It's great that climate change returns to the Senate agenda this week. The Clean Energy Jobs and American Power Act, introduced by Sen. John Kerry (D-Mass.) and Barbara Boxer (D-Calif.) seems to be gaining some momentum, but the slow pace in the Senate makes it extremely unlikely that a vote will occur before the forthcoming U.N. climate conference in Copenhagen in December.

Failure to move a bill means it will be difficult negotiators to cut deals on future emissions targets in Copenhagen. Even so, the climate talks are likely to see progress on deforestation issues, Clean Development Mechanism (CDM) reform, and, perhaps, some advancement in the understanding of sectoral mechanisms.

Kerry-Boxer is probably as tough as any bill can be in the Senate. This is not necessarily a bad thing; I think that the bill is a great step in the right direction; establishing a cap-and-trade scheme in the United States will provide the right incentives for American industries to reduce emissions in the most cost-effective way. However, as drafted, Kerry-Boxer contains a number of international carbon offset policies that are likely, if they remain unchanged, to result in wild price swings and radical shifts in offset supply. This in turn will significantly undermine the ability for U.S. companies to use investments in international offsets as a cost-containment mechanism.

What is the principle problem? The Senate, like the House-passed Waxman-Markey legislation, does treat offsets as a good cost-containment mechanism. The difference between the two, however, is where the offsets could/should come from. More specifically, the Waxman-Markey bill would allow 1 billion domestic offsets and 1 billion international offsets, for a total allowance of 2 billion. In the House bill, if the Environmental Protection Agency determines that the volume of domestic offsets is likely to be less than 900 million (and it certainly looks like it will be as the EPA has estimated the maximum domestic supply will be in the region of 500 million), then international offsets could be expanded up to 1.5 billion tons every year.

The Senate proposal is not as generous on international offsets; Kerry-Boxer sets an unrealistic ceiling for domestic offsets at 1.5 billion tons, and reduces the acceptable volume of international offsets to 500 million every year. The EPA could allow up to 1.25 billion tons of international offsets if it determines, on an annual basis, that domestic offsets are likely to generate less than 900 million tons.

This provision is very problematic for those companies covered by cap and trade. The offset provisions of the bill need to be structured to create a steady supply of offsets and a market that sends a clear, predictable price signal to the private sector. As the bill currently stands, its offset provision would create tremendous uncertainty about the demand and admissibility of international offset credits into the U.S. market.

To rectify this, the Senate should allow the EPA to review the expected domestic supply in the first year of enactment and determine the likely supply of domestic offsets in order to reset the allowed volume of international offsets to realistic levels. The EPA could subsequently monitor the market regularly, but not with a mandate to reset offset ceilings annually.

Alternatively, any adjustments to the proportion of international offsets that are allowed into the United States could be treated as a "high-water mark." In other words, if the proportion of international offsets allowed into the United States is increased to compensate for lack of domestic supply, this should represent the new minimum volume for international credits. The proportion should not be adjusted downward from one year to the next because, as mentioned earlier, it could prevent American companies from investing in new offset projects.

International offset supply gets even more problematic when considering how proposed sectoral mechanisms would work across industry segments and geographies, and how they may interact or overlap with the CDM. In brief, it is essential that a transition to a sectoral mechanism is well thought through and does not present a disruption in the long-term price and demand signals to players in the private market.

This transition would mean that any CDM project that is registered before the start of the relevant sectoral mechanism should have its crediting period honored. Alternatively, the project developer should be given the option to transition to the sectoral mechanism within a certain period of time, say two years.

As it stands, Kerry-Boxer remains silent about how these pre-existing CDM projects would be treated, and indeed, it looks like it would simply stop issuing international offsets after 2016 for any project determined to be covered by a sectoral mechanism. This would create a disincentive for companies to invest until a sectoral mechanism is in place, losing tremendous opportunity for early action across the world. We have already seen how a lack of a long-term policy and price signals have disrupted the number of new projects entering the CDM in the last couple of years.

A special concern of mine relates to how credits from Reducing Emissions from Deforestation and Degradation (REDD) efforts will be brought to market. But stay tuned and find out more about this in my next post.

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Send your question to Umbra!

Q. Dear Umbra,

What does a carbon offset do today for the planet? It seems to me like these vehicles are more for our guilty conscience than for real change. What do you think?

Ingrid G.
Chicago, Ill.

A. Dearest Ingrid,

Get involved in the climate fight -- become a Climate Citizen today.I am about to leave carbon offsets behind, but I want to use your letter to do two things: clarify a comment I made in Monday's column, then step up on my cap-and-trade soapbox.

First: I got a little too extreme on Monday what with averring that voluntary personal offsets did not "negate" our actual emissions. It is true that they don't magically erase the nasties you emit. However, if you have chosen a solid, verified provider and your money is going toward projects that would not otherwise exist (again, that's called "additionality"), and the offsetter is accurately counting the tons of carbon removed by the project ... if all those terms are met, the offset does keep an amount of carbon equivalent to your real emissions out of the atmosphere.

However! As I've said before, the voluntary offset market is frustrating because it has no overarching entity determining the quality of proffered products. Hence it seems suspicious, to you and to others. For this reason and many more, we need a national cap and trade program.

And that brings us to my second -- but actually primary -- purpose today: to emphasize that if we get a decent national cap-and-trade program going, all this voluntary offset stuff will be less urgent. The voluntary system, which is a passel of organizations patching together divergent methods, does not equal a well-planned national scheme with a target, a proven methodology, and rigorous accounting. It's great that individuals have an interest in creating and buying into small-scale offset projects. But it'll be even better when we have a national system that forces industry and hence consumers to internalize the cost of carbon.

The national system will not be perfect. But we will all be working together to reduce our global footprint, and reducing the chance that our footprint will be wiped out by giant waves from rising seas. It won't just be those of us with a guilty conscience who are trying to build an alternative energy system.

We need a decent cap-and-trade bill, and our politicians need to know that we want one and are willing to be part of the U.S. Stop Global Warming In Its Tracks Team. Contact your elected representatives and let them know how you feel -- visit our Climate Citizens section for tips on getting started.

Repetitively,
Umbra

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Q. Dear Umbra,

Lately I have been traveling a lot for work. This has made me seriously consider buying offsets for these trips. I know that it is better to not travel at all, but outside of quitting my job I can't get around it. I have considered spending money on projects around the house to lessen my footprint, but using a carbon offset seems to give you more bang for the buck. My question is, are these offsets really helping or should I save my money for a bigger ticket item like a solar water heater?

Kevin E.
Raymond, Wash.

A. Dearest Kevin,

Or you could find another way to go.What an elegant weaving together of our two most recent discussions, on carbon offsets and solar water heaters. Bonus points for you!

As we discussed last week (don't I sound like your mom or dad? was there a discussion, or just a monologue?), it may be most helpful to think of personal offsets as a contribution to a renewable energy project. In the best-case scenario -- with all the usual caveats about sussing out the quality of the offset here -- offsets help support renewable energy. This is good, because we do need more renewables capacity on our electric grid, people in deforested areas need solar ovens, landfill methane should be captured, wind turbines should be built, etc. However! Remember that voluntary offsets do not erase, vacuum up, cancel out, or otherwise negate the actual emissions you produce.

As we also discussed last week, solar water heaters are a proven, easily adopted technology that can make a real difference in your home emissions, replacing up to 70 percent of your water heater's footprint with galaxy-derived, renewable, carbon-neutral energy.

If we consider your travel emissions as but a subset of your total life emissions, it may help you see a bit more clearly how to choose a compensatory action. Installing a solar water heater, or any equivalent proven environmental home investment, will reduce your actual total emissions. The actual amount of greenhouse gases for which you are personally responsible -- Kevinpogenic greenhouse gases -- will shrink. Achieving this real shrinkage is what I would recommend.

I'm not alone, either. Voluntary climate offset advisories recommend the same, including the Stockholm Environment Institute, Suzuki Foundation, Environmental Defense Fund ... Do what you can to improve your personal footprint. This, by the way, should include discussing with your employer whether there are ways to reduce the amount you travel, or reduce the impact of your travel. You haven't said much about where you go, or why, or how you get there, but there may be creative solutions that could help -- carpool, or conference call, or even train instead of plane.

If you still must travel for work and if you have money left after you take more concrete emissions-reduction steps at home, by all means support renewable energy projects via offsetting or other methods. Vocally supporting a solid national cap and trade program, and your regional climate plan, are also vital actions that shouldn't cost you much money at all.

Umbrapogenically,
Umbra

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Q. Dear Umbra,

I've been hearing about carbon offsets for awhile and even have purchased some for my car emissions through Terrapass. But I just got an email from my local power company saying that I can pay to offset my own carbon emissions at the low rate of just $8 per month. Is this a good idea? I hear such conflicting stories about the "greening" of coal power plants. How do I know what they are doing with the money?

Mary B.
Winston-Salem, N.C.

A. Dearest Mary,

Is your power company partying in the tropics thanks to you?If a utility is offering carbon offsets or "green power" to their customers, details are usually available on the utility's web site. A customer must then wade through the self-congratulatory text on the site and determine whether or not the utility is actually taking Acapulco vacations with their $8 a month.

Don't put too much emphasis on this being a power company issue, though -- carbon offsets are a puzzle no matter how and where you buy them. There are a variety of "certifiers" and ratings for offsets, and some generally accepted ideas about what makes an offset project acceptable, but as of yet no overarching body with one stamp of approval.

Offsets themselves are an interesting and contentious issue, as you may have seen in these pages. (Check out our recent special series on offsets for a taste.) I got a bit harrumphy about offsets this past weekend, as I drove past a car with a boasting bumpersticker. Not that I could throw any stones (though we did have five people in the car, hooray). I ranted for a while, but am now prepared to offer a calm assessment of how we might all view offsets: Purchasing an individual carbon offset from a company, which then supports renewable energy development, is great. It is a wonderful chance to financially support projects that would not otherwise be able to get up and running. It does not erase whatever emissions we are emitting. So driving around in an SUV with a "My emissions are compensated for" kind of bumpersticker is ... is ... is -- ooh! I'm getting agitated again. Let's just say I think it misleads the uninformed.

If we think of our offset purchases as a charitable contribution to renewable energy development, then the question about whether we purchase them gets a little clearer. Without worrying too much about the financial logistics of green power credits (though they are clearly explained here by moi) we can simply ask: Will my money help create new, long-term projects that otherwise would not have happened (also called "additionality"), and are these projects approved and vetted by somebody? There are other questions, too (a good introduction can be found at CORE) but these are the basics. The answer should be yes.

In North Carolina you have an unusual opportunity to support renewable power generation in your very own state. NC GreenPower is your statewide non-profit green power program, supported and created by your state government, power companies, and fellow citizens. Utilities can offer offsets to consumers such as yourself, then pass the fees over to NC GreenPower, which then uses about a quarter of the money for administration and gives the rest as production incentives to renewable power producers. The idea is to slowly build up North Carolina's renewable energy capacity through what amounts to a small grant system. I found all this out by following the trail from Duke Energy. It all looks legitimate. And if you hate your power company and their coalish ways, you can support NC GreenPower directly.

