Climate Change: Observations on the Potential Role of Carbon Offsets in Climate Change Legislation
Published: 2009-03-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Carbon offsets--reductions of greenhouse gas emissions from an activity in one place to compensate for emissions elsewhere--can reduce the cost of regulatory programs to limit emissions because the cost of creating an offset may be less than the cost of requiring entities to make the reductions themselves. To be credible, however, an offset must be additional--it must reduce emissions below the quantity emitted in a business-as-usual scenario--among other criteria. In the U.S., there are no federal requirements to limit emissions and offsets may be purchased in a voluntary market. Outside the U.S., offsets may be purchased on compliance markets to meet requirements to reduce emissions. The Congress is considering adopting a market-based cap-and-trade program to limit greenhouse gas emissions. Such a program would create a price on emissions based on the supply and demand for allowances to emit. Under such a program, regulated entities could potentially substitute offsets for on-site emissions reductions, thereby lowering their compliance costs. Today's testimony summarizes GAO's prior work examining (1) the challenges in ensuring the quality of carbon offsets in the voluntary market, (2) the effects of and lessons learned from the Clean Development Mechanism (CDM), an international offset program, and (3) matters that the Congress may wish to consider when developing regulatory programs to limit emissions.
section_title: What GAO Found
paragraphs: In an August 2008 report, GAO identified four primary challenges related to the United States voluntary carbon offset market. First, the concept of a carbon offset is complicated because offsets can involve different activities, definitions, greenhouse gases, and timeframes for measurement. Second, ensuring the credibility of offsets is challenging because there are many ways to determine whether a project is additional to a business-as-usual baseline, and inherent uncertainty exists in measuring emissions reductions relative to such a baseline. Related to this, the use of multiple quality assurance mechanisms with varying requirements may raise questions about whether offsets are fully fungible--interchangeable and of comparable quality. Third, including offsets in regulatory programs to limit greenhouse gas emissions could result in environmental and economic tradeoffs. For example offsets could lower the cost of complying with an emissions reduction policy, but this may delay on-site reductions by regulated entities. Fourth, offsets could compromise the environmental certainty of a regulatory program if offsets used for compliance lack credibility. In a November 2008 report, GAO examined the environmental and economic effects of the CDM--an international program allowing certain industrialized nations to pay for offset projects in developing countries--and identified lessons learned about the role of carbon offsets in programs to limit emissions. While the CDM has provided cost containment in a mandatory emissions reduction program, its effects on emissions are uncertain, largely because it is nearly impossible to determine the level of emissions that would have occurred in the absence of each project. Although a rigorous review process seeks to ensure the credibility of projects, available evidence from those with experience in the program suggests that some offset projects were not additional. In addition, the project approval process is lengthy and resource intensive, which significantly limits the scale and cost-effectiveness of emissions reductions. The findings from these two reports illustrate how challenges in the voluntary offset market and the use of offsets for compliance--even in a rigorous, standardized process like the CDM--may compromise the environmental integrity of mandatory programs to limit emissions and should be carefully evaluated. As a result of these challenges, GAO suggested that, as it considers legislation that allows the use of offsets for compliance, the Congress may wish to consider, among other things, directing the establishment of clear rules about the types of projects that regulated entities can use as offsets, as well as procedures to account and compensate for the inherent uncertainty associated with offset projects. Further, GAO suggested that the Congress consider key lessons from the CDM, including the possibility that, (1) due to the tradeoffs involving cost savings and the credibility of offsets, their use in mandatory programs may be, at best, a temporary solution to achieving emissions reductions, and (2) the program's approval process may not be a cost-effective model for achieving emission reductions.

section_title: Letter
paragraphs: I am pleased to be here today to provide observations and matters for  congressional consideration on the potential role of carbon offsets in  climate change legislation drawn from two of our previously issued  reports. As the Congress and this Subcommittee consider legislation to  limit greenhouse gas emissions, the potential role of carbon offsets— reductions or avoidances of greenhouse gas emissions from an activity in  one place to compensate for emissions occurring elsewhere—is a critical  issue that could influence the economic and environmental outcomes  achieved through climate change legislation. Carbon offsets can be an  important cost-containment mechanism in policies to limit greenhouse gas  emissions because the cost of creating an offset may be less than the cost  of requiring regulated entities to make the reductions themselves.  However, ensuring the credibility of carbon offsets poses challenges  because of the inherent uncertainty in measuring emissions reductions  relative to a projected business-as-usual scenario.
