Domestic Offsets in the American Power Act: Preserving the Integrity?

NRDC staff have posted assessments of a number of key elements of the Kerry-Lieberman American Power Act discussion draft. Here, we’ll take a closer look at the domestic offsets program. I’ll give a brief overview of the program, as outlined in Part D of the bill (Sec. 731-741), highlight key strengths, and discuss several areas where we believe further improvements are needed.

The draft bill provides a solid foundation for an environmentally sound offset system, but there some important modifications are needed to ensure that the system meets key standards of environmental integrity.

Strong Safeguards for Offsets are Critical.  Before digging into the details of the draft bill’s offset provisions, we wanted to first step back and remind ourselves why it is so critical that the rules for offsets are correctly designed.  Every offset used for compliance represents one ton of reduction that isn’t achieved by regulated companies/facilities within their own operations (or within the cap).  So if we don’t get offsets right then the atmosphere doesn’t see the intended reductions.  And since we don’t have any spare space in the atmosphere, it is critical that we ensure that every offset ton represents the same environmental  benefit as the “other tons”—that “a ton is a ton”, not a half-ton or a three-quarter ton.  After all, the last thing we need is “subprime offsets” as it will lose confidence of the public and policymakers, increase global warming pollution, and lead to the loss of a low-cost compliance option if confidence in their integrity collapses.

Ensuring that the offset system is environmentally credible requires good answers both in the legislation and in the ensuing rules on: who develops the rules; whether those rules are guided by credible science; how the rules are applied to ensure the environmental integrity of each offset; what kinds of mechanisms are included to ensure third-party oversight, public scrutiny, and regular adjustment of the program.  

How does the draft bill handle offsets?  As Dan Lashof noted in his post, the American Power Act allows covered entities to use up to 2 billion tons per year of “offsets” (emissions reduced or carbon sequestered by sources not covered by the bill’s pollution limits)—split evenly between domestic and international offsets (see my colleagues post for how international offsets are handled)—for compliance with the emissions cap.

The bill establishes criteria, administered by EPA (or, for domestic farm and forestry offsets, by the Department of Agriculture in consultation with EPA), for crediting offsets, so as to assure that offset credits are earned only for real, verifiable and permanent actions that would not happen anyway.  Strong implementation of these principles is essential to ensuring the environmental integrity of the offset system and the cap (as Dan Lashof discussed).     

In addition, the bill calls on EPA and USDA to jointly create a Greenhouse Gas Emission Reduction and Sequestration Advisory Committee to advise both agencies on the establishment and implementation of the domestic offsets program (a separate Committee is established to do the same for international offsets). The Advisory Committee is to make recommendations on which projects should be eligible as offsets, provide relevant scientific data, recommend methodologies for each project type, and issue regular reports to EPA, USDA and the general public (more on this below) on how the environmental integrity of offset projects can be ensured. In addition, every 5 years, the Advisory Committee must provide a public scientific review of the offset program, including a review of methodologies being used, offset project verification reports and audits, the net emissions impact of the program (i.e. a “true up” to see if offsets are indeed delivering their promised reductions) and recommend changes to improve the program’s environmental performance.

The bill creates a very long list of “eligible project types” that the Advisory Committee must consider for offset eligibility. In developing program regulations, EPA and USDA are directed to give priority to those projects with well-established methodologies and must take into consideration the recommendations of the Advisory Committee. In establishing a list of eligible project types, the agencies must provide an explanation if their list differs from the list recommended by the Advisory Committee. In addition, the bill lays out a series of quality standards, including:

• requirements to set baselines using conservative estimates of “business-as-usual”;
• guidance on determining if a project meets the additionality criteria (i.e., whether a reduction would have happened anyway); and
• obligation to account for the risk of leakage (i.e. does the project cause emissions simply to shift to another location); and
• rules to address reversals (for example, if a forest burns down and the carbon reduced “goes up in smoke” in a later period), with minimum mechanisms that ensure the environment is compensated if a reversal takes place, as well as penalties for intentional reversals.

It also establishes crediting periods for sequestration offsets on agricultural and forestry land, requires third-party verification and regular auditing of offset projects, and lays out a process for creating an early offsets supply.

So that is what it does, but what are its strengths?  As we’ve discussed above, much of the overall structure of the offsets program in the draft bill is designed to guide the implementation of strong rules to ensure the environmental credibility of the system. 

1. Having science (not politics) drive key offset designs.  The independent Advisory Committee is tasked with making scientifically driven recommendations.  Ensuring that science is at the heart of the offset system requires that this body is effectively staffed, operates on the basis of hard science (not political science), and that the Agencies appropriately handle its recommendations.  Providing outside scrutiny (as we’ll discuss below) is critical to providing an extra scientific check.  

