Climate Change Issues
Options for Addressing Challenges to Carbon Offset Quality Gao ID: GAO-11-345 February 15, 2011Carbon offsets are reductions in greenhouse gas emissions in one place to compensate for emissions elsewhere. Examples of offset projects include planting trees, developing renewable energy sources, or capturing emissions from landfills. Recent congressional proposals would have limited emissions from utilities, industries, or other "regulated entities," and allowed these entities to buy offsets. Research suggests that offsets can significantly lower the cost of a program to limit emissions because buying offsets may cost regulated entities less than making the reductions themselves. Some existing international and U.S. regional programs allow offsets to be used for compliance with emissions limits. A number of voluntary offset programs also exist, where buyers do not face legal requirements but may buy offsets for other reasons. Prior GAO work found that it can be difficult to ensure offset quality--that offsets achieve intended reductions. One quality criterion is that reductions must be "additional" to what would have occurred without the offset program. This report provides information on (1) key challenges in assessing the quality of different types of offsets and (2) options for addressing key challenges associated with offset quality if the U.S. adopted a program to limit emissions. GAO reviewed relevant literature and interviewed selected experts and such stakeholders as project developers, verifiers, and program officials. This report contains no recommendations.
According to experts, stakeholders, and available information, key challenges in assessing the quality of offset projects include the following: (1) Additionality. According to many experts and stakeholders GAO interviewed, additionality is the primary challenge to offset quality. Assessing additionality is difficult because it involves determining what emissions would have been without the incentives provided by the offset program. Studies suggest that existing programs have awarded offsets that were not additional. (2) Measuring and managing soil and forestry offsets. For projects that store carbon in soils and forests, it is challenging to estimate the amount of carbon stored and to manage the risk that carbon may later be released by, for example, fires or changes in land management. Some studies have estimated that projects involving soils and forestry could constitute the majority of offsets under a U.S. program. (3) Verification. Experts and stakeholders said that verifying offsets in existing markets has presented several challenges. In particular, project developers and offset buyers may have few incentives to report information accurately or to investigate offset quality. According to experts, stakeholders, and available information, policymakers have several options to choose from in addressing challenges with offset quality. These approaches often involve fundamental trade-offs, such as increasing the cost of offsets. Nevertheless, some research indicates that including offsets in a program to limit emissions could provide substantial cost savings that would not be provided by a program without offsets. (1) Additionality. One way to assess additionality is project-by-project approval, a lengthy process that considers the individual circumstances of each project. Another approach is to group projects into categories and apply a standard to the entire group--for example, award offsets to all electricity generators with emissions below a certain level. While such standards may be less subjective and less costly to administer, they may also require a considerable up-front investment to collect data for various project types. (2) Measuring and managing soil and forestry offsets. To address these challenges a program could, for example, adjust the amount of offsets awarded based on measurement uncertainty, or establish a "buffer pool" of offsets to compensate for any re-released carbon. (3) Verification. To address this challenge, a program could, for example, hold verifiers liable for problems with offsets they have approved, contract with independent verifiers, and provide for rigorous oversight. Experts also identified options that could address multiple quality assurance challenges, such as limiting the quantity or type of offsets that can be used for compliance. However, limiting the supply of offsets could also raise their cost. Regardless of the program design, many experts said an offset program should clearly identify goals, align incentives with goals, promote transparency, and continuously evaluate progress.
GAO-11-345, Climate Change Issues: Options for Addressing Challenges to Carbon Offset Quality
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United States Government Accountability Office:
GAO:
Report to the Chairman, Committee on Oversight and Government Reform,
House of Representatives:
February 2011:
Climate Change Issues:
Options for Addressing Challenges to Carbon Offset Quality:
GAO-11-345:
GAO Highlights:
Highlights of GAO-11-345, a report to the Chairman, Committee on
Oversight and Government Reform, House of Representatives.
Why GAO Did This Study:
Carbon offsets are reductions in greenhouse gas emissions in one place
to compensate for emissions elsewhere. Examples of offset projects
include planting trees, developing renewable energy sources, or
capturing emissions from landfills. Recent congressional proposals
would have limited emissions from utilities, industries, or other
’regulated entities,“ and allowed these entities to buy offsets.
Research suggests that offsets can significantly lower the cost of a
program to limit emissions because buying offsets may cost regulated
entities less than making the reductions themselves.
Some existing international and U.S. regional programs allow offsets
to be used for compliance with emissions limits. A number of voluntary
offset programs also exist, where buyers do not face legal
requirements but may buy offsets for other reasons. Prior GAO work
found that it can be difficult to ensure offset quality”that offsets
achieve intended reductions. One quality criterion is that reductions
must be ’additional“ to what would have occurred without the offset
program.
This report provides information on (1) key challenges in assessing
the quality of different types of offsets and (2) options for
addressing key challenges associated with offset quality if the U.S.
adopted a program to limit emissions. GAO reviewed relevant literature
and interviewed selected experts and such stakeholders as project
developers, verifiers, and program officials. This report contains no
recommendations.
What GAO Found:
According to experts, stakeholders, and available information, key
challenges in assessing the quality of offset projects include the
following:
* Additionality. According to many experts and stakeholders GAO
interviewed, additionality is the primary challenge to offset quality.
Assessing additionality is difficult because it involves determining
what emissions would have been without the incentives provided by the
offset program. Studies suggest that existing programs have awarded
offsets that were not additional.
* Measuring and managing soil and forestry offsets. For projects that
store carbon in soils and forests, it is challenging to estimate the
amount of carbon stored and to manage the risk that carbon may later
be released by, for example, fires or changes in land management. Some
studies have estimated that projects involving soils and forestry
could constitute the majority of offsets under a U.S. program.
* Verification. Experts and stakeholders said that verifying offsets
in existing markets has presented several challenges. In particular,
project developers and offset buyers may have few incentives to report
information accurately or to investigate offset quality.
According to experts, stakeholders, and available information,
policymakers have several options to choose from in addressing
challenges with offset quality. These approaches often involve
fundamental trade-offs, such as increasing the cost of offsets.
Nevertheless, some research indicates that including offsets in a
program to limit emissions could provide substantial cost savings that
would not be provided by a program without offsets.
* Additionality. One way to assess additionality is project-by-project
approval, a lengthy process that considers the individual
circumstances of each project. Another approach is to group projects
into categories and apply a standard to the entire group”for example,
award offsets to all electricity generators with emissions below a
certain level. While such standards may be less subjective and less
costly to administer, they may also require a considerable up-front
investment to collect data for various project types.
* Measuring and managing soil and forestry offsets. To address these
challenges a program could, for example, adjust the amount of offsets
awarded based on measurement uncertainty, or establish a ’buffer pool“
of offsets to compensate for any re-released carbon.
* Verification. To address this challenge, a program could, for
example, hold verifiers liable for problems with offsets they have
approved, contract with independent verifiers, and provide for
rigorous oversight.
Experts also identified options that could address multiple quality
assurance challenges, such as limiting the quantity or type of offsets
that can be used for compliance. However, limiting the supply of
offsets could also raise their cost. Regardless of the program design,
many experts said an offset program should clearly identify goals,
align incentives with goals, promote transparency, and continuously
evaluate progress.
View [hyperlink, http://www.gao.gov/products/GAO-11-345] or key
components. For more information, contact David Trimble at (202) 512-
3841 or trimbled@gao.gov.
[End of section]
Contents:
Letter:
Background:
Key Offset Quality Challenges:
Several Options Could Address Key Offset Quality Challenges, but Most
Involve Trade-offs:
Appendix I: Scope and Methodology:
Appendix II: List of Experts and Stakeholders:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Descriptions of Offset Programs and Standards GAO Reviewed:
Table 2: Comparison of Project-by-Project and Standardized Approaches
to Additionality Identified by Experts:
Table 3: Eligibility of Select Offset Project Types in Select Programs:
Figure:
Figure 1: CDM Project Cycle:
Abbreviations:
ANSI: American National Standards Institute:
CAR: Climate Action Reserve:
CBO: Congressional Budget Office:
CCX: Chicago Climate Exchange:
CDM: Clean Development Mechanism:
DNV: Det Norske Veritas:
EPA: Environmental Protection Agency:
EU ETS: European Union Emissions Trading System:
ISO: International Standards Organization:
REDD: Reduced Emissions from Deforestation and Degradation:
RGGI: Regional Greenhouse Gas Initiative:
UFS: Voluntary Carbon Standard:
UNFCCC: United Nations Framework Convention on Climate Change:
VCS: Voluntary Carbon Standard:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
February 15, 2011:
The Honorable Darrell Issa:
Chairman:
Committee on Oversight and Government Reform:
House of Representatives:
Dear Mr. Chairman:
In the past year, Congress has considered proposals to limit
greenhouse gas emissions from many sectors of the economy, including
electric power generation, transportation, and manufacturing.[Footnote
1] Most of these proposals have focused on market-based mechanisms
such as cap-and-trade, a system the United States already uses to
reduce air pollution that causes acid rain. Under a cap-and-trade
program, the government would place an overall cap on emissions and
issue tradable permits. Entities covered by the program would have to
surrender enough permits for all of their emissions at the end of
specified time periods. Such market-based programs could forestall
some of the potentially adverse effects of climate change at less cost
than other options to regulate emissions. However, a program that
reduces emissions could also increase the cost of activities that
generate emissions, such as the burning of fossil fuels. As a result,
cap-and-trade proposals have also included various provisions aimed at
limiting costs to businesses and consumers.
One potential cost containment mechanism for a cap-and-trade program
is the use of carbon offsets--activities that reduce emissions in one
place in order to compensate for emissions occurring elsewhere.
[Footnote 2] Examples of offset projects include (1) planting trees;
(2) capturing greenhouse gases from mines, landfills, and agricultural
operations; (3) reducing tilling to store, or "sequester," more carbon
in agricultural soil; (4) installing more energy-efficient equipment;
and (5) generating renewable energy from hydroelectric, wind, or solar
power. Such projects produce tradable credits, or "offsets," which can
be purchased by regulated entities and used to comply with emissions
caps.[Footnote 3] In principle, allowing the use of offsets would
provide regulated entities with greater flexibility to make emissions
reductions at less cost. Regulated entities may find that it is
cheaper to reduce emissions by purchasing an offset than it is to
reduce their own emissions or to purchase permits from another
regulated entity. For example, it may cost less to pay a landfill
owner or operator to capture greenhouse gas emissions than to reduce
emissions at a power plant.