Locally,
Umbra

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Sen. Jeff Merkley (D-Ore.) won his 2008 race against 40-year Republican incumbent Gordon Smith in a squeaker, with a margin of just 3%. Despite the narrow win, Merkley has come out swinging on climate and energy issues, securing an appointment to the Environment & Public Works Committee, sponsoring or co-sponsoring a series of clean energy bills and amendments, and generally staking out -- with compatriot Sheldon Whitehouse (D-R.I.) -- the left edge of the climate bill debate. (Grist interviewed Merkley last July.)

Sen. Merkley was kind enough to answer a couple of questions from Grist about the upcoming Senate battle over the climate bill:

Here's the transcript:

Introduction: Greetings! I want to take just a few minutes to answer some questions from David Roberts from Grist. Now, David has some questions about our upcoming climate legislation.

Q: The first is: What are the most important ways to strengthen the climate bill that came out of the House?

A: Well, the first key thing is to strengthen the pollution-reduction target. We need to have at least a 20 percent reduction by 2020. Second is, we really need to focus on reducing the most polluting technologies, such as the current use of dirty coal technology. Third, we need to improve the integrity of our offsets. And fourth, we need to reduce the temptations to have speculation enter in to the trading regime. So those are all ways that we need to strengthen the legislation from the House.

Q: And the second question from David is: Is there any policy or provision in the climate bill that can serve as a rallying point for progressive organizing and advocacy?

A: Certainly I think one key thing that I would encourage folks to focus on is renewable energy standard. Because this is really about substituting green renewable energy, wind, and wave, and solar and geothermal, for the carbon-based energy that we are currently using. Right now, we are bringing a lot of fossil energy out of the ground. We're burning it, it creates carbon dioxide; we break that through these renewable energies. Having a very strong standard, and implementing it as quickly as possible, would be a huge rallying point that would create not only a lot of clean energy, but a tremendous number of clean energy jobs which would be great for recovering our economy, and strengthening the financial foundation of our families.

Conclusion: So I want to thank David for his questions, and thank all of you for caring so much about the stewardship of our planet, about the reduction of our dependence on foreign oil, and about creating a strong clean economy. Thank you.

A few notes on items Sen. Merkley mentioned:

As far as raising the 2020 targets: In addition to Merkley, several senators on the Environment & Public Works Committee have called for raising the 2020 targets from 17% to 20% (below 2005 levels), including Whitehouse, Frank Lautenberg (D-N.J.), and Bernie Sanders (I-Vt.). This will be a heavy lift on the Senate floor, where many coal-state Dems are leery even of the weak targets in the House's Waxman-Markey bill.

Note the second item on his list: reducing the use of dirty coal. This seems crushingly obvious, but you almost never hear a member of Congress explicitly calling out coal as a climate culprit. The entire dance of the bill through Congress thus far has been about how to help coal and insure its future. It's nice to hear someone acknowledge the elephant in the room.

On the third item -- insuring the integrity of offsets -- we need to hear more. This is a contentious subject among environmentalists. Just last week Friends of the Earth released a report calling offsets a "dangerous distraction." Since offsets are currently playing an important cost-containment role in the bill, the number available is unlikely to decrease. It may increase. Strict integrity controls will be crucial. There are actually some great measures in Waxman-Markey to regulate offsets, but the issue could always stand more scrutiny.

On the fourth item -- worries about speculation in carbon markets -- readers know I'm with Kevin Drum (i.e., skeptical). I just don't think it's very high on the list of worries. But of course responsible regulation of markets is always good, and the measures proposed by Sens. Dianne Feinstein (D-Calif.) and Olympia Snowe (R-Maine) seem solid. Boxer has said that she'll include them in her bill.

As for the answer to the second question, Merkley is dead on. One thing progressives have lacked in the climate fight is something analogous to the public option in the health care debate -- a single rallying point around which progressives can organize and advocate. Without those bright lines, it's incredibly hard to activate people. I've had debates with various folks about what the rallying point should be on the climate bill, but I've always believed the best place to focus is the renewable energy standard (RES). The public understands clean energy, and they support it in overwhelming numbers. The RES was weakened in the House energy committee but could be strengthened in the Senate -- this is a winnable fight, on the right side of public opinion.

Anyway, many thanks to Sen. Merkley for answering our questions. We hope this will be an ongoing dialogue.

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Medina co-authored this post with Toby Tiktinsky, Senior Client Manager, at EcoSecurities.

Amid the fallout from the near collapse of the global financial system and revelations of significant fraud by financiers like Bernie Madoff and R. Allen Stanford, an intense debate has emerged over the role of business in society. The increased scrutiny of Wall Street -- and by extension, corporate America -- has focused on profits, bonuses, and how compensation schemes can encourage excessive risk-taking. The fact that institutions deemed "too big to fail" were bailed out by the government and are now earning incredible profits only serves to entrench the feeling that something isn't right in corporate America.

These issues deserve the added attention and should be subject to a healthy debate, but the underlying tone of the debate has begun to worry us, as it seems to question the role of business in society. You may be wondering what this has to do with the climate change debate in general, or the debate on the role of offsets in a U.S. cap-and-trade scheme in particular. Believe us, it matters a great deal.

The American Clean Energy and Security Act of 2009 (HR 2454, aka the Waxman-Markey bill) would prompt a major paradigm shift in the way private companies operate in the United States and would require tremendous deployment of capital, entrepreneurship and ingenuity, tasks for which the private sector is aptly suited. Yet given the prevailing distrust of the private sector, especially when it involves any form of "trading," we have seen Congress adopt some command-and-control style measures.

For example, nongovernmental organizations succeeded in lobbying to have the Environmental Protection Agency (EPA) regulate methane emissions from landfills and coal mines, making them unavailable as offset projects. The rationale is that the emission reductions can be achieved quickly, meaning the emission reductions don't need to benefit from innovation and the profit motive.

Supporters of the command-and-control approach, however, do not realize that not only are they delaying the emission reductions, but they are also undermining investment in renewable energy. Project developers have already started pulling back on plans to invest in methane capture and flaring systems due to the Waxman-Markey bill. Without carbon revenue, projects that would cap landfills and use the gas to produce green electricity are not viable. For second-tier landfills in particular, a project developer needs both the electricity and carbon revenues to make projects financially acceptable. The private sector can only thrive under political certainty; this means that methane that would have been destroyed in the near term will continue being freely released into the atmosphere until EPA mandates its destruction, with an uncertain timeframe that may take years.

Furthermore, the growing distrust of the private sector has only amplified the concerns that the environmental community already voices about offsets (quoting credible and not so credible sources). Critics believe it's too easy to "game" the system, which undermines the environmental integrity of cap-and-trade. On the other hand, practitioners who have experienced the difficulty of getting through the current Clean Development Mechanism (CDM) firsthand would laugh at the suggestion that you can "game" the system.

However, if designed and executed properly, offsets play a critical role for the environment and the economy. Offsets not only provide financial incentives to invest in emission reductions that occur outside of the cap, but they also serve as a critical cost-control function for the system as a whole.

EPA has conducted an analysis of Waxman-Markey that predicts allowance prices given a certain supply of offsets in the market. EPA forecasts that the allowance price will be about $13 by 2015, $27 by 2030 and $70 by 2050, based on the assumption that the offset supply will reach 1.2 billion, 1.35 billion and 1.8 billion respectively in those years. The bill allows up to two billion tons of offsets every year, but EPA does not foresee the supply of offsets ever reaching the limit set by the bill.

Even so, EPA's expectation of offset supply will be massive compared to what we have seen in the market so far. The Kyoto Protocol's CDM, for example, has only issued about 315 million tons of offsets in total; 81 million of these were retired in the European Union in 2008. This is a far cry from what the United States will need to keep allowance prices at the levels predicted by the EPA.

To be clear, the implications for the economy are immense if the supply of offsets falls short of EPA's expectations. EPA estimates that the cost of allowances will increase by 96 percent if offsets are not available. Offset generation will thrive under political certainty that puts together a scheme that is clear, easy to navigate and ensures environmental integrity. Furthermore, for offset generation to thrive, there needs to be a clear link between investment and reward for private participants.

For example, as argued by Sonia in a previous post, having a scheme that bypasses or undermines the role of the private sector, such as a government-to-government sectoral scheme, would be extremely ineffective. This underlines how the growing distrust of the private sector directly belies the intent of the system to reduce costs by relying on the private sector to find the lowest cost reductions in the market place.

The debate, thus, should not focus on whether or not the private sector should play a role, but how do we design a system that includes the proper checks and balances to protect environmental integrity, while ensuring it is sufficiently streamlined to allow it to generate the volume of offsets needed to keep costs low.

Time and again the private sector has demonstrated its remarkable ability to mobilize tremendous skill and resources to accomplish great feats. Sadly more recently we have experienced its other great potential: economic destruction. Yet it would be a shame to focus on the latter, as surely we can -- and must -- harness this power to steer the world's economy down a low carbon path.

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Should Waxman and Markey have kicked off House climate-bill negotiations with a stronger ask?

The bill they introduced was effectively the U.S. Climate Action Partnership proposal, which already reflected years of negotiation and compromise. The idea was that the difficult work of negotiations had already been done -- enviros and business both on board! -- and it would be easy for conservative Dems (and a few Republicans) to sign off on it.

Of course that's not what has happened. Republicans are balking en masse. Conservative Dems have compromised the bill down further, and by all indications will further weaken it in the Senate. Could the bill have ended up in a stronger place if it had started in a stronger place?

The counterargument is that the "green" side just didn't have much leverage. Without sticks, all they had were carrots -- more giveaways, more offsets.

One stick they did have was the threat of EPA greenhouse-gas regulations. There was a lot of talk about this when Dems first won their majorities but very little once negotiations actually got underway. Nobody is brandishing the stick.

Rep. Rick BoucherCould it have made more of a difference? Some recent comments from Rep. Rick Boucher (D-Va.) are intriguing in this regard. In an interview with the Kingsport Times-News, Boucher was candid about his motivation for negotiating with Waxman:

Boucher stressed his interest in climate change has not been driven by a moral belief to control greenhouse gases. [Paging Times-News editors: You awake over there? What is a moral belief to control GHGs?]

What is driving his involvement, said Boucher, is the U.S. Supreme Court determined two years ago that greenhouse gases are pollutants.

“As a consequence of that decision, the Environmental Protection Agency is, for all intents and purposes, effectively required to regulate greenhouse gases,” Boucher said. “The debate about whether or not we will have regulation is over. So the only question is will EPA regulate or ... will we have congressional regulation that does balance economic effect against environmental effect? Given that choice, industry would rather have Congress do this. Industry needs and wants a bill to pass.”

