and
offsets may be purchased in a voluntary market. Outside the U.S.,
offsets may be purchased on compliance markets to meet requirements to
reduce emissions. The Congress is considering adopting a market-based
cap-and-trade program to limit greenhouse gas emissions. Such a program
would create a price on emissions based on the supply and demand for
allowances to emit. Under such a program, regulated entities could
potentially substitute offsets for on-site emissions reductions,
thereby lowering their compliance costs.
Today‘s testimony summarizes GAO‘s prior work examining (1) the
challenges in ensuring the quality of carbon offsets in the voluntary
market, (2) the effects of and lessons learned from the Clean
Development Mechanism (CDM), an international offset program, and (3)
matters that the Congress may wish to consider when developing
regulatory programs to limit emissions.
What GAO Found:
In an August 2008 report, GAO identified four primary challenges
related to the United States voluntary carbon offset market. First, the
concept of a carbon offset is complicated because offsets can involve
different activities, definitions, greenhouse gases, and timeframes for
measurement. Second, ensuring the credibility of offsets is challenging
because there are many ways to determine whether a project is
additional to a business-as-usual baseline, and inherent uncertainty
exists in measuring emissions reductions relative to such a baseline.
Related to this, the use of multiple quality assurance mechanisms with
varying requirements may raise questions about whether offsets are
fully fungible”interchangeable and of comparable quality. Third,
including offsets in regulatory programs to limit greenhouse gas
emissions could result in environmental and economic tradeoffs. For
example offsets could lower the cost of complying with an emissions
reduction policy, but this may delay on-site reductions by regulated
entities. Fourth, offsets could compromise the environmental certainty
of a regulatory program if offsets used for compliance lack
credibility.
In a November 2008 report, GAO examined the environmental and economic
effects of the CDM”an international program allowing certain
industrialized nations to pay for offset projects in developing
countries”and identified lessons learned about the role of carbon
offsets in programs to limit emissions. While the CDM has provided cost
containment in a mandatory emissions reduction program, its effects on
emissions are uncertain, largely because it is nearly impossible to
determine the level of emissions that would have occurred in the
absence of each project. Although a rigorous review process seeks to
ensure the credibility of projects, available evidence from those with
experience in the program suggests that some offset projects were not
additional. In addition, the project approval process is lengthy and
resource intensive, which significantly limits the scale and cost-
effectiveness of emissions reductions.
The findings from these two reports illustrate how challenges in the
voluntary offset market and the use of offsets for compliance”even in a
rigorous, standardized process like the CDM”may compromise the
environmental integrity of mandatory programs to limit emissions and
should be carefully evaluated. As a result of these challenges, GAO
suggested that, as it considers legislation that allows the use of
offsets for compliance, the Congress may wish to consider, among other
things, directing the establishment of clear rules about the types of
projects that regulated entities can use as offsets, as well as
procedures to account and compensate for the inherent uncertainty
associated with offset projects. Further, GAO suggested that the
Congress consider key lessons from the CDM, including the possibility
that, (1) due to the tradeoffs involving cost savings and the
credibility of offsets, their use in mandatory programs may be, at
best, a temporary solution to achieving emissions reductions, and (2)
the program‘s approval process may not be a cost-effective model for
achieving emission reductions.
View [hyperlink, http://www.gao.gov/products/GAO-09-456T] or key
components. For more information, contact John Stephenson, (202) 512-
3841, stephensonj@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to provide observations and matters for
congressional consideration on the potential role of carbon offsets in
climate change legislation drawn from two of our previously issued
reports.[Footnote 1] As the Congress and this Subcommittee consider
legislation to limit greenhouse gas emissions, the potential role of
carbon offsets” reductions or avoidances of greenhouse gas emissions
from an activity in one place to compensate for emissions occurring
elsewhere”is a critical issue that could influence the economic and
environmental outcomes achieved through climate change legislation.
Carbon offsets can be an important cost-containment mechanism in
policies to limit greenhouse gas emissions because the cost of creating
an offset may be less than the cost of requiring regulated entities to
make the reductions themselves. However, ensuring the credibility of
carbon offsets poses challenges because of the inherent uncertainty in
measuring emissions reductions relative to a projected business-as-
usual scenario.
In recent years, major scientific bodies such as the Intergovernmental
Panel on Climate Change and the National Academy of Sciences have
concluded that human activities, including the combustion of fossil
fuels, industrial and agriculture processes, landfills, and some land
use changes, are significantly increasing the concentrations of
greenhouse gases in the atmosphere and, in turn, global temperatures.
Specifically, these activities have increased the amount of carbon
dioxide and other greenhouse gases”including methane, nitrous oxide,
and several synthetic gases”in the atmosphere. This warming will cause
significant changes in sea level, ecosystems, and ice cover, among
other impacts. In recent years, key scientific assessments have
underscored the importance of reducing or stabilizing emissions of
greenhouse gases to mitigate the adverse effects of climate change.