2. Placing environmental integrity at the heart of the system.  The draft bill establishes a commitment to assuring environmental performance.   It requires that the rules lead to an offset credit that is equivalent to a ton of emission reduction in the sectors with firm limits on their pollution.  It also emphasizes the need for standardized methodologies (as opposed to case-by-case review) to address concerns about additionality, measurement, leakage accounting and discounting for uncertainty.  In addition, the Agencies are directed to use conservative methodologies that provide a “science-based margin of safety to ensure the emissions integrity”.

3. Reviews, Audits, Revisions.  The draft includes annual randomized performance audits of offset projects, offset credits and the auditors themselves, creating essential accountability for environmental integrity in the offset market.  And it allows for the removal of offset project types that are found to fall short in delivering environmentally sound reductions.  These regular checks on the system will be critical to provide ongoing oversight of whether the program is developing offsets which help us address global warming pollution (not make it worse). 

3. Public Transparency.  The bill requires that EPA and USDA establish a process to accept and respond to public comments on the program rules, as well as procedures for public appeal and review of individual project approvals.  In addition, EPA and USDA decisions and the information relevant to making their decisions is to be made publicly available. Transparency in rulemaking, public availability of information, and strong public accountability are key to ensuring that not only are regulations written well, but that they are also implemented well.

The draft also includes an important modification over previous proposals.  It provides strong guidance for cooperation between the EPA and USDA with respect to offsets in the domestic agriculture and forestry sectors. USDA is named the lead agency on all farm and forestry offsets, but it must carry out its work “in consultation and coordination” with EPA.  Because EPA is charged with guaranteeing the overall environmental performance of the bill, it is critical that EPA have a clear and established role in ensuring consistency of the overall offsets program.  

But there are also key areas that need to be strengthened, including the following:

1. Eliminating/refining the list of eligible offsets.  The bill includes a long list of project types which are supposed to be allowed to generate offsets.  Many of these project types are untested and inherently difficult or impossible to implement in an environmentally sound manner (in fact some of these have never been applied anywhere in the world under a credible system).  The list of presumptively eligible project types should therefore be eliminated or shortened to include only those most likely to produce high quality reductions.

2. Tightening the requirements for carbon reversals.  Offset credits issued for sequestering carbon in soils or forests only remain valid as long as the carbon stays out of the atmosphere.  Offset purchasers (not the project developer) should be ultimately responsible to make up tons lost through reversal of the carbon storage in agriculture and forestry projects (e.g. due to renewed plowing or tree cutting) if they are not replaced through a buffer.  Responsibility to monitor and compensate for reversals should also extend well beyond the crediting period.

3. Ensuring that only good early offsets count.  While it is important not to penalize farmers and other landowners that have taken action to reduce emissions prior to the implementation of the offset program, compensating early actors must be done in a way that ensures the environmental integrity of the emissions cap. In the case of early actors who received offset credit through existing state or voluntary program, only credits obtained through programs that use project standards, methodologies and protocols established through a process that involves both public transparency and peer review should qualify for the federal program. Early actors who have implemented qualifying projects or practices on their land in the years prior to the offsets program, but have not registered those practices or projects with any existing program, should be compensated via a set aside fund dedicated to the domestic agriculture and forestry sectors (as discussed below).

4. Providing a dedicated source of funding, separate from offsets, for “good” but not “creditable” activities.  Many farm and forestry practices present difficulties in terms of meeting rigorous additionality standards and are more appropriately compensated outside the offsets market (so as not to “bust the cap”).  In addition, there are examples of practices believed to deliver important environmental benefits that scientists simply cannot yet measure or verify with enough certainty to meet offset criteria, like projects in coastal marine areas and certain agricultural practices. A domestic agriculture, forestry, and coastal marine program would allow EPA and USDA to nonetheless incentivize these practices, all the while building important scientific and technical knowledge that would allow them to possibly be included in the offsets program in the future.  Such a program could also be used for early actions which reduce emissions, but aren’t eligible under the early offset system.  The addition of a robust, well-funded and well-regulated program would greatly enhance our ability to reduce emissions in certaub sectors and help improve the environmental integrity of the offsets program.

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Offsets will almost certainly be one of the key elements of a climate and energy bill under debate in the coming weeks and months.  Of course passage of the strong offset provisions in a climate and energy bill isn’t the final say, as ensuring the program’s integrity will require the responsible agencies to properly implement these rules and provide appropriate due diligence.

While far from perfect, the domestic program established in the bill has many strong features which must be retained to ensure that the offset system preserves the integrity of the emissions limits.  Key improvements can and should be make to enhance the environmental integrity of the offsets market and help ensure that offsets are helping (not hurting) our efforts to address global warming.