"Industry needs and wants a bill to pass" -- the words of the coal industry's most dogged and effective spokesperson.

So there was leverage. It was used to get Boucher to the table. But once he was there, it went out the window. Not once in the process has industry been forced to face an ultimatum or bargain away a key position. They've been relentlessly wooed, but rarely challenged. They've been able to talk out both sides of their mouths, offering tepid, nominal support while bulldogs like the Chamber of Commerce, National Association of Manufacturers, and the Edison Electric Institute attack and weaken the bill.

And Boucher got just about everything he wanted for Big Coal:

The Southwest Virginia congressman said he spent more than six weeks helping to rewrite the draft bill to help coal-powered utilities and coal producers in his district.

He pointed to “four key things” inserted in the bill.

First, Boucher said, was making sure emission allowances were assigned for free and not put up for auction by the federal government.

“That helps to keep electricity prices affordable and strengthens the case for utilities to continue to use coal,” he said.

Secondly, Boucher said the bill now includes 2 billion tons of carbon offsets available to industrial emitters to help them satisfy their reduction obligations.

“That means an electric utility burning coal will not have to reduce the emissions at the plant site. It can just keep burning coal,” he explained.

The third provision is a $1 billion per year special fund to develop carbon capture and sequestration technologies for controlled disposal or storage.

In the fourth provision, there is another special fund created to deploy the carbon capture and sequestration technology.

“Carbon capture and sequestration attached to coal still makes coal the cheapest fuel,” Boucher asserted.

These are the key -- some argue fatal -- weaknesses of the bill. They were put in to woo an industry that "needs and wants a bill to pass."

One other thing to note:

[Boucher] said lawmakers have “no political will” to mandate the EPA to do a cost-benefit analysis on climate change legislation.

Strictly speaking, this is false. The EPA has done detailed cost-benefit analyses of ACES. (It's going to be cheap, they say.) If Boucher is talking about the dipshit lawsuit the Chamber of Commerce is pushing, he's drifting into "death panel" territory.

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The massive climate and energy bill now working its way through Congress would create a multi-billion-dollar market in carbon offsets, giving owners of agricultural and forest land the opportunity to profit as companies seek to offset their carbon emissions.

On open question about carbon offsets is how will they be evaluated to ensure carbon is indeed being sequestered.Courtesy verago79 via PicasaBut what types of land management should qualify as an offset? How will an offset be measured and monitored? How often should offsets be reevaluated? Should environmental regulators or agriculture officials oversee the program?

Offset quality -- ensuring that an offset represents a genuine reduction in greenhouse gases -- has been a lightning rod issue in the voluntary market that emerged in the United States over the past decade. The eventual settling upon multiple standards -- while somewhat reasonable -- has not helped to ease concerns.

Even though some of the standards for evaluating offset quality are stringent, the fact remains that the industry is unregulated, and that is enough to sow seeds of doubt. Exposés about perverse incentives, corruption, and lack of oversight in the international Clean Development Mechanism's compliance market has not helped the image of offsets. (The CDM was launched in 2006 under the international Kyoto Protocol as a way for regulated countries to reduce the cost of compliance by buying carbon offsets.)

"They're just impossible to verify," said Daphne Wysham, a fellow at the Institute for Policy Studies, an independent think tank based in Washington, D.C. "The problem is that you're trying to prove a counterfactual. You're trying to prove that something would not have happened but for this additional revenue stream."

However, the fact that they were included in the House-passed American Clean Energy and Security Act is a good indication that they will be a part of potential federal legislation. The Waxman-Markey bill, as the legislation is widely known, stipulates that offsets should be verifiable, additional, and permanent.

Special Series: What's the deal with offsets?Photo illustration by Tom Twigg / GristIn addition to those attributes, quality offsets should also be "real" and "enforceable," according to Josh Margolis, co-CEO of San Francisco-based CantorCO2e, a broker for the world's emissions and environmental markets. "Those are [five] small words, but there have been tomes and tomes written on what that means," he said.

The other key element to achieving quality offsets is for regulators to monitor projects and enforce consequences against those who fail to comply, he said.

But whether a federal program will actually deliver quality is yet to be determined, and not just because the bill hasn't yet passed the Senate. Michael Wara is a climate scientist and professor at Stanford Law School who has studied and written about offsets and climate policy. "You can say all that in the bill, and it all sounds great, but what really matters are detailed decisions made after [we have a law] by whoever is regulating this system," he said. "The politics and who sits on the decision-making body and where their interests lie really matter."

Current offset providers wonder whether voluntary and compliance markets would use the same standard.

"In the European market, there's a set of standards applied to the voluntary market and a different standard for the compliance market," said Erik Blachford, CEO of Terrapass, an offset provider. "I think that's less likely to happen in the United States. I would guess there's going to be convergence between the voluntary and compliance markets against a single standard."

Offset provider Native Energy plans to comply with a federal regulatory standard for offsets that it would sell under the compliance market. But because the company believes that existing voluntary standards may be more stringent, it plans to continue offering offsets under those certifications to discerning clients. Terrapass' Blachford said he would consider doing the same thing.

For the voluntary market, "the wise way to proceed would be to allow the kind of innovation that has occurred to continue to occur, and to create a business environment in which the kinds of co-benefits that some projects bring could be assessed and valued," said Tom Rawls, spokesman for Native Energy.

But Stanford's Wara doubts that offset providers will actually hew to a stricter certification once federal law creates a standard. Because the voluntary market is "essentially buyer beware," companies spend a lot of energy, money, and time trying to ensure that their offsets are defensible, he said. "But once you get into a compliance-grade situation, all that matters is that USDA or EPA blesses the offset," he said.

For evidence, he points to the international CDM. "You don't see offset companies pushing for stricter standards. You see them complaining that the system is inefficient, leads to delays, and needs to be streamlined."

As the world's first attempt at a regulated offset market, the CDM is serving as an example to U.S. regulators, mostly in what not to do.

Reports from Wara and colleagues at Stanford and environmental activist organizations like Forests & the European Union Research Network (FERN) and International Rivers have highlighted some of the CDM's failures: awards for projects already in progress; falsification of audit reports; manipulation of data upon which companies base credit claims. There are calls to reform or replace the CDM in the renegotiation of the Kyoto Protocol, the first phase of which ends in 2012.

Terrapass' Blachford is willing to cut the CDM some slack. "Brand new things that are put together to tackle enormous problems take time to get right," he said. "It's like people looking at a Sony Walkman and wishing it were an iPod. You know, guys, progress takes time."

Jake Schmidt is international climate policy director at Natural Resources Defense Council, which worked on the Waxman-Markey legislation as a member of the Climate Action Partnership, a coalition of business and environmental groups. He said there are indications that offsets under Waxman-Markey would be better than under the CDM.

"The Offsets Integrity Advisory Board and the final rules are established in a very different legal and political context than in the CDM," he said. "The CDM has a 180 plus-country negotiation process with no Court of Appeals, no Supreme Court, and no agency overseeing the whole thing that has a single responsibility to protect the environment." The U.S. legal structure will allow us to challenge bad rules and projects, he said.

Also, Waxman-Markey would allow for random audits of projects and has a mandated program review. "The CDM has some semblance of a random audit function now, but it didn't at the beginning," said Schmidt.

One particular challenge will be to effectively evaluate agriculture and forestry projects, which would be a much larger part of the offset market than they are currently.

Land use, land use change, and forestry (LULUCF) offset projects have long been sneered at because it is difficult to ensure that the carbon will be stored forever, a quality called permanence. Credits are issued based upon the amount of carbon stored in plants and soil. But that storage could be lost, or "reversed," if, say, the trees burned or were infested with insects. LULUCF projects were excluded from the Kyoto Protocol for that reason and because activists feared they would give polluters an excuse to not clean up.

But now, new strategies are emerging to address risk to permanence. These include temporary credits, which expire and must be replaced with new credits; legal guarantees regarding management of the land; financial insurance to cover reversals; and buffer pools, which require that a portion of earned offsets be set aside in a shared pool to mitigate reversals.

Max Williamson is an environmental lawyer at Washington, D.C., law firm Andrews Kurth. He has lobbied legislators on behalf of the Carbon Offsets Providers Coalition, a group of offset providers, marketers, generators, and financiers. "Temporary credits are a new addition to the Waxman-Markey bill, which we are evaluating but at this time do not believe is necessary," he said. "The other mechanisms for addressing the possibility of reversals are all legitimate policy options."

Terrapass' Blachford is also cautiously optimistic. "For quite a few years we didn't see anything in the forestry world that met our basic philosophical approach to quality," he said. "But now people are starting to do the appropriate thing with things like buffer pools, using those as an active insurance against natural disasters." While Terrapass doesn't yet have any forestry projects, it is now considering them.

But in spite of such advances in regulation, there are still plenty of concerns about whether offsets will be of high enough quality to actually reduce emissions.

"The hard part is that everyone recognizes there is an inverse relationship between quality and quantity," said Stanford's Wara. "But the political deal at the heart of this bill is dependent upon there being a lot of offsets. So there's going to be a lot of political push to make sure that there are."

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Special Series: What's the deal with offsets?Photo illustration by Tom Twigg / GristImagine a system that can:

This is the promise of biochar -- the carbon-rich remains of "burning" organic matter via an oxygen-free process. According to the International Biochar Initiative (IBI), biochar "has four value streams: waste reduction, energy production, soil fertilization, and carbon sequestration." This has implications for both developing and developed economies --- and, most importantly, the interrelated problems of global warming and food security.

Based on the work of researchers in the Amazon who discovered the startling properties of terra preta, land that had been improved hundreds and, in some cases, thousands of years ago, soil scientists have been pursuing a way to replicate the success of the Amazonian Indians in producing spectacular fertility in the midst of the relatively infertile rainforest.

One of the key components of terra preta is charcoal. Modern biochar, however, isn't derived from the same process that agricultural societies have been using for millenia to produce charcoal. Instead, biochar is a product of the breaking down of biomass by a controlled thermal degradation -- not burning. The most prevalent method of producing biochar is through pyrolysis.

The first step in biochar production is providing feedstock. This can be agricultural waste that would otherwise sit in the field to decompose or be burned, in both cases generating greenhouse gases. Other sources are forest debris or waste products like the enormous fraction of municipal solid waste comprised of grass cuttings and leaves. The feedstock is placed into a pyrolysis chamber -- a nearly airtight device that intensifies heat but limits exposure to oxygen to avoid burning. The chamber can be a small unit processing as little as a few pounds of biomass for a family's cooking and gardening needs, or a large one with a capacity of as much as a 100 tons per day.

Since pyrolysis is performed with little or no oxygen present, it produces no combustion byproducts such as black carbon (soot), carbon monoxide or carbon dioxide. Instead, gases such as hydrogen and biofuels are produced, which can be used to provide the necessary heat for the pyrolysis process with some left over for other uses.

