Offsets, offsets, offsets

Offsets.

Offsets.

(related to) Offsets.

It seems like all anyone can do anymore is talk about offsets (at least in my sheltered life). Partially that’s because they are emerging as the key issue that could make or break the Waxman-Markey bill, and possibly a future Senate bill (which may make a splash before the end of the summer).  The three links above provide a good snapshot of the world of offsets as it stands now.

The first link is a rundown of the lobbying brawls surrounding the amount of offsets in Waxman-Markey. It does a good job of highlighting the difference between industry lobbyists (they heart offsets) and environmental lobbyists (they don’t trust them). One thing the article gets wrong, however, is who decides what is an offset:

Near the top of the lobbyists’ wish list is persuading Congress to specify which projects would be eligible as offsets. The bill creates large categories, then allows third parties to decide what is eligible as an offset. Those third parties probably would be similar to groups in the voluntary offset market like the Chicago Climate Network or the Climate Action Reserve in California.

That is an incorrect statement. Third party standards will probably be followed closely or entirely, but it is the Offsets Integrity Advisory Board (OIAB) that will be housed in the EPA that will be the the final authority that determines what is an offset. Thankfully, the bill itself does not say what counts as an offset, but you can imagine the fury that will burn around the OIAB if they make a decision that enrages a powerful and well-endowed interest group.

Actually, you need not imagine that because it has already occurred, which brings us to the second link above. Way back when Waxman-Markey emerged from committee markup, Collin Peterson (D-MN), chariman of the House Agriculture Committee started throwing a hissy fit about the supposed lack of role for agriculture offsets. He basically threatened to torpedo the whole bill if it gave offset market oversight to the EPA. Peterson is still stewing about an EPA rule that may make biofuel producers responsible for their full carbon footprint, including the possible indirect landuse changes resulting from ethanol production, so his solution is to bring down Waxman-Markey unless he gets his way. Discussions between Peterson and Henry Waxman’s staff have been on-going, but as of today, it sounds like Waxman is done playing with Peterson and House leadership may look to take their chances with a floor debate.

At this point, it can feel like using economic arguments is sort of like sternly yelling at a freight train, but I’ve got a loud voice, so I’ll give it a shot. This bill in no way excludes agricultural offsets. It doesn’t exclude any kind of offsets, nor should it. The point is to establish a market system where offsets can be brought, and let the market decide what makes a good offset. The role of OIAB is essentially quality control and setting standards. If your offset is legit, then you don’t need to worry. If it’s just a play to get make more money for Monsanto without any real carbon benefits, then there’s a chance it won’t make the cut.

Even though the offset language in the bill doesn’t favor a certain kind of offset, it contains a number of additional standards for forest offsets. That’s probably because everyone recognizes landuse and forest emissions are a big slice of the climate pie (20% of global emissions), but it also because we have a ways to go before we figure out how to make international forest offsets and REDD (Reducing Emissions from Deforestation and forest Degradation) work effectively.

The third link connects to the latest and greatest studies related to REDD and offsets. Basically, if we want to keep temperature changes below 2 degrees C, we need forest carbon. In the short term, capacity building, establishing pilot projects, and setting baselines for forests are the priorities. In the long term, international offset markets are going to sustain efforts to reduce emissions, so long that enough revenues make their way to indigeneous communties to compete with other land uses.

How well can these international offset markets work? According the authors of the economics study, offset prices between $10-$30 may capture 1-4 billion tons of CO2 per year, or 12-20% of current global emissions. Additionally, international links between markets may significantly reduce global allowance prices (by about 40%). Not bad. It’s important, however, to view these studies in context of the others. If we don’t get local buy-in and solid capacity building, we don’t get our offset markets. Conversely, if the market benefits don’t make their way down to the people on the ground, then all those forests (and investments) could go up in smoke. An when indigeneous people feel like they are being exploited by foreign investment, it’s none too pretty.

How do Catastrophes Factor into our Calculations?

I’ve always been fascinated by the idea of including the probability of a catastrophic climate event when calculating the costs and benefits of climate change. Even if the probability is very small, the sheer devastation of such an event can factor into climate estimates. Other models can have tipping points, where once a certain temperature is reached, a chain reaction is triggered which can accelerate CO2 release. I am in no way an expert on models that deal with each of these phenomena, but I did recently see a piece of news which disturbed me greatly.

The article titled “Forests could flip from sink to source of CO2: study” link discussed findings by “35 of the world’s top forestry scientists”

If temperatures climb even further, the consequences could be devastating, according to the report by the Vienna-based International Union of Forest Research Organisations (IUFRO).

“The current carbon-regulating functions of forests are at risk of being lost entirely unless carbon emissions are reduced drastically,” said Alexander Buck, IUFRO’s deputy director and coordinator of the report.

