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Benefits of Limiting Compliance Offsets in Cap and Trade Programs

Fact Sheets, Reports, Policy Briefs:

Sign-On Statements in Support of Limiting Offsets:

Offsets allow regulated polluters to purchase emission reductions from unregulated sectors or countries that do not have caps, instead of reducing an equivalent amount of their own emissions or buying allowances from other regulated facilities.

For example, a regulated electricity generator could “offset” its emissions by paying an unregulated landfill company to capture methane emissions.

Offsets, if they are cheaper than emissions reductions for regulated entities, can help to lower compliance costs for polluters in the short run. They create one avenue for sectors and countries that are not yet under a mandatory cap to nevertheless contribute to the global emissions reduction goal. However, by helping postpone emissions reductions from major emitting sectors, offsets could also delay much-needed technological transformation and delay innovations in the sectors that have been capped. This would in turn jeopardize the program’s long-term emissions reduction goals. Considerable resources and institutional capacity may be required to ensure that any allowed offsets meet the stringent quality criteria of being real, verifiable, quantifiable, additional, permanent and enforceable.

There may be better (cheaper, more efficient) ways to get emissions reductions from sectors that are not easy to cap than via offsets. These could include direct mandates (such as performance or technology standards), financial incentives paid for by allowance auction revenues, subsidies and loan guarantees.

All of these reasons lead to the conclusion that bounding the amount of offsets available within a cap-and-trade program is likely to be a superior policy choice. Any offsets allowed should meet strict quality standards and there should a strong institutional framework to monitor and enforce these standards. The appropriate level of offsets to allow must be directly related to the stringency of the cap set.

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