Abstract
We demonstrate and apply methods for assessing global, system-scale effects on energy and greenhouse emissions of offset programs that explicitly consider the rules by which energy-based offset credits are awarded. We compare our approach to idealized calculations in which all regions, including those without mitigation obligations, face a common carbon tax. We find a substantial gap between potential reductions in emissions and those realized in a suite of hypothetical offset assignment protocols as well as between offset creation and system-scales emissions mitigation, even when project-scale additionality and compliance issues are absent and baselines are known with certainty. In the worst cases, seemingly reasonable rules were counterproductive—i.e. increased global carbon emissions, despite strictly meeting additionality and baseline requirements. But, even when we modified the rules for creating offsets to reflect more closely implementation practices, there remained a large gap between potential and realized mitigation. This difference is systemic and traces to the basic nature of offsets. Offsets subsidize the deployment of non-emitting technologies instead of penalizing the use of emitting technologies. As a consequence, offsets lower the cost of energy, and encourage greater use energy rather than its conservation. Thus, even in well-crafted programs, it is impossible to capture the full economic potential because the program lacks a means by which to engage energy conservation. We demonstrate that while offsets programs reduce the cost to regions with emissions caps, they may achieve this result at the expense of reduced global emissions mitigation.
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The goal of any approximation method is to get as close as possible to the unobservable world without the project. As pointed out by Kartha, et al. (2004), to the extent that standardized methods can be established for whole classes of projects, transaction costs can be reduced and the process of approving (or rejecting) projects can be expedited.
In addition to lowering the cost of meeting an emissions limitation goal CDM has the companion objective of facilitating sustainable economic development. A substantial literature has emerged exploring the performance of CDM in both domains, e.g. Lema and Lema (2013) examine CDMs role in technology transfer; Subbarao and Lloyd (2011) evaluate CDM as a mechanism for economic development and show limited success and go on to question the ability of a single policy instrument to deliver both reduced costs of CO2 emissions while enhancing economic development; Zhang and Wang (2011) empirically test the ability of CDM to deliver local air quality in addition to producing CERs and find little evidence for co-benefits; Popp (2011) reviews the broad literature on CDM, noting issues with additionality as well reviewing the role of CDM as a mechanism for clean economic development.
Under CDM, a panel evaluates proposed methods for computing offsets attributable to a project. In 2003, the Meth Panel approved a standardized “Combined Margin” method for determining crediting baselines in power generation projects under CDM (Millard-Ball and Ortolano 2010). The “Combined Margin” is a weighted average of the operating and build margins. The “Operating Margin” is emissions factor for all operating facilities. The “Build Margin” is the emissions factor for recently constructed facilities.
Under an economy-wide carbon tax (as opposed to a sector-only carbon tax) power generation can expand even though its price rises. This can occur because there are two effects. On the one hand the carbon tax increases the price of power, reducing demand as conserving options become more attractive. On the other hand, the economy-wide tax increases the price of all of electricity’s fossil-fuel competitors’ rises even more than the increase in the price of power, resulting in a well-known substitution of electricity for fossil fuels in end-use sectors. Whether or not total generation increases or decreases depends on the balance of the two countervailing effects.
We are indebted to David Victor for bringing this example to our attention.
Note, electric generating facilities used in combination with CO2 capture and storage are still eligible for offsets in this case.
Leakage is a well-studied problem that emerges when some regions mitigate and others do not. In a nutshell, the problem is that the cost of emissions-intensive products rises in mitigating regions causing regions without an emissions limitation obligation to have a comparative advantage. Production of emissions-intensive goods rises in regions without an emissions limitation causing their emissions to rise relative to a reference scenario without emissions limits. In addition, reduced demand for fossil fuels lowers their world price, encouraging greater use in non-mitigating regions. See for example, Calvin, et al. (2009), Boehringer, et al. (2010), Gerlagh and Kuik (2014), and Bollen, et al. (2012).
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Acknowledgments
The authors are grateful for research support provided by Electric Power Research Institute. The authors also appreciate helpful comments on an earlier draft of this paper by David Victor and Michael Wara and by two anonymous reviewers. The views and opinions expressed in this paper are those of the authors alone.
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Calvin, K., Rose, S., Wise, M. et al. Global climate, energy, and economic implications of international energy offsets programs. Climatic Change 133, 583–596 (2015). https://doi.org/10.1007/s10584-015-1482-3
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DOI: https://doi.org/10.1007/s10584-015-1482-3