Cap and Trade Part 4: Forests, Farms, and Offsets

by Bill Chameides | June 17th, 2009
posted by Erica Rowell (Editor)

Permalink | 6 comments

Changing timber rotations to increase the amount of carbon stored in forests has by far the greatest potential to offset emissions but presents big verification challenges. (USDA)

The fourth post in a series on cap and trade.

What do you do if something emits greenhouse gases but is not under the cap? Use offsets.

Ideally, a cap and trade (or a carbon tax) would be applied economy-wide so that everything that emits greenhouse gases is subject to the limitations imposed by the emissions cap. In practice, an economy-wide cap is not realistic.

Take for example farms and forests. Huge quantities of carbon dioxide (CO2) flow into and out of these terrestrial ecosystems, and yet in the Waxman-Markey climate bill, farms and forests are not under the cap. Why?

  • logistics – it is not practical to monitor every forest and farm for compliance;
  • politics – subjecting farmers and foresters to regulations that involuntarily affect their practices would probably cause a serious political backlash.
In This Series
Part 1: It’s About the Cap, Stupid
Part 2: Walking the International Tightrope
Part 3: You Ask, “What?” I Say, “How Wide?”
Part 4: Forests, Farms, and Offsets
Part 5: What’s With the Add-Ons?
Part 6: Emission Allowances

But leaving farms and forests outside the cap doesn’t necessarily mean ignoring them. That’s where offsets come in.

Cap and Trade: A Carrot-and-Stick Approach

In a cap and trade:

  • the carrot is the opportunity to earn money by figuring out how to lower emissions more than required and profiting by selling the unused emission allowances;
  • the stick is the extra money one has to pay if one cannot lower emissions enough.

Offsets: Leaving Out the Stick and Using Just the Carrot

No-till farming may increase the storage of carbon in the soil and so is potentially a form of offsets. (USDA)

An offset is created when operations in a sector that is outside the cap (such as agriculture and forestry) are changed so as to enhance the removal or prevent the emissions of greenhouse gases; the resulting greenhouse savings become a commodity which emitters operating under the cap can buy and use to “offset” an equivalent amount of emissions. (In other words, emitters under the cap can buy pollution cuts that someone else makes.)

The carrot part comes from the fact that offset sales put money in the pocket of the creator. But because there is no penalty for doing something that inadvertently or deliberately leads to more greenhouse gas emissions, there is no stick.

There are a number of ways that landowners can develop offsets:

  • Capturing methane, a potent greenhouse gas, from animal manure before it gets into the atmosphere;
  • Changing farming practices to increase the storage of carbon in the soil. No-till farming may represent one way of doing this, although there is a good deal of disagreement about that;
  • Changing timber rotations to increase the storage of carbon in forests — because so much carbon resides in forests, they have the greatest potential for offsetting emissions but this method is also the hardest to verify.

The advantage of allowing offsets from farms and forests in a cap and trade is that they can provide a relatively cheap source of emissions reductions in the early stages of the program, thereby containing costs while new, low-carbon technologies come on line. By some estimates farms and forests could offset as much as a billion tons of CO2 emissions annually, nothing to sneeze at.

Potentially Significant Downsides of Offsets

Imagine you want to buy a bushel of corn. It’s pretty straightforward — you see the corn; you weigh the corn; you buy the corn. Now suppose you want to buy a ton of CO2 emission offsets from a hog farmer. You can’t see the offset. You can’t weigh the offset. How do you know the offset is worth a ton of emissions? This is a really important issue. If fictitious offsets are allowed into the market, they could break the cap for the entire system.

Certain Criteria Must Be Part of Any Offset System

This high-solids digester from methane production uses microbes that occur naturally in wastes to transform garbage and other wastes into methane-rich biogas and compost. It is a potential offset tool. (NREL)

For this system to work:

  • the offset developer must establish the offset amount through extensive documentation and monitoring;
  • the methods used to quantify the offsets must be independently audited to assure that the offset is real and verifiable, and satisfies other important criteria;
  • the provenance of the offset must be fully recorded through a registry system; and
  • the emissions savings must be monitored and maintained continuously, even after the sale.

Doing all this is difficult, but it can be done. If you want to know more about how, take a look at Harnessing Farms and Forests in the Low-Carbon Economy by yours truly and my friend Zach Willey. It’s really riveting. Put it on your nightstand and if you are ever having trouble falling asleep, it’s sure to do the job.

Because of the potential risks with offsets, cap-and-trade systems such as the one proposed in Waxman-Markey limit the amount of offsets that can be used.

Two Prime Reasons Offsets Have Gotten a Bum Rap

Quality of voluntary offsets currently available. Even though we don’t have a cap-and-trade system for carbon in the United States, a pretty healthy market of voluntary offsets has sprung up. The problem is that there are no standards for these offsets. Some may be real, others not so much. And it’s those bad ones that have given offsets a bad name. But just because there are bad offsets in our voluntary market, it does not follow that there will be bad offsets in a regulated carbon market.

