07/18/2009 05:12 am ET | Updated May 25, 2011

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

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.

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?"

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.

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

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.)

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

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

anaerobic digestor
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.

Dr. Bill Chameides is the dean of Duke's Nicholas School of the Environment and a member of the National Academy of Sciences. He blogs regularly at