In recent years, major scientific bodies such as the Intergovernmental  Panel on Climate Change and the National Academy of Sciences have  concluded that human activities, including the combustion of fossil fuels,  industrial and agriculture processes, landfills, and some land use changes,  are significantly increasing the concentrations of greenhouse gases in the  atmosphere and, in turn, global temperatures. Specifically, these activities  have increased the amount of carbon dioxide and other greenhouse  gases—including methane, nitrous oxide, and several synthetic gases—in  the atmosphere. This warming will cause significant changes in sea level,  ecosystems, and ice cover, among other impacts. In recent years, key  scientific assessments have underscored the importance of reducing or  stabilizing emissions of greenhouse gases to mitigate the adverse effects of  climate change.
Most of the efforts to limit greenhouse gas emissions under consideration  in the United States generally focus on market-based programs—such as a  cap-and-trade system or a tax—that would create a price on greenhouse  gas emissions. In general, under a cap-and-trade program, the government  would limit the overall amount of greenhouse gas emissions from  regulated entities. These entities would need to hold allowances for their  emissions, and each allowance would entitle them to emit a specific  amount of a greenhouse gas. Under such a program, the government could  sell the allowances, give them away, or some combination of the two.  Regulated entities that find ways to reduce their emissions to below their  allowed limit could sell their excess allowances to regulated entities that  emit more than their limits, effectively creating a market for allowance  trading and establishing a price for a ton of emissions based on supply and  demand. A cap-and-trade system could allow regulated entities to  purchase offsets in lieu of purchasing additional allowance or reducing  emissions themselves.
Currently, carbon offsets are generated, bought, and sold in two types of  markets. In markets such as the United States, which does not have  binding limits on emissions, the market is referred to as a voluntary  market. Conversely, in the European Union’s Emissions Trading Scheme  (EU ETS), a program to limit emissions of carbon dioxide from certain  industry sectors, the market is referred to as a compliance market because  regulated entities can use a limited number of carbon offsets to meet their  regulatory limits on emissions. Under the EU ETS, regulated entities use  offsets generated through the Clean Development Mechanism (CDM), a  program under the Kyoto Protocol that allows countries with binding  limits on emissions to implement projects that reduce or avoid emissions  in a developing country that does not have a binding target under the  Protocol. CDM projects earn credits, each equivalent to 1 metric ton of  carbon dioxide that an industrialized country sponsoring the project can  sell or use for compliance with targets under the Protocol. These credits  are known as Certified Emissions Reductions (CERs). The United States  has not ratified the Kyoto Protocol and is therefore not a source or  purchaser of CERs.
My testimony today draws observations from two previously issued GAO  reports that characterized the U.S. voluntary carbon offset market and  identified lessons learned from international climate change programs,  including the CDM. Specifically, this testimony summarizes our prior work  related to (1) challenges in ensuring the quality of offsets in the voluntary  market, (2) the effects of and lessons learned from the Kyoto Protocol’s  CDM, and (3) matters for congressional consideration included in those  reports that may merit consideration in the development of climate change  policy.
Our work related to voluntary offset market is based on analysis of  literature and data and interviews with stakeholders, including offset  providers, third party verifiers, and other participants in the voluntary  market. To identify the lessons learned from the CDM, we worked with the  National Academy of Sciences to recruit 26 experts based on their  experience and expertise with international climate change programs and  their knowledge of the U.S. policy development process. We gathered the  experts’ opinions through a questionnaire, interviewed stakeholders, and  reviewed available information. We conducted our work in accordance  with GAO’s Quality Assurance Framework, which requires that we plan  and perform each engagement to obtain sufficient and appropriate  evidence to meet our stated objectives and to discuss any limitations in  our work. We believe that the information and data obtained, and the  analyses conducted, provided a reasonable basis for the findings and  conclusions in these reports.
subsections: section_title: Ensuring the Credibility of Carbon Offsets Poses Challenges in the U.S. Voluntary Market
paragraphs: Our August 2008 report identified four primary challenges with the U.S.  voluntary market. First, the concept of a carbon offset is complicated  because offsets can involve different activities, definitions, greenhouse  gases, and timeframes for measurement. While most markets involve  tangible goods or services, the carbon offset market involves a product  that represents the absence of something—in this case, an offset equals  the absence of one ton of carbon dioxide emissions or the equivalent  quantity of another greenhouse gas.
