Barbara Haya

Carbon offsets allow greenhouse gas emitters regulated under an emissions cap to comply by paying others outside of the capped sectors to reduce emissions. The first major carbon offset program, the United Nations’ Clean Development Mechanism (CDM), has been criticized for generating a large number of credits from projects that do not actually reduce emissions. Following the controversial CDM experience, California pioneered a second-generation compliance offset program that shifts the focus of quality control from assessments of individual projects to the development of offset protocols, which define eligibility criteria and methods for estimating emissions reductions for categories of projects. We assess how well California’s protocol-centered approach mitigates the risk of over-crediting greenhouse gas reductions. This analysis is relevant because the offset program could make up the full effect of the state’s cap-and-trade program through 2020, and half of its effect through 2030. We review the development of two of California’s offset protocols—Mine Methane Capture and Rice Cultivation—and examine the regulator’s treatment of three sources of uncertainty in emission reduction estimates that led to large-scale over-crediting under the CDM: determining additionality, estimating the counterfactual baseline scenario, and avoiding perverse incentives that inadvertently increase emissions.

We find that while the risk of over-crediting can be reduced through careful analysis, conservative design decisions, and ongoing monitoring of protocol outcomes, even best practices result in significant uncertainty in quantifying true emission reductions. Rather than eliminate the risk of overcrediting, California’s approach shifts risk from project-level to protocol-level quality assessments. To the extent that carbon pricing policies include large offset programs, as is the case in California, government priorities and methodological choices drive program outcomes, contrary to the common perception that carbon pricing policies mainly delegate decision-making to private actors. Ultimately, relying on carbon offsets to lower compliance costs risks lessening total emission reductions and increases uncertainty in whether an emissions target has been met. As a result, offsets can be understood as a way for regulated emitters to invest in an incentive program that achieves difficult-to-estimate emission reductions rather than as quantifiable and verifiable reductions equivalent to reductions under a cap. Substantial ongoing regulatory oversight is needed to contain uncertainty and avoid over-crediting.

Analysis of projects generating 80% of total offset credits issued by ARB under its U.S. Forest projects offset protocol shows that 82% of the credits generated by these projects likely do not represent true emissions reductions, due to the protocol’s leakage accounting methods. The total quantity of over-crediting across these 36 projects equals approximately 80 million tons of CO2. For context, the U.S. Forest Protocol has generated 80% of the offset credits in California’s cap-and- trade program; the estimated over-crediting is equal to one third of the total expected effect of California’s cap-and-trade program on emissions during 2021-2030.

Carbon offsets allow greenhouse gas emitters to comply with an emissions cap by paying others outside of the capped sectors to reduce emissions. The first major carbon offset programme, the United Nations’ Clean Development Mechanism (CDM), has been criticized for generating a large number of credits from projects that do not actually reduce emissions. Following the controversial CDM experience, California pioneered a second-generation compliance offset programme that shifts the focus of quality control from assessments of individual projects to the development of offset protocols, which define project type-specific eligibility criteria and methods for estimating emissions reductions. We assess the ability of California’s ‘standardized approach’ to mitigate the risk of over-crediting greenhouse gas reductions by reviewing the development of two California offset protocols – Mine Methane Capture and Rice Cultivation. We examine the regulator’s treatment of three sources of over-crediting under the CDM: non-additional projects, inflated counterfactual baseline scenarios, and perverse incentives that inadvertently increase emissions. We find that the standardized approach offers the ability to reduce, but not eliminate, the risk of over-crediting. This requires careful protocol-scale analysis, conservative methods for estimating reductions, ongoing monitoring of programme outcomes, and restricting participation to project types with manageable levels of uncertainty in emission reductions. However, several of these elements are missing from California’s regime, and even best practices result in significant uncertainty in true emission reductions. Relying on carbon offsets to lower compliance costs risks lessening total emission reductions and increases uncertainty in whether an emissions target has been met.

Key policy insights

- Substantial and ongoing oversight by offset programme administrators is needed to contain uncertainty and avoid over-crediting.

- California’s Mine Methane Capture Protocol may have influenced federal decisions not to regulate methane emissions from coal mines on federally-owned lands.

- Government priorities and methodological choices drive outcomes in carbon pricing policies with large offset programmes, contrary to the common perception that these policies delegate decision-making to private actors.

- Offsets are better understood as a way for regulated emitters to invest in an incentive programme that achieves difficult-to-estimate emission reductions, than as accurately quantified tons of reductions.

Natural and social scientists are increasingly stepping out of purely academic roles to actively inform science-based climate change policies. This chapter examines a practical example of science and policy interaction. We focus on the implementation of California's global warming law, based on our participation in the public process surrounding the development of two new carbon offset protocols. Most of our work on the protocols focused on strategies for ensuring that the environmental quality of the program remains robust in the face of significant scientific and behavioral uncertainty about protocol outcomes. In addition to responding to technical issues raised by government staff, our contributions- along with those from other outside scientists- helped expand the protocol development discussion to include important scientific issues that would not have otherwise been part of the process. We close by highlighting the need for more scientists to proactively engage the climate policy development process.

