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William O'Keefe
CEO, George C. Marshall Institute

William O'Keefe

William O'Keefe is CEO at the George C. Marshall Institute, a think tank that promotes better use of science in public policy. He is a former COO at the American Petroleum Institute. ALL POSTS

Offsets create complications

The issue of "offsets" is complicated. In the short run, they can slow the growth in emissions but they are not the equivalent of cutting emissions. And, in the long run, they are likely to create more problems than benefits.

In a cap-and-trade world, offsets and allowances are essential because no one is smart enough to be able to set caps and emission allowances just right. The caps being discussed in legislative proposals are excessively stringent and in the short run impractical. Without offsets the economic damage would be even more significant.

The EU experience with offsets has not been encouraging. It has been fraught with fraud and abuse and there is no reason to believe that the U.S. experience would be any different. Claiming credit for not clearing land or being paid to shut down HFC facilities built for the sole purpose of extracting payment to shut them down are hardly examples of avoiding emissions or reducing them elsewhere.

The problems with "offsets" are tied to legitimacy, verification and enforcement, and liability. And, the problems are multiplied when the offsets are in other countries, primarily developing nations.

There are some who see offset markets as being analogous to the subprime mortgage market and the debacle in the financial system that was associated with them and derivatives trading. And, that concern has been validated by documented experiences of fraudulent emission avoidance schemes.

Some offset projects, such as capturing methane, can result from good business practices and economic incentives. If these would have been implemented in any case, why should there be a greenhouse gas emission credit? If offsets are to represent activities that are in addition to business as usual, how do you verify and distinguish between the two categories?

How will the market for offsets be managed and policed? An abundance of financial regulations and oversight didn't prevent the mortgage crisis and that involved hard assets backing those mortgages. It will be much more difficult to regulate and police a market in something that doesn't exist -- avoided emissions.

The advocates for offsets have many motivations--a belief that the cap and trade system will create incentives for low or no carbon alternatives, protection against too much economic damage from overly restrictive emission reduction mandates, and the opportunity to money. The one motivation that will be realized without any doubt is that traders will make money. The other certainties are that consumers will face higher costs and the system will grow ever more complex as regulators attempt to correct its flaws and unintended consequences.

The problems with cap-and-trade systems for greenhouse gas reductions have been documented in great detail. The problems are not trivial and history suggests that they won't be avoided. Reducing carbon through a carbon tax with the revenue used to reduce a more distorting tax such as the payroll tax is a much simpler and honest approach.

By William O'Keefe  |  October 21, 2009; 7:10 AM ET Save & Share:  Send E-mail   Facebook   Twitter   Digg   StumbleUpon   Technorati  
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