U.S. legislation proposed in the past year would have created a cap-
and-trade program that allowed regulated entities to use offsets to
comply with emissions caps, as does the European Union Emissions
Trading System (EU ETS) and other existing programs that limit
greenhouse gas emissions.[Footnote 4] Economic research indicates that
including offsets in a cap-and-trade program could provide substantial
cost savings. For example, in an analysis of the American Clean Energy
Security Act, Congressional Budget Office (CBO) estimated that from
2012 through 2050, the annual net cost of a program allowing offsets
would be about 70 percent less than a program without offsets.
[Footnote 5] The extent of any savings is uncertain and would depend
on many factors, including the design of the regulatory and offset
programs. Such decisions could greatly influence an offset market
that, under some past legislative proposals, could become many times
greater than the largest existing offset market, which involves
billions of dollars worth of offset transactions each year.
However, we have previously reported that carbon offsets may also
compromise the environmental integrity of programs to limit emissions
and should therefore be carefully evaluated.[Footnote 6] Among other
things, we identified challenges that can affect the quality of carbon
offsets. A quality offset is one that achieves its intended
reductions--in most programs, this means that one offset credit equals
one ton of reduced or avoided emissions. While definitions vary, our
review of the literature points to five general criteria for assessing
offset quality--an offset must be additional, real, verifiable,
permanent, and enforceable. An offset is additional if it would not
have occurred without the incentives provided by the offset program.
Real means that the quantified emissions reductions represent actual
net emissions reductions, and are not a product of incomplete or
inaccurate accounting; verifiable means the reductions associated with
the project can be accurately quantified, monitored, and verified;
permanent means the emissions stored by a project will not be released
into the atmosphere in the future, or that there are guarantees to
ensure that such releases are replaced; and enforceable ensures that
offsets are backed by tracking systems that define their ownership as
well as regulations and penalties for noncompliance.
Some legislative proposals to limit greenhouse gases, if enacted,
would have involved a number of federal agencies in the development of
offset quality standards and program oversight. The discussion draft
of the 2010 American Power Act, for example, would have given the
Environmental Protection Agency (EPA) primary oversight over domestic
offsets--except for those pertaining to agriculture and forestry, for
which the Department of Agriculture would have had primary
responsibility.[Footnote 7]
This report responds to your request for a review of offset quality
issues. This report provides information on (1) the key challenges in
assessing the quality of different types of offset projects, and (2)
options for addressing key challenges associated with offset quality
if the United States adopted a program to limit greenhouse gas
emissions. To respond to these objectives, we reviewed relevant
literature and interviewed 13 experts--including economists, academic
researchers, and experts in ecology and law--selected based on their
experience, recommendations from persons knowledgeable in climate
policy issues, and the relevance and extent of their publications. We
also assessed approaches used in seven offset programs selected based
on their representation in literature, and interviewed 17
stakeholders--project developers, verifiers, and program officials--
from these programs. Information from our sample of experts and
stakeholders cannot be generalized to those we did not speak to.
Appendix I provides additional information about our scope and
methodology, and appendix II lists the experts and stakeholders we
interviewed.
We conducted our work from April 2010 to February 2011 in accordance
with all sections of GAO's Quality Assurance Framework that are
relevant to our objectives. The framework requires that we plan and
perform the 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
analysis conducted, provide a reasonable basis for any findings and
conclusions in this product.
Background:
Carbon offsets can be used by entities that are subject to legal
requirements to limit their emissions, such as utilities or
manufacturing facilities. Offset programs designed for this purpose
are called compliance programs. One such program is the Clean
Development Mechanism (CDM), an offset program established by the
Kyoto Protocol.[Footnote 8] The CDM allows nations with binding
emissions targets under the Kyoto Protocol--including those
participating in the EU ETS--to purchase offsets from projects in
developing nations without binding targets. The CDM is the world's
largest offset market, valued at $2.7 billion in 2009, and has
registered over 2,700 offset projects in 70 countries.[Footnote 9] Our
prior work found that the CDM provided developed nations with
flexibility in meeting their emissions targets but that the program's
effects on emissions were uncertain, in part because the CDM's
screening process could not fully ensure offset quality.[Footnote 10]
There are also "voluntary" carbon offset programs, where purchasers do
not face legal requirements to limit emissions but may buy offsets for
various reasons. For example, companies may purchase offsets to
demonstrate their environmental stewardship, while individuals may
purchase offsets to compensate for emissions resulting from their
personal travel or consumption of fossil fuels. Because the federal
government has not adopted binding limits on greenhouse gas emissions,
domestic purchases of carbon offsets generally fall within the
voluntary portion of the market. Voluntary programs in the United
States include private sector programs, such as the Climate Action
Reserve (CAR) and the Voluntary Carbon Standard (VCS), as well as
Climate Leaders, an industry-government partnership overseen by EPA.
Voluntary offset programs represent a relatively small share of the
offset market--in 2009, the total value of the voluntary offset market
was approximately $338 million, around one-eighth of the CDM market.
[Footnote 11] Our prior work on U.S. voluntary markets suggests that
many quality assurance mechanisms exist but the extent of their use is
uncertain.[Footnote 12] Table 1 lists the compliance and voluntary
programs we reviewed.
Table 1: Descriptions of Offset Programs and Standards GAO Reviewed:
Compliance programs:
Clean Development Mechanism (CDM);
Description: Established by the Kyoto Protocol to the United Nations
Framework Convention on Climate Change (UNFCCC), the CDM enables
nations with binding emissions targets under the Protocol to purchase
offsets from projects in developing nations without binding targets.
The mechanism is overseen by the CDM Executive Board [hyperlink,
http://cdm.unfccc.int];
Offsets Issued (million tons of carbon dioxide equivalent):
Cumulative: 536;
Offsets Issued (million tons of carbon dioxide equivalent): In 2010:
132.
Regional Greenhouse Gas Initiative (RGGI);
Description: Created in 2005 and implemented in 2009, RGGI regulates
the carbon dioxide emissions of large fossil fuel electricity
generators in 10 participating northeastern and mid-Atlantic states.
Under the RGGI Model Rule, electricity generators can generally use
offsets to meet 3.3 percent of their compliance reduction [hyperlink,
http://www.rggi.org];
Offsets Issued (million tons of carbon dioxide equivalent):
Cumulative: 0;
Offsets Issued (million tons of carbon dioxide equivalent): In 2010: 0.
Voluntary programs or standards:
Climate Action Reserve (CAR);
Description: A voluntary offset program that establishes standards for
the development, quantification, and verification of offset projects
in North America [hyperlink, http://www.climateactionreserve.org];
Offsets Issued (million tons of carbon dioxide equivalent):
Cumulative: 10.5;
Offsets Issued (million tons of carbon dioxide equivalent): In 2010:
7.9.
Chicago Climate Exchange (CCX)[A];
Description: A voluntary greenhouse gas reduction and trading system
through which members made commitments to decrease their emissions.
CCX participants could trade offsets generated from qualifying
emissions reduction projects [hyperlink,
http://www.chicagoclimatex.com];
Offsets Issued (million tons of carbon dioxide equivalent):
Cumulative: 83.5;
Offsets Issued (million tons of carbon dioxide equivalent): In 2010:
1.5.
Climate Leaders[B];
Description: An EPA industry-government partnership where EPA has
provided technical assistance to companies on how to calculate and
track greenhouse gas emissions over time, calculate emissions
reductions from offsets, and incorporate offsets into emission
reduction strategies [hyperlink, http://www.epa.gov/climateleaders];
Offsets Issued (million tons of carbon dioxide equivalent):
Cumulative: 0.012;
Offsets Issued (million tons of carbon dioxide equivalent): In 2010:
0.009.
The Gold Standard;
Description: Certifies projects in the voluntary market, and offers an
additional quality "label" for projects that have already been
approved through the CDM. The Gold Standard focuses on renewable
energy and energy efficiency projects with sustainable development
benefits for the local community [hyperlink,
http://www.cdmgoldstandard.org];
Offsets Issued (million tons of carbon dioxide equivalent):
Cumulative: 5.4;
Offsets Issued (million tons of carbon dioxide equivalent): In 2010: 3.
Voluntary Carbon Standard (VCS);
Description: Initiated by The Climate Group, the International
Emissions Trading Association, and the World Economic Forum in late
2005 to standardize and provide transparency and credibility to the
voluntary offset market, among other objectives [hyperlink,
http://www.v-c-s.org];
Offsets Issued (million tons of carbon dioxide equivalent):
Cumulative: 52;
Offsets Issued (million tons of carbon dioxide equivalent): In 2010:
29.
Source: GAO analysis of offset program documents and information
provided by program officials.
[A] According to CCX officials, the part of the program involving
emissions reduction commitments was discontinued in 2010. However, CCX
has announced the operation of an Offsets Only program for 2011 and
2012.
[B] Climate Leaders did not register offset projects or issue offsets.
Instead, the program approved the use of offset tons by Climate
Leaders partners to meet emissions reduction goals, assuming those
tons met program criteria.
[End of table]
While the project review process can vary by program, it often
involves the following basic steps: (1) preparing application
documents, (2) establishing that the project meets eligibility
criteria, (3) approving the project and registering it in a database,
(4) monitoring emissions reductions over time, (5) verifying the
amount of emissions reductions produced over a certain time period,
and (6) issuing offsets. Existing programs generally have an
administrative body to oversee offset projects and ensure they meet
established quality criteria. Other key participants include project
developers, who identify and perform actions that reduce, avoid, or
sequester emissions, and third-party verifiers, who ensure that
projects adhere to relevant quality assurance mechanisms. Figure 1
illustrates the CDM's project cycle.
Figure 1: CDM Project Cycle:
[Refer to PDF for image: illustration]
Project Preparation (Project developer):
Develop project design documents.
Validation (Third-party auditor):
Evaluate documents to ensure they meet program criteria.
Registration (Program administrator):
Formally accept validated project.
Monitoring (Project developer):
Evaluate project performance.
Verification (Third-party auditor):
Review and verify emission reductions.