Project developers produce offsets from a variety of activities such as  sequestration in agricultural soil and forestry projects, and methane  capture. Specifically, carbon offsets can result from three broad types of  activities: (1) reductions of greenhouse gases, which may include activities  such as the capture of methane from landfills or coalmines, (2) avoidance  of greenhouse gases, which may include activities such as the  development of renewable energy infrastructure, and (3) sequestration,  which may involve storing carbon dioxide in geologic formations or  planting trees that take carbon dioxide out of the atmosphere. See figure 1  for a diagram of common types of carbon offset projects.
An additional complication is that the parties involved in generating,  buying, and selling offsets may also use different definitions of a carbon  offset. The term is often used generically to describe reductions or  avoidances of emissions of any or all of the six primary greenhouse gases.  Furthermore, these six gases vary in their potency or climate forcing  effect, referred to as global warming potential. See table 1 for a description  of U.S. greenhouse gas emissions and global warming potential. Scientists  have developed a concept known as carbon equivalence that takes these  variations into account and provides a way to describe emissions of  different gases in comparable terms. For example, methane is roughly  equivalent in global warming potential to about twenty one tons of carbon  dioxide, the most common greenhouse gas.
Finally, the timing of an offset’s creation is complicated. In cases where  offsets are sold before they are produced, the quantity of offsets generated  from projects can be calculated using what is known as ex-ante (or future  value) accounting. On the other hand, when offsets are sold after they are  produced, the quantity of offsets can be calculated using ex-post  accounting. Using future value accounting, consumers may purchase an  offset today, but it may take several years before the offset is generated.  Ensuring the credibility of offsets purchased before they are produced  inherently involves a higher degree of uncertainty than purchasing an  offset that has already been generated.
The second challenge is ensuring the credibility of offsets. Our prior work  identified four general criteria for credible carbon offsets—they must be  additional, quantifiable, real, and permanent. A carbon offset project is  generally considered “additional” if it decreases emissions of greenhouse  gases below the quantity that would have been emitted in a projected  business-as-usual scenario. “Quantifiable” means the reductions can be  measured, and “real” means the reductions can be verified. “Permanent”  means the emissions reduced, avoided, or sequestered by a project will not  be released into the atmosphere in the future.
Providing assurance that offsets are credible is inherently challenging  because it involves measuring the reductions achieved through an offset  project against a projected baseline of what would have occurred in its  absence. For example, if a facility that emitted 200 tons of carbon dioxide  per year implemented a project that reduced its emissions by 100 tons, it  may have created 100 tons of offsets. See figure 2 for a hypothetical  depiction of an offset project measured against a projected business-as- usual scenario.
E m i s s i o n s   w i   p r o j e c t Our prior work found that additionality is fundamental to the credibility of  offsets because only offsets that are additional to business-as-usual  activities result in new environmental benefits. Several stakeholders we  interviewed as part of our study said that there is no correct technique for  determining additionality because it requires comparison of expected  reductions against a projected business-as-usual emissions baseline.  Determining additionality is inherently uncertain because, it may not be  possible to know what would have happened in the future had the projects  not been undertaken. There are many ways to estimate whether projects  are additional, and many stakeholders said that applying a single test is too  simplistic because every project is different from others and operates  under different circumstances.
There are many quality assurance mechanisms, commonly described  collectively as “standards,” for assuring the credibility of carbon offsets in  the U.S. voluntary market, but few standards, if any, that cover the entire  supply chain. The proliferation of standards has caused confusion in the  market, and the existence of multiple quality assurance mechanisms with  different requirements raises questions about the quality of offsets  available on the voluntary market, according to many stakeholders. The  lack of standardization in the U.S. market may also make it difficult for  consumers to determine whether offsets are fully fungible— interchangeable and of comparable quality—a characteristic of an efficient  commodity market. The term “carbon offset” implies a uniform  commodity, but offsets may originate from a wide variety of project types  based on different quantification and quality assurance mechanisms.  Because offsets are not all the same, it may be difficult for consumers to  understand what they purchase.