Most of the efforts to limit greenhouse gas emissions under
consideration in the United States generally focus on market-based
programs”such as a cap-and-trade system or a tax”that would create a
price on greenhouse gas emissions. In general, under a cap-and-trade
program, the government would limit the overall amount of greenhouse
gas emissions from regulated entities. These entities would need to
hold allowances for their emissions, and each allowance would entitle
them to emit a specific amount of a greenhouse gas. Under such a
program, the government could sell the allowances, give them away, or
some combination of the two. Regulated entities that find ways to
reduce their emissions to below their allowed limit could sell their
excess allowances to regulated entities that emit more than their
limits, effectively creating a market for allowance trading and
establishing a price for a ton of emissions based on supply and demand.
A cap-and-trade system could allow regulated entities to purchase
offsets in lieu of purchasing additional allowance or reducing
emissions themselves.
Currently, carbon offsets are generated, bought, and sold in two types
of markets. In markets such as the United States, which does not have
binding limits on emissions, the market is referred to as a voluntary
market. Conversely, in the European Union‘s Emissions Trading Scheme
(EU ETS), a program to limit emissions of carbon dioxide from certain
industry sectors, the market is referred to as a compliance market
because regulated entities can use a limited number of carbon offsets
to meet their regulatory limits on emissions. Under the EU ETS,
regulated entities use offsets generated through the Clean Development
Mechanism (CDM), a program under the Kyoto Protocol that allows
countries with binding limits on emissions to implement projects that
reduce or avoid emissions in a developing country that does not have a
binding target under the Protocol. CDM projects earn credits, each
equivalent to 1 metric ton of carbon dioxide that an industrialized
country sponsoring the project can sell or use for compliance with
targets under the Protocol. These credits are known as Certified
Emissions Reductions (CERs). The United States has not ratified the
Kyoto Protocol and is therefore not a source or purchaser of CERs.
My testimony today draws observations from two previously issued GAO
reports that characterized the U.S. voluntary carbon offset market and
identified lessons learned from international climate change programs,
including the CDM. Specifically, this testimony summarizes our prior
work related to (1) challenges in ensuring the quality of offsets in
the voluntary market, (2) the effects of and lessons learned from the
Kyoto Protocol‘s CDM, and (3) matters for congressional consideration
included in those reports that may merit consideration in the
development of climate change policy.
Our work related to voluntary offset market is based on analysis of
literature and data and interviews with stakeholders, including offset
providers, third party verifiers, and other participants in the
voluntary market. To identify the lessons learned from the CDM, we
worked with the National Academy of Sciences to recruit 26 experts
based on their experience and expertise with international climate
change programs and their knowledge of the U.S. policy development
process. We gathered the experts‘ opinions through a questionnaire,
interviewed stakeholders, and reviewed available information. We
conducted our work in accordance with GAO‘s Quality Assurance
Framework, which requires that we plan and perform each engagement to
obtain sufficient and appropriate evidence to meet our stated
objectives and to discuss any limitations in our work. We believe that
the information and data obtained, and the analyses conducted, provided
a reasonable basis for the findings and conclusions in these reports.
Ensuring the Credibility of Carbon Offsets Poses Challenges in the U.S.
Voluntary Market:
Our August 2008 report identified four primary challenges with the U.S.
voluntary market.[Footnote 2] First, the concept of a carbon offset is
complicated because offsets can involve different activities,
definitions, greenhouse gases, and timeframes for measurement. While
most markets involve tangible goods or services, the carbon offset
market involves a product that represents the absence of something”in
this case, an offset equals the absence of one ton of carbon dioxide
emissions or the equivalent quantity of another greenhouse gas.
Project developers produce offsets from a variety of activities such as
sequestration in agricultural soil and forestry projects, and methane
capture. Specifically, carbon offsets can result from three broad types
of activities: (1) reductions of greenhouse gases, which may include
activities such as the capture of methane from landfills or coalmines,
(2) avoidance of greenhouse gases, which may include activities such as
the development of renewable energy infrastructure, and (3)
sequestration, which may involve storing carbon dioxide in geologic
formations or planting trees that take carbon dioxide out of the
atmosphere. See figure 1 for a diagram of common types of carbon offset
projects.
Figure 1: Common Offset Project Types:
[Refer to PDF for image: illustration]
Offset projects:
Emission reduction:
* Fossil fuel reduction:
- Direct reductions, including energy efficiency, fuel switching, and
power plant upgrades;
- Renewable energy;
* Greenhouse gas destruction:
- Methane: Agricultural; Coal; Landfill.
