by Jessica Wentz

The Kerry-Lieberman (KL) bill addresses international offsets in Title II, Subtitle A, Part E, entitled: “Offset Credit Program for International Emission Reductions”, §§ 751-763 (p. 423-469). These sections articulate the requirements for implementing an international offsets program, and for determining what types of offsets will be recognized in the program.

Kerry-Lieberman International Offsets

This bill permits covered entities to acquire international offset credits if they invest or engage in activities that result in the reduction, avoidance, destruction or sequestration of greenhouse gas emissions in developing countries. These credits count against the entities’ total carbon allowance.

Eligibility

The bill stipulates that the emissions-reducing activity must be located in a developing country in order to receive offset credits.  (§753) The bill defines “developing country” as a country that is eligible to receive official development assistance according to the income guidelines of the Development Assistance Committee of the Organization for Economic Co-operation and Development. (§700) The bill also requires that the developing country be party to an international agreement with the United States contain provisions that will: (a) ensure that all of the offset program requirements in KL will be met, (b) provide for appropriate distribution of international offset credits, and (c) provide that the offset project representative be eligible for civil legal action in U.S. federal courts. (§753)

Comparison to Domestic Offsets

Prior to 2018, a covered entity may use 1 international offset credit in lieu of 1 emission allowance, up to the maximum quantity of allowed offsets.  Each entity is permitted to satisfy up to 15% of its compliance obligation with offsets. Thus, an international offset is effectively the same as a domestic offset during this initial period.

The bill places additional restrictions on international offsets after 2018. Whereas domestic offsets are considered as good as emissions reductions (1 ton of offset carbon equals 1 ton of emissions), the international offset credits are weighted such that 1.25 international credits are equal to 1 domestic credit after 2018.  (§722) Thus, a covered entity would need to purchase five tons of international offsets in order to obtain four carbon credits. Furthermore, the bill specifies that covered entities may not use international offsets to demonstrate compliance for more than 25% of the maximum permitted offsets.  (§722) Covered entities may collectively use domestic and international offset credits to demonstrate compliance for up to a maximum of 2 billion tons of greenhouse gas emissions annually, therefore international offsets are limited to .5 billion tons annually. (§722) This 2 billion ton figure remains the same indefinitely, even as emissions reduction targets increase.  If the Administrator determines that domestic offset credits for any calendar year fall below 1.5 billion tons, the Administrator is directed to increase the percentage of international offsets to reflect the difference between 1.5 billion and the actual number of domestic offset credits issued. (§722)

Program Structure

The EPA Administrator is primarily responsible for issuing regulations and implementing the international offsets program.

To ensure that program decisions are well informed, the Administrator is required to create an International Offsets Integrity Advisory Committee within 60 days of the bill’s enactment. (§ 752) The Committee will contain at least nine members, to be selected by the Administrator. The Committee’s purpose is to make scientific and technical recommendations to the Administrator regarding regulations enacted under the program, eligible offset project types, and methodologies for addressing issues like additionality, activity baselines, measurement, leakage, uncertainty, permanence and environmental integrity. The Committee also provides oversight by making recommendations to ensure the overall integrity of the programs established pursuant to program regulations. (§752)

The bill directs the Administrator to create an international offsets program within two years of the bill’s enactment, which will issue international offset credits for activities that either reduce greenhouse gas emissions or increase sequestration of greenhouse gases in developing countries. (§753)  The Administrator is required to consult with the Secretary of State and the USAID administrator and to consider the recommendations of the Advisory Committee when designing this program. (§753). Rather than specifying which types of offset projects must be covered by the program, the bill requires that the Administrator, with the Committee’s assistance, create and update a list of offset project types that are eligible under the program. (§754)

The Administrator is also required to enact regulations to ensure that offset credits represent verifiable and additional emissions reductions. (§753) Creditable emissions reductions may include reductions in greenhouse gases achieved through destruction of methane and conversion of methane to carbon dioxide, and reductions achieved through destruction of chlorofluorocarbons or other ozone depleting substances, based on the carbon dioxide equivalent value of the substance destroyed.  (§753)

The bill includes additional guidelines for the types of regulations the Administrator should promulgate, in order to ensure that reductions are verifiable and additional. For example, the bill requires that the Administrator establish standardized methodologies for (1) determining the additionally of emission reductions achieved by particular offset project types, (2) establishing activity baselines for particular offset project types, (3) determining the extent to which emission reductions of a particular project type exceed a relevant activity baseline, and (4) accounting for and mitigating potential leakage if any, for particular offset project types. (§755)  The Administrator is also required to devise rules that will account for and address reversals, sequestration, and double counting. (§755) As for monitoring and oversight, the bill directs the Administrator to establish protocols for verification of the quantity of greenhouse gas emission reductions resulting from an offset project, (§758) and to establish an auditing program concerning project representatives, third party verifiers, and reports submitted by those persons. (§760)

Although the bill does not include a list of specific project types that are eligible under the program, it does specify three general categories of international offset credits: (1) sector-based credits, issued for the quantity of sector-wide emission reductions achieved across the relevant sector of the economy relative to a baseline emissions level; (2) credits issued by an international body; and (3) offsets from reduced deforestation. (§ 756) International offset credits may only be issued by the Administrator if they fall within one of these categories, or within a supplemental category created by the Administrator in accordance with the general requirements for establishing the offsets program.  The Administrator and Advisory Committee are responsible for determining which projects are eligible for which categories of offset credits, based on the type of activity and the location of the project.

Compared to Waxman-Markey International Offsets

The WM bill addresses international offsets in §743, starting on page 479 of the draft bill. Most of the provisions from that section were replicated in the KL bill, but some notable additions were made.

The KL bill and the WM bill share many of the same provisions. For example, the maximum offset allowance—2 billion tons—is the same in both bills, as is the relative weight of international offsets (1.25 for every 1 domestic offset). The general requirements for issuing offsets are also very similar, with emphasis on ensuring that offset credits represent verifiable and additional greenhouse gas emissions. Both bills recognize the same three categories of international offset projects: sector-based credits, credits issued by an international body, and offsets from reduced deforestation.

One of the most substantial changes in the KL bill is that it reduces the percentage of international offsets that an individual source may use to satisfy its emission requirements. Whereas the WM bill permits up to 50% of the total permitted offsets to be international (after 2018), the KL bill limits this amount to 25%. This stricter requirement reflects concerns about the quality and verifiability of international offsets.

The KL bill also addresses these concerns by creating an independent advisory committee for international offsets. The WM bill, in contrast, only includes a general Offsets Integrity Advisory Board that addresses both international and domestic offsets. These committees serve similar functions, both providing technical and scientific advice to the administrator. However, the International Offsets Integrity Advisory Committee has a narrower focus, and thus can provide more extensive oversight and more specialized expertise on offset programs in developing countries.

There are some smaller differences as well. For example, the KL bill specifies that, in order for a country’s project to be eligible for the offset program, there must be an international agreement between the U.S. and the developing country, which ensures that the offset project representative can be served process for legal action in U.S. federal courts. (§753) There was no such provision in the WM bill.  The KL bill also provides more detailed stipulations than the WM bill for determining eligible project types (§ 754), establishing standardized methodologies for analyzing offset projects (§ 755) and dealing with problems like reversal and double-counting (§ 755).

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