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Offsets in Cap-and-Trade - July, 2011


Offsets in Cap-and-Trade - July, 2011  

Tom Markowitz - Friday, July 01, 2011

Welcome to Enerhope

 July 1st, 2011

Offsets in Cap-and-Trade

(c)Enerhope.com 2011

This article explains the role that Offsets play in a greenhouse gas "Cap-and-Trade" emissions trading system. This model Cap-and-Trade system is located in the imaginary country of Enerhope, which is described in the web site www.Enerhope.com
The author hopes that this description can serve as a guide for the establishment of real Offset systems, avoiding some of the mistakes which have been made in the formation of some existing or planned real emissions trading systems.

If you are having trouble understanding the terminology in this article, please consult the general description of Enerhope's emissions trading system, at

What is an Offset?

Enerhope's Glossary of Cap-and-Trade terms
has the following definition for Offset:

A reward for emission reductions outside the Capped Sector.
An organization which is not a Capped Facility can complete an emission reduction project and apply to the Government for creation of Offsets, to reward the emission reductions. If the Government agrees that the emission reductions were real and satisfy program requirements, the Government will create a specific number of kilotonnes of Offsets, with specific serial numbers, and transfer these new Offsets to the applicant’s Account in the Registry.
Strong Synonyms: Offset Credit, Emission Reduction Credit
Weak Synonym: Credit (a vague, misleading term)

Let's visit the Island of Enerhope, to see how Offsets fit into the Cap-and-Trade system.

In 2015, Enerhope will launch a greenhouse gas Cap-and-Trade system for large industrial facilities (e.g. steel mills, petroleum refineries, coal-fired electricity generators). These Large Direct Emitters will be "Under the Cap." They must participate in the Cap-and-Trade system, starting in 2015. Each "Capped Facility" must monitor and report its total of 2015 greenhouse gas emissions to the Government at the end of 2015, and then "Retire," (transfer to the government's Retirement Account) Allowances equal to its 2015 emissions.

The Capped Facilities will try to reduce their emissions in 2015, but they may not succeed in reducing their emissions below the limited total number of Allowances available. If the total emissions by capped facilities in 2015 are NOT less than the total number of Allowances Retired, one or more of the Capped Facilities could be charged by the Government with being out of Compliance with the Cap-and-Trade Regulation. How can the Government of Enerhope design a rigorous Cap-and-Trade system to reduce emissions, without the risk of massive non-compliance by Capped Facilities?    Offsets!

Offsets encourage the UNCAPPED Facilities (e.g. motor vehicle fleets, small industries, commercial buildings) to reduce their emissions. Offset projects are voluntary, not required by regulation. Offset holders can sell their Offsets to Capped Facilities, which can use the purchased Offsets to supplement their Allowances during Retirement.

Here is an Offset Certificate from Enerhope's Greenhouse Gas Cap-and-Trade System:


Let’s assume that each Offset is a paper certificate, printed by the Government of Enerhope, and awarded to a specific applicant to reward a specific Emission Reduction Project.


Each Offset Certificate is printed with the following information:

The Country of Origin

The Year of Issue

The Quantity of GHG Emission Reductions represented by the Offset

A Unique Serial Number for Each Offset

Let's compare

Allowances vs. Offsets


And now, an emission reduction project!  (Eligible for Offsets?)



In 2015, Enerhope Bus Lines, a non-capped facility, will switch its entire bus fleet from diesel fuel to natural gas. which emits 30% less CO2 per unit of fuel energy than diesel fuel.


By switching fuels, Enerhope Bus Lines will reduce its annual GHG emissions. The company could then apply to the Government of Enerhope for creation of Offsets, one kilotonne of Offsets for each kilotonne of GHG emission reductions.


If Enerhope Bus Lines’ application for Offsets meets the program rules of the Offsets program, the Government of Enerhope will create Offsets and will transfer these Offsets to Enerhope Bus Line’s Account in the Emissions Trading Registry.