Sequestration:
* Biological:
- Forestry;
- Agricultural soil;
* Geological.
Source: GAO based on Ricardo Bayon, Amanda Hawn, and Katherine
Hamilton, Voluntary Carbon Markets, (Sterling, Virginia: Earthscan).
[End of figure]
An additional complication is that the parties involved in generating,
buying, and selling offsets may also use different definitions of a
carbon offset. The term is often used generically to describe
reductions or avoidances of emissions of any or all of the six primary
greenhouse gases. Furthermore, these six gases vary in their potency or
climate forcing effect, referred to as global warming potential. See
table 1 for a description of U.S. greenhouse gas emissions and global
warming potential. Scientists have developed a concept known as carbon
equivalence that takes these variations into account and provides a way
to describe emissions of different gases in comparable terms. For
example, methane is roughly equivalent in global warming potential to
about twenty one tons of carbon dioxide, the most common greenhouse
gas.
Table 1: Shares and Global Warming Potentials of Greenhouse Gas
Emissions from U.S. Sources, 2006:
Greenhouse gas: Carbon dioxide;
Major sources: Fossil fuel combustion, nonenergy use of fuels, and iron
and steel production;
Percentage of total U.S. greenhouse gas emissions: 85%;
Global warming potential: 1.
Greenhouse gas: Methane;
Major sources: Landfills, natural gas and petroleum systems,
agriculture, and coal mining;
Percentage of total U.S. greenhouse gas emissions: 8%;
Global warming potential: 21.
Greenhouse gas: Nitrous oxide;
Major sources: Agricultural soil management, transportation, and manure
management;
Percentage of total U.S. greenhouse gas emissions: 5%;
Global warming potential: 310.
Greenhouse gas: Synthetic gases (HFCs, PFCs, and SF6)[A];
Major sources: Substitution of ozone-depleting substances, electric
power transmission and distribution, and aluminum production;
Percentage of total U.S. greenhouse gas emissions: 2%;
Global warming potential: 140 to 23,900.
Source: Environmental Protection Agency.
[A] HFCs (hydrofluorocarbons), PFCs (perfluorocarbons), SF6 (sulfur
hexafluoride).
[End of table]
Finally, the timing of an offset‘s creation is complicated. In cases
where offsets are sold before they are produced, the quantity of
offsets generated from projects can be calculated using what is known
as ex-ante (or future value) accounting. On the other hand, when
offsets are sold after they are produced, the quantity of offsets can
be calculated using ex-post accounting. Using future value accounting,
consumers may purchase an offset today, but it may take several years
before the offset is generated. Ensuring the credibility of offsets
purchased before they are produced inherently involves a higher degree
of uncertainty than purchasing an offset that has already been
generated.
The second challenge is ensuring the credibility of offsets. Our prior
work identified four general criteria for credible carbon offsets”they
must be additional, quantifiable, real, and permanent. A carbon offset
project is generally considered ’additional“ if it decreases emissions
of greenhouse gases below the quantity that would have been emitted in
a projected business-as-usual scenario. ’Quantifiable“ means the
reductions can be measured, and ’real“ means the reductions can be
verified. ’Permanent“ means the emissions reduced, avoided, or
sequestered by a project will not be released into the atmosphere in
the future.
Providing assurance that offsets are credible is inherently challenging
because it involves measuring the reductions achieved through an offset
project against a projected baseline of what would have occurred in its
absence. For example, if a facility that emitted 200 tons of carbon
dioxide per year implemented a project that reduced its emissions by
100 tons, it may have created 100 tons of offsets. See figure 2 for a
hypothetical depiction of an offset project measured against a
projected business-as-usual scenario.
Figure 2: Hypothetical Depiction of Offset Project Measured against
Business-as-Usual Scenario:
[Refer to PDF for image: illustration]
This figure is a line graph depicting projected business-as-usual
emission over the four year life of a project versus emissions with
offset project. Emissions are depicted in tons per year on a gradually
increasing basis.
Source: GAO.
[End of figure]
Our prior work found that additionality is fundamental to the
credibility of offsets because only offsets that are additional to
business-as-usual activities result in new environmental benefits.
Several stakeholders we interviewed as part of our study said that
there is no correct technique for determining additionality because it
requires comparison of expected reductions against a projected business-
as-usual emissions baseline. Determining additionality is inherently
uncertain because, it may not be possible to know what would have
happened in the future had the projects not been undertaken. There are
many ways to estimate whether projects are additional, and many
stakeholders said that applying a single test is too simplistic because
every project is different from others and operates under different
circumstances.