Here's a look at the overall process:

Courtesy Johannes Lehmann, Cornell University

The remaining solid material -- the biochar -- can be used as a soil additive that, according to most of the research to date, has a remarkable ability to enhance agricultural or horticultural productivity.

One key international governmental organization, the United Nations Convention to Combat Desertification (UNCCD), believes "the role of the soil in capturing and storing carbon dioxide is often one missing information layer in taking into consideration the importance of the land in mitigating climate change."

The UNCCD, along with the IBI, pushed hard to include biochar in the draft negotiating text for the upcoming Copenhagen climate talks. This means that biochar and other methods of employing agriculture to mitigate carbon emissions may well lead to the issuing of offset credits for these methods. This is the big prize that could lead to the massive deployment of biochar production worldwide.

Biochar has been embraced by worthies such as Chris Goodall and James Lovelock. Tim Flannery, in his foreword to Biochar for Environmental Management, says: "The biochar approach provides a uniquely powerful solution, for it allows us to address food security, the fuel crisis and the climate problem, and all in an immensely practical manner. With its careful evaluation of every aspect of biochar, this book represents a cornerstone of our future global sustainability."

Cornell's Johannes Lehmann is studying how various types of biochar can boost soil fertility and sequester carbon.Courtesy LehmannDr. Johannes Lehmann -- co-editor of Biochar for Environmental Management, chairman of the IBI, and a professor at Cornell University -- is one of the driving forces behind the growing recognition of biochar's value. Like any good scientist, however, he's conservative in his prognostications. His current work focuses on generating and evaluating research on biochar production and use. His group at Cornell, for instance, is evaluating scores of different chars from around the world.

Lehmann does not endorse growing biomass on a massive scale as biochar feedstock -- something George Monbiot accused biochar boosters of advocating in a somewhat infamous Guardian column from March.

"It doesn't make any sense to grow biomass on land specifically and solely for the purpose of generating energy or biochar or a combination," Lehmann said. "It makes the most sense to talk about agricultural waste."

Lehmann considers forest debris and yard waste to be prime candidates for biochar production. But he is circumspect about which wastes might be most cost-effective. Collecting corn stover from fields for the purpose of generating char and energy might be ineffective, but the massive amounts of waste generated by sugar cane production could work very well. Similarly, if money and effort must be expended to collect forest debris for biochar production, then it might not be worthwhile. However, it could be cost-effective if the debris is being collected anyway for fire prevention.

Biomass is often left on the ground to decompose, creating huge amounts of greenhouse gas emissions, or is burned in the fields or in forest fires, creating carbon dioxide. Biomass, usually scrub wood or animal dung, is also burned in open cooking fires throughout the developing world, a practice that has drastic dire health impacts for the people routinely exposed to the smoke, mostly women and children. It also generates black carbon (or soot), increasingly being identified as a powerful driver of climate change second only to carbon dioxide.

Among the many projects in which Lehmann is involved is comprehensive research and development on pyrolyzing cookstoves that produce both clean heat and biochar for use by farmers. "You can dramatically expand your feedstock options when you switch from burning to charring," he said. What matters in all of this, Lehmann emphasizes, is looking carefully at the costs and benefits in each situation, performing "whole systems analysis, from cradle to grave."

Biochar could get a big boost in the United States if the Waxman-Markey bill is passed. The legislation would allow agricultural and forestry projects to qualify as carbon offsets, a move that sparked outcry from some environmental groups concerned that Congress would prevent regulators from measuring the full carbon footprint of U.S. farming practices.

Nevertheless, offsets retain considerable support in Congress. Sen. Tom Harkin (D-Iowa), chairman of the Senate Agriculture Committee, is a biochar booster. "As part of the overall effort to lessen the effects of global warming, biochar is an exciting method for sequestering carbon," he said in a statement for this article. "It is a truly innovative option not only because it sequesters carbon, but also because it improves soil condition and reduces the amount of water and fertilizer required on farms."

William Hohenstein, the director of USDA's Office of Global Climate Change, sees biochar in the context of a comprehensive policy construct, along with conservation tillage, tree planting, and other mitigation methods. He envisions the inclusion of these methods in a system of offsets, both domestically and internationally. The Agricultural Research Service, meanwhile, concluded in a recent report that the costs of processing crop residue into biochar and incorporating it into farmland soils could be offset by giving farmers the ability to sell credits for the carbon sequestered by the biochar.

See next page for videos >>>

A chart via Biochar Fund showing how biochar production can be used for electricity generation:

Courtesy Biochar Fund

Video: Cornell's Lehmann is featured in this video on biochar produced for an Australian audience:

A pyrolysis cooking stove that can generate biochar as a fuel residue:

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Special Series: What's the deal with offsets?Photo illustration by Tom Twigg / GristThe compliance market for offsets proposed under the House's American Clean Energy and Security Act would not just mean more opportunity for companies already in the business of selling carbon offsets. It would also result in a major realignment in the types of offsets offered, shifting away from renewable energy to offsets derived largely from land use, land use change, and forestry projects (otherwise referred to by the clunky acronym LULUCF).

That's because Waxman-Markey, as the House bill is known, excludes all forms of energy production, including renewable sources, from the huge carbon offset program it would create.

"Since fossil fuels used to make electricity are capped, there is an automatic 'credit' from purchasing renewable energy due to the need to hold fewer allowances," said David Hawkins, director of the Natural Resource Defense Council's climate center. "Creating an offset credit for those renewable kilowatt hours would be double counting."

Aside from the carbon price, which would help to level the playing field for clean energy, as Hawkins noted, other mechanisms will also drive renewable energy development, including the renewable electricity standard, which specifies that the United States should get 20 percent of its electricity from renewable sources or energy efficiency by 2020; CAFE standards that regulate auto emissions; and already-approved federal stimulus money for research and development.

But the prospect of agricultural and forestry offsets presented an irresistible opportunity for Big Ag, and just days before the House passed Waxman-Markey on June 26, the House Agriculture Committee, led by Rep. Collin Peterson (D-Minn.) and supported by Agriculture Secretary Tom Vilsack, won some key victories for their constituency that critics argue would impede the country's ability to actually reduce greenhouse gas emissions.

One of the reasons corn ethanol and, to a lesser extent, soy biodiesel, have fallen out of favor in many circles is because of the international leakage issue. When American farmland is turned over to growing crops for biofuel production, that reduces food availability on the international market, pushing prices higher. People in developing countries can't afford corn and soy at these prices, so they cut down rainforests to increase local supplies. When the resulting loss of carbon sequestration from deforestation is calculated, biofuels typically do not show a net reduction in CO2 emissions over fossil fuels.

Many people in agriculture regard biofuels as an economic godsend that can help save struggling farms (witness the huge boom in biofuel production in the first half of this decade as oil prices reached historic highs). And they have been dismayed by carbon accounting reports that have shown their product to have an about equal warming effect as fossil fuels, information that led California to exclude corn ethanol from its renewable energy fuel standard.

Rep. Collin Peterson used his position as chairman of the House Agriculture Committee to win key concessions for farm interests in the Waxman-Markey climate and energy bill.Courtesy AFLCIO2008 via FlickrPeterson and the House Agriculture Committee won a concession that international leakage won't be calculated as part of American biofuels' carbon footprint for five years, making it appear more desirable on paper. At that point, there will be an evaluation, but the USDA will have veto power over any decision to count leakage.

Environmentalists argue that there is no point to growing biofuels if there is no net climate benefit, and increased water consumption and fertilizer runoff associated with these crops could make them an environmental net negative.

Profit motives seem a clear driver for the leakage exemption. But it is also partly explained by farmer culture, which is generally more alarmed by the issue of energy security than climate change, said Bob Stallman, president of the American Farm Bureau Federation.

Awarding the USDA oversight of offsets, rather than the EPA, was another big win for the Agriculture Committee. Many environmentalists say the EPA would be better at oversight because its mandate is to protect the environment, whereas the USDA's is to look out for agricultural interests.

But Stallman said such criticisms show "a huge lack of understanding about what the overall role of USDA is. Yes, production agriculture is a part of its portfolio, but certainly not its priority."

In addition, the USDA currently runs a variety of conservation programs, he said. "They are required to do oversight. They are required to set up the regulations; they are required to handle compliance. And they have a network of over 2,000 local offices across this country that do that. EPA doesn't begin to have that kind of network."

Specifically, Stallman believes USDA is better equipped to oversee a LULUCF-focused carbon offset program than the EPA because it already staffs soil scientists, plant biologists, and agronomists, the people who will calculate to what degree carbon is being sequestered or not emitted based upon any given practice.

Michael Wara of Stanford Law School, however, said he is afraid that the USDA would follow the lead of voluntary offset markets such as the Chicago Climate Exchange (CCX) and the U.S. Department of Energy's Voluntary Reporting of Greenhouse Gases program, which don't do on-site monitoring or use third-party verifiers but rather estimate carbon uptake based on soil type, climate zone, and other factors.

Furthermore, deciding what makes a quality offset involves a lot of subjective decisions, Wara said. "Agency discretion is fairly broad, and a number of choices are defensible."

For example, reducing the use of fertilizer would likely qualify as an agricultural offset. Fertilizer is released from soils into the atmosphere in the form of nitrous oxide, a potent greenhouse gas, and the production of synthetic fertilizer is carbon intensive. However, over-fertilization of fields in the United States is already declining as a result of other policies the USDA has implemented and the rising cost of fertilizer. So how do certifiers take into account the likelihood that fertilizer use would have continued to fall, even without an offset program?

"That's going to be a very subjective question," said Wara. "How fast would it have fallen? Would it have leveled off? The USDA faces political pressure from its constituency, which is used to subsidies that are considered to be more like entitlements. So the whole concept that practices change and you might not be entitled to the same level of crediting is not one that's going to be very popular or familiar to farmers."

Stallman said he expects to see offsets' validity reviewed regularly as natural part of the process, negating the need for a periodic, formal review. As an example, he points to no-till farming offsets currently traded on the Chicago Climate Exchange. These offsets are temporary, not permanent. Farmers usually sign a contract for five years, a period during which they agree to implement certain practices. Scientists then calculate a carbon credit for that time frame.

"At the end of five years, there's nothing to say that there would be another contract available just like that," said Stallman. "Maybe the USDA would come in and say, given technological changes and other developments that are occurring, the amount of carbon you're going to reduce by using that practice is a new number."

While he admits that calculating business as usual versus additionality for offsets can be tricky, Stallman expressed faith in the system. "I would support anything that ultimately qualifies as an offset. My assumption is there's not going to be an offset granted unless the additionality requirement is met."

The Offsets Integrity Advisory Board that would be created under Waxman-Markey could be a venue in which to review such issues, according to Daphne Wysham, a fellow at the Institute for Policy Studies, an independent think thank in Washington, D.C. But her optimism is tempered.

"The question is, once you've got all these interest groups in place, how easy is it to make these changes politically?" The USDA overseeing these offsets "is like the fox guarding the henhouse," she said.