The Government Creates the Offsets

Notice that the Government of Enerhope reserves the exclusive right to create Offsets. The government that passed the Cap-and-Trade Regulation, the government which is responsible for the integrity of the Cap-and-Trade system, must reserve this exclusive right to create Offsets. Any private individual can claim, "I reduced my emissions!" but only the government has the right to create the Offsets for this reduction, assign a unique serial number for each kilotonne of created Offsets, and place the new Offsets in the applicant's Registry Account. Only then can the applicant sell or Retire the new Offsets on the Registry.


Creation of Offsets: The Program Rules

Before starting the Offsets System, the Government must announce the rules for what is acceptable for creation of Offsets. Here are some essential criteria, and other considerations:

Essential Criteria for Offset Creation


The emission reductions must be:



The Offsets applicant must prove to the government that the emission reductions were real. This is not an obvious statement, e.g. a municipality which converted a city avenue to bicycle and pedestrian traffic and then applied for Offsets must prove that this conversion really reduced emissions.



The applicant must satisfy the government that the total of claimed emission reductions is correct and appropriate.



The applicant must prove to the government that the reported emission reductions were not used to obtain Offsets anywhere else.


Additional ("Incremental") ("Surplus")

The applicant must satisfy the government that the reported emission reductions were beyond what was already required by regulations ("Regulatory Additionality"). Some jurisdictions also require that the reported emission reductions were beyond what would have made a profit for the owner ("Financial Additionality").



The truth of the application and the conformity with government rules must be verified in writing by a registered, independent expert.


Other Considerations should be specified in the rules:


Which Greenhouse Gases?

Carbon dioxide? Methane? Nitrous oxide?.....The rules should list which greenhouse gases may be reduced to qualify for Offsets.



When did the applicant make the claimed emission reductions? If the Cap-and-Trade system is operating in 2016 and the reductions were in 2015, the Offsets would probably meet this criterion easily. What if the reductions were in 2015, but not claimed until 2020? The rules should specify which reduction years are eligible.

Offsets should NOT be created for future emission reductions.


An emission reduction project reduces emissions in its first year, second year, third....For how many years should the project be eligible for Offsets?

Early Action

Some jurisdictions create Offsets for reductions which occurred one or two years before the start of the Cap-and-Trade system. This "credit for early action" rewards applicants who started to reduce without waiting for the start of the Cap-and-Trade system.


What would happen if Offsets were created for planting a forest, which grew for ten years, removing CO2 from the atmosphere, and then was cut down and burned?



A natural gas utility enourages its customers to save energy and reduce emissions, and then applies for Offsets. Who owns the emission reductions? The customers? The natural gas company?

A wind farm developer signs a contract with an electric utility to sell electrical energy to the utility at a guaranteed price and guaranteed access for twenty years. The contract states that the electric utility has ownership of the "environmental attributes" of the wind farm project. Who owns the Offsets? The wind farm owner? The electric utility?

When applying for Offsets, the applicant must provide written proof of ownership, signed by all participants in the project.



Uncapped facilities are eligible for Offsets.

Capped facilities are NOT eligible for Offsets. Why? Because capped facilities already benefit at retirement from their own emission reductions. They do not need a second, Offset benefit for their emission reductions.


Government Facilities and Grant Recipients

Should government facilities, or government-financed facilities (e.g. hospitals), be eligible for Offset creation? Should government grant recipients be eligible for Offsets? Private industry might answer, "no," because government facilities should not use the taxpayer's dollar to make emission reductions, obtain Offsets, and then sell the Offsets to private industry. Since the government reserves the exclusive right to review applications and create Offsets, the government should disqualify itself from creating Offsets for its own emission reduction projects. Governments do not need to award Offsets to themselves to encourage reductions. Governments have other policy and program options for reducing emissions from their own facilities.


Geographic Eligibility

Where is the Offset project located? The rules should state whether emission reduction projects outside the country are eligible.


Eligible Technologies and Activities

The rules should state in general terms which technologies and activities are eligible for Offsets. Two examples of Offset technology problems which have occurred in real Cap-and-Trade systems:

Canada, 2005

The Liberal Government could not decide whether to create Offsets for new nuclear electricity projects in the planned Cap-and-Trade system.