There are many quality assurance mechanisms, commonly described
collectively as ’standards,“ for assuring the credibility of carbon
offsets in the U.S. voluntary market, but few standards, if any, that
cover the entire supply chain. The proliferation of standards has
caused confusion in the market, and the existence of multiple quality
assurance mechanisms with different requirements raises questions about
the quality of offsets available on the voluntary market, according to
many stakeholders. The lack of standardization in the U.S. market may
also make it difficult for consumers to determine whether offsets are
fully fungible”interchangeable and of comparable quality”a
characteristic of an efficient commodity market. The term ’carbon
offset“ implies a uniform commodity, but offsets may originate from a
wide variety of project types based on different quantification and
quality assurance mechanisms. Because offsets are not all the same, it
may be difficult for consumers to understand what they purchase.
While the concept of carbon offsets rests on the notion that a ton of
carbon reduced, avoided, or sequestered is the same regardless of the
activity that generated the offset, some stakeholders believe that
certain types of projects are more credible than others. Specifically,
the stakeholders identified methane capture and fuel-switching projects
as the most credible, and renewable energy certificates (REC) and
agricultural and rangeland soil carbon sequestration as less credible.
[Footnote 3] The stakeholders‘ views on the credibility of different
project types may stem from the fact that methane and fuel-switching
projects are relatively simple to measure and verify, while other
projects such as RECs, forestry, and agricultural and rangeland soil
carbon projects face challenges related to additionality, measurement,
and permanence. With respect to agricultural and rangeland
sequestration and forestry, certain stakeholders said it is difficult
to accurately measure emissions reductions from these types of
projects. In addition, forestry offset projects may not be permanent
because disturbances such as insect outbreaks and fire can return
stored carbon to the atmosphere.
Third, there are economic and environmental tradeoffs associated with
using offsets in a regulatory program to limit greenhouse gas
emissions. In many cases, regulated entities may find it economically
advantageous to buy offsets instead of reducing emissions themselves.
The Environmental Protection Agency (EPA) has stated that the cost of
compliance with mitigation policies under consideration by the Congress
decreases substantially as the use of offsets increases. Specifically,
EPA‘s analysis of the Climate Security Act of 2008 (S. 2191),
introduced in the last Congress, reported that if the use of domestic
and international offsets is unlimited, then compliance costs fall by
an estimated 71 percent compared to the bill as written. Alternatively,
the price increases by an estimated 93 percent compared to the bill as
written if no offsets are allowed. Other studies show similar results.
In general, the carbon price is lower in quantitative models of a U.S.
compliance system when domestic and international offsets are widely
available and their use is unrestricted. In the short term, lower
prices make compliance with a policy to reduce emissions less
expensive.
Multiple stakeholders we interviewed as part of our study said that
including offsets in a compliance scheme could slow investment in
certain emissions reduction technologies in regulated sectors and
lessen the motivation of market participants to reduce their own
emissions. According to some stakeholders, if more cost-effective
offsets are available as compliance tools, regulated sources may delay
making investments to reduce emissions internally, an outcome that
could ultimately slow the development of, and transition to, a less
carbon-intensive economy.
Fourth, allowing the use of offsets could compromise the environmental
certainty of a regulatory program to limit emissions of greenhouse
gases if the offsets do not meet requirements that underpin their
integrity. If a significant number of nonadditional offsets enter the
market, emissions may rise beyond levels intended by the scheme,
according to some stakeholders. Nonadditional offsets could thus
increase uncertainty about achieving emissions reduction goals. This
concern underscores the importance of using quality assurance
mechanisms to ensure the credibility of any offsets allowed into a
compliance scheme. Using offsets in a compliance scheme could also
increase administrative costs because of increased government oversight
of quality assurance mechanisms used to ensure the credibility of
offsets.
Concerns associated with using offsets for compliance in a regulatory
system to limit emissions could be minimized by restricting the use of
offsets or including policy options for enhancing oversight of the
market such as applying discounts or imposing insurance requirements on
offsets with greater uncertainty or potential for failure. Certain
stakeholders suggested imposing limits on the use of offsets in a
compliance scheme to address some of these challenges, but stakeholders
held different opinions about the potential effectiveness of this
approach. Some said it may be necessary to place restrictions on the
use of offsets in order to achieve internal emissions reductions from
regulated sources. If all the effort to reduce emissions is in the form
of offsets, then the compliance system may not provide the price
signals necessary for long-term investment in technology at domestic
industrial facilities and power plants, according to multiple
stakeholders. They said that domestic abatement is central to achieving
the long-term goal of any emissions reduction system. However, other
stakeholders said that incorporating offsets into a compliance scheme
will enable greater overall climate benefits to be achieved at a lower
cost, as long as offsets are additional and are not double-counted.