While the concept of carbon offsets rests on the notion that a ton of  carbon reduced, avoided, or sequestered is the same regardless of the  activity that generated the offset, some stakeholders believe that certain  types of projects are more credible than others. Specifically, the  stakeholders identified methane capture and fuel-switching projects as the  most credible, and renewable energy certificates (REC) and agricultural  and rangeland soil carbon sequestration as less credible. The  stakeholders’ views on the credibility of different project types may stem  from the fact that methane and fuel-switching projects are relatively  simple to measure and verify, while other projects such as RECs, forestry,  and agricultural and rangeland soil carbon projects face challenges related  to additionality, measurement, and permanence. With respect to  agricultural and rangeland sequestration and forestry, certain stakeholders  said it is difficult to accurately measure emissions reductions from these  types of projects. In addition, forestry offset projects may not be  permanent because disturbances such as insect outbreaks and fire can  return stored carbon to the atmosphere.
Third, there are economic and environmental tradeoffs associated with  using offsets in a regulatory program to limit greenhouse gas emissions. In  many cases, regulated entities may find it economically advantageous to  buy offsets instead of reducing emissions themselves. The Environmental  Protection Agency (EPA) has stated that the cost of compliance with  mitigation policies under consideration by the Congress decreases  substantially as the use of offsets increases. Specifically, EPA’s analysis of  the Climate Security Act of 2008 (S. 2191), introduced in the last Congress,  reported that if the use of domestic and international offsets is unlimited,  then compliance costs fall by an estimated 71 percent compared to the bill  as written. Alternatively, the price increases by an estimated 93 percent  compared to the bill as written if no offsets are allowed. Other studies  show similar results. In general, the carbon price is lower in quantitative  models of a U.S. compliance system when domestic and international  offsets are widely available and their use is unrestricted. In the short term,  lower prices make compliance with a policy to reduce emissions less  expensive.
Multiple stakeholders we interviewed as part of our study said that  including offsets in a compliance scheme could slow investment in certain  emissions reduction technologies in regulated sectors and lessen the  motivation of market participants to reduce their own emissions.  According to some stakeholders, if more cost-effective offsets are  available as compliance tools, regulated sources may delay making  investments to reduce emissions internally, an outcome that could  ultimately slow the development of, and transition to, a less carbon- intensive economy.
Fourth, allowing the use of offsets could compromise the environmental  certainty of a regulatory program to limit emissions of greenhouse gases if  the offsets do not meet requirements that underpin their integrity. If a  significant number of nonadditional offsets enter the market, emissions  may rise beyond levels intended by the scheme, according to some  stakeholders. Nonadditional offsets could thus increase uncertainty about  achieving emissions reduction goals. This concern underscores the  importance of using quality assurance mechanisms to ensure the  credibility of any offsets allowed into a compliance scheme. Using offsets  in a compliance scheme could also increase administrative costs because  of increased government oversight of quality assurance mechanisms used  to ensure the credibility of offsets.
Concerns associated with using offsets for compliance in a regulatory  system to limit emissions could be minimized by restricting the use of  offsets or including policy options for enhancing oversight of the market  such as applying discounts or imposing insurance requirements on offsets  with greater uncertainty or potential for failure. Certain stakeholders  suggested imposing limits on the use of offsets in a compliance scheme to  address some of these challenges, but stakeholders held different opinions  about the potential effectiveness of this approach. Some said it may be  necessary to place restrictions on the use of offsets in order to achieve  internal emissions reductions from regulated sources. If all the effort to  reduce emissions is in the form of offsets, then the compliance system  may not provide the price signals necessary for long-term investment in  technology at domestic industrial facilities and power plants, according to  multiple stakeholders. They said that domestic abatement is central to  achieving the long-term goal of any emissions reduction system. However,  other stakeholders said that incorporating offsets into a compliance  scheme will enable greater overall climate benefits to be achieved at a  lower cost, as long as offsets are additional and are not double-counted.