--

Below, watch Bob Stallman's testimony before the Senate environment committee on climate legislation and the agriculture sector. (Read a related Grist story.)

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Owners of forestland in the Pacific NW could benefit more under a national carbon offsets system, as trees common to the region store more carbon per acre than East Coast species. Pictured: Douglas firs in an Oregon forest.Courtesy Ecotrust's sbeebe via FlickrThough most people probably think of national parks when they think of forests, more than half of the 750 million acres of forestland in the United States is actually privately owned, much of it by individuals and families, according to the American Forest Foundation, a nonprofit advocacy organization.

Together, these trees suck up about 10 percent of U.S. carbon dioxide emissions annually, according to the Environmental Protection Agency, a portion that could double to almost 20 percent with increased sustainable management practices like replanting cut trees and lengthening cut rotations.

But many of these family-owned lands are small -- a few hundred acres in size. Alone, these small plots don't sequester much carbon. This makes it difficult for forest owners to participate in voluntary carbon markets, which typically trade carbon by the tens of thousands of tons. In addition, private owners often can't afford to inventory and verify the amount of carbon sequestered by their forest on their own.

That's why there's growing interest in packaging small parcels of forestland into carbon portfolios that can then be traded competitively on voluntary markets.

Woodlands Carbon Company, an Oregon-based pilot project funded by the American Forest Foundation, is just one so-called aggregator looking to pool the carbon trading power of forest owners. It focuses specifically on West Coast clients, who are especially primed to benefit from carbon offsets with lands planted with trees like Douglas Fir and Hemlock Spruce that can sequester more than 1,000 metric tons of CO2 per acre over a 125-year period. Its sister organization, CarbonTree, focuses on the East Coast.

"We bundle all of the smaller woodland owners together so that they can get access to these markets," says Mike Gaudern, chief executive of Woodlands Carbon. "They wouldn't have access to these markets unless they had an aggregator to work on their behalf."

Special Series: What's the deal with offsets?Photo illustration by Tom Twigg / GristParticipating in the carbon offset market can be technically challenging, so companies like Woodlands help educate private landowners and foresters through informational workshops that walk potential clients through the many steps of carbon trading. In July, Woodlands hosted two workshops where 120 landowners and foresters came from Oregon, Washington and even California.

"It was a pretty successful event," says Gaudern. "There were landowners there that represented close to 60,000 acres of forestland that will be immediately eligible for carbon offset trading."

In addition, Woodlands offers revolving loans for landowners to complete their carbon inventories, which landowners then pay back through carbon sales.

Woodlands plans to have its first bundle of carbon offsets ready to sell by the end of the fall, most likely either over-the-counter or through the Chicago Climate Exchange (CCX), which requires landowners to sign a contract attesting that the land will be maintained as forest for at least 15 years.

Approximately 9,000 individual farmers, ranchers and forest owners are currently enrolled in CCX, according to Brookly McLaughlin, director of communications for the exchange. Together, they have earned approximately 16.4 million metric tons of offsets since the program's inception in 2003.

The short-term contracts appeal to Ken Faulk, president of the Oregon Small Woodlands Association, because he believes that the focus should be on reducing carbon emissions in the short term. Faulk owns 155 acres in the Willamette Valley in Oregon and is currently inventorying his forest so he can sell carbon offsets through Woodlands Carbon.

"If people truly believe that we're going to be on a fossil fuel economy for the next 100 years, then maybe we should be worried about putting carbon away in the trees for a 100-year rotation," says Faulk. "But I think our goal should be to get the most carbon dioxide out of the atmosphere as soon as we can."

Clint Bentz, an Oregon family forest landowner and chairman of the Oregon Tree Farm System, also believes short-term contracts are the way to go.

"We think the shorter time frame is not only more palatable to the landowners, it's also more valuable because it keeps everybody's attention," says Bentz. "Keeping everybody's feet to the fire with these shorter contracts works better with human nature."

Carbon offsets also provide an additional revenue stream for landowners feeling the squeeze of falling timber prices.

"Nobody's going to get rich off of carbon offsets, but it's a real help," says Bentz. "Recognizing these ecosystem services [like carbon sequestration] is one of the bright lights that we're seeing to help offset the costs of sustainably managing forests."

Of course, as long as the price of carbon remains low, many landowners are holding off in the hopes that a national climate law would spur prices.

"For most people who do the math if they're actually in the sustainable forestry business, they're going to stay in the timber business and not the carbon business right now," says Bill Stewart, a forestry specialist at the University of California Cooperative Extension.

Still, some private owners are getting a head start on the offset market now, before carbon legislation is passed. "We see it as trying to get ready to have these offsets available in any future federal legislation and to have the infrastructure in place to make this work for landowners," says Ted Dodge, executive director of the National Carbon Offset Coalition and Woodlands' carbon broker.

But not everyone agrees that short-term contracts will best benefit the planet, in part because landowners could clear cut their trees after the contract expires. Ecotrust, an environmental organization based in Portland, Ore., is hoping that any federal legislation for carbon offsets would include strict regulations and long-term contracts similar to the Climate Action Reserve's (CAR) protocols, a carbon market that began in California and is now looking to go national.

"Climate Action Reserve's protocols that are being developed are much more rigorous [than CCX's] in terms of permanence and additionality," explains Brent Davies, director of forestry for Ecotrust. Additionality means that the project wouldn't have happened without carbon offset funds.

For example, CAR's standards require that forest owners agree to a permanent conservation easement, a legal agreement that requires owners to permanently give up land development rights. But since many private owners aren't willing to make that commitment, CAR is considering substituting the conservation easement requirement for a 100-year contract.

"We found that the 100-year contract is more acceptable to private landowners who don't want to necessarily bind their great, great grandchildren to this requirement," explains Gary Gero, president of CAR. The California Air Resources Board will vote on the new draft in September.

David Eisler, a landowner in the coast range of Oregon, is looking for the sort of long-term contract that CAR offers because he wants to guarantee that his forest stewardship practices will continue after he passes. He is working with Ecotrust on carbon credit possibilities for his property, an 80-acre tract of land that serves as habitat for spotted owls and endangered coho salmon.

"Our efforts to really protect some of this high quality forestland and ancient trees could be gone in a blink once the property changes hands," says Eisler. "That's why I'm looking for a conservation easement, but I'm also looking to carbon credits to commit to very long term forest stand."

Peter Hayes, a landowner who manages about 800 acres in the Northern Oregon Coast Range, is also looking to sell carbon credits on a long-term basis, but says he has yet to find a carbon offset project that fully meets his family's stringent conservation goals.

"Our approach is to be eagerly involved in understanding and following what's going on, but constructively skeptical and critical before we choose to commit our land long term," says Hayes.

Because opinions on carbon offsets are akin to the number of leaves on a branch, one solution may be to include a broad range of options for carbon offsets in the new carbon legislation. By casting a wide net, more people will be able to participate, which will therefore bring in the largest amount of carbon.

"I don't think it should be either/or situation," says David Ford, executive director of the Oregon Small Woodlands Association. "We have a rather large problem. We're not going to solve it with a narrow solution."

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America's first major stab at tackling global climate change comes in the form of the American Clean Energy Security Act, a massive piece of legislation that would touch nearly every corner of the U.S. economy.

The bill, often referred to as "Waxman-Markey" after its principal sponsors in the House of Representatives, contains provisions for clean energy technology, energy efficiency, green building codes, green jobs, and adaptation measures to help ease people into a new world order. But its most talked about feature is the regulation arm, "cap and trade": limit pollution to a finite amount, lower the allowable amount each year, and let polluters trade pollution permits to create market incentives for businesses to reduce emissions as cheaply as possible.

Modeled, in part, on the federal program created in the early 1990s to combat acid rain, the Waxman-Markey trading scheme would create a mandatory (or compliance) market in greenhouse gas emission credits for businesses regulated under the cap. Credits would be measured in carbon dioxide equivalent (CO2e), where each type of greenhouse gas is converted to its equivalent in CO2, the most common greenhouse gas. Hence the term "carbon markets."

But here's the rub: Waxman-Markey does not propose a pure cap-and-trade scheme. It's actually cap and trade and offset. Offsets, put simply, would let polluters pump more carbon dioxide into the atmosphere than they would be permitted under the "cap" part of the program. Companies would earn that right by investing in projects in the United States or in other countries that reduce the amount of carbon dioxide being emitted into the atmosphere.

Supporters, including regulated industries, agribusiness, and some environmentalists, say offsets would control the cost of pollution permits, helping the country transition to a low-carbon economy without jolting price increases for energy. One factor that influenced the inclusion of offsets in Waxman-Markey was a June 23 EPA analysis (PDF), which found that without international offsets, the cost of permits, also called allowances, would be 89 percent higher.

Still, critics charge that offsets as envisioned by Waxman-Markey would defeat the overriding goal of cutting emissions. That's because ensuring the quality of offsets -- i.e. that greenhouse gas reductions are actually happening -- has proven to be a tall order.

Offsets are hardly a new phenomenon. A robust voluntary market emerged internationally and in the United States during the past decade as businesses raced to flaunt their sustainable bona fides. Several major rental car companies give drivers the option of buying offsets. Online retailer Destination Lighting touts its purchase of offsets as a selling point. Pacific Gas and Electric, a huge utility in California, announced in July that it is offsetting some of its carbon emissions by supporting The Conservation Fund's forestry projects; money for the offsets comes from customers who opt to pay extra each month. Dell, the personal computer manufacturer, is a large purchaser of offsets, as is search-engine giant Google.

Inevitably, the offsets trend prompted a backlash: questions about methodology and merit, comparisons to sin indulgences, nicknames like "rip-offsets" (thanks, Joe Romm!), and parodies like Cheat Neutral. In August 2008 the Government Accountability Office lent a stamp of authenticity to these concerns by issuing a report that outlined the challenges associated with the voluntary market for offsets. And on August 3, the Congressional Budget Office issued a report (PDF) that, while concluding offsets under the Waxman-Markey bill would likely reduce compliance costs and cut carbon emissions, conceded that a lot depends on the design of the program and how offsets are certified.

If regulated companies are allowed to buy offsets as an alternative to reducing their own emissions or buying extra allowances under the cap, and if those offsets aren't actually reducing pollution, then we would be merely running a "shell game," not tackling climate change, said Daphne Wysham, a fellow at the Institute for Policy Studies, an independent think tank based in Washington, D.C.

In spite of these concerns, lobbyists for offsets struck it big with Waxman-Markey: The bill, which was narrowly passed by the House on June 26, would authorize up to 2 billion tons annually until 2050. In 2007, 2 billion tons would have been about 29 percent of total U.S. greenhouse gas emissions, according to the EPA's 2009 U.S. Greenhouse Gas Inventory Report. This is a massive increase over the 10.2 million tons traded in the United States in 2007, according to the August 2008 GAO report.