(The Liberal Government, and its Cap-and-Trade system,

 were defeated in 2006.)


HFC-23(chemical formula CHF3) is an unwanted chemical byproduct in the manufacture of HCFC-22 (chemical formula CHClF2), a refrigerant gas. With a Global Warming Potential of 11,700, HFC-23 is on the UN list of greenhouse gases to be reduced.

Since the beginning of the UN and EU greenhouse gas emissions trading systems, HCFC-22 producers in the developing world have applied for Offsets, to be awarded by the UN emissions trading system for capture and destruction of their byproduct HFC-23.

As of September, 2010, projects that cut HFC-23 made up 52 percent of the current supply of Offsets created under the UN’s Offsets program for developing nations, which currently totaled $2.7 billion at market prices.

In June, 2010, the non-governmental organization CDM Watch proclaimed that HCFC-22 plants in the developing world had boosted production, with the sole intent of maximizing their Offsets from HFC-23 destruction. According to CDM Watch’s Policy Briefing, revenue from sales of HFC-23 Offsets is far higher than revenue from sale of HCFC-22.


Documents Submitted by the Applicant to the Government Cap-and-Trade Authority


The Offsets applicant must submit, to the authority, documents containing the following information:

Description of the Project

Who, how, what, where, when the emission reduction project was done.

Protocol ("Methodology")

A standard, pre-approved document, describing the technology or activity used to reduce emissions, how the technology or activity reduces emissions, and the procedure for monitoring, calculating, and reporting the claimed emission reductions. A library of "Methodologies" already exists for the UNFCCC emissions trading program (see below).

Emission Reduction Report

A report of the total tonnes of greenhouse gas emission reductions claimed by the project applicant in the specified year. May include a description of the method for calculating the reductions.

Verifier's Report

The project Verifier is a registered, independent expert who examines the project and the other documents and then signs written approval that the information in the other documents is correct and that the project meets the requirements of the Government's rules.


If the applicant applies for Offsets for the same project for several years, a new Emission Reduction Report and a new Verifier's Report must be submitted for each new year of application.


The government may require other documents, e.g. a non-conflict-of-interest statement from the Verifier.


Standards for Reporting and Verifying

How should an Offsets applicant report greenhouse gas emission reductions? How should a project Verifier investigate and report whether an Offsets project meets program criteria? International standards already exist for reporting and verifying greenhouse gas emissions. The ISO 14064 Series of standards provides tools for assessing and supporting greenhouse gas reduction and emissions trading.


The Registry

If the government approves the Offsets application, the government will then create the Offsets, assign a unique serial number to each Offset, and place the new Offsets in the applicant's Account in the Emissions Trading Registry, which is visible to the public on a website. The project documents are then posted on a government website, accessible to the public. Then, the Offset holder can trade or retire these Offsets on the Registry.

United Nations Emissions Trading System

The UNFCCC Emissions Trading System, through its Clean Development Mechanism, functions as a government authority in creating "CER" Offsets, for emission reduction projects in "developing" nations. These CER Offsets are supported by the integrity of the United Nations itself. These CER Offsets are heavily traded in the European Union emissions trading systems. http://cdm.unfccc.int/about/index.html

Offsets with Integrity

Offsets that meet the above description have integrity. Their authenticity is supported by the integrity of the government that created them, just as the value of a dollar or a Euro is supported by the integrity of the government that created it. Offsets with integrity can be traded in the government's Cap-and-Trade system with the same value as Allowances.

Offsets without Integrity.

Unfortunately, today, over the web, some entrepreneurs are offering to sell "Offsets" which do not meet the above description. These so-called "Offsets" do not have the support of any government or the UN. Let the buyer beware!

Offsets: a Summary

Offset: a Reward for Emission Reductions

  • Emission reductions outside the Capped Sector
  • Must apply to government for creation of Offsets
  • Must prove a credible emission reduction
  • Government may create Offsets, award to an applicant
  • Offsets can be traded and retired to supplement Allowances







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