section_title: The CDM’s Environmental and Economic Effects Provide Important Lessons About the Role of Carbon Offsets in Mandatory Programs to Limit Emissions
paragraphs: Our November 2008 report discussed the environmental and economic  effects of the CDM and identified lessons learned about the role of carbon  offsets in mandatory programs to limit emissions. First, with respect to  environmental effects, the overall effect of the CDM on international  emissions is uncertain, largely because it is nearly impossible to determine  the level of emissions that would have occurred in the absence of each  offset project. The CDM imposes a rigorous set of review requirements for  applicants to complete before obtaining project credits, known as  Certified Emissions Reductions (CERs), which can be sold or used for  compliance with targets under the Kyoto Protocol.  Applicants must  demonstrate, among other things, that the project would not have  occurred without the CDM and to obtain approval of the Executive Board,  a regulatory body established by the Kyoto Protocol. See figure 3 for the  resources and time associated with each step in the review process.
This resource- and time-intensive process, however, has involved  challenges. While the CDM project review process may provide greater  assurance of credible projects, available evidence suggests that some  credits have been issued for emission reduction projects that were not  additional. Because additionality is based on projections of what would  have occurred in the absence of the CDM, which are necessarily  hypothetical, it is impossible to know with certainty whether any given  project is additional. Researchers have reported that some portion of  projects registered under the CDM have not been additional, and although  there is little empirical evidence to support a precise figure, some studies  have concluded that a substantial number of nonadditional projects have  received credits.
Second, with respect to economic effects, specifically opportunities for  cost-effective reductions, available information and experts indicate that  the CDM has enabled industrialized countries to make progress toward  achieving their emissions targets at less cost and has involved developing  countries in these efforts. For example, facilities covered under the  European Union’s Emissions Trading Scheme (ETS) may invest in CERs  as a lower-cost alternative to reducing emissions on-site or purchasing  allowances under the ETS. Further, the availability of CERs may produce  lower allowance prices than would be observed under a no-offset  scenario. As a result, the CDM can potentially reduce firms’ compliance  costs regardless of whether these firms choose to purchase CERs. See  figure 4 for information about the number and types of offset projects in  CDM pipeline. The first chart in figure 4 shows the most common types of  projects and their growth over time while the second chart shows the  volume of credits expected to be produced through 2012.
The demand for CERs has also provided developing countries that do not  have emissions targets under the Kyoto Protocol with an economic  incentive to pursue emission reduction activities. However, while CDM  projects have been established in over 70 developing countries, most  benefits have thus far accrued to fast-growing nations such as China and  India. In fact, these two countries host over half of all registered projects.  Conversely, countries in Africa and the Middle East have seen little CDM- related investment.
We also reported that investors in the CDM market face higher risks,  depending on, for example, whether the rights to the CDM credits are  purchased prior to actual issuance of the credits. Because the credits in  this case are not issued until the project is completed and emissions are  verified, there is some risk that the project will not produce the expected  number of credits. For example, the CDM’s Executive Board may delay or  reject a project and even approved projects might not be built on schedule  or within budget. Further, the amount of actual reductions may differ from  what was planned—for example, wind energy projects may generate more  or less electricity depending on weather conditions. One study shows that  projects reaching the registration phase tended to yield only about 76  percent of their forecasted CDM credits.
Our review of the CDM experience, in particular using offsets in a  compliance program, revealed that reducing compliance costs while  maintaining overall environmental integrity can prove difficult. Using  available information, stakeholder interviews, and our experts’ responses  to a questionnaire, we identified three key lessons learned about the use of  offsets in programs to limit emissions.
First, the use of offsets can compromise the integrity of programs  designed to reduce greenhouse gas emissions. In theory, if all offsets were  real and additional, their use in a mandatory program to limit emissions  shifts the location of the emission reductions and would not negatively  affect the scheme’s integrity. However, as many experts mentioned, it is  nearly impossible to demonstrate project additionality with certainty.  Because the CDM is primarily used by countries to comply with the Kyoto  Protocol’s binding targets and the ETS emissions caps, credits that do not  represent real and additional emission reductions do not represent  progress toward these targets or caps. If a significant number of  nonadditional credits are allowed into the program, for instance, these  credits may allow covered entities to increase their emissions without a  corresponding reduction in a developing country. This can cause  emissions levels to rise above the targets set by the program, introducing  uncertainty as to the actual level of reductions, if any, achieved by the  program. As a result, this use of nonadditional offsets negates one of the  advantages—greater certainty about the level of emissions—of a cap-and- trade program compared to other market-based programs.