Offset Issuance (Program administrator):
Distribution of credits for achieved reductions.
Source: GAO analysis of UNFCCC documents and United Nations
Development Programme data.
[End of figure]
Key Offset Quality Challenges:
Experts and stakeholders identified five key challenges to assessing
the quality of offsets in existing programs. First, many experts and
stakeholders agreed that the primary challenge is assessing whether
the offset project results in additional emissions reductions. Second,
emissions reductions from some types of offset projects, particularly
soil and forestry projects, can be difficult to measure. Third, carbon
stored through soil and forestry projects may not be permanent.
Fourth, in some cases it can be difficult to verify that offset
projects complied with program rules and that emissions reductions
occurred as expected. Fifth, the types of projects that are the most
difficult to assess--forestry, international, and certain agriculture
projects--may make up the majority of offsets in a future U.S.
program, posing challenges for policymakers designing an offset
program.
Additionality Is the Primary Challenge:
According to many of the experts and stakeholders we interviewed, the
primary challenge to assessing offset quality is determining whether
offsets generate "additional" emissions reductions--reductions that
would not have occurred without the incentives provided by the offset
program. In theory, offsets allow regulated entities to emit more
while maintaining the emissions levels set established by a cap-and-
trade program or other program to limit emissions. However, if the
offsets represent emissions reductions that would have occurred
anyway, net emissions may exceed the cap and compromise the
environmental integrity of the program. We previously identified
additionality as a challenge to offsets in 2008 and 2009.[Footnote 13]
Although each program we examined took steps to ensure the
additionality of offsets, evidence suggests that non-additional
offsets have nonetheless been awarded under some existing programs.
For example, the CCX, a voluntary program, awarded offsets to farmers
who had practiced the credited activity for years.[Footnote 14]
Several studies on the CDM also suggest that a substantial number of
non-additional projects have received offsets,[Footnote 15] although
some experts reported that the CDM has improved the quality of its
offsets significantly in recent years.[Footnote 16]
Experts and stakeholders cited a number of reasons why assessing
additionality can be challenging, including the following:
* Difficulty of setting a baseline. Assessing additionality involves
comparing a project's expected reductions against a projected baseline
of what would have occurred in the absence of the program. While this
is not a challenge unique to offset programs--many policy decisions
involve assessing alternative policies against a hypothetical
baseline--it may involve a number of assumptions that are uncertain.
For example, some programs approve offsets for forest management
practices, such as lengthening harvest cycles to allow forests to
store carbon for longer periods. An offset program could establish a
baseline for these projects by assessing historical data about how
forest owners respond to changes in timber prices and other economic
variables. However, it may be difficult to account for the variety of
decisions a forest owner may make that affect the amount of carbon
stored--for example, not all forest owners may want to maximize the
amount of timber produced. Assumptions regarding this and other
factors that affect the amount of carbon stored can have a significant
impact on the number of offsets awarded, according to some studies.
For example, one study suggested that the number of offsets awarded
for a hypothetical forest management project could vary by an order of
magnitude, depending on the approach used to set baselines.[Footnote
17]
* Asymmetric information. To evaluate the additionality of a project,
program administrators must often rely on information provided by
applicants, and in some cases, this information may be difficult to
evaluate. One additionality test used by the CDM requires wind power
developers, for example, to establish that a project either is not
financially feasible without the revenues from offsets or is not the
most economically attractive option. This can involve a complex
analysis including assumptions about the internal rate of return for
the project, the cost of financing, the relative costs of fuels, and
the lifetime of the project. Research suggests that it can be
difficult to verify these assumptions, especially since applicants
know more details about the project than program administrators or
verifiers, and may present data selectively to support claims of
additionality.
* Multiple incentives. According to literature we reviewed, in some
cases there may be reasons to pursue an activity that are unrelated to
the offset program. For example, energy efficiency and renewable
energy projects may be profitable on their own, making it difficult to
gauge how offset revenue affects these projects' financial viability.
[Footnote 18] Similarly, conservation tillage is an agricultural
practice that can earn offsets because it stores more carbon in soil
than regular tillage, but farmers may also practice it for other
reasons, such as to help soils retain moisture. One study suggests
that conservation tillage increased by 3.5 percentage points between
1998 and 2004 as a share of total planted acres.[Footnote 19] If
conservation tillage offsets are accepted under a future offset
program, it may be difficult to determine what portion of future
increases is attributable to the offset program. In addition, some
land use practices may be eligible for other federal subsidies or
policy incentives outside of the offset program, potentially
complicating additionality assessments.[Footnote 20]
* Misaligned incentives. Some experts suggested that an offset program
may create disincentives for policies that reduce emissions. For
example, under an offset program that allows international projects,
U.S. firms might pay for energy efficiency upgrades to coal-fired
power plants in other nations. According to our previous work, this
may create disincentives for these nations to implement their own
energy efficiency standards or similar policies, since doing so would
cut off the revenue stream created by the offset program. For example,
some wind and hydroelectric power projects established in China were
reviewed and subsequently rejected by the CDM's administrative board
amid concerns that China intentionally lowered its wind power
subsidies so that these projects would qualify for CDM funding. In
addition, our review of the literature suggests that in some cases an
offset program may unintentionally provide incentives for firms to
maintain or increase emissions so that they may later generate offsets
by decreasing them. This potential problem is illustrated by the CDM's
experience with industrial gas projects involving the waste gas HFC-
23, a byproduct of refrigerant production. Because destroying HFC-23
can be worth several times the value of the refrigerant, plants may
have had an incentive to increase or maintain production in order to
earn offsets for destroying the resulting emissions.[Footnote 21]
Measuring Emissions Can Be Challenging for Agricultural Soil,
Forestry, and Other Types of Offset Projects:
As we have previously reported, it can be difficult to accurately
measure emissions from some types of offset projects, particularly
soil and forestry projects.[Footnote 22] An offset program needs
accurate measurements of emissions to ensure that it awards an
appropriate number of offsets. According to our review of the
literature, the most straightforward way to measure emissions is
through direct monitoring. For example, a project can run methane
collected from a landfill or coal mine through a meter to measure the
quantity collected and destroyed. Similarly, power plants can install
monitors to measure their carbon dioxide emissions. However, direct
monitoring is not feasible or cost-effective for all types of offset
projects, and does not capture the effect that some projects have on
emissions elsewhere. Types of offset projects with measurement
challenges include the following:
* Land-use offsets. Land-use offset projects seek to absorb greenhouse
gases or reduce emissions by affecting various natural processes. For
example, trees absorb carbon dioxide from the atmosphere as they grow,
and soils store carbon. However, the precise amounts stored or emitted
due to an offset project may be uncertain because some of the
underlying natural processes are complex and not fully understood. The
amount of carbon absorbed by agricultural soils, for example, depends
on the local climate, soil type, vegetation, and past land management
practices. While precise methods for measuring carbon in soil samples
are well established, the level of carbon will vary across a parcel of
land, and changes due to the project may be small compared with the
total level of carbon in the soil. Accurate estimates can therefore
require extensive sampling, which may be prohibitively costly for some
offset projects. Carbon storage projects also require ongoing
monitoring to assess whether the stored carbon is re-released.
According to literature we reviewed, estimates of emissions from land-
use offset projects can be more uncertain than those of other
projects. For example, the uncertainty of a meter that measures
methane captured from a landfill may be less than plus or minus 1
percent, whereas uncertainties of the amount of carbon stored in
agricultural soils range from plus or minus 6 percent to plus or minus
100 percent.[Footnote 23]
* Dispersed projects. Offset projects that include many small sources
can also be challenging to measure. For example, estimating emissions
reductions from a project that distributes energy-efficient light
bulbs would require assessing light bulb use among recipients and
estimating the associated energy savings. According to our review of
literature, one option is to collect information from a sample of
recipients; however, this can cost more and may involve sampling
errors or other errors compared with projects where emissions are
directly monitored using a meter at a single point.
* Projects prone to leakage. The net effect of some types of offset
projects may be challenging to measure because of the potential for
emissions to increase elsewhere as a result of the project. This is
known as leakage. For example, avoiding wood harvest in one area may
simply displace harvesting and its emissions to another location. Some
studies that assessed different project types in different regions
suggest that leakage may be significant, although there is
considerable uncertainty about the extent of leakage and the factors
that cause it. Estimates suggest that between none or almost all of
the emissions reductions from some types of land-use offset projects
could be negated by increased emissions elsewhere.[Footnote 24] Other
types of projects may also be at risk. For example, energy-efficiency
projects may save resources that are ultimately spent on activities
that increase energy use elsewhere.
Some experts suggested that measurement costs can affect the viability
of certain types of projects. The measurement stringency or degree of
accuracy required in a program can affect the costs of offset projects
and make some types of projects unviable. Some stakeholders reported
that a program will need to balance the benefits of accurate
measurements with the costs. Such a balance will shift over time as
new techniques and approaches are developed.
Carbon Stored in Soils and Forests May Not Be Permanent:
As we have previously reported, projects that store, or "sequester,"
carbon carry the risk that the stored carbon will be re-released into
the atmosphere, known as a reversal.[Footnote 25] The risk of reversal
is most commonly associated with projects involving forestry and
agricultural soil sequestration. In these types of projects, reversals
can occur as a result of human activity, such as logging or changes in
tilling practices, or from natural events such as fires, storms, or
insect infestations.
Addressing the risk of reversal is important because a reversal can
negate the environmental benefit of the project. Carbon dioxide can
remain in the atmosphere for a long time--up to thousands of years,
according to the Intergovernmental Panel on Climate Change.[Footnote
26] In the context of an offset program, this means that a project in
which trees planted in one year but destroyed 30 years later would
convey a minimal environmental benefit compared to a project that
captured and permanently destroyed methane emitted from a landfill.
