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Wednesday, May 5, 2010

Estimating Offset Supply in a Cap-and-Trade Program

Jonathan L. Ramseur
Specialist in Environmental Policy

If allowed as a compliance option in a greenhouse gas (GHG) emission reduction program (e.g., a cap-and-trade system), offsets have the potential to provide considerable cost savings and other benefits. However, offsets have generated considerable controversy, primarily over the concern that illegitimate offsets could undermine the ultimate objective of a cap-and-trade program: emission reduction. 

An offset is a measurable reduction, avoidance, or sequestration of GHG emissions from a source not covered by an emission reduction program. An estimate of the quantity and type of offset projects that might be available as a compliance option would provide for a more informed debate over the design elements of a cap-and-trade program. It is difficult to estimate the supply of offsets that might be available in a cap-and-trade system, because the supply is determined by many variables, including: 

Mitigation potential.
Mitigation potential estimates are the raw data that feed into models estimating offset use in a cap-and-trade program. Recent estimates contain considerable uncertainty. 

Policy choices.
The design of the cap-and-trade system would be critical to offset supply. Particularly relevant design choices include which sources are covered; which types of offset projects are allowed; whether or not offset use is limited; and the degree to which set-aside allowances are allotted to activities that may otherwise qualify as offsets. Policymakers' treatment of international offsets would play a major role. 

Economic factors.
The development and market penetration of low- and/or zero-carbon technologies would likely have substantial effects. These technologies could lower the costs of the cap-and-trade program, making fewer offset projects cost effective. 

Emission allowance price.
The allowance price would determine the supply and type of offsets that would be economically competitive in a cap-and-trade system. As the price increases, more (and different types of) projects would become cost effective. Allowance price estimates are difficult to predict, as they are dependent on numerous variables, including offset treatment. 

Other factors.
Non-market factors, such as social acceptance, may influence offset use. In addition, information dissemination would likely be an issue, because some of the offset opportunities exist at smaller operations, such as family farms. 

Although economic models have generated estimates of offsets that would be developed and used in a cap-and-trade system, the estimates are rife with uncertainty. This report examines the multiple variables that would help shape offset supply.

Date of Report: April 16, 2010
Number of Pages: 14
Order Number: RL34705
Price: $29.95

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