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Testimony: 

Before the Subcommittee on Energy and Environment, Committee on Energy 
and Commerce, House of Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 9:30 a.m. EST: 
Thursday, March 5, 2009: 

Climate Change: 

Observations on the Potential Role of Carbon Offsets in Climate Change 
Legislation: 

Statement of John Stephenson, Director: 
Natural Resources & Environment: 

GAO-09-456T: 

GAO Highlights: 

Highlights of GAO-09-456T, a testimony before the Subcommittee on 
Energy and Environment, Committee on Energy and Commerce, House of 
Representatives. 

Why GAO Did This Study: 

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. 

What GAO Found: 

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. 

View [hyperlink, http://www.gao.gov/products/GAO-09-456T] or key 
components. For more information, contact John Stephenson, (202) 512-
3841, stephensonj@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

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.[Footnote 1] 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. 

Ensuring the Credibility of Carbon Offsets Poses Challenges in the U.S. 
Voluntary Market: 

Our August 2008 report identified four primary challenges with the U.S. 
voluntary market.[Footnote 2] 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. 

Figure 1: Common Offset Project Types: 

[Refer to PDF for image: illustration] 

Offset projects: 

Emission reduction: 
* Fossil fuel reduction: 
- Direct reductions, including energy efficiency, fuel switching, and 
power plant upgrades; 
- Renewable energy; 
* Greenhouse gas destruction: 
- Methane: Agricultural; Coal; Landfill. 

Sequestration: 
* Biological: 
- Forestry; 
- Agricultural soil; 
* Geological. 

Source: GAO based on Ricardo Bayon, Amanda Hawn, and Katherine 
Hamilton, Voluntary Carbon Markets, (Sterling, Virginia: Earthscan). 

[End of figure] 

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. 

Table 1: Shares and Global Warming Potentials of Greenhouse Gas 
Emissions from U.S. Sources, 2006: 

Greenhouse gas: Carbon dioxide; 
Major sources: Fossil fuel combustion, nonenergy use of fuels, and iron 
and steel production; 
Percentage of total U.S. greenhouse gas emissions: 85%; 
Global warming potential: 1. 

Greenhouse gas: Methane; 
Major sources: Landfills, natural gas and petroleum systems, 
agriculture, and coal mining; 
Percentage of total U.S. greenhouse gas emissions: 8%; 
Global warming potential: 21. 

Greenhouse gas: Nitrous oxide; 
Major sources: Agricultural soil management, transportation, and manure 
management; 
Percentage of total U.S. greenhouse gas emissions: 5%; 
Global warming potential: 310. 

Greenhouse gas: Synthetic gases (HFCs, PFCs, and SF6)[A]; 
Major sources: Substitution of ozone-depleting substances, electric 
power transmission and distribution, and aluminum production; 
Percentage of total U.S. greenhouse gas emissions: 2%; 
Global warming potential: 140 to 23,900. 

Source: Environmental Protection Agency. 

[A] HFCs (hydrofluorocarbons), PFCs (perfluorocarbons), SF6 (sulfur 
hexafluoride). 

[End of table] 

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. 

Figure 2: Hypothetical Depiction of Offset Project Measured against 
Business-as-Usual Scenario: 

[Refer to PDF for image: illustration] 

This figure is a line graph depicting projected business-as-usual 
emission over the four year life of a project versus emissions with 
offset project. Emissions are depicted in tons per year on a gradually 
increasing basis. 

Source: GAO. 

[End of figure] 

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. 
[Footnote 3] 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. 

The CDM’s Environmental and Economic Effects Provide Important Lessons 
About the Role of Carbon Offsets in Mandatory Programs to Limit 
Emissions: 

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.[Footnote 4] 
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.[Footnote 5] See figure 3 for the resources and time 
associated with each step in the review process. 

Figure 3: CDM Project Cycle: 

[Refer to PDF for image: illustration] 

Project Initiation: Estimated Cost - $80,000-$230,000: 

Estimated time: 1 year: 

Project Preparation: 
Development of project design documents (by Project developer); 

Validation: 
Evaluation of documents to ensure they meet CDM criteria (by Accredited 
third-party auditor [Designated Operational Entity]); (Host Country 
Approval); 

Registration: 
Formal acceptance of validated project into the CDM (by CDM oversight 
board [Executive Board]). 

Project Operations: Annual Estimated Cost - First year: $20,000-
$35,000; Subsequent years; $15,000-$25,000: 

Estimated time: 1 year (from registration to first credit issuance): 

Monitoring: 
Ongoing evaluation of project performance (by Project developer); 

Verification and Certification: 
Ongoing review and official recognition of emission reductions by 
Accredited third-party auditor [Designated Operational Entity]); 

CER Issuance: 
Distribution of credits for achieved reductions (by CDM oversight board 
[Executive Board]). 

Source: GAO analysis of UNFCCC documents and UNDP data. 

[End of figure] 

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.[Footnote 6] 

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.[Footnote 7] 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. 

Figure 4: CDM Pipeline: 

[Refer to PDF for image: two stacked line graphs] 

Cumulative number of projects[A] added to pipeline: 

Year: 2003; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
1; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 2; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 0; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 0; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 2; 
Total: 5. 