Some research has advocated limiting the use of offsets in compliance  schemes as a way to reduce the environmental risk of nonadditional  projects; however, our research shows that even restricted offset use can  have broad environmental implications. In particular, the experience of  the European Union’s ETS illustrates the importance of considering offset  limits in the context of a country’s overall reduction effort, in addition to  its overall emissions target. As noted previously, limiting offsets based on  the overall emissions cap—for example, allowing countries to meet 12  percent of their emissions cap with offsets—may mean in practice that  most or all reductions occur outside of that country’s borders. If most  reductions occur elsewhere, there may be little incentive for entities under  the compliance program to make infrastructure changes or other  technological investments. Furthermore, the negative environmental  effects of nonadditional offsets increase as the number of imported credits  rises. On the other hand, stringent limits can ensure that a certain portion  of abatement activity occurs at home and help secure a carbon price that  is high enough to spur investment in low-carbon technologies; limits also  can lessen the impact of nonadditional credits. If limits are imposed,  therefore, it is important that such limits are sufficiently stringent and are  based on actual expected emission reductions, not the overall emissions  cap.
Second, carbon offset programs involve important tradeoffs and the use of  such programs may be, at best, a temporary solution to addressing climate  change. While the CDM may encourage developing countries to participate  in emission reduction activities, it also may increase their reliance on  external funding for such activities. According to several experts, the CDM  effectively deters efforts that fall outside the scope of creditable activities.  Moreover, as many of our experts pointed out, the concept of additionality  presents a difficult regulatory problem. Rigorous project reviews may help  ensure some degree of credit quality, but also can increase the overall cost  of the program. Overall, many experts suggested that the CDM has not yet  achieved an effective balance of these priorities.
There is general consensus among climate change experts that both  industrialized and developing countries must be engaged in emission  reduction efforts to meet international emission reduction goals. In light of  these circumstances, several experts we consulted noted that international  offset programs such as the CDM can help to engage developing nations  and encourage emission reductions in areas that may not otherwise have  incentives to do so. Several experts also said that the CDM helps stimulate  interest in international climate change dialogue and may help facilitate  progress toward future emission reduction commitments.
Given these tradeoffs, some observers have said the best approach may be  to gradually incorporate developing nations under a global emission  reduction plan or move toward full-fledged, worldwide emission trading.  However, political and institutional capacity may make worldwide  emission trading an unlikely possibility. As a result, the CDM may be best  used as a transition tool to help developing nations move toward a more  comprehensive climate change strategy.
Third, the CDM’s approval process may not be a cost-effective model for  achieving emission reductions. Most experts expressed dissatisfaction  with this approach, which requires individual review and additionality  assessments for each project. Observers also have described the project- by-project approach as inefficient, noting that the long, uncertain process  can create risks and costs for investors. Host country stakeholders we  spoke with generally agreed with this assessment, saying that the process  was bureaucratic and overly burdensome. Indeed, the length and  administrative complexity of the process, as well as the shortage of  available emission verifiers, has resulted in bottlenecks and delays as the  CDM’s administrative structure has struggled to keep up with the number  of projects. Moreover, the transaction costs and investment risks  associated with CDM projects can reduce their effectiveness as a cost- containment mechanism when linked to compliance schemes. While the  CDM’s intensive review process may help ensure some degree of  environmental integrity, it also can limit the number of potential projects  in the system. For example, the cost to initiate a CDM project and usher it  through the approval process may be too high for certain projects,  rendering them unviable.
The CDM’s oversight board has taken a number of actions to help improve  the process over time, but many experts said that the program does not yet  provide a sufficient level of quality assurance. Also, it is unlikely under the  current approach that the CDM will achieve large-scale reductions or  significantly impact global emissions in the future. The scale of the CDM is  limited not only by the extensive set of requirements; it also is constrained  by the fundamental time and resource limitations of the 10-member  Executive Board and its subsidiary panels, and the shortage of accredited  auditing firms to validate projects and verify emissions. Even assuming all  projects are real and additional, it is likely that reductions from these  projects will only represent about 2 percent to 3 percent of annual energy- related carbon dioxide emissions in China and India, and less than 1  percent in Africa. Finally, the design features of an offset program such as  the CDM can be fine-tuned to help maximize their effectiveness, but the  underlying challenges of determining additionality, for example, may not  be eliminated completely.