Verifying Offset Projects Presents Challenges:
According to our review of literature and interviews with experts,
verification is an important aspect of an offset program because
participants may have limited incentives to report information
accurately or to evaluate quality. Verification involves confirming
that the project complied with program rules and that estimates of
emissions reductions are reasonable.[Footnote 27] In most programs, a
third-party auditor conducts the verification, which can involve
checking that emissions reduction calculations are correct and site-
visits to verify information with independent measurements and
observations. The verifier may also review the assumptions underlying
the assessment of additionality. According to our review of
literature, verification may be challenging because sellers of carbon
offsets may have little incentive to report information accurately to
program administrators, and buyers may have little incentive to
investigate the quality of offsets. Unlike buyers of other
commodities, like oil or corn, buyers of offsets may not care about
the quality of the offsets they buy and may be primarily interested in
lowering their compliance costs by purchasing lower-cost offsets. This
is partly because under some designs, buyers may not be liable for the
quality of offsets they purchase after those offsets have been issued
by a program.[Footnote 28]
On the basis of our review of the literature and interviews with
experts, we identified several challenges to verifying offset
projects, including the following:
* Projects in developing countries and those involving complex
measurement techniques can be difficult to verify. Some experts and
stakeholders suggested that offset projects in developing countries
can be difficult to verify because of varying legal frameworks, lack
of available documentation, or other reasons. For example, some
verifiers reported that it is sometimes difficult to verify whether
project developers have legal ownership of land used in a project.
These challenges can vary considerably depending on the country
hosting the project. Some verifiers noted that projects involving
forestry and agricultural soils--in the United States or in other
nations--can be more challenging to verify, since they often involve
complex measurement methods. To verify emissions reduction claims in
such projects, a verifier must assess the reasonableness of the model
or estimation technique used, as well as the data used in the model.
* Incentives and conflicts of interest may complicate verification.
Many experts and some stakeholders reported that misaligned incentives
and conflicts of interest may affect the quality of verifications. In
most cases, third-party verifiers are selected and paid by project
developers. This may give verifiers an incentive to further the goals
of the developer--earning offsets at low cost--over the goal of
ensuring the quality of offsets.
* Specifying verification criteria can be difficult. Some stakeholders
suggested that the verification criteria used in some programs have
been unclear or subject to interpretation. This can make verifications
difficult, as verifiers must make subjective judgments as to the
reasonableness of assumptions and may interpret program guidelines
differently than program administrators intend. For example, according
to CDM documentation, about 7 percent of projects authorized by third-
party verifiers in 2009 were subsequently rejected by the board that
ultimately approves CDM projects. According to one study, this is
partly because the CDM rules for additionality were unclear or
ambiguous, which led to different interpretations between third-party
verifiers and the CDM board.[Footnote 29] In addition, the CDM's
guidelines do not establish a level of confidence required in a
verification, known as a materiality threshold. Two verifiers we
interviewed suggested that without such a threshold, verifiers may
spend considerable effort investigating potential errors that would
have a negligible or no impact on emissions reduction estimates.
* Competence and supply of verifiers may be inadequate. Some
stakeholders we interviewed suggested that there has been a limited
supply of qualified verifiers. Following spot checks of some
verifiers, the CDM suspended four verification firms from 2008 to
2010, in part because of concerns over the skills and experience of
staff.[Footnote 30] Two stakeholders said that the shortage of
verifiers is especially acute in developing countries or for more
technically demanding project types such as avoided deforestation.
[Footnote 31] The CDM has taken various steps to improve its
verification system, and these challenges may be alleviated in the
future as verifiers and program administrators gain experience with
the verification process.
These challenges have raised verification costs, according to our
review of literature and stakeholders we interviewed. One stakeholder
said that verification can be the single largest cost of developing an
offset project. According to information collected by the CDM, costs
range from $13,000 to $54,000 to initially register a project and
$7,900 to $32,000 to periodically verify emissions reductions in that
program.[Footnote 32] According to two stakeholders involved in
verifying CDM projects, these issues have driven up verification costs
in the CDM and contributed to a growing backlog of projects.
Verification costs could cause some otherwise high-quality offset
projects not to be undertaken because they are not financially viable.
The Most Plentiful Types of Projects May Also Be the Most Challenging
to Assess:
Experts and stakeholders generally agreed that for some types of
offset projects, quality is relatively easy to assess. In particular,
many suggested that projects that have one emissions source and
involve the metered destruction of greenhouse gases--such as methane
flaring from landfills and coal mines--generally produce high-quality
offsets. These projects take place at a single location; permit easy,
reliable and continuous monitoring of emissions; and are not at risk
of re-releasing emissions. However, offsets from such projects were
forecast to be a small portion of total offsets in recent legislative
proposals.[Footnote 33] Further, EPA's review of recent draft
legislation suggests that the potential emissions reductions from
these activities may be limited, and therefore may do little to reduce
the cost of a future U.S. program to limit emissions. For example,
EPA's analysis of the American Clean Energy and Security Act estimated
that allowing landfill, coal mine, and natural gas system methane
projects as offsets would decrease the cost of emissions by only 2
percent relative to a program without these projects.
According to our review of the literature, the types of projects that
are particularly challenging to assess--including forestry,
international, and some agricultural offsets--may account for the
majority of offsets. In 2009, CBO estimated that most offsets under
proposed U.S. legislation would result from forestry and agricultural
practices, with most domestic offsets coming from the forestry
sector.[Footnote 34] CBO also estimated that international offsets
would comprise slightly over half of all offsets from 2012 to 2050.
Efforts to reduce deforestation in developing countries could be a
particularly significant source of offsets, given that up to 20
percent of global greenhouse gas emissions results from tropical
deforestation. However, forestry offsets pose key challenges for
measurement, leakage, and permanence, and have therefore had a
relatively limited role in existing offset programs thus far.[Footnote
35]
Several Options Could Address Key Offset Quality Challenges, but Most
Involve Trade-offs:
According to our review of the literature and interviews with experts,
policymakers have several options to choose from in addressing
challenges with offset quality, but many of these options could
increase the cost of offsets and may involve other trade-offs.
Nonetheless, addressing these challenges may be valuable since
offsets, in principle, could substantially lower the cost of a program
to limit greenhouse gases relative to the cost of a program without
offsets. The extent of these savings will depend partly on the quality
assurance mechanisms used to address offset quality. On the basis of
our review of relevant literature and interviews with experts, we
identified several options that address challenges associated with
additionality, measurement, permanence, or verification. We also
identified steps that could address multiple offset quality challenges
at the same time. Finally, we identified four overarching principles
that experts generally agreed could enhance offset quality.
Several Options Could Specifically Address Additionality, Measurement,
and Other Key Challenges:
On the basis of our review of relevant literature and interviews with
experts and stakeholders, we identified several options to address
specific challenges to offset quality. Many of these options involve
trade-offs--most notably, more stringent quality assurance can
increase the cost of offsets. These options are not mutually
exclusive, and some experts suggested that a program will likely need
to employ a combination of options depending on the type of offsets
allowed under the program.
Options for Addressing Additionality:
There are several options to assess additionality, although many
experts we interviewed stated that it may be practically impossible to
ensure that all offsets are additional at the project level. Still,
all of the programs we examined included additionality as a criterion
for offset approval, and all took certain straightforward steps to
increase the likelihood that issued offsets are additional. For
example, all of the programs we reviewed seek to accept only those
projects that achieve emissions reductions beyond what is already
required by law or regulation, and all require that projects be
initiated after a certain date (e.g., the start date of the program).
The assumption behind both of these requirements is that projects that
cannot meet them were likely motivated by something other than the
incentives of the offset program.
All the programs we examined also take one of two approaches to more
thoroughly assess the additionality of offsets--a standardized
approach or a project-by-project approach. With a standardized
approach, a program establishes a standard way of assessing
additionality for each type of offset project and uses it for all
projects of that type. One way to do this is for a program to review
comparable projects and establish a performance level or set of
technologies that would be considered additional. For example, a
performance level for international electricity projects might reflect
the most efficient method of producing electricity that is in use in a
given region. Projects that exceed that performance level would then
be considered additional. Alternatively, a program could identify
technologies or practices that are generally additional. For example,
after reviewing current livestock manure waste management practices in
the United States, CAR decided that any project that installed a
system to capture and destroy methane gas from manure treatment or
storage facilities could be considered additional and defined a
baseline methodology for all such projects.[Footnote 36] Therefore, to
demonstrate additionality under CAR, a project developer simply has to
show that an approved methane collection system has been installed.
In contrast, with a project-by-project approach, additionality can be
assessed differently for each project--even projects of the same type--
so as to consider the unique circumstances of each project. For
example, CDM program documents show that livestock methane capture
projects generally have to (1) conduct either an investment analysis
to show that methane capture was not attractive without revenue from
the sale of offsets, or demonstrate that offsets allow the project to
overcome some prohibitive barriers; (2) demonstrate that methane
capture is not already common practice in that area; and (3) define an
appropriate baseline from which offsets would be awarded. Table 2
compares these two approaches.
Table 2: Comparison of Project-by-Project and Standardized Approaches
to Additionality Identified by Experts:
Description:
Project-by-project: Program examines the unique circumstances of each
project to assess additionality;
Standardized: Program establishes an approach to assessing the
additionality of each project type, which is then used for all
projects of that type.
Example:
Project-by-project: Projects that can demonstrate they have lower than
acceptable financial returns without revenues from offsets are
considered additional (investment analysis, CDM);
Standardized: Installing a system to capture and destroy methane
emissions from livestock manure treatment or storage facilities is
considered additional (CAR).
Programs using this approach:
Project-by-project: CDM, Gold Standard, VCS;
Standardized: Climate Leaders, CAR, CCX, RGGI, VCS[A].
Advantages:
Project-by-project: Flexible and can be tailored to specific
circumstances, easy to update with changing conditions;
Standardized: Less subjective, provides certainty for developers, may
be less costly to administer.
Disadvantages:
Project-by-project: Can be more costly to administer, uncertain for
project developers, subjective, may award non-additional offsets;
Standardized: Not appropriate for all types of projects, needs to be
updated, may exclude some projects that could generate additional
offsets, may award non-additional offsets.
Source: GAO analysis of program documentation and interviews with
experts.
[A] Several programs also have mechanisms to consider projects outside
of their primary standardized approaches, including Climate Leaders,
CCX, and VCS.