"Enormous numbers of offsets defer to a later day the time at which [entities under the cap] will have to change their behavior," said Michael Wara, a climate scientist and professor at Stanford Law School who has studied and written about offsets. "If you look at the EPA analysis of [Waxman-Markey], there will not be a change in the amount of electricity coming from coal until 2020 or 2030. My own analysis shows that emissions under the cap will not have to fall until 2030."

But the outcome pleased Max Williamson, a lawyer at Andrews Kurth law firm in Washington, D.C., who lobbied legislators on behalf of the Carbon Offsets Providers Coalition, a group of offset providers, marketers, generators, and financiers. "We applaud Mr. Waxman and Mr. Markey for recognizing that offsets are an important cost-containment mechanism," said Williamson.

Some critics stress that offsets are not the only or best way to control costs under a cap-and-trade scheme. Wara would prefer a "safety valve" that would allow regulated businesses to buy unlimited allowances to pollute if the price of carbon rose to a predetermined level. The underlying premise is similar to the strategy behind the inclusion of a large number of offsets in Waxman-Markey: adding supply reduces demand, thereby keeping costs down.

But with a safety valve, the government could use the money raised by selling excess allowances to buy and retire offsets. "What that does is disconnect the cost-control [mechanism from] emission-reduction activities outside the cap, thereby improving the incentives to fund only the higher quality projects," Wara said.

Bill Burtis of Clean Air Cool Planet would prefer to control costs using a "price collar" that sets both a ceiling and a floor. The collar would be set at some percent below and above market cost, so as the market rate goes up or down, the collar moves with it.

"Basically the idea is that, particularly for businesses and others who might be impacted by these costs, they can see what the potential range will be and plan accordingly," Burtis said.

As for the Institute for Policy Studies' Wysham, she would like to see a straightforward carbon tax. "While prices would rise in some sectors, they would decrease in others, creating a shift in subsidies," she said. "So you would not only have stick, you'd also have a carrot for clean energy, public transportation, alternative vehicles." Because she believes that it is impossible to verify that offsets are reducing greenhouse gas emissions, "my personal perspective is that offsets are a dangerous distraction from real action," she said.

In spite of these arguments, "the political reality has been that offsets are what we're using," said Stanford's Wara. That reality has been created in part by the voluntary offset market, which has worked to make legislators and the general public alike more familiar with its product over the last few years.

"Current offset companies exist because of the prospect of something like this system," said Wara. "Companies that do voluntary offsets in the U.S. right now are basically laying down markers on what are going to be very valuable compliance-grade offset projects in the future."

Existing offset providers would likely sell to both the voluntary and compliance markets. That's because, although approximately 85 percent of the U.S. economy would be under the cap as defined by Waxman-Markey, the market for voluntary offsets will continue, said Josh Margolis, co-CEO of San Francisco-based CantorCO2e, a broker for the world's emissions and environmental markets.

Individual consumers will still want to neutralize their impact on the climate, and shareholders and stockholders of companies without a compliance requirement will recognize liabilities associated with the carbon emitted in manufacturing and selling products, he said. Insurance companies may also want offsets as a hedge against the carbon consequences of business operations.

But Clean Air Cool Planet's Burtis believes the voluntary market will decrease over time. "The role that plays is certainly reduced once you've got a cap on carbon and people are paying for it," he said. "The farther upstream that cap is in place, the more [everyone is], in effect, regulated." For example, oil producers will be paying for carbon emissions, as will gasoline refineries. "Do I feel a need any longer to purchase an offset for my automobile?" Burtis asked.

Of course, none of this has been enacted, as the Senate must still produce its own climate bill. Nevertheless, if Congress passes a final bill this year, offsets will likely be included -- and the compromises  made along the way will undoubtedly satisfy very few.

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The American Farm Bureau Federation, not content with the major concessions for agriculture that its congressional allies secured during the House climate debate, is now lobbying the Senate for a better deal.

Appearing at a hearing of the Environment and Public Works Committee on Tuesday, Farm Bureau President Bob Stallman not only pushed for provisions that environmentalists believe would limit the efficacy of a climate bill, he also repeated climate skeptic talking points, questioning whether climate change is even happening, according to written testimony submitted to the committee:

As the House drafted a climate bill last month, the Farm Bureau worked hard to win a number of ag-specific changes, but then went on to oppose the bill overall. On Tuesday, Stallman said the Farm Bureau wants the Senate bill to place a higher priority on domestic carbon offsets. The House bill would allow for half of the 2 billion tons of offsets to come from other countries. This is seen both as a way to allow U.S. companies to buy offsets at a lower price, and as a way to avoid deforestation in other countries – specifically, developing countries that need encouragement to participate in a global climate deal. But Stallman wants the Senate to increase the share for domestic providers.

"Every offset that is international is a transfer of wealth out of this country to some other country, out of the pockets of consumers in this country," said Stallman after the hearing.

"Even the first year that the international offset program goes into place, according to EPA's analysis, you're going to send $20 billion to another country, overseas," said Robert Young II, the Farm Bureau's chief economist. "As I recall our total foreign aid at this point in time only runs about $30 billion. So to do that in one fell swoop in one year, and then we're going to do that for forever. By the time you get out to 2050, you're talking about $100 a ton for carbon, you're literally sending $100 billion for carbon credits overseas. Just think about that."

"That's coming out of the pockets of citizens of this country," echoed Stallman.

Raising fears about money going overseas (i.e. to CHINA!) is one of the major lines of attack on the offsets provisions from opponents of the bill these days. But the Farm Bureau and others are also raising concerns that if forestry offsets are more valuable than agricultural offsets, farmers might convert cropland to forests.

"Farmers are smart people. They're going to look at the net return for crop production and the net return for forest sequestration," said Stallman.

Stallman also listed what the Bureau would like to see changed in the overall bill, beyond the ag provisions. Included in the request is an offramp for the bill, should the price of carbon get too high. Enviros aren't very supportive so-called "safety valves" in a climate bill, noting that the point of an emission-credit system is to make it noticeably more expensive to pollute so industries will have incentive to reduce their emissions.

Stallman also said his group wants the bill to include provisions that would fast track construction of new nuclear plants or further support the development of carbon-capture-and-storage technology to "plug the energy hole" that could be created by moving away from carbon.

The Farm Bureau is planning to talk to Sen. Tom Harkin (D-Iowa), chair of the Agriculture Committee, about its requests. "We look forward to working with Sen. Harkin and his staff to come up with ways to improve [the bill]," Stallman said. "Ultimately whether we support a massive piece of legislation or not, depends on the board of directors' determination after the bill is completed and we can do an analysis of the impacts. There are a lot of things we would need before we would even consider it."

What they might get

Stallman will likely have a willing ear in Harkin, who has said he wants to ensure that the Senate bill contains all the goodies in the House package, and then some. The deal forged in the House, under pressure from Collin Peterson (D-Minn.), included giving the Department of Agriculture oversight over offsets rather than the EPA, delayed for five years the inclusion of indirect land use in accounting for the emissions of biofuels, and ensured that farmers already using conservation practices would be eligible for the incentive programs.

"If it's like the House bill, I'll be reasonably happy," Harkin said recently. "We want no indirect land use, things like that in there -- there is no scientific basis for that."

Harkin said in a recent speech to the National Council of Farmer Cooperatives that he will seek "more allocations and allowances" for agriculture in the Senate bill.

Both the American Farm Bureau Federation and the National Council of Farm Cooperatives were among the farm groups that did not support the House bill, as were the American Farmers and Ranchers, National Corn Growers Association, National Chicken Council, National Turkey Federation, and the National Pork Producers Council.

Some farm groups have supported the House bill, however, including the National Association of Wheat Growers, the American Farmland Trust, and the National Farmers Union.

Tuesday's EPW hearing was titled (not too subtly), "Economic Opportunities for Agriculture, Forestry Communities and Others in Reducing Global Warming Pollution." It was a clear attempt on the part of committee chair Barbara Boxer (D-Calif.) to court ag interests as she attempts to craft the Senate's version of a climate and energy bill. Boxer played up the benefits for ag in the House bill, which allows for a significant amount emissions reductions to come from domestic agricultural and forestry offsets. And she also played up the potential harms to agriculture if global warming continues unfettered.

"If we do nothing and argue over this to the point of stalling everything, the farmers in my state will be desperate, as they see more droughts and more warming," said Boxer. "This is a rare time, we have the confluence of a recession that is deep and global and the issue of climate change -- it creates an exceptional opportunity, if we can just get over our fear-mongering and get over the naysayers."

Boxer was also sure to point out to her Midwestern, Republican colleagues at the hearing that she in fact represents the largest agriculture state in the country, a statement prompted by Kit Bond (R-Mo.) suggestion that coastal-state senators might not understand opposition to the climate bill emanating from the heartland. Boxer's retort didn't stop farm-state Republicans from presenting a solid block against the bill throughout the hearing. "This bill will cost Missouri farmers up to $30,000 a year," claimed Bond.

"Wealth will be transferred away from the Midwest to the West Coast," said John Barrasso (R-Wyo.).

What farm-state Democrats will demand in the Senate version to secure their support remains to be seen. It's not yet clear whether Harkin will try to get his priorities included in the EPW's bill, or if he will have to introduce them in the form of an amendment when it eventually reaches the Senate floor. He says he would prefer to see his input incorporated early on. "I don't want to offer an amendment," he told National Journal.

He also indicated that he doesn't think a climate bill will come to the floor until November or even December and could even "slip until next spring."

Harkin's committee will host a hearing on the role of agriculture and forestry in climate policy on July 22, stay tuned.

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The Clean Development Mechanism (CDM) has already failed Africa, some observers believe, so why bother post-2012 when the existing CDM framework established under the Kyoto Protocol expires?

But as the international community prepares to negotiate a new climate pact, we should care about extending the CDM, and care a great deal.

After all, the CDM was created with the dual goals of promoting sustainable development in developing countries and reducing costs of compliance in regards to greenhouse gas (GHG) emissions in rich countries. In the early years of the CDM, the market rewarded the lowest hanging fruit -- reductions in industrial facilities in countries where there were already well-established investment environments and where government institutions were relatively well developed. It's no surprise then that most of the early projects were in Brazil, Mexico, Chile, South Africa, Malaysia and China.

Today the CDM has broadened to reach over 50 countries worldwide, including African nations like Uganda, Tanzania, Nigeria, Morocco, Egypt, and Tunisia. But we need to improve and extend the CDM to reach even more developing nations.

In 2007, while serving in my previous role as Global Head of Origination for EcoSecurities, I started focusing on business development in Africa. My first trip to scope out potential projects was to Tunisia, Ghana and Nigeria. Later we also evaluated opportunities in Ethiopia, Kenya and Tanzania, and from our South African office we tried to work with projects in countries as diverse as Rwanda, Mozambique, Mauritius, Madagascar, Namibia and Angola.