While some of the experts who participated on our panel said that offset  programs on their own are unlikely to be sufficient to help curb  developing country emissions, others stated that reforming or  supplementing the CDM could make a broader impact worldwide. Experts  provided a number of potential improvements to the CDM, many of which  would represent fundamental changes to the current mechanism’s  structure and procedures. For example, moving toward a sectoral  approach under the CDM would involve crediting emission reductions in  relation to baselines set for different economic sectors, such as a  benchmark based on the best available technology for the industry, rather  than making a project-specific determination of additionality. A sectoral  approach would eliminate the need for project-specific determination of  additionality, because credits are awarded based on performance in  relation to a predetermined baseline. However, this approach requires  reliable historic emissions data to set baselines and the technical capacity  to monitor emissions, requirements which may prove problematic for  some developing countries.
In addition, a few experts recommended discounting CDM credits. For  example, with a discount rate of 30 percent, a project that is expected to  reduce carbon dioxide by 100 metric tons would only receive 70 credits.  While discounting may not help screen out nonadditional projects, it can  help mitigate the environmental consequences of nonadditional credits.  Our November 2008 report discusses these and other alternatives to the  CDM in greater detail.
section_title: GAO’s Reviews of Carbon Offset Markets Have Identified Matters for Congressional Consideration in Developing Climate Change Legislation
paragraphs: Our reports on two different markets for carbon offsets—the U.S.  voluntary market and the CDM under the Kyoto protocol—have identified  matters for the Congress to consider as it deliberates legislation to limit  greenhouse gas emissions. While carbon offsets have the potential to  lower compliance costs for entities that could be affected by regulatory  limits on emissions, their use for compliance in a mandatory emissions  reduction scheme could undermine the program’s integrity if the offsets  lack credibility.
Our report on the voluntary market for offsets in the United States  highlights the complexity and challenges with a largely unregulated  market that lacks transparency and provides market participants with  limited information on the credibility of offsets. Alternatively, our work on  CDM identifies challenges with using carbon offsets in a mandatory  emissions reduction program despite the use of rigorous quality assurance  procedures. The experience with both markets demonstrates the  importance of ensuring the credibility of offsets, but this remains a  challenge for both markets because of the inherent uncertainty associated  with estimating emissions reductions relative to projected business-as- usual baselines. Using offsets in a mandatory emissions reduction program  would involve fundamental trade-offs between offset credibility and  compliance costs.
As we have reported, to the extent that the Congress chooses to develop a  program that limits greenhouse gas emissions while allowing the use of  carbon offsets for compliance, it may wish to establish (1) clear rules  about the types of offset projects that regulated entities can use for  compliance, as well as standardized quality assurance mechanisms for  these allowable project types; (2) procedures to account and compensate  for the inherent uncertainty associated with offset projects, such as  discounting or overall limits on the use of offsets for compliance; (3) a  standardized registry for tracking the creation and ownership of offsets;  and (4) procedures for amending the offset rules, quality assurance  mechanisms, and registry, as necessary, based on experience and the  availability of new information over time.
In addition, our report on international carbon offset programs generated  matters for consideration that may prove useful if the Congress looks to  the CDM as a model for an offset program. Specifically, Congress may  wish to consider that (1) the existing program may not be the most direct  or cost-effective means of achieving reductions in emissions, (2) the use of  carbon offsets in a cap-and-trade system can undermine the system’s  integrity, given that it is not possible to ensure that every credit represents  a real, measurable, and long-term reduction in emissions; and (3) while  proposed reforms may significantly improve the CDM’s effectiveness,  carbon offsets involve fundamental tradeoffs and may not be a reliable  long-term approach to climate change mitigation.
section_title: Contact and Staff Acknowledgments
paragraphs: Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this statement. For further  information about this testimony, please contact John Stephenson,  Director, Natural Resources and Environment at (202) 512-3941 or  stephensonj@gao.gov. Key contributors to this statement were Michael  Hix (Assistant Director), Kate Cardamone, Janice Ceperich, Jessica  Lemke, Alison O’Neill, and Joe Thompson. Cindy Gilbert, Anne Johnson,  Richard P. Johnson, Ardith A. Spence, and Lisa Vojta also made important  contributions.
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