The CDM‘s Environmental and Economic Effects Provide Important Lessons
About the Role of Carbon Offsets in Mandatory Programs to Limit
Emissions:
Our November 2008 report discussed the environmental and economic
effects of the CDM and identified lessons learned about the role of
carbon offsets in mandatory programs to limit emissions.[Footnote 4]
First, with respect to environmental effects, the overall effect of the
CDM on international emissions is uncertain, largely because it is
nearly impossible to determine the level of emissions that would have
occurred in the absence of each offset project. The CDM imposes a
rigorous set of review requirements for applicants to complete before
obtaining project credits, known as Certified Emissions Reductions
(CERs), which can be sold or used for compliance with targets under the
Kyoto Protocol. Applicants must demonstrate, among other things, that
the project would not have occurred without the CDM and to obtain
approval of the Executive Board, a regulatory body established by the
Kyoto Protocol.[Footnote 5] See figure 3 for the resources and time
associated with each step in the review process.
Figure 3: CDM Project Cycle:
[Refer to PDF for image: illustration]
Project Initiation: Estimated Cost - $80,000-$230,000:
Estimated time: 1 year:
Project Preparation:
Development of project design documents (by Project developer);
Validation:
Evaluation of documents to ensure they meet CDM criteria (by Accredited
third-party auditor [Designated Operational Entity]); (Host Country
Approval);
Registration:
Formal acceptance of validated project into the CDM (by CDM oversight
board [Executive Board]).
Project Operations: Annual Estimated Cost - First year: $20,000-
$35,000; Subsequent years; $15,000-$25,000:
Estimated time: 1 year (from registration to first credit issuance):
Monitoring:
Ongoing evaluation of project performance (by Project developer);
Verification and Certification:
Ongoing review and official recognition of emission reductions by
Accredited third-party auditor [Designated Operational Entity]);
CER Issuance:
Distribution of credits for achieved reductions (by CDM oversight board
[Executive Board]).
Source: GAO analysis of UNFCCC documents and UNDP data.
[End of figure]
This resource- and time-intensive process, however, has involved
challenges. While the CDM project review process may provide greater
assurance of credible projects, available evidence suggests that some
credits have been issued for emission reduction projects that were not
additional. Because additionality is based on projections of what would
have occurred in the absence of the CDM, which are necessarily
hypothetical, it is impossible to know with certainty whether any given
project is additional. Researchers have reported that some portion of
projects registered under the CDM have not been additional, and
although there is little empirical evidence to support a precise
figure, some studies have concluded that a substantial number of
nonadditional projects have received credits.[Footnote 6]
Second, with respect to economic effects, specifically opportunities
for cost-effective reductions, available information and experts
indicate that the CDM has enabled industrialized countries to make
progress toward achieving their emissions targets at less cost and has
involved developing countries in these efforts. For example, facilities
covered under the European Union‘s Emissions Trading Scheme (ETS) may
invest in CERs as a lower-cost alternative to reducing emissions on-
site or purchasing allowances under the ETS.[Footnote 7] Further, the
availability of CERs may produce lower allowance prices than would be
observed under a no-offset scenario. As a result, the CDM can
potentially reduce firms‘ compliance costs regardless of whether these
firms choose to purchase CERs. See figure 4 for information about the
number and types of offset projects in CDM pipeline. The first chart in
figure 4 shows the most common types of projects and their growth over
time while the second chart shows the volume of credits expected to be
produced through 2012.
Figure 4: CDM Pipeline:
[Refer to PDF for image: two stacked line graphs]
Cumulative number of projects[A] added to pipeline:
Year: 2003;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
1;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 2;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 0;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 0;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 2;
Total: 5.
Year: 2004;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
38;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 18;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 2;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 1;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 2;
Total: 61.
Year: 2005;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
313;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 126;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 62;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 22;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 11;
Total: 534.
Year: 2006;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
801;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 328;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 160;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 52;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 33;
Total: 1374.
Year: 2007;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
1705;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 515;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 419;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 98;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 73;
Total: 2810.
Year: 2008;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
2465;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 641;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 607;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 132;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 95;
Total: 3940.
Volume of 2012 expected CERs, in millions[A]:
Year: 2003;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
0.11;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 6.82;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 0;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 0;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 38.60;
Total: 45.53.
Year: 2004;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
14.5;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 33.5;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 0.5;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 0.1;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 38.6;
Total: 87.2.
Year: 2005;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
124.4;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 164.4;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 29.8;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 9.6;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 392.4;
Total: 720.6.
Year: 2006;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
310.7;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 328.5
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 87.1;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 91;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 682.8;
Total: 1503.1.
Year 2007;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
678.1;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 462.3;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 253.7;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 177.5;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 746.7;
Total: 2318.3.