Despite our efforts, our African portfolio remains much smaller than one would expect given the resources devoted to it. Africa, we found, is a rather complicated place to work. First of all, it is extremely diverse and geographically huge. But, more importantly, the continents institutions are still in their infancy. Most African nations have only been independent for 50 years or less. As such, many governments have not evolved strong policymaking processes or had time to build the roads and rail networks needed to support economic development.

Slowly but surely, however, Africa is picking up. Unfortunately, the current debate on a post-Kyoto climate regime seems to be overlooking carbon financing as a tool for sustainable development, especially for Africa. The current debate tends to focus on competitiveness -- i.e. obtaining level playing fields for industries. But this approach insinuates that only major emerging economies matter in the fight against climate change, so only those that already possess developed industry and the money to set baselines and manage major schemes can aspire to benefit from carbon financing internationally.

People in developed countries often associate Africa with high-profile "bad news" stories, such as the political violence and economic collapse in Zimbabwe, the years-long wars in Congo, or even the horrors of 1994 Rwanda and today's Darfur. True, these are shocking and distressful facts, but they should not tarnish the substantial strides that other countries like Ghana, Botswana, Namibia and Ethiopia have made.

In the words of Youssou N'dour, one of the most well-known African singers who recently released a movie called "I bring what I love" (highly recommended by the way), developed countries need to move away from their idea that Africa is just a story of poverty and start expecting nations there to take care of their own development ... and make sure they have the flexibility to do so.

Africa needs more investment (not aid) to build businesses and infrastructure. Recently, there's been much discussion of aid's failure to help Africa's countries achieve certain development milestones. Carbon financing, I believe, can play an important role in boosting economic development and reducing corruption by channeling direct foreign investment to African nations for the right purposes.

Looking toward Copenhagen, it is not enough for Africa that the CDM simply continues past 2012. We need to recognize that:

The bad news is that we are out of time in the current Kyoto architecture, and it does not look like there will be a future for scalable carbon financing in Africa unless the United States also looks at climate change regulation as a force to promote sustainable development.

Let's encourage the United States and other developed nations to be more ambitious in Copenhagen and put on the table not only the idea of getting China and other key developing countries to agree on emissions targets, but also the idea of reinforcing the role of CDM and pushing for much needed reforms of the mechanism addressing Africa's challenges.

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One of the little-known ingredients of the deal that allowed the American Clean Energy and Security Act, H.R. 2454, to pass the Energy and Commerce committee was a breakthrough on protections for the world's vanishing tropical forests. The bill's authors, Representatives Henry Waxman (D-CA) and Ed Markey (D-MA), used this agreement to achieve the bill's environmental aims while keeping it affordable enough to maintain the political support it needed to pass. As such, the bill's tropical forest provisions are essential not only to strong climate policy, but also to overall hopes for climate legislation as it works its way through Congress.

Destruction of these carbon-rich, biodiverse forests causes about 20 percent of global climate pollution -- more than the emissions from all the cars, trucks, planes and ships in the world combined. The bill's supporters recognized that you can't solve the climate crisis unless you solve the deforestation crisis.

Tropical forest conservation is one of the most affordable and fastest ways to achieve large pollution reductions. These forests are so biologically rich that every acre stores an average of about 200 tons of carbon dioxide, but because there are currently no systems to value tropical forest carbon, they're being destroyed for ranchland and soy plantations. Indeed, the consulting firm McKinsey & Co.'s recent greenhouse gas abatement cost curve analysis found that tropical forest conservation has the potential to reduce carbon pollution at just a fraction of the cost of other essential strategies, like installing clean energy or improving agricultural practices.

The challenge has been that, despite the importance of saving tropical forests and the relative ease of doing it, intractable debate about exactly how to end deforestation has persisted for years. As a result, tropical forests were entirely excluded from the Kyoto Protocol in 1997, resulting in 300 million acres of forests getting wiped off the map since then.

Since then, a consensus has emerged that this "colossal blunder" cannot be repeated -- but exactly how to protect the forests has continued to be disputed, with some groups favoring a pure government funding approach and others backing an approach that would give emitters pollution credits for investing in successful forest conservation.

To resolve this question, leading environmental groups and major U.S. corporations (including some of the biggest greenhouse gas emitters) like American Electric Power and Duke Energy convened a negotiating process through Avoided Deforestation Partners, while the Waxman-Markey legislation was being drafted.

These groups had a major realization: instead of choosing a government or private investment approach, we could do both. Indeed, it became clear that doing both was essential -- private investment was the only real hope for attracting the scale of financing needed to end deforestation, while government funding was necessary to build the scientific and policy infrastructure and developing country capacity necessary for a robust private investment system -- and to accomplish conservation goals to which private investment was less well suited.

In addition to endorsing this dual approach, the coalition also agreed to set very strict standards for any private conservation efforts. First and foremost, they agreed that emitters could only get credit for conservation activities once they had already occurred -- not just for having a plan. They also agreed that all forest conservation activities in major emitting countries like Indonesia and Brazil must be done in association with a national plan that ensures that the project is contributing to a national decline in deforestation, not just a local one.

In order to reduce deforestation immediately, however, the agreement doesn't require that all forest conservation wait for the establishment of national plans and baselines, a process expected to take some years, especially in the least developed countries that lack the resources to quickly evaluate deforestation levels and carbon stocks.

Instead, in the first years after the adoption of climate legislation, emitters will also be able to get credit for conservation activities that are part of state or province efforts to reduce deforestation in cases where those states or provinces themselves are major sources of carbon pollution. Companies can also receive credit for conservation projects in the least-developed, relatively low-emitting countries while they prepare their national plans. These provisions help ensure that the next few years don't result in a deforestation race to the bottom before conservation protections are established.

Finally, and crucially, no conservation project at any time will be able to receive credit unless it promotes biodiversity, and indigenous and forest-dependent people benefit from it.

With groups ranging from the Sierra Club to Starbucks and Pacific Gas and Electric Company endorsing these principles, the agreement had the political and policy support it needed. As I outlined in a recent brief paper for The Center for American Progress, the Waxman-Markey legislation includes almost all of these principles - though some technical differences between the agreement and the legislation remain.

That's great news for tropical forests. Based on figures from the EPA, the tropical forest provisions of the bill would reduce pollution by one billion tons annually by 2015 -- equivalent to eliminating all of Germany's pollution. And one third of those reductions -- those generated by auctioning off five percent of the bill's allowances and dedicating those funds to establishing a conservation infrastructure, among other purposes -- come in addition to the bill's pollution cap. That provides a big carbon saving bonus not accounted for in most estimates of the bill's impact.

These provisions also provide major cost savings. EPA has estimated that without international offsets (most of which will be forest-based), the bill would have been 96 percent more expensive. In the words of a recent New York Times editorial, "the economics make sense."

Despite the benefits, the bill has a long way to go before it becomes law -- and there are threats at every turn. The House leadership can ensure that the bill's forest provisions stay intact by not allowing hostile amendments to risk the entire agreement underlying the bill - and the realization of the bill's environmental goals.

The Waxman-Markey bill's forest provisions provide a model for action by other countries. If the bill passes and other industrialized countries adopt similar tropical forest conservation measures, deforestation could be ended or even reversed -- a huge global achievement that, until Waxman-Markey, seemed tragically out of reach.

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House Ag Committee: Like a combine thundering through a field.By all accounts, Thursday's House Ag Committee hearing on the Waxman-Markey climate-change legislation went as expected: angry men blustered and fulminated and generally vented spleen. (See the Wall Street Journal's coverage here and here; Farm Policy blog's summary; and here's links to the testimony of the hearing's carefully selected witnesses.)

Grist's Kate Sheppard attended the hearing. She tells me that Committee members, especially Republicans, spent considerable time airing their doubts about whether climate change exists at all. Mostly, though, the farm-states' finest got down to business: demanding that the legislation be tailored to reward the industry they more or less unapologetically represent: the agrichemical firms that dominate U.S. agriculture. Their agenda, as I laid out earlier this week, essentially rests on funneling carbon credits to a practice known to critics as "chemical no-till," which sequesters little if any carbon but burns through copious amounts of Monsanto's blockbuster herbicide Roundup.

The fight is essentially about who will control the role of agriculture in a cap-and-trade scheme. According to the incessant complaints of committee members, the legislation offers no opportunity for farmers to receive credits for offsetting carbon and reducing GHG emissions. That's just false; the role of ag isn't explicitly laid out, but farming projects are eligible for offsets. The catch is that judging the eligibility and value of GHG-saving activities would fall to an offset-review board within the EPA. The ag lobby finds that arrangement intolerable; Chairmen Colin Peterson (D.-Minn.), who has pushed the agribiz agenda on the climate bill with the force of a gigantic combine roaring through a cornfield, declared Friday that he doesn't want that agency "to go anywhere near farmers."

The push, as I reported in my piece earlier this week, is to create an industry-controlled regime for assessing ag offsets.

The main object of the committee members' vitriol was USDA secretary Tom Vilsack. Representing the Obama administration, which has strongly supported Waxman-Markey, he must have felt like a mouse skittering about in a house full of hungry cats.

In a sense, the cats caught Vilsack and shared him for lunch. In one exchange--captured on an MP3 from Farm Policy blog--the committee's ranking Republican, Frank Lucas of Oklahoma, pressed Vilsack on whether he supported Waxman-Markey in its current form.

"No," Vilsack replied. "What I support is the notion that there is work left to be done" to make the bill more friendly to ag interests. He goes on to say if such interests aren't accounted for in the bill's current form, they will be in its final version.

Another rep, the sublimely named Jerry Moran (R.-Kansas), repeats that line of questioning at tedious length, wringing a similar concession from the beleaguered secretary. (MP3 here.)

For an idea about how much cash could be at stake, check out the testimony (PDF) of Roger Johnson of the National Farm Union, an enthusiastic proponent of carbon credits for industrial-ag practices. According to Johnson, offsets for practices such as chemical no-till could generate between $1.17 billion and $3.4 billion per year--a bit less than I might have guessed, which could explain some of the hearing's relentlessly sour mood. But it's hardly chump change.

All in all, the hearing didn't seem to change the facts on the ground for Waxman-Markey as it moves to a vote on the House floor. To gain enough votes to push through, the bill's proponents will likely have to cut a deal with ag interests. And if Vilsack's testimony is any indication, those interests have got the Obama administration's support sewn up.

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Last month I went home to Barcelona to attend Carbon Expo, one of the major annual gatherings for professionals involved in the global carbon market. There were many interesting conversations and panel discussions over the course of the three-day conference, but one in particular focused on sectoral mechanisms as a way of sourcing international offsets from emerging economies.

In my last post, I argued that a sectoral mechanism can be a powerful instrument to deliver cost-effective offsets -- provided it is able to clearly link investment and subsequent returns from a private sector perspective. In relation to this, one of the panelists from the International Energy Agency (IEA) presented the conclusions from a recent study on sectoral mechanisms and carbon markets (PDF). The slide below, taken from this paper, schematically represents how a sectoral ex-post crediting mechanism may work.

