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Stopping Global Warming Begins At Home: The Case Against the Use of Offsets in a Regional Power Sector Cap-and-Trade Program 9/10/2004 Stoppingstarts.pdf News Release

Executive Summary

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

At the direction of their governors, representatives of nine Northeast states (Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont) are currently working to develop a regional cap-and-trade system designed to limit emissions of carbon dioxide (the leading global warming gas) from power plants in the region. The process, known as the Regional Greenhouse Gas Initiative (RGGI), holds the promise of significantly reducing the Northeast’s contribution to global warming.

A number of stakeholders in the RGGI process have suggested that the region allow owners of power plants to purchase “offsets” (reductions in global warming emissions made at other facilities outside the region or at facilities other than the fossil fuel power plants regulated under the program) to ease compliance with the program or to help achieve further reductions. Supporters of this approach claim that allowing the use of offsets will reduce the cost of global warming emission reductions while achieving similar environmental benefits and broadening the reach of the program to other sectors of the economy.

However, allowing offsets to be used to comply with a regional power-sector emission cap could undermine otherwise significant gains in reducing carbon dioxide emissions from power generating facilities. There are three main reasons for the Northeast to resist a liberal approach to offsets in setting rules for the cap-and-trade program:

1. Offsets reduce the certainty of achieving real emission reductions.

• Rules for the use of offsets typically require that offsets deliver emission reductions that are real, surplus, permanent, quantifiable and enforceable. Assuring that offsets meet these criteria is very difficult. For example:

- Emission reductions may not be “real” if reductions claimed in one location are simply shifted elsewhere. (For example, as a result of a manufacturer reducing production in one location but increasing it in another location).

- Emission reductions may not be “surplus” if the reductions would have occurred anyway. (For example, through the planned replacement of aging equipment with a more energy-efficient model.)

- Emission reductions are not easily enforceable if they occur outside the region or in a sector of the economy that is not vigorously regulated.

• Assuring compliance with these criteria through aggressive monitoring and verification efforts drives up the administrative costs of the program. Failing to do so reduces the certainty of achieving environmental benefits.

2. Offsets reduce the associated benefits of achieving emission reductions within the region.

• Requiring that emission reductions be achieved at power plants within the region (as opposed to through the purchase offsets from elsewhere) would encourage the renovation, repowering or closure of some of the region’s oldest, dirtiest and least-efficient power plants.

• In 2000, approximately half of all carbon dioxide emissions from power plants in the RGGI region came from just 20 power plants. These plants produced twice as much carbon dioxide per unit of power produced as the regional average. They also emitted:

- 38 percent of the region’s power-sector emissions of mercury—a neurological toxicant that has triggered fish consumption advisories nationwide

- 64 percent of the region’s power-sector emissions of sulfur dioxide, which causes acid rain

- 47 percent of the region’s power-sector emissions of smog-forming nitrogen oxides

While other air pollution control programs mandate reductions in emissions of these pollutants, the renovation, repowering or retirement of these plants could reduce the overall need for and thus cost of installing emission controls.

• A strong regional carbon cap without offsets could provide further momentum in the region’s efforts to achieve a cleaner, more reliable electric system by making greater use of renewable energy and improved energy efficiency. One recent study by Synapse Energy Economics found that such an approach—if adopted nationally—would reduce carbon dioxide emissions while generating $36 billion annually in savings by 2025.

3. Offsets will dull, not enhance, momentum for emission reductions in other sectors of the economy.

• Supporters of offsets claim that allowing other sectors of the economy to participate in the power-sector program will create the foundation for future emission reduction efforts in those sectors. However, cap-and-trade systems may not be the most appropriate means to reduce emissions in some portions of the economy with large climate impacts and could delay other policies that would be more effective—further limiting the precedent-setting potential of an offset program. Indeed, providing financial rewards to entities outside of the power sector that reduce their greenhouse gas emissions could create a disincentive for those entities to accept a mandatory emissions cap later on.

• Achieving real, quantifiable emission reductions in the electric sector in the Northeast would set a powerful example that such reductions are achievable – and encourage the development of programs that produce similar results in other regions and other sectors of the economy.

The Northeast should tread carefully before allowing the use of offsets to comply with a power-sector carbon dioxide emission cap. Specifically:

• The Northeast governors and their staff involved in the RGGI process should stick with their originally stated goals and principles by not incorporating the use of offsets until after the core cap-and-trade program is designed and the model rule is adopted. As the original Action Plan for the process sets forth, offsets should be considered simultaneously with expansion of the cap to other sources.

• States should first determine the cap level they can achieve without the use of offsets. Offsets should only be considered if the carbon dioxide cap adopted through the RGGI process is strong—requiring emission reductions of at least 10 percent below current levels by 2010 and 25 percent below current levels by 2020.

• Should offsets eventually be included in a later phase of the program, the Northeast should adopt a conservative approach, requiring that:

- Offsets be generated only within states participating in the cap-and-trade program. Offsets from outside RGGI will be difficult to enforce and allowing them will reduce the incentive that other states have to join the program. In addition, dollars paid by consumers in the RGGI states should go towards emissions reductions and investments here at home.

- Strong provisions be established to assure that offsets represent real, surplus emission reductions.

- Nuclear power projects and other environmentally damaging technologies not be eligible for offsets or otherwise obtain a market advantage for being zero emitting in any cap-and-trade system.

- Offsets be limited to no more than five percent of the total number of emission allowances issued. This would allow for demonstration of the viability of an offsets program while limiting the potential damage that a poorly designed program could inflict.

- The benefits of offsets be shared equally between those covered by the cap and the environment. For example, a decision to allow 10,000 tons of offsets should be paired with a reduction in the cap of 5,000 tons.