Misunderstanding of climate system. Many people have a hard time accepting that one can emit CO2 from a power plant in Ohio and offset those
emissions by capturing methane on a North Carolina hog farm. Or that a New Jersey driver can offset her emissions by paying a California farmer to store carbon on his farm.

In fact these scenarios work just fine. When it comes to greenhouse gases, the atmosphere doesn’t care where the gases come from; it only cares how much of the gases are in the atmosphere. Offsetting emissions is the same as never emitting the greenhouse gas in the first place.

Another criticism is that offsets allow people to assuage their guilt for driving their car or heating their home. In fact in a recent op-ed by George Will, the entire green movement was dismissed as mass hysteria, everyone trying to be PC.

I think the guilt/PC thing is silly. Why should I care why Mr. X purchases offsets? As long as his actions end up lowering emissions, I am happy. The reasons why Mr. X purchased his offsets are between him and his therapist — and apparently Mr. Will. (Hmmm … George Will as your shrink. What do you think?)

Probably the most humorous take on “offsetting” guilt is at, where unfaithful spouses can neutralize their straying by purchasing non-straying hours from some faithful partner. It’s hilarious but not quite applicable. You see with regard to climate, the atmosphere does not care where the emissions come from, but I suspect that when it comes to relationships, spouses care very much where one’s emissions go to.

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  1. Peter Griffith
    Jun 18, 2009

    Bill, what’s your thought of managing the risks of loss of forests due to external factors (fire, insects), resulting in the release of sequestered carbon? I’ve watched way too much of the Amazon burn in synchrony with external factors. Then I hear the commodity brokers talk about hedging risk via “bundling” of forest lands, which sounds much like the bundled mortgages that did such a fine job of risk management in the financial sector. They even say similar things: “Well, the chance of all the forests parcels burning at the same time is really low, so that will hedge the risk across the portfolio”. Trouble is, the risks (of fire or insects or drought or combinations) are NOT independent among forest lands.

    • Bill Chameides
      Jun 18, 2009

      Peter – That is an important issue you raise. If someone gets an emissions credit for carbon sequestered in a forest and that carbon goes up in smoke (or gets eaten by bugs), those emissions credits no longer equate to an actual emissions decrease. One way, not my way, of dealing with this is bundling. Put lots of sequestered carbon in a single bundled credit with the expectation that only, say, 20 percent will be lost. But that only works if you discount the initial bundled credit by 20 percent to begin with — and you’d better hope that the losses are not larger than 20 percent. The possibility that the loss may be larger than 20 percent could be addressed by discounting the offset by, say, 30 percent instead of 20 percent. But then you have to hope that … well, I think you get the idea. Another way, and the way that I favor, is that whoever owns the emissions credit is responsible for that credit going into the future. The owner would have to continuously check that the carbon remains in the forest and if for any reason the carbon is lost, the owner would have to find (i.e., purchase) new offsets equal to what had been lost. In this scenario, someone who owns an offset might decide to take out insurance from a company who owns its own set of offsets and charges a premium for holding them in reserve against, well, not a rainy day but a fire day. Another strategy, and one that I think makes the most sense, is to lease the offsets from a landowner for, say, 10 years. The reason is the following: suppose you own a power plant. You know that it will be extremely difficult to lower your emissions anytime soon, but in 10 years when your new low-carbon plant comes on line, it will be a snap. So you lease the offsets for that 10-year period. When the lease is up, you use your very low-carbon plant to meet your allowance AND make up the extra emissions reductions you had with the leased offsets. The advantage is that you are no longer responsible for maintaining the offset. The advantage for the landowner/forester is that she gets her land back — she could even turn around and sell/lease her sequestered carbon to someone else.

      • Jeff
        Jun 20, 2009

        This cap and trade is all about the government getting more control through taxation. It can never be accurately monitored and it’s going to only hurt the poor and middle class. That being said, I agree that we need to reduce emissions. In the auto industry, although not perfect, this is accomplished by modifying mileage requirements over years. We can do the same thing with emissions. Coal plants would have to reduce their emissions over time through improvements. We could also try tax incentives for lowering emissions and offering prizes, like the private space flight contests, for improvements.

        • Bill Chameides
          Jun 26, 2009

          Jeff, Actually the whole notion of cap and trade is that it is *not* taxation. And as a matter of fact, when it comes to emissions of CO2 from fossil fuels, monitoring is very easy and straightforward. It’s simply a matter of how much fuel you use. All the things you mention are great ideas, but to make the magnitude of the changes needed, a realignment of the market to reflect the true cost of greenhouse gas pollution is needed.

  2. Dan K.
    Jun 17, 2009

    This is going to be an interesting thing to watch, to see how the regulatory structure of this is set up, how current companies will fit under it, how it affects voluntary carbon markets even (like Chicago’s). Got to do it right the first time. Joe Romm, over at, talks about them constantly, as you are probably well aware of. He just has a different name for them, haha!! His pieces are excellent, even has made me go back and re-read my undergrad econ books.

    • Bill Chameides
      Jun 18, 2009

      Dan, Yep, it better be done right.

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