Not Enough Offsets to Meet Targets of Waxman-Markey Bill: Report

Not Enough Offsets to Meet Targets of Waxman-Markey Bill: Report

A Point Carbon report published last week suggests greenhouse gas reduction targets outlined in the recent Waxman-Markey House climate change bill will require more carbon offsets than what will be available domestically.

That means U.S. emitters will look increasingly to overseas offsets and power generation fuel switching as 2020 approaches, which could potentially push the price of carbon past the $50 per ton mark.

However, there are several provisions that can help ease pricing pressures, particularly in the short-term. For example, standards for energy efficiency and renewable energy could halve the gap between actual emissions and the emissions cap established in a federal cap-and-trade system.

Offsets serve an important function in the short- to mid-term: keeping prices down nations shift to the low-carbon economies. Point Carbon estimates there will be about 20 million tons of offset projects in the U.S. and Canada in 2012, but only about half will be eligible for inclusion in a federal compliance program.  The report predicts five offsets projects will qualify for a federal program: agricultural waste, forestry, fugitive emissions from coal methane, landfill gas and soil sequestration.

The biggest constraint to the development of more offset projects domestically is physical: There aren't enough eligible sites to meet the market demand. There is also the possibility that offsets will be discounted at a 5-4 ratio, so the domestic offset supply will be further limited and unable to fill the gap between actual emissions and the cap.

"It is highly unlikely, if not impossible," the report said. "Even though we anticipate investment in offsets to rise sharply as the beginning of the cap-and-trade program nears, the increase in available credits is unlikely to get even near the limit."

This will place more demand on international offsets and allowances, but U.S. emitters will face competition from global entities in the EU Emissions Trading Scheme and other trading programs. That will lead some within the power generation sector to seek less-carbon intensive and presumably cheaper fuels, such as switching from coal to natural gas, but the practice faces extreme price volatility.

"Power plant" -- CC licensed by Flickr user Elite PhotoArt.