“With a global warming of 2.5 C (4.5 F) compared to pre-industrial times, the forest ecosystems would begin to turn into a net source of carbon, adding significantly to emissions from fossil fuels and deforestation,”

While estimates of devastation due to large temperature increases are not new, these recent warnings are still very scary. A lot of the carbon loss will be in the tropics, an area which captures almost 20% of total carbon emissions according to the article.

This recent finding brings a few questions to mind. First, as another tipping point is identified, how do we account for it in our cost/benefit analysis of climate policy?  Hopefully results such as these will highlight the growing importance of Domestic and International climate agreements.

My second question is about forestry offsets.  Do they not lose some of their value if they might eventually release the CO2 they were supposed to be offsetting?

I drink your MILKSHAKE

Reading this article I couldn’t help but think of Daniel Day-Lewis’ outstanding performance as the oil tycoon Daniel Plainview in There Will be Blood. There’s this liquid substance under your property, and we’re going to pay you just for the right to drill and take it out for you. You won’t even have to lift a finger! Or, in 2009:

“There’s an odorless, colorless gas that is sucked out of the air by your trees, and somebody’s going to pay you for that.”

I don’t want to be overly cynical (although it does seem to be a theme of this blog), but when most Washingtonians or New Yorkers read about people like Justin Maxson who are using market mechanisms to promote sustainable forestry (and that’s what we’re all about here on CT), the only green they can think of isn’t the kind growing on trees.

Continuing on Danny’s and Josh’s week o’ offsets, I think stories like this (and the issue of offsets in general) really illustrate the difficulty many “environmentalists” still have in using “economics” to achieve their goals. Is it morally wrong to support something that will do a lot of good but that people are only interested in because they can make money? Many climate activist-types I know are seriously angry with the huge amount of offsets in Waxman-Markey. Shouldn’t they be happy because more reductions will be achieved at a lower total cost? Or is that not really the goal here? Do we really want to cause the power companies some pain and make them take clean energy more seriously? But, you say, those costs will just get passed on to the consumer anyway…and on it goes.

Of course, I’m not about to resolve this debate right here, but I do know that it’s a really important one to keep having. Oh, and when you’re finished with all that arguing, there is A LOT OF GREEN to be made for whoever gets forestry right in the U.S. (if the EPA allows domestic forests as an offset category). To the tune of 150 million metric tons…just in Wisconsin.

Money doesn’t grow on trees per se…

Full disclosure: I love the Christian Science Monitor. Not only was it founded by an ornery, possibly crazy old woman and is one of the only newspapers in the country that most of its own reporting instead of relying on wire reports, but it also has a fantastic editorial board. First, they advocated a carbon tax last fall before Congress had even begun seriously discussing cap-and-trade schemes. They dropped another rhetorical gem today, coming out in favor of assigning an monetary value for the world’s forests. Some of the best lines include:

Today, trees are worth more dead than alive. This despite the fact that they stash away billions of tons of carbon in their soil and themselves and constantly inhale more carbon from the atmosphere. They also help regulate the earth’s climate in other ways, influencing rainfall patterns far away, including in the US. And they contain unique plant and animal life, the economic value of which is only beginning to be understood…

If developing countries earned credits for preserving forests, the pace of deforestation might be cut by 75 percent by 2030, the report says. Saving forests, in turn, could reduce the cost of cutting the world’s greenhouse-gas emissions by half…

Talk of adding forest protection into carbon-market schemes does spotlight an important fact: Forests have a value that so far has not been fully reflected in the world economy. Until it is, trees will be cut in favor of other land use.

As you can see, they are talking about climate change and reducing emissions through deforestation and forest degradation (REDD) projects, but there is a less than veiled reference to ecosystem services in the first paragraph of the quote above. Now, the CSM is not exactly the most influential paper in the nation. I, however, think it’s pretty cool that reputable news organizations are discussing REDD and ecosystem services, even in the middle of electoral pandemonium. Speaking of which, if anyone’s looking for a new investment that won’t drop like John McCain’s Intrade value, I have a sandalwood grove in Indonesia to sell you…

Take this money, and light it on fire

of the annual budget of the Forest Service, the Forest Service used for wildfire suppression activities –
A) 13 percent in 1991; and
B) 45 percent in 2007

That is in Section 4901 (in Title IV, Subtitle I) of the Lieberman-Warner climate policy bill (S. 2191). In response the bill proposes to use the revenues generated by the auction of emission allowances to provide up to $1.1 billion per year for emergency firefighting efforts.

Assorted links

1. British Columbia is implementing a revenue-neutral carbon tax. Mike Moffatt is a fan.

2. Oil closed above $100 per barrel for the first time ever yesterday (in nominal terms). The WSJ Environmental Capital guys immediately called it speculation rather than fundamentals.

