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Cracks In The Cap: How the “Offsets” Loophole Undermines the Control of Global Warming Pollution from Power Plants 9/12/2005 cracksinthecap.pdf News Release

Executive Summary

As the new home of MASSPIRG's environmental work, Environment Massachusetts can be contacted regarding this report.

Nine Northeast states from Delaware to Maine are currently working to develop a regional system to limit global warming pollution from power plants. The program, known as the Regional Greenhouse Gas Initiative (RGGI), represents one of the first significant efforts to mitigate the serious impacts of global warming in the United States.

At the outset of the negotiations, the states agreed to keep the program simple as a guiding principle. The states decided to initially limit the program to reducing global warming pollution from electric power generators in the Northeast. However, negotiators are now revisiting that principle and considering five categories of offset measures—pollution cuts outside the regional electricity sector that would “offset” excess power plant pollution.

The five offset measures under consideration are:

• Reducing methane emissions from landfills;

• Cutting sulfur hexafluoride (SF6) emissions from electrical equipment;

• Planting forests on non-forested land (afforestation); and

• Improving the efficiency of natural gas, heating oil and propane use and reducing fuel consumption with solar thermal technology.

And potentially:

• Accepting retired credits from the European Union Emission Trading Scheme and the Clean Development Mechanism.

For a variety of reasons, these proposed offset measures will undermine the benefits of the program for the Northeast:

Offsets would reduce the level of emission reductions from power plants in the Northeast and erode the integrity of the cap-and-trade program.

• The cap proposed by the RGGI staff working group would limit global warming pollution to current levels for 10 years and then reduce emissions 10 percent by 2020. Offsets would be allowed to substitute for half of the required emissions reductions— defined as the difference between a business-as-usual forecast and the cap—slashing the amount of emission reductions that will be attained from power plants in the Northeast.

• The 50 percent cap on the use of offsets is an unnecessarily high threshold that, over time, will create pressure on state officials to approve low integrity offset measures when the currently proposed measures prove inadequate to meet demand.

Proposed offsets may fund pollution cuts that would happen anyway, driven by economic incentives and policies already in place. For example:

• Landfill gas projects are already driven by regulations and financial incentives, such as Renewable Energy Standards and dedicated funding programs for renewable energy. Landfill gas consumption doubled nationwide between 1994 and 2002—without additional financial advantages from carbon trading programs—and will likely continue to grow.

• Sulfur hexafluoride emissions have dropped more than half since 1990, driven by the rapidly increasing price of the gas (which increased from $3 per pound in 1994 to between $12 and $37 per pound in 2001). Pacific Gas & Electric saved $300,000 by cutting its emissions of sulfur hexafluoride in half between 1998 and 2002.

• End-use fuel efficiency projects are already cost effective in many cases. For example, New Jersey’s Clean Energy program installed measures in 2003 that delivered natural gas savings at $0.30 per therm, 37 percent lower than the U.S. wellhead price and 64 percent lower than the average residential price. Ongoing high natural gas prices will continue to make efficiency measures attractive.

• Some land chosen for afforestation projects could revert to forest without human intervention. Most of the Northeast was originally covered by forest. Since 1870, forest coverage in New England has been on the rise. From 1970 to 1998, forest area increased by 12 percent without carbon credit trading programs.

Offsets can reduce the local co-benefits of a carbon cap. For example:

• Credits under the European Union Emissions Trading Scheme would direct Northeast dollars to fund cleanup abroad. As a result, Europe would benefit from improved air quality, better energy efficiency and increased economic output, while the Northeast would share only in the benefit of reduced global emissions of carbon dioxide.

• Clean Development Mechanism offsets—a part of the Kyoto Protocol meant to encourage technology sharing with underdeveloped countries— could generate environmental improvements in Third World nations. Northeast electricity consumers would fund these projects without sharing in the co-benefits. This would be acceptable only if the modest cap currently under consideration were stringent enough to move us toward real climate stabilization.

Offsets raise equity and fairness issues and limit the expandability of the cap to other sectors of the economy. For example:

• Allowing offsets for sulfur hexafluoride (SF6) reductions would actually reward bad actors who have failed to adequately reduce their emissions of SF6 in the past. Utilities that have already made voluntary, good-faith efforts to reduce SF6 emissions would be penalized by allowing their competitors to receive a greater amount of offsets.

• Landfill gas offsets would subsidize landfill operators for installing pollution control measures—a “pay me not to pollute” arrangement. Rewarding landfill operators that do not currently capture methane would undermine the ability to fairly incorporate these pollution sources into the program later on, or to require them to reduce methane emissions by regulation.

Offsets can inadvertently create adverse environmental outcomes. For example:

• Landfill gas offsets could create a perverse subsidy to dispose of recyclable wastes in a landfill. Much organic matter—the source of landfill methane—could more effectively be composted and recycled as fertilizer, reducing global warming pollution and creating a useful product at the same time.

• Clean Development Mechanism projects could include large-scale dams and mono-culture industrial tree farms, both of which damage local ecosystems.

Offsets can be difficult to quantify and challenging to enforce. For example:

• Afforestation measures could displace global warming pollution rather than reducing it in the aggregate. For example, an afforestation project could displace would-be development from vacant pastureland to a nearby forest parcel.

• All five proposed offset measures would need rigorous accounting to ensure credit only for the extent that the offset overcomes a genuine market or financial barrier, and to discount for any “leakage” of emission reductions to other locations. Developing and implementing accounting standards would be time- and resource-intensive, with no foolproof guarantee of accuracy.

• State agency staff tasked with monitoring compliance and enforcement may not have the funding to do so for complicated projects or those located outside the region. Third party certifiers are not elected or appointed officials and not directly accountable to the public.