How International Offsets Hurt Low Income Families
Posted by jab12004 on May 19, 2009
There has been some great discussion on the new Waxman-Markey bill including Danny’s previous post. One aspect of the legislation, however, that I don’t think has received enough attention is how offsets affect low income Americans.
First it is important to realize how large of a part offsets play in Waxman-Markey. For a quick refresher on their role, check out Danny’s post on the subject. Besides their large and increasing percentage of abatement, offsets are a huge factor in allowance price. Here are a few quotes on the importance of offsets from the EIA analysis of the Waxman-Markey draft.
“Without international offsets, the allowance price would increase 96 percent.”
“The availability of offsets under WM-Draft significantly influences the allowance price.”
And from the appendix.
“Without the use of international offsets, covered sectors are forced to find an additional 39 billion metric tons of abatement.”
So, offsets have a HUGE impact on how the program functions. Just how huge? Check out this graph from the EPA analysis.
Looking at the highlighted statistics, you can see that the 1,677 international offsets dwarfs the 408 domestic abatement in 2015. Also, this equates to $4 billion being spent on domestic covered abatement, while $17 billion is spent on international offsets. (The story balances out a bit looking into the future, but it still leaves us spending 50% of abatement costs abroad in 2030.)
Getting back to the original question of how offsets harm low income families, it is important to remember that climate policy is regressive. One way to remedy this is to redistribute some of the money raised by selling allowances. International offsets, however, don’t allow this to happen. The EPA analysis says:
“International offset payments are calculated for each model as the product of the amount of international credits purchased and the international credit price. Unlike the abatement costs associated with domestic covered abatement and domestic offsets, … international offsets .. are all purchased at the full price of international allowances and those payments are sent abroad.”
So, basically purchasing international offsets is equivalent to shipping money overseas. For example, if the cheapest international offset in Mexico costs $4/ton to offset, U.S. firms still have to buy it for the international offset allowance price of $10/ton. The remaining $6 (called the rent) will flow to international firms. If this abatement or offset was done in the U.S., either the government or U.S. firms would be able to capture this rent. These captured rents could then be redistributed to low income U.S. households bearing the brunt of climate policy. With international offsets, this money is lost abroad.
I understand that offsets are being relied upon heavily for cost containment, but why hasn’t the idea of rents being shipped overseas showed up in the political debate? Considering the average American doesn’t know what cap-and-trade is, this might be an effective way to sway public support towards a more effective system.
Unfortunately, in the current political climate, offsets will continue to be a significant part of climate policy. Offsets can have many positive components, but they also have a direct harmful effect on low income Americans. If this is the pill we have to swallow for climate policy to pass, then so be it. However, I would at the very least like to see this important trade off enter the discussion.