Year: 2008;
Renewable energy (i.e., using wind, solar, or hydropower technologies):
928.3;
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill
waste through composting or collecting methane from coal mines): 538.7;
Energy efficiency (i.e., increasing building efficiency or providing
energy-efficient appliances): 336.7;
Fuel switching (i.e., switching fuels from more carbon-intensive
options, such as coal, to less carbon-intensive options, such as
natural gas): 207.2;
Industrial gas destruction (i.e., destroying waste gases used in the
production of refrigerants, such as HFC-23): 768.6;
Total: 2779.5.
Source: GAO analysis of UNEP Risoe Center data (2008).
[End of figure]
The demand for CERs has also provided developing countries that do not
have emissions targets under the Kyoto Protocol with an economic
incentive to pursue emission reduction activities. However, while CDM
projects have been established in over 70 developing countries, most
benefits have thus far accrued to fast-growing nations such as China
and India. In fact, these two countries host over half of all
registered projects. Conversely, countries in Africa and the Middle
East have seen little CDM-related investment.
We also reported that investors in the CDM market face higher risks,
depending on, for example, whether the rights to the CDM credits are
purchased prior to actual issuance of the credits.[Footnote 8] Because
the credits in this case are not issued until the project is completed
and emissions are verified, there is some risk that the project will
not produce the expected number of credits. For example, the CDM‘s
Executive Board may delay or reject a project and even approved
projects might not be built on schedule or within budget. Further, the
amount of actual reductions may differ from what was planned”for
example, wind energy projects may generate more or less electricity
depending on weather conditions. One study shows that projects reaching
the registration phase tended to yield only about 76 percent of their
forecasted CDM credits.
Our review of the CDM experience, in particular using offsets in a
compliance program, revealed that reducing compliance costs while
maintaining overall environmental integrity can prove difficult. Using
available information, stakeholder interviews, and our experts‘
responses to a questionnaire, we identified three key lessons learned
about the use of offsets in programs to limit emissions.
First, the use of offsets can compromise the integrity of programs
designed to reduce greenhouse gas emissions. In theory, if all offsets
were real and additional, their use in a mandatory program to limit
emissions shifts the location of the emission reductions and would not
negatively affect the scheme‘s integrity. However, as many experts
mentioned, it is nearly impossible to demonstrate project additionality
with certainty. Because the CDM is primarily used by countries to
comply with the Kyoto Protocol‘s binding targets and the ETS emissions
caps, credits that do not represent real and additional emission
reductions do not represent progress toward these targets or caps. If a
significant number of nonadditional credits are allowed into the
program, for instance, these credits may allow covered entities to
increase their emissions without a corresponding reduction in a
developing country. This can cause emissions levels to rise above the
targets set by the program, introducing uncertainty as to the actual
level of reductions, if any, achieved by the program. As a result, this
use of nonadditional offsets negates one of the advantages”greater
certainty about the level of emissions”of a cap-and-trade program
compared to other market-based programs.
Some research has advocated limiting the use of offsets in compliance
schemes as a way to reduce the environmental risk of nonadditional
projects; however, our research shows that even restricted offset use
can have broad environmental implications. In particular, the
experience of the European Union‘s ETS illustrates the importance of
considering offset limits in the context of a country‘s overall
reduction effort, in addition to its overall emissions target. As noted
previously, limiting offsets based on the overall emissions cap”for
example, allowing countries to meet 12 percent of their emissions cap
with offsets”may mean in practice that most or all reductions occur
outside of that country‘s borders. If most reductions occur elsewhere,
there may be little incentive for entities under the compliance program
to make infrastructure changes or other technological investments.
Furthermore, the negative environmental effects of nonadditional
offsets increase as the number of imported credits rises. On the other
hand, stringent limits can ensure that a certain portion of abatement
activity occurs at home and help secure a carbon price that is high
enough to spur investment in low-carbon technologies; limits also can
lessen the impact of nonadditional credits. If limits are imposed,
therefore, it is important that such limits are sufficiently stringent
and are based on actual expected emission reductions, not the overall
emissions cap.
Second, carbon offset programs involve important tradeoffs and the use
of such programs may be, at best, a temporary solution to addressing
climate change. While the CDM may encourage developing countries to
participate in emission reduction activities, it also may increase
their reliance on external funding for such activities. According to
several experts, the CDM effectively deters efforts that fall outside
the scope of creditable activities. Moreover, as many of our experts
pointed out, the concept of additionality presents a difficult
regulatory problem. Rigorous project reviews may help ensure some
degree of credit quality, but also can increase the overall cost of the
program. Overall, many experts suggested that the CDM has not yet
achieved an effective balance of these priorities.
There is general consensus among climate change experts that both
industrialized and developing countries must be engaged in emission
reduction efforts to meet international emission reduction goals. In
light of these circumstances, several experts we consulted noted that
international offset programs such as the CDM can help to engage
developing nations and encourage emission reductions in areas that may
not otherwise have incentives to do so. Several experts also said that
the CDM helps stimulate interest in international climate change
dialogue and may help facilitate progress toward future emission
reduction commitments.