[End of table]
The choice of approaches to address additionality involves three basic
trade-offs, according to on our review of relevant literature and
interviews with experts and stakeholders:
1. Stringency versus cost. Regardless of the approach that is used, a
more rigorous assessment of additionality can be more costly to
implement and exclude some projects that could have produced
additional offsets, according to some experts. Two experts we
interviewed estimated that relatively lenient offset standards could
mean that nearly half of issued offsets are not additional. On the
other hand, these experts estimated that stringent offset standards
could greatly reduce non-additional offsets but exclude a significant
number of potentially additional offsets from the program.[Footnote 37]
2. Up-front costs versus lower overall administrative costs. Some
experts and stakeholders suggested that a standardized approach may
reduce administrative costs overall but may also involve higher up-
front investments than a project-by-project approach. For example, the
verification to register a project can cost a project developer
between $13,000 and $54,000 and can take over 250 days in the CDM's
project-specific process, while the same step involves minimal cost
and approximately 4 to 12 weeks under CAR's standardized approach.
However, developing a standard can involve up-front costs for
collecting and evaluating information to assess business-as-usual
activities, and for soliciting and considering public comments on
proposed standards. Although a project-by-project approach may be more
expensive to operate over time, an expert suggested that it can be
established more quickly and at lower initial cost. This is because
the program administrator would not need to establish specific
standards for assessing additionality for each type of offset project,
although general offset criteria for all projects would still be
needed.
3. Flexibility versus objectivity. While standardized approaches are
more objective to implement than project-by-project approaches, they
are less flexible, according to some experts and stakeholders. Some
stakeholders were concerned about subjective and inconsistent
decisions that have occurred in some programs that use a project-by-
project approach, and these concerns would likely be reduced under a
standardized approach. However, once a standardized method is
established, it may allow little flexibility in assessing whether a
given offset project meets the standard. This lack of flexibility
might mean that some projects with the potential to generate
additional offsets will be excluded, and some non-additional projects
will be included.
Recognizing these tradeoffs and that the suitability of a given
approach may depend on the type of offset project, many experts
recommended a hybrid approach that would use elements of both project-
by-project and standardized approaches, and that would be tailored to
each offset project type. For example, a standardized approach may
work well for project types where sufficient data on relevant industry
practices are available, while a project-by-project approach may be
better suited to less common project types.
Options for Addressing Measurement:
According to literature we reviewed, one option to address the
potential for measurement error is to require project developers to
incorporate measurement uncertainty into their emissions reductions
calculations, reducing the number of offsets claimed to those that can
be measured with a specified degree of certainty. For example, CAR
adjusts the number of offsets that can be credited to a forestry
project when measurement uncertainty exceeds a certain threshold.
Projects measured with high uncertainty receive fewer offsets than
comparable projects measured with less certainty. Such deductions can
be a significant amount of potential offsets for some types of
projects--up to 15 percent for some forestry projects.[Footnote 38]
Additional options exist for addressing measurement challenges due to
the risk of emissions leakage, according to the literature we
reviewed. At the project level, some leakage may be addressed by
expanding the area of emissions monitoring--for example, for certain
project types, VCS tracks local "leakage belts" surrounding the
project area. However, this option does not address any emissions that
shift beyond a localized region. An alternative is to expand the scale
of emissions monitoring to the national or international level--for
example, monitoring emissions in the forestry sector or other sectors
where leakage is likely to occur. In such a system, adjustments could
be made if the emissions in a given sector were higher than expected,
given estimated reductions from offsets. However, it may be difficult
to isolate the effect of leakage from other factors that affect
emissions. While some experts characterized leakage as a particularly
difficult challenge, literature we reviewed suggests that assessing
the potential for leakage may help policymakers adjust emissions
measurements appropriately. For example, leakage may often be driven
by the need to meet agricultural and timber demands. Assessing the
circumstances of the markets, regions, and countries targeted by an
emissions reduction program may help provide information on how much
leakage can be expected, enabling program administrators to adjust
policies as needed.
Options to Address Reversals:
Addressing the risk of offset reversals--which occur when carbon
stored in trees or soil is subsequently re-released into the
atmosphere--is critical to achieving expected reductions under a
program to limit emissions, according to literature we reviewed.
Developing a policy to address reversals involves deciding how long a
project must continue to store carbon, and how to compensate for lost
reductions in the event that stored carbon is re-released into the
atmosphere.
Under existing offset programs, carbon must be stored for a certain
period of time, although these "permanence" requirements vary
significantly. In the voluntary offset program CAR, for example, a
forestry project must store carbon for 100 years after offsets are
issued or pay back the offset credits. In contrast, CCX required a
commitment of 15 years. Given that carbon dioxide can remain in the
atmosphere for anywhere between 30 years and several centuries, a
longer time commitment may help improve the likelihood that offset
projects convey their intended environmental benefit. On the other
hand, some stakeholders suggested that extended time commitments could
reduce participation from landowners and renters, who may be unwilling
to commit to 100-year time frames. A CAR official we interviewed
noted, however, that CAR had received nearly 140 applications for
forestry projects, each of which would be subject to the 100-year
commitment.
The CDM takes a different approach by issuing temporary credits for
forestry activities, which can be used for compliance purposes only
for a certain amount of time. Once a credit expires, the owner must
replace it.[Footnote 39] New temporary credits can be used to replace
the expiring credits if the project owner is able to demonstrate that
the carbon remains stored. According to literature we reviewed,
temporary crediting avoids the need for ongoing monitoring to ensure
permanence, and three experts characterized it as the best option to
address reversals. However, others expressed skepticism that temporary
credits would be attractive to buyers in the context of a mandatory
program to limit emissions.[Footnote 40] One expert, for example,
suggested that temporary credits would create ongoing compliance
liabilities that offset buyers would be unwilling to carry. According
to one study we reviewed, alternative forms of temporary crediting
could address these issues--for example, allowing the private market,
rather than the administrator of the program, to set contract length
to meet the different needs of market participants.
On the basis of our review of the literature and experts we
interviewed, we identified several other options which, together or
independently, could help ensure that carbon is stored for the
specified time or otherwise accounted for:
* Hold seller or buyer liable. Policymakers could assign liability to
either project developers (sellers) or offset buyers. In the event of
a reversal, the liable party would either have to replace the offsets
or face sanctions for noncompliance. The advantage of holding the
seller liable, according to experts and literature we reviewed, is
that the landowner has a greater incentive to avoid reversals.
Flexibility is another potential advantage to this option, according
to one expert--a landowner that wanted to use the land for other
purposes could simply replace the offsets. However, literature we
reviewed suggests the transfer of liability may have to be established
through a contract or other mechanism, since land ownership can shift
over time. Under the buyer liability option, the responsibility for an
offset reversal shifts along with the ownership of the offset.
According to some literature we reviewed, this option may give buyers
a greater incentive to pursue quality offsets, and liability may be
easier to enforce. However, one stakeholder we interviewed suggested
that such an approach would significantly dampen program participation
because potential offset buyers would be unwilling to take on this
level of risk. An unexpected forest fire, for example, could create a
significant and immediate financial liability for an offset owner.
[Footnote 41]
* Insurance. In the case of buyer or seller liability, private
insurance markets may help address the risk of offset reversals. For
example, offset owners could insure themselves through private
insurance or bonds issued by a bank, and if a reversal occurs, the
insurer pays for the cost of replacing the offsets. According to one
expert, one advantage of this option is that some private insurance
companies may be better equipped to assess risk than the federal
government. However, another expert noted that, because offsets are a
relatively new commodity, there may not yet be sufficient information
to identify risks. This expert therefore recommended against using
this option until sufficient data exist to allow a private market
system to work at reasonable cost.
* Programwide buffer pools. A program could establish a "buffer" pool
by setting aside a portion of all offsets from new projects to cover
possible future reversals. For example, the VCS requires land-use
projects to undergo a risk assessment for non-permanence, which
encompasses risks of natural disaster, technical failure, and
political instability, among others. On the basis of this assessment,
a percentage of the credits is withheld and put into a buffer pool for
use in the event of reversal.[Footnote 42] According to literature we
reviewed, a programwide buffer pool can serve as a type of insurance
against unanticipated reversals. However, determining the appropriate
size of the buffer pool may be difficult, according to some experts. A
smaller buffer pool may not provide enough protection against
reversals, whereas a large buffer pool may require applicants to
withhold a larger share of their offsets, potentially dampening
participation in the program.
Options to Address Verification:
There are three basic ways to verify offset projects. First, offset
projects can be verified by independent third-party organizations.
Nearly all of the programs we examined use this approach. Verifiers
are generally chosen and paid by project developers, presenting a
potential conflict of interest. Because of this, the programs we
reviewed have various requirements governing the relationship between
the verifier and the developer. For example, all require conflict of
interest reviews, and some have additional requirements governing the
relationship between the verifier and the developer. In RGGI, for
example, verifiers may not have any other direct or indirect financial
relationship with project developers. Under some programs, such as the
CDM, third-party verifiers may also be liable for failing to
adequately verify that emissions reductions have occurred as a result
of the offset project.[Footnote 43] According to many stakeholders,
these and other requirements generally prevent potential conflicts of
interest from affecting the quality of third-party verifications,
although two experts suggested that such policies may not be
sufficient.
Second, some experts suggested that a program could itself verify
offset projects, either directly or by contracting with third parties.
This could eliminate many potential conflicts of interest by
eliminating the relationship between project developer and verifier,
although this is not done in any of the programs we examined.[Footnote
44] Some stakeholders suggested that having the program select
verifiers could be problematic because it could add a layer of
bureaucracy and could reduce market competition, among other reasons.
Third, one expert and one project developer suggested that project
developers could certify their own information if a program had strong
compliance and enforcement provisions to encourage developers to
report truthfully. For example, the government could conduct random
spot checks or audit a sample of projects. This would eliminate
verifications, but could increase the risk of fraud, abuse, and
mistakes.
In addition to choosing who will verify offset projects, programs face
additional challenges related to verification. Experts and
stakeholders identified the following options to address these:
* Oversight can help align incentives and improve verification. Some
experts and stakeholders stressed the need for rigorous oversight to
ensure verifications are effective and meet specified goals. This
could take the form of accreditation processes to select third-party
verifiers and ongoing monitoring of verifications including spot
checks.
* Clearly defined guidelines and expectations can facilitate
verifications. Some experts and many stakeholders indicated that clear
guidelines and expectations are important for effective verification.
More specific guidance and more objective criteria can reduce the
chance that verifiers and program administrators will interpret
information differently.