With this approach there are two major problems from a private sector perspective:

1. The credits are sold to the carbon market at a country level (i.e. the government), removing direct access for a private entity to enter the market, which has been one of the most successful features of the Clean Development Mechanism (CDM).

2. A good performance from a private entity does not guarantee carbon credits in return, since it depends on other companies also operating under a country's baseline. This is completely outside the control of an investor and therefore it introduces an incalculable risk into that investment.

IEA paper via Sonia Medina / EcoSecurities

The IEA study made the same point:

Furthermore, under the terms of the current Kyoto Protocol, we already have evidence that government-run schemes have not been as successful as the CDM, which has a more clearly defined private sector approach. Joint Implementation and the International Emissions Trading system have failed tremendously to deliver the trading and financial flows that were initially expected of them. It may be argued that this failure to deliver has been caused by the lack of a clear incentive between private sector investment and a transparent carbon reward, since both schemes are heavily dependent on government action.

Another worrying aspect of a sectoral mechanism as described above relates to timing and transition issues. It is clear that a sectoral mechanism will mean a lot more work upfront by host countries in setting up the rules, developing baselines and monitoring procedures. This raises questions as to what would happen to CDM projects that get caught in the middle of this transition. Further still, it raises questions as to how quickly countries can start delivering a flow of credible, high-quality sectoral credits that can be used for compliance commitments. If the supply is not there, the United States and other demand-side countries will see their cost of compliance increase.

One final point regarding sectoral mechanisms, that from my point of view makes them difficult to be a source of reliable compliance-grade offsets, relates to the fungibility of credits across different sectoral crediting schemes. It is not clear if all sectoral mechanisms will be governed by a single entity like the World Trade Organization or the current UN Framework Convention on Climate Change (UNFCCC), or will rely exclusively on host countries.

Worryingly, this may mean that the market could perceive the credits coming from different countries or sectors to be of differing quality, and therefore, it may create fungibility issues. Understandably, the U.S. Environmental Protection Agency may decide at that point to subject those credits to extra checks in order to accept them into a US scheme. If we thought that dealing with the UN was difficult, we can only imagine what it may be like dealing with two governments that have conflicting priorities.

I remain convinced that sectoral mechanisms can be quite powerful if applied correctly, but from what I have seen in the United States and Europe, further debate is required. It is tremendously important we get this right, otherwise it could be a missed opportunity for businesses and governments to tackle climate change cost-effectively, while unleashing large amounts of private capital to develop a new green economy.

It is also of special relevance in the United States because the Waxman-Markey bill clearly relies on offsets as a cost-containment strategy, having established a theoretical limit of 2 billion offsets per year. Domestically, it is already clear that the potential supply will be well below 1 billion, especially if the EPA ends up regulating landfills and coal mine-methane.

Therefore, international offsets need to play a crucial role in controlling costs of compliance in the United States. If sectoral mechanisms fail to deliver, as I think they will, then U.S. businesses will face a tremendous shortage of offsets and will suffer from an unexpected increase in compliance costs.

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You keep hearing about the Waxman-Markey climate and energy bill -- aka the American Clean Energy and Security Act, ACES, H.R. 2454 -- but what's actually in it? We combed through the 946-page beast so you don't have to.

Here are the highlights of the bill, which is sponsored by Reps. Henry Waxman (D-Calif) and Ed Markey (D-Mass.) and was passed by the House Energy and Commerce Committee on May 21.

The bill creates a renewable electricity standard (RES) that would require large utilities in each state to produce an increasing percentage of their electricity from renewable sources. Qualifying renewable sources are wind, solar, geothermal, biomass, marine and hydrokinetic energy, biogas and biofuels derived exclusively from eligible biomass, landfill gas, wastewater-treatment gas, coal-mine methane, hydropower projects built after 1992, and some waste-to-energy projects.

The RES:

The bill would put a cap on emissions of planet-warming greenhouse gases, and would require high-emitting industries to reduce their output to specific targets between now and the middle of the century. (This is the "cap" part of the "cap-and-trade" program.) The bill covers 85 percent of the overall economy, including electricity producers, oil refineries, natural gas suppliers, and energy-intensive industries like iron, steel, cement, and paper manufacturers.

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The goals for U.S. emission reductions, below 2005 levels:

Regulated industries would need to acquire permits for their emissions. (Emission permits are also referred to as "carbon credits," "pollution allowances," and various combinations of these words.)

If a company cuts its emissions so much that it has more permits than it needs, it can sell excess permits to other companies or bank them for future use. If a company doesn't have enough permits, it can buy more or borrow its future credits and pay interest on them. Non-regulated entities (banks, nonprofits, people like you) can also buy and sell permits. (This is the "trade" part of the "cap-and-trade" program.) If a company's emissions exceed its permits, it would be fined two times the fair market value of the permits it should have purchased.

Some of the permits would be given away to industries regulated under this bill:

Some of the permits would be given to entities that are not covered under the bill, which would sell them and use the proceeds for specific purposes:

About 15 percent of the pollution permits would be sold by the federal government in the initial years of the program. Here's how the revenue would be spent (shown as a percentage of the value of all permits):

By 2025, the bill would direct an estimated total of $190 billion to energy technologies and efficiency measures:

The bill also creates a Clean Energy Deployment Administration within the federal government that would provide loans and loan guarantees to spur more private investment in energy technology.

Regulated companies would be allowed to purchase carbon offsets to meet a portion of their required emission reductions -- meaning they could fund clean-energy projects elsewhere instead of cutting their own emissions. This could lower the cost of complying with the new law.

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As the struggle to pass the Waxman-Markey climate-energy bill showed, there is a certain price any political system is willing to bear for climate action. In China, that price is low. In the United States, it is medium. And in Europe, it is relatively high.

But in every system, there exist two primary ways to reduce the costs of climate legislation to align it with that politically-determined price. One is by weakening the pollution reduction targets – something which provides zero benefit to the climate. The other is by including offsets – making it possible for emitters to get credit for low-cost pollution reduction activities like tropical forest conservation and energy efficiency investments.

Offsets have come under fire from critics who wish all of our organizing and effort had produced a stronger bill. But those critics are aiming their fire in the wrong direction. The inclusion of offsets was critical to getting the cost of the bill to a level at which a majority of the members of the Energy and Commerce committee could support it – without excessively lowering the targets. If the offsets had been eliminated or diminished, the pollution reduction targets would have been weakened much further in order to get the cost of the legislation down to the price the majority would support.

Indeed, we can estimate about how much those all-important targets would have been lowered: according to the EPA analysis (pdf) of the original Waxman-Markey discussion draft, the international offsets alone lowered the cost of the bill by about half. Take out those offsets, and the targets would have been made drastically lower to get the majority support the bill needed. As a result, the bill would have fallen far, far short of what we need to do to avoid climate catastrophe.

For my fellow political science nerds lovers, I've written an equation to express this phenomenon below:

The Law of Offsets

C = T / P

Where C = the cost of climate legislation a given political system will bear

T = Strength of pollution reduction targets

P = Price of pollution reductions

Excluding offsets also would have meant excluding major sources of global warming pollution like deforestation (20 percent of climate pollution, more than all the world’s cars, trucks, and planes combined) and agriculture (which, with offsets and other changes, has the potential to sequester almost 40 percent of global emissions).

Of course, it’s essential that offsets, like other kinds of pollution reductions, be real – and the Waxman-Markey legislation did a good job of ensuring they are. In addition to establishing a rigorous scientific board to evaluate any proposed offsets, the bill also includes an essential requirement: in order for any offsets to receive credit, they must have already taken place. In other words, you can’t get credit for a plan to offset emissions, but only for verified emission reductions that have already occurred.

In addition, there are a variety of very strict requirements to ensure, for instance, that indigenous and forest-dependent people benefit from tropical forest conservation offsets (indeed, if a country doesn’t meet the bill’s standards for protection of indigenous people, they could be entirely shut out of the program) and that domestic reforestation activities use only native species and protect biodiversity. There are a number of other safeguards and protections you can read about in Part D of the bill.

Of course, there are not an infinite number of real offsets out there. Indeed, the EPA analysis of the Waxman-Markey draft suggested that there may only be several hundred million tons a year of legitimate domestic offsets. As valuable as offsets can be, it’s essential that we maintain their integrity by sticking to the high standards in the bill.

A final point: the use of offsets shouldn’t be conceived of as some kind of necessary concession. They should be used in any climate legislation (or international agreement), no matter how strong, to make it even stronger. In essence, lowering the price of pollution reductions means more reductions are possible while staying within the politically achievable price.

Even if a political system will bear a relatively high cost for pollution reduction (as in Europe), you can still achieve even more pollution reductions through the use of low-cost measures like offsets. To sum up, in the words of climate economist Kenneth Chomitz, "cheapness is a virtue."

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We saw how years of accumulated habit, chummy political relationships, and a regulatory model that all-but mandates big central power plants have left coal utilities betting their futures almost entirely on "clean coal." They've told their legislators that it's the only way to go low-carbon in the South and Midwest. Their legislators, who have long seen themselves as defenders of coal, aren't hard to convince.

Take "moderate" Democrat Rick Boucher of Virginia. He knows "clean coal" is at least a decade away from serious deployment, but he also knows (or thinks he does) that coal-dependent regions can lower their carbon emissions only insofar as "clean coal" happens. So from his point of view, serious mandatory emission reductions need to be put at least ten years out in the future. In the meantime, he wants money shoveled at utilities to pay for "clean coal" R&D.

It isn't a conspiracy. Boucher is quite open about the fact that his goal is to allow coal utilities to do what they're doing for at least another ten years, allowing the companies to buy carbon offsets to meet short-term targets. He says so (watch about 1:25):

That's what Boucher's been pushing for during negotiations over Waxman-Markey: softer short-term targets, free pollution permits, and more offsets. All that -- along with the goodies secured in the first round and the supplementary goodies proposed in other legislation -- is in service of the same goal: give coal utilities at least 10 years of cheap compliance so they have time to develop "clean coal." (Most of what Boucher wanted, he got.)

This perspective also explains Boucher's resistance to the original bill's tough Renewable Electricity Standard. He's convinced that any option but "clean coal" will be wildly expensive and drive up rates, so he wants a softer RES target too, and more room for efficiency under the RES. He got that too.

Boucher thinks coal protects his constituents by keeping their rates down, so he's there to defend coal. Anything that penalizes emissions hits coal the worst, so he's trying to minimize emission penalties and maximize R&D subsidies. That's what "moderate" means in energy politics.

(Of course now that Boucher has secured goodies for his favorite lobby, other legislators and committees will demand their spoils. Floor debate is going to be a feeding frenzy.)

But ... what if Boucher is wrong? What if he and his friends in the utilities are mistaken about their short-term prospects? More on that in part four of ... [fade in catchy theme song] ... Southern Utility Blues [sound of audience applause]!

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