3. In the face of high fuel prices, residents in the Northeast U.S. are switching back to wood-burning stoves, but this move carries its own costs, particularly to local air quality.

4. Cameroon wants to rent a forest — preferably to conservationists — but doesn’t seem to have any takers. The article points out that they may be above the market-clearing price.

5. Ezra Klein praises density.

6. George Monbiot, writing about climate change policy, is offended that economists place a monetary value on human life, and that hence there is a chance “we would then find that it makes economic sense to kill people.” One of the Free Exchange bloggers defends the use of benefit-cost analysis, while Tim Haab provides a straightforward explanation and able defense of why economists place a value on life. (Hint: it’s because we all do — they’re called trade-offs.)

Bali news roundup: Deal unlikely for targets, but probable for forests

Today’s New York Times and Christian Science Monitor both report that the current UN talks in Bali — intended to design a road map for negotiations on a post-2012 climate architecture to be concluded by 2009 — are unlikely to result in agreement between the EU and the US on a specific target for reductions in greenhouse gas emissions. The EU wants a commitment that industrialized countries will cut emissions by 25 to 40 percent from 1990 levels by 2020, while the US is opposed to including specific targets in the road map, preferring to put off discussion of emissions reduction commitments — and perhaps whether such commitments will be mandatory — until later negotiations.

Over at FT.com, meanwhile, there is nice short article on a likely agreement at Bali that would aim to reduce emissions from deforestation. The article is highly recommended for those who want a primer on some of the issues surrounding measuring deforestation and properly encouraging conservation. Here’s an excerpt:

Forestry is one of the least contentious issues at the talks but there has been disagreement over how to give financial incentives to poor countries to retain their trees in the face of illegal logging and other forms of exploitation.

One option would be to grant countries carbon credits for their trees, in the same way that projects such as wind farms or solar power are awarded credits for cutting emissions under the “clean development mechanism” of the Kyoto protocol. However, the United Nations said this would be impossible because if the trees in one area were protected, loggers or farmers could simply move elsewhere.

Another option, which Brazil is understood to favour, would be for countries to be given credit for curbing deforestation at a national level.

For those who are ready for more of a graduate course in reducing deforestation emissions, Environmental Economics recently had a couple of posts that explored this topic. The second, basically a guest post from Brent Sohngen, is particularly recommended. I’m hoping to write more about this topic in the next couple weeks.

Money does grow on trees

The U.S. Government, in conjunction with some NGOs, continues its program of swapping debt relief for forest conservation:

As part of the U.S. Tropical Forest Conversation Act, the United States will spend US$12.6 million (€9 million) to buy back Costa Rica’s debt at discounted rates. Conservation International and The Nature Conservancy will each contribute US$1.26 million (€890,000). Together, with interest, the money will be enough to pay down US$26 million of the Central American country’s debt, according to the agreement.

I’d like to highlight two aspects of this policy.

Seeing the forests for the trees

I went to an interesting seminar today at Resources for the Future, given by Brent Sohngen from Ohio State, on the role that forests could play in climate stabilization. He’s done some modeling that tries to get a handle on how much carbon sequestration you could get from forests globally through two means: 1) reforesting some areas of the world (called afforestation), and 2) preventing deforestation that would otherwise occur in other areas. Here’s my summary from hearing his talk and participating in the interesting discussion that followed:

1) His results showed that in theory forest sequestration could significantly contribute to global reductions in carbon emissions, accounting for around 20% of the total reductions over the next century.

2) Effectively incorporating forest sequestration into a global climate policy could reduce global costs significantly.

3) The biggest portion of available sequestration is in the developing world, and is avoided deforestation that will happen in a business-as-usual world. In fact, avoided deforestation in South America and Africa could potentially account for more than half of near-term — in the next 30 years — global emissions reductions. A much smaller portion of available sequestration is afforestation, mostly in developed countries.

4) Monitoring these reductions would have to be both local and global in scale: local because you have to account for all the trees, and global because it does the climate no good to protect one stand of trees here if someone else comes along and cuts down another strand over there. Literally every tree — globally — would have to be monitored to make this work. Project-based activities like those that many offset programs have used thus far won’t be effective because the more you specifically protect some forests the more other forests will come under pressure.

My impressions from the talk? There is a big payoff for the world in cheap reductions if we can get the rules and institutions right; however, that’s a huge if. I am somewhat — but not too — worried about the local/global scale of an effective global forest registry; I think remote-sensing satellite data can help address this. I am very skeptical, however, that in countries like Brazil or [insert any African country here] that good institutions — effective governance, private property rights, etc. — can be implemented within the next few years in order to avoid the massive amounts of deforestation that are projected to occur over the next couple decades. Basically, I think that there are too many very real but hard-to-measure transaction costs in these countries that will prevent a carbon price — even a relatively high carbon price — from translating into substantive forest sequestration.