* Standards and training can help improve the competence and supply of
verifiers. A program can help ensure that verifiers are competent by
establishing standards or a minimum set of qualifications. For
example, the CDM specifies that verifiers must have a certain level of
verification experience before they can serve as team leaders. Some
stakeholders also reported that training can be useful, although one
suggested that the private sector can develop necessary training if
standards are clear enough.
Other Options Could Address Multiple Challenges with Offset Quality:
On the basis of our review of the literature and experts we
interviewed, we identified several other options that--used in
combination or separately--may help address multiple challenges to
offset quality at the same time. Many of these options involve
addressing the quality of the program on aggregate, rather than
attempting to ensure the quality of each offset at the project level.
This may be necessary because, according to a CBO study, complete
quality assurance of every project would be prohibitively costly,
particularly for forestry and other challenging types of offsets.
[Footnote 45]
Limiting the Quantity of Offsets Allowed:
According to our review of the literature, one way to mitigate the
negative impacts of non-additional offsets, leakage, and other quality
problems is to simply limit the use of offsets in a cap-and-trade
program or other program to limit emissions. With this option, the
emissions reduction program would ensure that only a fixed percentage
of the emissions permits could be affected by any problems with offset
quality.
All existing emissions reduction programs we reviewed use this option.
In the EU ETS, regulated entities are able to use CDM credits for 12
percent of their emissions cap, on average, through 2012. In contrast,
a draft Senate bill would have allowed a greater number of offsets
into the program--approximately 42 percent of the emissions cap during
the first year of the program.[Footnote 46] These percentages are
based on the total emissions cap, not the required emissions
reduction. As a result, such limits could mean that regulated entities
could use offsets for all of their required emissions reductions,
assuming a sufficient supply of offsets was available. RGGI's
approach, on the other hand, limits offsets to no more than 50 percent
of required reductions under the cap, which may avoid a scenario where
emissions reductions were wholly dependent on offsets.[Footnote 47]
Restricting the number of offsets allowed would likely increase the
cost of meeting the emissions cap in an emissions reduction program.
On the other hand, one expert suggested that while offsets may lower
the cost of compliance, such savings are irrelevant if offsets do not
represent actual emissions reductions.
Limiting the Types of Offsets Allowed:
Policymakers could also choose to limit the types of projects eligible
for offsets, excluding the types most likely to pose quality problems.
While existing offset programs we reviewed allow a wide variety of
project types, they all also impose some limits on the type of
projects they accept (see table 3). In some cases, programs impose
limits because of concerns over the likely quality of offsets from
certain types of projects. For example, soil sequestration projects,
including conservation tillage, are not permitted in the CDM because
of difficulties in accurately measuring the amount of carbon that is
ultimately absorbed into the soil.[Footnote 48]
Table 3: Eligibility of Select Offset Project Types in Select Programs:
Energy efficiency;
VCS[A]: Eligible;
CCX[A]: Eligible;
CDM[A]: Eligible;
Gold Stand.: Eligible;
CAR: [Empty];
RGGI: Eligible[B];
Climate Leaders[A]: Eligible[C].
Renewable energy;
VCS[A]: Eligible;
CCX[A]: Eligible;
CDM[A]: Eligible;
Gold Stand.: Eligible;
CAR: [Empty];
RGGI: [Empty];
Climate Leaders[A]: [Empty].
Forestry: Reforestation/afforestation;
VCS[A]: Eligible;
CCX[A]: Eligible;
CDM[A]: Eligible;
Gold Stand.: [Empty];
CAR: Eligible;
RGGI: Eligible;
Climate Leaders[A]: Eligible.
Forestry: Forest management;
VCS[A]: Eligible;
CCX[A]: Eligible;
CDM[A]: [Empty];
Gold Stand.: [Empty];
CAR: Eligible;
RGGI: [Empty];
Climate Leaders[A]: Eligible.
Forestry: Avoided deforestation;
VCS[A]: Eligible;
CCX[A]: [Empty];
CDM[A]: [Empty];
Gold Stand.: [Empty];
CAR: Eligible;
RGGI: [Empty];
Climate Leaders[A]: [Empty].
Industrial gases;
VCS[A]: Eligible;
CCX[A]: Eligible[D];
CDM[A]: Eligible;
Gold Stand.: [Empty];
CAR: Eligible[E];
RGGI: Eligible[F];
Climate Leaders[A]: [Empty].
Agricultural methane;
VCS[A]: Eligible;
CCX[A]: Eligible;
CDM[A]: Eligible;
Gold Stand.: [Empty];
CAR: Eligible;
RGGI: Eligible;
Climate Leaders[A]: Eligible.
Soil sequestration;
VCS[A]: Eligible;
CCX[A]: Eligible;
CDM[A]: [Empty];
Gold Stand.: [Empty];
CAR: [Empty];
RGGI: [Empty];
Climate Leaders[A]: [Empty].
Coal mine methane;
VCS[A]: Eligible;
CCX[A]: Eligible;
CDM[A]: Eligible;
Gold Stand.: [Empty];
CAR: Eligible;
RGGI: [Empty];
Climate Leaders[A]: [Empty].
Landfill methane;
VCS[A]: Eligible;
CCX[A]: Eligible;
CDM[A]: Eligible;
Gold Stand.: [Empty];
CAR: Eligible;
RGGI: Eligible;
Climate Leaders[A]: Eligible.
Source: GAO analysis of program documents and information provided by
program officials.
[A] Indicates that program also accepts proposals for projects from
nonapproved project types.
[B] Eligible nonelectric energy efficiency measures in the building
sector.
[C] Commercial boilers, industrial boilers, and bus fleets.
[D] Only ozone-depleting substances.
[E] Only nitrous oxide from nitric acid and ozone-depleting substances.
[F] Projects that reduce emissions of sulfur hexafluoride in the
transmission and distribution sector.
[End of table]
Many experts and stakeholders suggested that project types should only
be eligible if they meet key quality criteria. Experts and
stakeholders generally agreed on the characteristics of projects that
presented relatively few quality assurance challenges:
* Projects that represent a single, localized source of emissions are
less likely to necessitate resource-intensive sampling and complicated
measurement models than projects that cover large areas of land or
those with multiple emissions sources.
* Projects with emissions that can be measured directly through a
meter allow for relatively easy monitoring and verification and are
generally not subject to leakage or reversals.
* Projects that do not receive subsidies or generate revenue on their
own may be less challenging to assess for additionality, since the
offset is often the only financial incentive for these activities.
* Projects implemented in the United States may be easier to verify
than international projects, given that verifiers may be less familiar
with the legal, political, and institutional infrastructures of other
nations.
Rather than limiting an offset program to only these types of
projects, however, some experts cited reasons that the government
should allow some flexibility around offset types. First, the supply
of offsets from easy-to-monitor, low-risk projects--such as projects
to capture fugitive gases from landfills or coal mines--may be
limited. Second, some types of offsets that present quality assurance
challenges--such as those in the forestry sector--also present large
opportunities for emissions reductions. Third, imposing higher limits
on international projects relative to domestic projects could exclude
many legitimate reduction opportunities, according to some experts.
Many experts and stakeholders recommended developing a list of
acceptable project types carefully over time. Some of them cautioned
against codifying a list of acceptable project types in legislation,
instead suggesting that the implementing agency choose acceptable
project types using guidance from scientific and financial experts.
One expert recommended that the agency initially focus on a set of
project types that are most likely to produce quality offsets using
the experience of existing programs and standards, and gradually build
on that list as more information is collected.
Discounting:
According to our previous work, one way to compensate for offset
quality problems is to discount the value of offset credits. This
could be done in one of several ways, each of which has advantages and
disadvantages, according to literature and experts we interviewed:
* Discount all offset projects. Challenges in quantifying offsets
range from assessing additionality and setting emissions baselines to
measuring and verifying emissions reductions. While ideally an offset
program would have measures to address these issues, our previous work
suggests that even a rigorous approval process can still allow a
substantial number of offsets that do not meet quality criteria. An
offset program could seek to compensate for this by estimating the
percentage of offsets that do not meet quality standards in the
program overall and then discounting all offsets by that percentage.
For example, five offset credits could be set as equal to four
emissions permits in a cap-and-trade program. The burden of the
discount would be borne by offset buyers, who would then need to
purchase more offset credits, or by offset suppliers, who would have
to perform more emissions-reducing activities. On one hand, some
experts characterized this as a relatively simple approach that may
help limit the adverse effects of non-additionality or other offset
quality issues. However, others suggested that determining the
appropriate discount would be difficult and somewhat arbitrary, and
others expressed concern that discounting would reduce the chance that
additional projects would be viable.[Footnote 49]
* Discount certain project types. This option could be used to
prioritize certain types of projects over others, such as projects
whose reductions are relatively easy to measure or verify. These
projects would receive smaller discounts--or no discount--relative to
higher-priority projects. For example, some proposals suggest applying
a greater discount to forestry or international projects. However,
some experts cautioned that such an approach can impede economic
efficiency by reducing the overall supply of offsets or by making
certain types of offsets more expensive.
* Apply a discount before credits are issued. Under this option, used
by several existing programs, discounts are incorporated into a
project's measurement methodologies before credits are issued, as a
way to target projects for which measurement error, leakage, or
additionality is a high risk. In general, experts and stakeholders
supported this form of discounting when it is possible, but some noted
that leakage and additionality can be especially hard to quantify and
may be better addressed through other quality assurance options.
Four Broad Principles Could Improve Quality in Any Offset Program:
On the basis of interviews with experts and our review of literature,
we identified four broad principles that could help guide offset
program design under any approach to quality assurance:
* Identify key goals and priorities for the program. Identifying key
goals and priorities can help guide the numerous decisions that will
need to be made in designing and administering the program. In many
cases, policy mechanisms designed to increase the quality of offsets
may also increase their cost. As a result, some experts suggested that
policymakers should define an acceptable level of uncertainty--or an
acceptable level of cost--on which to base the choice of quality
assurance measures. Establishing these parameters may help
policymakers determine whether specific types of projects can be
reliably verified within the acceptable ranges of uncertainty, taking
into account existing methods and technologies.
* Align incentives with goals. The design of the offset program
creates incentives that may or may not serve program goals. Assessing
the incentives created by various program designs can inform design
decisions and may help improve outcomes. For example, evaluating
whether the incentives offered by the offset program overlap with
other incentive programs could help policymakers determine if program
adjustments--such as offset discounts or limits on project types--are
needed.