Year: 2004; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
38; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 18; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 2; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 1; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 2; 
Total: 61. 

Year: 2005; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
313; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 126; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 62; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 22; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 11; 
Total: 534. 

Year: 2006; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
801; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 328; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 160; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 52; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 33; 
Total: 1374. 

Year: 2007; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
1705; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 515; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 419; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 98; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 73; 
Total: 2810. 

Year: 2008; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
2465; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 641; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 607; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 132; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 95; 
Total: 3940. 

Volume of 2012 expected CERs, in millions[A]: 

Year: 2003; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
0.11; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 6.82; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 0; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 0; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 38.60; 
Total: 45.53. 

Year: 2004; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
14.5; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 33.5; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 0.5; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 0.1; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 38.6; 
Total: 87.2. 

Year: 2005; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
124.4; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 164.4; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 29.8; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 9.6; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 392.4; 
Total: 720.6. 

Year: 2006; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
310.7; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 328.5
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 87.1; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 91; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 682.8; 
Total: 1503.1. 

Year 2007; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
678.1; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 462.3; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 253.7; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 177.5; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 746.7; 
Total: 2318.3. 

Year: 2008; 
Renewable energy (i.e., using wind, solar, or hydropower technologies): 
928.3; 
Agriculture, cement, and fugitive gas capture (i.e., avoiding landfill 
waste through composting or collecting methane from coal mines): 538.7; 
Energy efficiency (i.e., increasing building efficiency or providing 
energy-efficient appliances): 336.7; 
Fuel switching (i.e., switching fuels from more carbon-intensive 
options, such as coal, to less carbon-intensive options, such as 
natural gas): 207.2; 
Industrial gas destruction (i.e., destroying waste gases used in the 
production of refrigerants, such as HFC-23): 768.6; 
Total: 2779.5. 

Source: GAO analysis of UNEP Risoe Center data (2008). 

[End of figure] 

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.[Footnote 8] 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.[Footnote 9] 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.[Footnote 10] 

GAO’s Reviews of Carbon Offset Markets Have Identified Matters for 
Congressional Consideration in Developing Climate Change Legislation: 

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. 

Contact and Staff Acknowledgments: 

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. 

[End of section] 

Footnotes: 

[1] GAO, Carbon Offsets: The U.S. Voluntary Market is Growing, but 
Quality Assurance Poses Challenges for Market Participants, [hyperlink, 
http://www.gao.gov/products/GAO-08-1048] (Washington, D.C.: Aug. 29, 
2008), and GAO, International Climate Change Programs: Lessons Learned 
from the European Union’s Emissions Trading Scheme and the Kyoto 
Protocol’s Clean Development Mechanism, [hyperlink, 
http://www.gao.gov/products/GAO-09-151] (Washington, D.C.: Nov. 18, 
2008). 

[2] GAO, Carbon Offsets: The U.S. Voluntary Market is Growing, but 
Quality Assurance Poses Challenges for Market Participants, [hyperlink, 
http://www.gao.gov/products/GAO-08-1048] (Washington, D.C.: Aug. 29, 
2008). 

[3] Renewable energy certificates certify that a certain quantity of 
electricity has been generated from a qualifying type of renewable 
generation technology. 

[4] See GAO, International Climate Change Programs: Lessons Learned 
from the European Union’s Emissions Trading Scheme and the Kyoto 
Protocol’s Clean Development Mechanism, [hyperlink, 
http://www.gao.gov/products/GAO-09-151] (Washington, D.C.: Nov. 18, 
2008). 

[5] Applicants seeking CDM credits must demonstrate the proposed 
projects are additional— i.e., that the project would not have occurred 
without the CDM due to technological, economic, or other barriers. As 
part of this demonstration, applicants estimate the reductions achieved 
by the project using a projected business-as-usual baseline. An 
external party must validate documentation and verify emission 
reductions. In addition to Executive Board approval, projects must 
undergo review by national officials of the country where the project 
occurs before credits are issued. Once approved, emissions from each 
project are monitored periodically in accordance with procedures 
outlined in the initial project proposal. Credits are issued only for 
emission reductions that have been verified by a separate, independent 
auditing firm. 

[6] See, for example, Schneider, Lambert, Is the CDM fulfilling it 
environmental and sustainable development objectives? An evaluation of 
the CDM and options for improvement (Berlin, Germany, 2007). 

[7] Covered entities in the ETS need to hold allowances for their 
emissions, and each allowance entitles them to emit a specific amount 
of carbon dioxide. Under the ETS, covered entities have been able to 
use certain CDM credits in addition to ETS allowances to cover their 
emissions. 

[8] Known as “primary CERs,” these credits involve a higher level of 
uncertainty because most purchases involve forward contracts—the buyer 
purchases the rights to future credits instead of the credits 
themselves. See GAO-09-151 for more detailed discussion. 

[9] Analysis uses country-specific emissions data from IEA, Key World 
Energy Statistics (2008) as well as data on expected CERs from the UNEP 
Risoe CDM/JI Pipeline Analysis and Database, Oct. 1, 2008. IEA data for 
each region are based on 2006 indicators and include emissions from 
fuel combustion only. 

[10] See [hyperlink, http://www.gao.gov/products/GAO-09-151]. 

[End of section] 

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