Given these tradeoffs, some observers have said the best approach may
be to gradually incorporate developing nations under a global emission
reduction plan or move toward full-fledged, worldwide emission trading.
However, political and institutional capacity may make worldwide
emission trading an unlikely possibility. As a result, the CDM may be
best used as a transition tool to help developing nations move toward a
more comprehensive climate change strategy.
Third, the CDM‘s approval process may not be a cost-effective model for
achieving emission reductions. Most experts expressed dissatisfaction
with this approach, which requires individual review and additionality
assessments for each project. Observers also have described the project-
by-project approach as inefficient, noting that the long, uncertain
process can create risks and costs for investors. Host country
stakeholders we spoke with generally agreed with this assessment,
saying that the process was bureaucratic and overly burdensome. Indeed,
the length and administrative complexity of the process, as well as the
shortage of available emission verifiers, has resulted in bottlenecks
and delays as the CDM‘s administrative structure has struggled to keep
up with the number of projects. Moreover, the transaction costs and
investment risks associated with CDM projects can reduce their
effectiveness as a cost-containment mechanism when linked to compliance
schemes. While the CDM‘s intensive review process may help ensure some
degree of environmental integrity, it also can limit the number of
potential projects in the system. For example, the cost to initiate a
CDM project and usher it through the approval process may be too high
for certain projects, rendering them unviable.
The CDM‘s oversight board has taken a number of actions to help improve
the process over time, but many experts said that the program does not
yet provide a sufficient level of quality assurance. Also, it is
unlikely under the current approach that the CDM will achieve large-
scale reductions or significantly impact global emissions in the
future. The scale of the CDM is limited not only by the extensive set
of requirements; it also is constrained by the fundamental time and
resource limitations of the 10-member Executive Board and its
subsidiary panels, and the shortage of accredited auditing firms to
validate projects and verify emissions. Even assuming all projects are
real and additional, it is likely that reductions from these projects
will only represent about 2 percent to 3 percent of annual energy-
related carbon dioxide emissions in China and India, and less than 1
percent in Africa.[Footnote 9] Finally, the design features of an
offset program such as the CDM can be fine-tuned to help maximize their
effectiveness, but the underlying challenges of determining
additionality, for example, may not be eliminated completely.
While some of the experts who participated on our panel said that
offset programs on their own are unlikely to be sufficient to help curb
developing country emissions, others stated that reforming or
supplementing the CDM could make a broader impact worldwide. Experts
provided a number of potential improvements to the CDM, many of which
would represent fundamental changes to the current mechanism‘s
structure and procedures. For example, moving toward a sectoral
approach under the CDM would involve crediting emission reductions in
relation to baselines set for different economic sectors, such as a
benchmark based on the best available technology for the industry,
rather than making a project-specific determination of additionality. A
sectoral approach would eliminate the need for project-specific
determination of additionality, because credits are awarded based on
performance in relation to a predetermined baseline. However, this
approach requires reliable historic emissions data to set baselines and
the technical capacity to monitor emissions, requirements which may
prove problematic for some developing countries.
In addition, a few experts recommended discounting CDM credits. For
example, with a discount rate of 30 percent, a project that is expected
to reduce carbon dioxide by 100 metric tons would only receive 70
credits. While discounting may not help screen out nonadditional
projects, it can help mitigate the environmental consequences of
nonadditional credits. Our November 2008 report discusses these and
other alternatives to the CDM in greater detail.[Footnote 10]
GAO‘s Reviews of Carbon Offset Markets Have Identified Matters for
Congressional Consideration in Developing Climate Change Legislation:
Our reports on two different markets for carbon offsets”the U.S.
voluntary market and the CDM under the Kyoto protocol”have identified
matters for the Congress to consider as it deliberates legislation to
limit greenhouse gas emissions. While carbon offsets have the potential
to lower compliance costs for entities that could be affected by
regulatory limits on emissions, their use for compliance in a mandatory
emissions reduction scheme could undermine the program‘s integrity if
the offsets lack credibility.
Our report on the voluntary market for offsets in the United States
highlights the complexity and challenges with a largely unregulated
market that lacks transparency and provides market participants with
limited information on the credibility of offsets. Alternatively, our
work on CDM identifies challenges with using carbon offsets in a
mandatory emissions reduction program despite the use of rigorous
quality assurance procedures. The experience with both markets
demonstrates the importance of ensuring the credibility of offsets, but
this remains a challenge for both markets because of the inherent
uncertainty associated with estimating emissions reductions relative to
projected business-as-usual baselines. Using offsets in a mandatory
emissions reduction program would involve fundamental trade-offs
between offset credibility and compliance costs.