* Promote transparency. A program might cover projects from a wide
range of economic sectors and countries. Clear and transparent
processes and publicly available information can enable concerned
third parties to be involved in project oversight, potentially
improving the quality of offsets. In addition, maintaining
transparency in the development of procedures and standards can help
build trust in the program and reduce uncertainty for investors.
* Incorporate evaluation and continuous improvement into the program.
Carbon markets are relatively new and less mature than other commodity
markets, and program administrators will therefore need to be able to
respond to an evolving marketplace. This may include adapting to
unforeseen consequences of program policies as well as incorporating
new technologies and innovations that emerge over time. Experts and
literature thus recommended that a program develop a process for
ongoing evaluation and assessment of program policies and outcomes.
For example, a program could establish an ongoing process to update
the methods used to establish baselines so that they accurately
reflect current conditions and technologies. According to one expert,
a program could also evaluate the effectiveness of its additionality
procedures by assessing whether projects that had been screened out by
program policies were ultimately implemented.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to the
appropriate congressional committees and other interested parties. In
addition, the report will be available at no charge on GAO's Web site
at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or trimbled@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Individuals making key contributions
to this report are listed in appendix III.
Sincerely yours,
Signed by:
David C. Trimble:
Acting Director, Natural Resources and Environment:
[End of section]
Appendix I: Scope and Methodology:
This report examines (1) the key challenges in assessing the quality
of different types of offset projects, and (2) options for addressing
key challenges associated with offset quality if the United States
adopted a program to limit greenhouse gas emissions. To address these
objectives, we reviewed existing information, assessed approaches in
seven offset programs, and conducted semistructured interviews with
knowledgeable persons in two broad groups: experts (researchers,
economists, and academic experts involved with designing or assessing
offset programs) and stakeholders (individuals that directly
participate in or administer offset programs).
Specifically, we assessed approaches that seven offset programs use to
address offset quality. We selected programs based on their
representation in relevant literature and assessed two compliance
programs--the Clean Development Mechanism (CDM) and the Regional
Greenhouse Gas Initiative (RGGI)--and five voluntary programs--Climate
Action Reserve (CAR), Chicago Climate Exchange (CCX), Climate Leaders,
Gold Standard, and Voluntary Carbon Standard (VCS). We identified and
interviewed 19 stakeholders from these programs to better understand
quality issues from multiple perspectives. Stakeholders we interviewed
included (1) program officials, (2) verifiers, and (3) offset project
developers. To select a sample of verifiers, we identified seven
verification firms that worked with at least three of the seven offset
programs and interviewed representatives from each. To select a sample
of project developers, we selected the three U.S.-based and three
internationally based offset developers that had the most projects
registered with the three largest offset programs in each market.
Appendix II lists the stakeholders we interviewed and their
affiliations.
We also selected a nonprobability sample of 13 experts--a group that
included economists, academic researchers, and specialists in ecology
and law--based on their knowledge and experience in relevant areas,
recommendations from knowledgeable persons including agency officials
and other interviewees, and the relevance and extent of their
publications. To ensure coverage and range of perspectives, we
selected experts who had information about key offset types, like the
agriculture and forestry sectors; came from scientific, technical, or
economic backgrounds, and provided perspectives from both developing
offset standards and assessing the quality of offsets. We verified our
list of experts with other experts that have served on previous GAO
panels focused on market-based mechanisms to address climate change to
ensure that we had sufficient expertise. Appendix II lists the experts
we interviewed, which included agency and international officials and
researchers. We conducted a content analysis to assess experts'
responses and grouped the top responses into overall themes. Not all
of the experts provided their views on all issues, and we do not
report the entire range of expert responses in this report. Findings
from our nonprobability sample of experts and stakeholders cannot be
generalized to those we did not speak to. The views expressed by
experts do not necessarily represent the views of GAO. To characterize
expert and stakeholder views, we identified specific meanings for the
modifiers we use to quantify views, as follows:
* "Many" represents 6 to 10 experts, and 7 to 15 stakeholders,
* "Some" represents 3 to 5 experts, and 3 to 6 stakeholders.
To understand the scope of current and possible U.S. government work
in carbon offsets quality assurance, we interviewed officials
responsible for offset-related work at agencies identified as having
important roles in either existing programs or current legislation.
These agencies were Energy Information Administration, Environmental
Protection Agency, Department of Agriculture, and United States Agency
for International Development. To understand issues related to quality
assurance in the Clean Development Mechanism (CDM), we met with
officials of the United Nations Framework Convention on Climate Change
(UNFCCC), which administers the CDM. We also met with officials of the
German Federal Environmental Ministry to learn about quality issues in
the context of the implementation of the CDM on the national level.
GAO provided a summary of the contents of this report to UNFCCC and
EPA officials prior to its issuance.
We conducted our work from April 2010 to February 2011 in accordance
with all sections of GAO's Quality Assurance Framework that are
relevant to our objectives. The framework requires that we plan and
perform the 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
analysis conducted, provide a reasonable basis for any findings and
conclusions in this product.
[End of section]
Appendix II: List of Experts and Stakeholders:
Experts:
John Antle, Oregon State University:
Michael Gillenwater, Greenhouse Gas Management Institute:
Alexia Kelly, Department of State:
Michael Lazarus, Stockholm Environment Institute:
Jennifer Macedonia, JLM Environmental Consulting:
Bruce McCarl, Texas A&M University:
Axel Michaelowa, Perspectives:
Brian Murray, Nicholas Institute, Duke University:
Karsten Neuhoff, Climate Policy Initiative:
Lydia Olander, Nicholas Institute, Duke University:
Gordon Smith, Ecofor:
Lambert Schneider, Öko-Institut:
Michael Wara, Stanford University:
Stakeholders:
We interviewed officials from the following organizations:
Offset programs and standards:
American National Standards Institute (ANSI):[Footnote 50]
Clean Development Mechanism (UNFCCC Secretariat and German Federal
Environment Ministry):
Climate Action Reserve:
Climate Leaders (EPA):
Voluntary Carbon Standard:
Project developers:
AgCert International Limited:
AgraGate Climate Credits Corporation:
EcoSecurities:
Environmental Credit Corporation:
TerraPass:
World Bank, Carbon Finance Unit:
Project verifiers:
Det Norske Veritas (DNV):
Environmental Services, Inc.
ERM Certification and Verification Services:
First Environment, Inc.
Rainforest Alliance:
Scientific Certification Systems:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
David C. Trimble, (202) 512-3841 or trimbled@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Michael Hix (Assistant
Director), Quindi Franco, Cindy Gilbert, Cody Goebel, Tim Guinane,
Richard Johnson, Erik Kjeldgaard, Jessica Lemke, Susan Offutt, and Ben
Shouse made key contributions to this report.
[End of section]
Footnotes:
[1] There are six primary greenhouse gases: carbon dioxide, methane,
nitrous oxide, and three synthetic gases--hydrofluorocarbons,
perfluorocarbons, and sulfur hexafluoride.
[2] This report uses the term carbon offsets to describe offsets
derived from any of the six primary greenhouse gases. Carbon offsets
are typically quantified and described in terms of metric tons of
carbon dioxide equivalent. Carbon dioxide equivalents provide a common
standard for measuring the warming potential of different greenhouse
gases and are calculated by multiplying the emissions of the non-
carbon dioxide gas by its global warming potential, a factor that
measures its heat-trapping ability relative to that of carbon dioxide.
[3] Although carbon offsets have primarily been considered as part of
a cap-and-trade proposal, they could be used to limit the costs of a
variety of programs to limit greenhouse gas emissions.
[4] The EU ETS, which commenced operation in January 2005, is the
world's largest greenhouse gas cap-and-trade program. For more
information on the EU ETS, see GAO, International Climate Change
Programs: Lessons Learned from the European Union's Emissions Trading
Scheme and the Kyoto Protocols Clean Development Mechanism,
[hyperlink, http://www.gao.gov/products/GAO-09-151] (Washington, D.C.:
Nov. 18, 2008).
[5] CBO, The Use of Offsets to Reduce Greenhouse Gases (Washington,
D.C.: Aug 3, 2009). According to CBO, this figure includes an estimate
of the costs involved in an offset program, such as administration
costs and measures taken to address offset quality, but does not
provide insight into whether offsets provide the full intended
reductions.
[6] See [hyperlink, http://www.gao.gov/products/GAO-09-151]; 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 Climate Change: Observations on the Potential Role of
Carbon Offsets in Climate Change Legislation, Testimony Before the
Subcommittee on Energy and Environment, Committee on Energy and
Commerce, House of Representatives, [hyperlink,
http://www.gao.gov/products/GAO-09-456T] (Washington, D.C.: Mar. 5.
2009).
[7] American Power Act (discussion draft), available at [hyperlink,
http://kerry.senate.gov/imo/media/doc/APAbill3.pdf].
[8] The Kyoto Protocol is an international agreement to limit the
adverse effects of climate change developed within the United Nations
Framework Convention on Climate Change (UNFCCC).
[9] World Bank, State and Trends of the Carbon Market 2010
(Washington, D.C.: May 2010).
[10] [hyperlink, http://www.gao.gov/products/GAO-09-151].
[11] World Bank, State and Trends of the Carbon Market 2010
(Washington, D.C.: May 2010). Data on voluntary market provided by
Bloomberg New Energy Finance, Ecosystem Marketplace.
[12] [hyperlink, http://www.gao.gov/products/GAO-08-1048].
[13] See [hyperlink, http://www.gao.gov/products/GAO-08-1048],
[hyperlink, http://www.gao.gov/products/GAO-09-151], and [hyperlink,
http://www.gao.gov/products/GAO-09-456T].
[14] The farmers earned credits for conservation tillage, an
agricultural practice that stores more carbon in soil than regular
tillage.
[15] One study analyzed documentation from 93 projects that were
registered from 2004 to 2007, and concluded that additionality was
questionable in approximately 40 percent of these projects. However,
the author noted that this figure was based on past performance and
did not reflect recent improvements to the approval process. See
Lambert Schneider, Is the CDM Fulfilling Its Environmental and
Sustainable Development Objectives? An evaluation of the CDM and
options for improvement (Öko-Institut: Berlin, 2007). Another study of
222 CDM projects concluded that approximately 26 percent of projects
in the sample were likely to be non-additional. However, like the
previous study, this analysis does not reflect recent program
improvements. See H. W. Au Yong, Investment Additionality in the CDM.