The Indian government has set the challenging goal of increasing its electricity capacity six- to eight-fold in the next 30 years in the context of significant capacity shortfalls and a financially ailing electricity sector. The central and state governments are subsidizing renewable energy because of energy security concerns, to promote domestic resources and a diversity of fuel supply. International funds made available through the international climate change regime could potentially provide much needed support to pay the higher costs that most renewable energy requires. This article performs a case study analysis of the history of the development of one renewable energy technology in India – cogeneration of sugarcane waste – focusing on the barriers this technology has faced in the past and now faces, and how well international and domestic efforts have worked to overcome these barriers. The goal of this work is to lend insight into the effective structure of future international support mechanisms being discussed for inclusion under the post-2012 climate change regime. This study finds that bagasse cogeneration has faced layers of informational, technical, regulatory and financial barriers that have changed over time, and differed significantly between the private and cooperative sugar sectors. Each of the programmes designed to support bagasse cogeneration had a role to play in enabling the bagasse cogeneration currently installed, and no single programme would have been successful on its own. Some barriers to the technology needed directed efforts designed to address the specific context of the sugar sector in India; simply subsidizing the technology or putting a price on carbon was not enough. Where climate (global) and development (local) priorities differ, projects that bring about international goals risk running into conflict with other more pressing domestic goals. Interviews at mills attempting to access carbon financing through the Kyoto Protocol’s Clean Development Mechanism (CDM) indicate that additionality-testing is a challenge to the effectiveness of this mechanism. Any effort to exploit the remaining 86% of the estimated national potential for high efficiency bagasse cogeneration will need to address the special financial and political conditions facing cooperative mills.

Land-use activities that affect the global balance of greenhouse gases have been a topic of intense discussion during ongoing climate change treaty negotiations. Policy mechanisms that reward countries for implementing climatically beneficial land-use practices have been included in the Bonn and Marrakech agreements on implementation of the Kyoto Protocol. However some still fear that land-use projects focused narrowly on carbon gain will result in socioeconomic and environmental harm, and thus conflict with the explicit sustainable development objectives of the agreement. We propose a policy tool, in the form of a multi-attribute decision matrix, which can be used to evaluate potential and completed land-use projects for their climate, environmental and socioeconomic impacts simultaneously. Project evaluation using this tool makes tradeoffs explicit and allows identification of projects with multiple co-benefits for promotion ahead of others. Combined with appropriate public participation, accounting, and verification policies, a land-use activity decision matrix can help ensure that progressive land management practices are an effective part of the solution to global climate change.

Carbon trading is being implemented on international, national and sub-national scales in most places where greenhouse gas (GHG) emissions targets are enacted. The appeal of carbon trading is efficiency, lowering the cost of climate mitigation by allowing the market to find the least expensive sources of reduction. In this dissertation I probe the assumptions that carbon trading is efficient and effective through grounded case study.

A multi-year study on how the Kyoto Protocol’s Clean Development Mechanism (CDM) – the world’s largest carbon offsetting program – is working in practice in the Indian power sector (Chapter 2) documents large uncertainties associated with the emissions reduced by the program. This uncertainty has resulted in large numbers of CDM projects that do not actually reduce emissions (are “non-additional”) and regulatory uncertainty that undermines the effectiveness of the program in supporting new projects. In the medium- and long-term, even if the quality of offsetting projects can be assured, the purported efficiency of offsetting must be weighed against ways that offsetting at large scale makes international climate change cooperation more difficult over the next decades.

There has been a lot of interest in continuing offsetting by ensuring that the credits generated represent real emissions reductions. Chapter 3 examines the prospects for developing a more rigorous “additionality test” for filtering out proposed CDM projects that are business-asusual and therefore do not represent real emissions reductions under the program. Through in depth case studies of additionality testing for wind, biomass and hydropower projects in India, I conclude that at today’s carbon prices there is no accurate verifiable indicator of whether CO2 reduction projects would be built without the CDM.

Chapter 4 probes the effectiveness of carbon crediting in incentivizing emissions reductions. A focused look at the history of support for bagasse cogeneration in India reveals that a range of shifting barriers have impeded the development of this cost effective technology. A carbon price alone would not have overcome the barriers to this technology, and parallel support efforts were needed to spur this technology.

Post-2012 climate change agreements and legislation include provisions for replacing CDM additionality testing with standardized project eligibility criteria and indicate a shift away from project-based offsetting towards offsetting on a sectoral level as ways to retain the efficiency of offsetting, but avoid the current problems with the CDM. I examine this range of proposals for reforming or replacing the CDM with a study of the design of a sectoral crediting programs in the cement sector in Shandong province in China. This study indicates that for most 2 conceptions of sectoral crediting programs, the problems with the CDM documented in Chapters 2, 3 and 4 risk being even worse when offsetting is implemented on a sectoral level.

I conclude with a brief discussion of how some of the inefficiencies of offsetting may feature in carbon trading generally by tracing parallels between the design and implementation of the CDM and California’s Low Carbon Fuel Standard. I end with a policy discussion of the political space within which offsetting is being negotiated internationally, and within the US, and alternatives to the CDM and offsetting that might fulfill political and environmental goals together.