As we have reported, to the extent that the Congress chooses to develop
a program that limits greenhouse gas emissions while allowing the use
of carbon offsets for compliance, it may wish to establish (1) clear
rules about the types of offset projects that regulated entities can
use for compliance, as well as standardized quality assurance
mechanisms for these allowable project types; (2) procedures to account
and compensate for the inherent uncertainty associated with offset
projects, such as discounting or overall limits on the use of offsets
for compliance; (3) a standardized registry for tracking the creation
and ownership of offsets; and (4) procedures for amending the offset
rules, quality assurance mechanisms, and registry, as necessary, based
on experience and the availability of new information over time.
In addition, our report on international carbon offset programs
generated matters for consideration that may prove useful if the
Congress looks to the CDM as a model for an offset program.
Specifically, Congress may wish to consider that (1) the existing
program may not be the most direct or cost-effective means of achieving
reductions in emissions, (2) the use of carbon offsets in a cap-and-
trade system can undermine the system‘s integrity, given that it is not
possible to ensure that every credit represents a real, measurable, and
long-term reduction in emissions; and (3) while proposed reforms may
significantly improve the CDM‘s effectiveness, carbon offsets involve
fundamental tradeoffs and may not be a reliable long-term approach to
climate change mitigation.
Contact and Staff Acknowledgments:
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this statement. For further
information about this testimony, please contact John Stephenson,
Director, Natural Resources and Environment at (202) 512-3941 or
stephensonj@gao.gov. Key contributors to this statement were Michael
Hix (Assistant Director), Kate Cardamone, Janice Ceperich, Jessica
Lemke, Alison O‘Neill, and Joe Thompson. Cindy Gilbert, Anne Johnson,
Richard P. Johnson, Ardith A. Spence, and Lisa Vojta also made
important contributions.
[End of section]
Footnotes:
[1] GAO, Carbon Offsets: The U.S. Voluntary Market is Growing, but
Quality Assurance Poses Challenges for Market Participants, [hyperlink,
http://www.gao.gov/products/GAO-08-1048] (Washington, D.C.: Aug. 29,
2008), and GAO, International Climate Change Programs: Lessons Learned
from the European Union‘s Emissions Trading Scheme and the Kyoto
Protocol‘s Clean Development Mechanism, [hyperlink,
http://www.gao.gov/products/GAO-09-151] (Washington, D.C.: Nov. 18,
2008).
[2] GAO, Carbon Offsets: The U.S. Voluntary Market is Growing, but
Quality Assurance Poses Challenges for Market Participants, [hyperlink,
http://www.gao.gov/products/GAO-08-1048] (Washington, D.C.: Aug. 29,
2008).
[3] Renewable energy certificates certify that a certain quantity of
electricity has been generated from a qualifying type of renewable
generation technology.
[4] See GAO, International Climate Change Programs: Lessons Learned
from the European Union‘s Emissions Trading Scheme and the Kyoto
Protocol‘s Clean Development Mechanism, [hyperlink,
http://www.gao.gov/products/GAO-09-151] (Washington, D.C.: Nov. 18,
2008).
[5] Applicants seeking CDM credits must demonstrate the proposed
projects are additional” i.e., that the project would not have occurred
without the CDM due to technological, economic, or other barriers. As
part of this demonstration, applicants estimate the reductions achieved
by the project using a projected business-as-usual baseline. An
external party must validate documentation and verify emission
reductions. In addition to Executive Board approval, projects must
undergo review by national officials of the country where the project
occurs before credits are issued. Once approved, emissions from each
project are monitored periodically in accordance with procedures
outlined in the initial project proposal. Credits are issued only for
emission reductions that have been verified by a separate, independent
auditing firm.
[6] See, for example, Schneider, Lambert, Is the CDM fulfilling it
environmental and sustainable development objectives? An evaluation of
the CDM and options for improvement (Berlin, Germany, 2007).
[7] Covered entities in the ETS need to hold allowances for their
emissions, and each allowance entitles them to emit a specific amount
of carbon dioxide. Under the ETS, covered entities have been able to
use certain CDM credits in addition to ETS allowances to cover their
emissions.
[8] Known as ’primary CERs,“ these credits involve a higher level of
uncertainty because most purchases involve forward contracts”the buyer
purchases the rights to future credits instead of the credits
themselves. See GAO-09-151 for more detailed discussion.
[9] Analysis uses country-specific emissions data from IEA, Key World
Energy Statistics (2008) as well as data on expected CERs from the UNEP
Risoe CDM/JI Pipeline Analysis and Database, Oct. 1, 2008. IEA data for
each region are based on 2006 indicators and include emissions from
fuel combustion only.
[10] See [hyperlink, http://www.gao.gov/products/GAO-09-151].
[End of section]
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