Technical Paper. Edinburgh, Ecometrica Press (2009).
[16] CDM officials we spoke with cited a number of recent initiatives
aimed at improving offset quality while streamlining the approval
process, including (1) developing further guidelines for
additionality, (2) simplifying methodologies for measuring emissions
by identifying superfluous requirements as well as requirements that
needed further explanation, and (3) various initiatives to improve the
performance and accountability of verifiers.
[17] Christopher S. Galik, Daniel Richter, Megan L. Mobley, Lydia P.
Olander, Brian C. Murray, Climate Change Policy Partnership: A
Critical Comparison and Virtual "Field Test" of Forest Management
Carbon Offset Protocols, Duke University, October 2008.
[18] CDM officials we interviewed said that projects that would be
viable without offset revenues, such as some wind or hydroelectric
power projects, could still be legitimately considered additional if a
more financially attractive option--for example, a coal plant--
existed. The number of credits awarded would be measured against
hypothetical emissions under the most financially attractive
alternative (e.g., the coal plant).
[19] National Crop Residue Management Survey, Conservation Technology
Information Center. See [hyperlink, http://www.ctic.purdue.edu/CRM/].
[20] Such incentives may include payments for protecting wetlands or
preventing soil erosion issued through other government programs.
[21] The CDM credits these projects based on historic baseline
emissions of HCFC-22, the refrigerant of which HFC-23 is a by-product.
Some research contends that refrigerant producers may have inflated
their base year production levels in order to receive more offsets.
(See Michael Wara, "Measuring the Clean Development Mechanism's
Performance and Potential" (Stanford University, Stanford, CA: Jan 20,
2008)). A 2010 CDM Methodology Panel report was unable to state
conclusively whether this had occurred, although the report
recommended that the methodology be further revised to ensure that
this and related issues do not occur in the future. In January 2011,
member states participating in the EU ETS voted to ban CDM projects
that destroy HFC-23 and nitrous oxide, although companies will be able
to use credits for compliance until April 30, 2013. In a press
release, the European Commission said that allowing such credits can
create a perverse incentive to continue to produce or even increase
production of HCFC-22.
[22] [hyperlink, http://www.gao.gov/products/GAO-08-1048].
[23] The term uncertainty refers to a description of the range of
values that could be reasonably attributed to a quantity. An
uncertainty is often presented as "plus or minus" a percentage of the
estimate, meaning that the actual value could be either above or below
the estimate by that amount with a certain degree of confidence.
[24] Specifically, researchers have used a variety of techniques to
estimate leakage from different offset project types and activities
that are similar to offsets. The estimates vary widely depending on a
number of factors such as the geographic scope where leakage is
considered, the location and type of project that is modeled, and
other modeling choices. Results of the studies we examined ranged from
less than 0 to 95 percent of targeted activities moving to other
locations. See B. Sohngen and S. Brown, "Measuring Leakage from Carbon
Projects in Open Economies: a Stop Timber Harvesting Project in
Bolivia as a Case Study" Canadian Journal of Forest Research 34: 2004,
p. 829-839; D. Wear and B. Murray, "Federal Timber Restrictions,
Interregional Spillovers, and the Impact on U.S. Softwood Markets"
Journal of Environmental Economics and Management, 47(2): 2004. 307-
330; EPA, Greenhouse Gas Mitigation Potential in U.S. Forestry and
Agriculture, EPA 430-R-05-006 (Washington, D.C.: November 2005); J.
Wu, "Slippage Effects of the Conservation Reserve Program" American
Journal of Agricultural Economics, 82 (November 2000): 979-992;
Jianbang Gan and Bruce A. McCarl, "Measuring Transnational Leakage of
Forest Conservation," Ecological Economics, 64(2):February 23, 2007:
423-432; and B. Murray, B. McCarl, and H. Lee, "Estimating Leakage
from Forest Carbon Sequestration Programs" Land Economics 80(1):2004,
109-124.
[25] See [hyperlink, http://www.gao.gov/products/GAO-08-1048].
[26] According to the Intergovernmental Panel on Climate Change, about
50 percent of emitted carbon dioxide will be removed from the
atmosphere within 30 years, and a further 30 percent will be removed
within a few centuries. The remaining 20 percent may stay in the
atmosphere for many thousands of years.
[27] We use the term verification to refer to both the initial
assessment of whether a project conforms to a program's requirements,
sometimes called a validation, as well as the assessment of emissions
reductions calculations.
[28] Offset buyers may have an interest in the quality of offsets that
they purchase if they are held liable for the quality of offsets they
have purchased under a given program, often termed buyer liability.
[29] Lambert Schneider and Lennart Mohr, 2010 Rating of Designated
Operational Entities (DOEs) Accredited Under the Clean Development
Mechanism (CDM), Report for World Wildlife Fund, (Berlin: Öko-
Institut, July 28, 2010).
[30] Third-party verification firms must be accredited by the CDM.
[31] Avoided deforestation projects aim to preserve forestlands by
establishing contracts, easements, or other legal instruments to
ensure that a site is not cleared of its timber.
[32] CDM requires one verification, called a validation, when an
offset project is approved and registered, and a verification of the
resulting reductions before offsets are issued. For comparison, the
median registered CDM project expects to receive 213,000 tons of
offsets through 2012. In 2009, the average price of CDM offsets was
$16.6, and at those prices, the median registered CDM project would
generate about $3.5 million in offset revenues. (See World Bank, State
and Trends of the Carbon Market: 2010 and United Nations Environment
Programme Risoe Centre, CDM Pipeline Overview (Denmark: [hyperlink,
http://cdmpipeline.org], downloaded Jan. 24, 2011). However, CDM
officials noted that verification costs can be substantial for smaller
offset projects.
[33] These sources may also be addressed outside of an offset program.
For example, emissions from many of these sources were excluded from
offsets in the American Clean Energy and Security Act, which instead
regulated these sources. EPA's analysis of the American Power Act is
available at: [hyperlink,
http://www.epa.gov/climatechange/economics/pdfs/EPA_APA_Analysis_6-14-
10.pdf[.
[34] The Use of Agricultural Offsets to Reduce Greenhouse Gases.
Statement before the Subcommittee on Conservation, Credit, Energy, and
Research, Committee on Agriculture, U.S. House of Representatives
(2009), of Joseph Kile, Assistant Director for Microeconomic Studies,
Congressional Budget Office. Estimates are based on the offset
provisions of the American Clean Energy and Security Act of 2009 (H.R.
2454).
[35] However, policymakers internationally are now considering the
inclusion of reduced emissions from deforestation and degradation
(REDD) in UNFCCC climate agreements.
[36] Specifically, the Climate Action Reserve found that less than 1
percent of livestock operations used methane gas collection systems
and that the main reason for this was that they were not commercially
attractive without offset revenues. See Climate Action Reserve, U.S.
Livestock Project Protocol V3.0 (Los Angeles, Calif.: Sept. 29, 2010).
[37] These experts stressed that such estimates are uncertain and
depend on the design of an offset program. See Peter Erickson, Michael
Lazarus, and Alexia Kelly, "The Importance of Program Design for
Potential U.S. Domestic Greenhouse Gas Offset Supply" (accepted for
publication in Climate Policy, 2011).
[38] Specifically, forestry projects that have error rates of plus or
minus 20 percent.
[39] According to CDM officials, this process effectively assumes that
the carbon has been released after a certain period but offers a way
to extend the compliance value of the offset if no reversal has
occurred.
[40] While the CDM allows forestry activities, the EU ETS does not
allow CDM credits from these activities to be used for compliance with
its emissions caps. As a result there has been little demand to date
for forestry projects in the CDM, and the market for temporary credits
is small.
[41] According to some program officials, an alternative option is to
enforce liability provisions only in the case of intentional
reversals, while having the program administrator take on the role of
replacing unintentional reversals through a buffer pool.
[42] Ten percent of a project's buffer is released every 5 years if
the project is reverified and has the same or lower risk profile. A
periodic "truing-up" ensures that total portfolio losses over time are
covered by the buffer pool.
[43] For example, under the CDM, if excess offset credits are issued
based on a deficient third-party verification, and certain other
conditions are met, the third-party verifier must acquire and transfer
an amount of reduced tonnes of carbon dioxide equivalent equal to the
excess credits issued to a cancellation account maintained in the CDM
registry by the Executive Board.
[44] One aspect of the VCS does involve program administrators
choosing verifiers. When a new methodology describing an approach to
monitoring, determining a project's baseline, and other provisions is
submitted for approval, it gets verified twice--once with a verifier
chosen by the project developer, and a second time with a verifier
chosen by program staff. This is a distinct step from verifying an
individual offset project.
[45] CBO, The Use of Offsets to Reduce Greenhouse Gases (Washington,
D.C.: Aug 3, 2009).
[46] American Power Act (draft bill), §§ 721(e)(1), 722(d)(1)
(available at [hyperlink,
http://kerry.senate.gov/imo/media/doc/APAbill3.pdf]). In subsequent
years, the offset limit would have stayed flat while the overall
emissions cap would have generally declined, meaning that offsets
would comprise a larger share of the cap over time.
[47] Under RGGI, each source may cover up to 3.3 percent of its total
reported emissions in a compliance period with offsets. According to a
state official, this 3.3 percent metric is generally equivalent to 50
percent of projected avoided emissions required by the program through
2018.
[48] According to UNFCCC officials, soil sequestration can be taken
into account in forestry projects, but agricultural soil projects are
not allowed.
[49] In other words, because the incremental cost of a non-additional
offset is zero (compared with the baseline), suppliers would
presumably be willing to sell these offsets at relatively low prices,
potentially reducing the number of additional offsets.
[50] ANSI coordinates U.S. participation in the International
Standards Organization's (ISO) international standard-setting process.
This is the process where the climate-related ISO standards were
developed, 14064-1, 2, and 3 and 14065. In the United States, ANSI is
an accreditation body and accredits verifiers for different offset
standards.
[End of section]
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Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
