Offsets and Climate Policy: EPA Perspectives Dina Kruger Director, Climate Change Division U.S. Environmental Protection Agency May 30, 2008

2 Offsets Defined Offsets are emissions reductions from non-capped source categories –Done right, they will lower the costs of the overall program to regulated sources require moderate administrative procedures to implement create incentives for reductions in non-capped sectors –Done wrong, they will impose a substantial administrative drag on both the government and regulated entities pose a risk that the reductions aren’t real, thus, effectively increasing the overall cap and negatively impacting the environmental integrity of the overall system

3 Importance of Additionality Landfill Emissions (without methane collection/combustion) Power plant Emissions (no cap) Landfill Reduction (with methane collection/combustion) Power plant Emissions (with cap) No Offset/No Cap Offset/Cap Cap

4 Offsets and Climate Policy EPA Perspectives Informed by Programmatic experience in the offset sectors Economic analysis of sectoral mitigation options Economic analysis of legislative proposals

5 On-the-ground Experience Domestic and international programs to reduce methane and high-GWP gases Provide technical assistance –Identifying candidate sites –Conducting feasibility studies –Bringing partners together

6 Demonstrated Results Total US Methane Emissions in 2005 were more than 11% lower than emissions in 1990, in spite of economic growth over that time period. Methane to Markets −US is leveraging significant investment and engagement from the private sector −Projects initiated through 2006 are expected to achieve annual emission reductions of almost 10 MMTCO2E Cumulative Total U.S. Government Funding and Leveraged Funding $262,089,623 $18,102,638 $0$100,000,000$200,000,000$300,000,000 Total U.S. Government funding Leveraged funding

7 Applying Program Knowledge to Economic Analysis EPA reports on mitigation opportunities and costs for non-CO 2 gases and agriculture and forestry –Engineering cost curves –U.S. and Globally –Gas by gas, sector by sector EPA data integrated into most climate economic models Substantial improvement in analytical ability –How many tons are available? –At what cost? –In what sectors and regions?

8 Offset Provisions of Bills Analyzed by EPA “Lieberman-Warner Climate Security Act of 2008” (S. 2191) –Domestic offsets may be used to meet 15% of compliance obligation –International credits may be used to meet 15% of compliance obligation –Set-asides for agriculture and forestry sequestration as well as landfill and coal mine CH 4 Bingaman-Specter, “Low Carbon Economy Act” (S. 1766) –Unlimited specified domestic offsets can be used to meet the emission cap level –Specified offset project categories include CH4 from landfills, coal mines, and animal waste, and SF6 from electric power systems For other offset project categories, the President may distribute less than 1 credit for each ton of greenhouse gas emissions reduced or sequestered. Our analysis assumes that only offsets from specified project categories are allowed. –The President can implement an international offset program, allowing not more than 10% of compliance to be met through this program –Set-asides for agriculture sequestration Lieberman-McCain, “Climate Stewardship and Innovation Act” (S. 280) –Domestic offsets & international credits can be used to meet up to 30% of compliance obligation

9 Offset Provisions of S (L-W) Significantly Influence Costs 2030 Allowance price in core S Scenario: $61 - $83 Range of 2030 Allowance prices in all scenarios: $24 - $160 Scenario 2 from EPA’s analysis of S. 2191: S as written (15% of compliance obligation from domestic offsets, 15% from international credits), assumes 150% increase in nuclear power between now and 2050, assumes CCS available after Provisions for Nitrous Oxide/Methane set aside allowance dropped in the Substitute Amendment to S2191; the 15% limit on offsets is now applied to the annual overall quantity of emissions allowances rather than individual compliance obligations.

10 S – Sources of Domestic Offsets (Cumulative ) The total quantity of abatement from domestic offsets is limited to 15% of allowance submissions in each year. The quantity of abatement from international credits is similarly limited to 15% of allowance submissions in each year. The quantity of abatement from allowance set-asides is prescribed by the bill, 4% of allowances in each year are set aside for Ag/Forestry abatement projects, and 1% are set aside for landfill and coal mine CH 4 abatement projects.

11 Quantity of Offsets Under S ’s of Coal Mine Methane Projects 100’s of Landfill Methane Projects 10,000,000’s of acres of ag / forestry projects

12 Observations Offsets reduce the cost of policy implementation. Effective program implementation is key to ensuring the benefits of offsets. Key elements include: –Efficient project certification/processing –Assessment of environmental integrity If the tons are additional, offsets provide the same level of climate protection. If not, costs are reduced but environmental integrity is compromised. Set-asides may increase costs, as compared to offsets, but additionality is not an issue (because the tons used for crediting come from under the cap).

13 Contact Information Dina Kruger Director, Climate Change Division U.S. Environmental Protection Agency Telephone: