One such design element is the treatment of offsets. An offset is a measurable reduction, avoidance, or sequestration of GHG emissions from a source not covered by an emission reduction program. If Congress establishes a GHG emission cap-and-trade program, only sources not covered by the cap could generate offsets. If offsets are allowed as a compliance option in an emissions trading program, eligible offset projects could generate "emission credits," which could be sold and then used by a regulated entity to comply with its reduction requirement. As with renewable energy projects, there could be energy efficiency projects in nations that do not limit GHG emissions. However, implementing this objective would likely present challenges. Integrity Concerns

If offsets are to be included in an emissions trading program, offset integrity—i.e., whether or not the offsets represent real emission reductions—is critical. If allowed as part of an emissions reduction program, offsets have the potential to provide various benefits. The ability to generate offsets may
provide an incentive for non-regulated sources to reduce, avoid, or sequester emissions (where these actions would not have occurred if not for the offset program); expand emission mitigation opportunities, thus reducing compliance costs for regulated entities; offer environmental co-benefits for certain projects; support sustainable development in developing nations; and create new economic opportunities and spur parties to seek new methods of generating offsets. The main concern with offset projects is whether or not they produce their stated emission reductions. To be credible, an offset ton should equate to a ton reduced from a direct emission source, such as a smokestack or exhaust pipe. If illegitimate offset credits flow into the trading program, the cap would effectively expand and credible emissions reductions would be undermined. The program would fail to meets its ultimate objective: overall GHG emissions reductions. One debate may involve whether including offsets would send the appropriate price signal to encourage the development and deployment of new technologies, such as carbon capture and storage. Policymakers may consider striking a balance between sending a strong price signal and reducing the costs of the emissions reduction program. On the other hand, some maintain that if developed nations use all of the low-cost offsets in developing nations, the developing nations will face higher compliance costs if and when they establish GHG emission reduction requirements. Moreover, there is some concern that international offsets may serve as a disincentive for developing nations to enact laws or regulations limiting GHG emissions because they would lose funding from the offset market. If eligible in a U.S. program, international offsets from countries without binding reduction targets are likely to dominate in early decades because of their comparatively lower costs. Certain domestic economic sectors, primarily agriculture and forestry (if eligible as offsets), would benefit if international offsets are excluded.
If Congress establishes a greenhouse gas (GHG) emissions reduction program (e.g., cap-and-trade system), the treatment of GHG emission offsets would likely be a critical design element. If allowed as part of an emissions program, offsets could provide cost savings and other benefits. However, offsets have generated concern.
An offset is a measurable reduction, avoidance, or sequestration of GHG emissions from a source not covered by an emission reduction program. If allowed, offset projects could generate "emission credits," which could be used by a regulated entity (e.g., power plant) to comply with its reduction requirement. Offsets could include various activities:
agriculture or forestry projects: e.g., conservation tillage or planting trees on previously non-forested lands; renewable energy projects: e.g., wind farms; energy efficiency projects: e.g., equipment upgrades; non-CO2 emissions reduction projects: e.g., methane from landfills.
Including offsets would likely make an emissions program more cost-effective by (1) providing an incentive for non-regulated sources to generate emission reductions and (2) expanding emission compliance opportunities for regulated entities. Some offset projects may provide other benefits, such as improvements in air or water quality. In addition, the offset market may create new economic opportunities and spur innovation as parties seek new methods of generating offsets.
The main concern with offset projects is whether or not they represent real emission reductions. For offsets to be credible, a ton of CO2-equivalent emissions from an offset project should equate to a ton reduced from a covered emission source, such as a smokestack or exhaust pipe. This objective presents challenges because many offsets are difficult to measure. If illegitimate offset credits flow into an emissions trading program, the program would fail to reduce GHG emissions. Another concern is whether the inclusion of offsets would send the appropriate price signal to encourage the development of long-term mitigation technologies. Policymakers may consider a balance between price signal and program costs.
If eligible in a U.S. program, international offsets are expected to dominate in early decades because they would likely offer the lowest-cost options. Domestic sectors, such as agriculture and forestry, might benefit if international offsets are excluded. Some object to the use of international offsets due to concerns of fairness: the low-cost options would be unavailable to developing nations if and when they establish GHG emission targets. However, some offset projects may promote sustainable development. On the other hand, international offsets may serve as a disincentive for developing nations to enact laws or regulations controlling GHG emissions because many projects would no longer qualify as offsets.