POLITICS:

Offset provisions in House climate bill draw some heat

Buried in a massive climate bill introduced last week were two words that seem obscure but could make or break a cap on greenhouse gases.

Carbon offsets are causing anxiety these days. A slew of interests ranging from environmental groups to oil lobbyists are warning that while they have great potential, proposed legislative language governing them threatens to hurt more than help.

"If a final bill is hamstrung with too many limits, it could really hurt the offset market," said Bruce Braine, vice president for strategic policy analysis with utility giant American Electric Power.

Offsets refer to projects that cut accumulations of heat-trapping gases in the atmosphere indirectly, such as by funding things such as mass plantings of trees, which absorb CO2, or installing equipment that grabs methane from landfills. The new draft legislation proposed in Congress by Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.) carves out a major role for them in an attempt to keep costs low under climate regulation.

The idea is to allow companies to invest in green-energy projects around the globe to meet an emissions cap, which may remove greenhouse gases more cheaply than paying for expensive retrofits on their own factories.

"Offsets can act as a bridge, allowing us to take on tougher near-term emission reduction targets than might otherwise be possible," Markey said at a congressional hearing in March.

But many analysts and advocates who are studying the bill closely are worried about the offset provisions, although for different reasons.

A Goldilocks version has yet to appear

Some think the measures are too generous and create a loophole for businesses to skirt pollution controls. Others warn that U.S. EPA is being tasked with a huge new regulatory undertaking at a time when it's already begging for dollars.

And yet others say the bill is too restrictive and threatens to dampen the supply of offset projects just as they are needed to make a dent in emissions.

"The bill is a good first step, but it goes too far," said Richard Rosenzweig, chief operating officer at Natsource, an investment firm focusing on carbon markets.

Privately, one lobbyist went further and said that many offset developers are "terrified" and that "there's a real risk that there won't be any offset projects" in three years unless the Markey-Waxman language is altered.

Part of the concern for these offset backers is that the bill doesn't clarify what types of clean-energy projects are eligible under an economywide cap on greenhouse gases. It doesn't say, for example, whether the capture of methane from lagoons of hog waste count as an offset.

Major climate legislation sponsored last year by now-retired Sen. John Warner (R-Va.) and Sen. Joe Lieberman (I-Conn.) did outline a list of qualifying programs ranging from "conversion of cropland to rangeland or grassland" to "waste aeration." The new bill, in contrast, gives EPA up to two years after enactment to decide which types of clean-energy initiatives receive a thumbs-up from the federal government.

Voids in the bill generate financial angst

That is generating unease because of the years it can take to build something -- like a methane capture system at a dairy farm -- that actually blocks greenhouse gases from reaching the atmosphere. Financiers likely won't funnel much money toward projects until they have the certainty of an EPA list, Rosenzweig said.

"I would recommend that they make the start date [for regulation] several years later than 2012," added Braine.

He said many businesses would need offsets early in a climate regime, since there currently isn't available technology to capture all the emissions coming from coal plants. If they are not in full supply right away because of delays in EPA paperwork, it's going to make a everything much more expensive, he said.

"If they don't have offsets early on, many utilities are going to switch to natural gas," he said, noting that such a move would send electricity prices much higher than expected.

Additionally, some offset lobbyists are less than thrilled with restrictions on the number of carbon credits available to businesses.

The Markey-Waxman approach requires companies to have 1.25 offsets for every one allowance permitting them to spew greenhouse gases into the air from their facilities. That essentially reduces the value of offset credits compared with what they might be worth otherwise, creating additional uncertainty right now for investors thinking of funneling dollars toward projects.

There shouldn't be an "across-the-board discount on offsets that already have gone through a rigorous set of environmental screens," said Kyle Danish, attorney for the Coalition for Emission Reduction Projects, a group of companies advocating for carbon offsets.

Aware of the complexities, a separate set of actors is raising questions about the Markey-Waxman language, but for entirely different reasons.

Strange bedfellows converge

The unlikely set of bedfellows, including some environmental groups and Republicans, is warning that offsets are subject to fraud and manipulation, and shouldn't be in the legislation in the first place. They say that the bill's annual limit on 2 billion tons of greenhouse gases traded as offsets is still too large.

"The offsets are definitely the biggest problem with this bill," said Emily Figdor, federal global warming program director at Environment America. "They put in jeopardy our environmental goals."

Because emission reductions would be less restrictive in the early years of regulation, she warned that some industries might be relying almost exclusively on outside projects at the beginning. That raises serious questions about whether a cap would actually be a cap, she said.

In recent congressional testimony, John Stephenson of the Government Accountability Office said that the use of offsets in a mandatory climate regime "may be, at best, a temporary solution to achieving emission reductions." Europe faced difficulties with offsets under its mandatory cap, including instances in which projects didn't really curb emissions, he noted.

With the EPA operating at budget levels lower than those of the 1970s in real dollars, the agency doesn't currently have the resources to take on such a huge enforcement and regulation process, said Victor Flatt, an environmental law professor at the University of Houston who recently analyzed the offset provisions in a blog posting.

EPA's burden triggers regulatory nightmares

In addition to having to come up with an initial project list, the agency would be tasked with things such as approving offsets in foreign countries, sector by sector. So the federal government would have to figure out whether windmills in China would qualify versus methane-capturing systems in Indonesia.

"We saw how things got bottlenecked in Europe," Flatt said. "This is going to be so much bigger and difficult to deal with."

Flatt recommended that House Democrats ensure additional staffing for EPA as part of a final cap-and-trade bill. That would be one way to make sure there isn't a disconnect between the offset proposals and the capabilities of the bureaucracy, he said.

Despite all the hollering skeptics, some of the toughest critics of the new bill emphasized that Waxman and Markey took a step in the right direction by including offset language in the first place. It is just a draft, they noted.

Danish, Braine and Rosenzweig, for example, praised the lawmakers for standardizing the process by which offsets would be verified and enforced after they were operational.

Flatt echoed Markey in saying that offsets are a critical piece of climate legislation because of their ability to control costs. Think tanks such as the Pew Center on Global Climate Change also have done analyses on how offsets could work successfully under global-warming legislation.

"When there's a priority, EPA directs its resources there," said Manik Roy, Pew's vice president of federal government outreach, about the concerns about the agency's capacity.

Braine echoed that sentiment and said the EPA already has many offset experts, unlike the United Nations when it took on regulation of projects overseas several years ago.

And Sasha Lyutse of the Natural Resources Defense Council argued in a blog posting last week that having EPA develop an initial list of offset projects with input from scientists would "give a seal of good quality" to the projects.

Agriculture is hunting for a role

Even so, the issue likely has a difficult political road ahead, considering the criticism coming from different corners. For that reason, some analysts said Waxman and Markey were shrewd to leave some ambiguity in their initial wording and avoid immediate assaults for picking winners and losers in the offset community.

The debate over the Lieberman-Warner climate bill, which stalled in the Senate last year, provides a case in point.

Chelsea Maxwell, who served as Warner's chief climate adviser before the senator retired this year, said some of the most difficult negotiations occurred when various interest groups suddenly felt slighted by changes in offset language.

She said this was evident with farming interests, which could receive a financial boost if agricultural projects end up counting as federally approved carbon credits. Already, some lobbyists are jittery that the congressional draft doesn't provide a huge role for the Agriculture Department in setting up an offset framework.

Maxwell's chief advice was for lawmakers to leave some flexibility in an offset plan, and make sure senators from America's bread basket have a seat at the table.

"This was definitely in the top five of the most contentious issues," she said. "It brings in votes from heartland states that might not otherwise support a climate bill. "

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