	Introduction

An estimate of the quantity and type of offset projects that might be available in a cap-and-trade system would provide for a more informed debate over the design elements of a cap-and-trade system. An offset is a measurable reduction, avoidance, or sequestration of GHG emissions from a source not covered by an emission reduction program. If Congress enacts a greenhouse gas (GHG) emission reduction program, such as a cap-and-trade system, the treatment of offsets would be a critical design element. However, offsets have fueled considerable debate, primarily for the concern that illegitimate offsets could undermine the ultimate objective of a cap-and-trade program: emission reduction. Although economic models have generated estimates of offsets developed and used in a cap-and-trade system, the estimates are rife with uncertainty. This report examines the multiple variables that help shape offset supply. Factors Affecting Offset Supply

It is difficult to estimate the supply of offsets that might be available in a cap-and-trade system, because the supply is determined by many variables, including policy choices. Some of the activities included in mitigation potential estimates would likely not qualify as offsets in a cap-and-trade system. However, these offset supply estimates are imperfect, because the underlying data—mitigation potential estimates—contain considerable uncertainty. More projects would become economically competitive as the emission allowance price rises. In addition, the degree to which international offsets are allowed would have considerable impact on domestic offsets. A critical factor is the development and market penetration of low- and/or zero-carbon technologies. These technologies could lower the costs of the cap-and-trade program. If these technologies are available earlier than predicted (by models), the " Emission Allowance Price " (discussed below) would likely decrease, making fewer offset projects cost effective. In addition to the core structural design of the cap-and-trade program, the allowance price would be dependent on the program's treatment of offsets: which types would be allowed; whether international offsets could be used; whether covered sources would be limited (e.g., as a percentage of their allowance submission) in their use of offsets. Other Factors

An EPA study stated that "other non-price factors, such as social acceptance, tend to inhibit mitigation option installation in many sectors." Information dissemination may play a role.
If allowed as a compliance option in a greenhouse gas (GHG) emission reduction program (e.g., a cap-and-trade system), offsets have the potential to provide considerable cost savings and other benefits. However, offsets have generated considerable controversy, primarily over the concern that illegitimate offsets could undermine the ultimate objective of a cap-and-trade program: emission reduction.
An offset is a measurable reduction, avoidance, or sequestration of GHG emissions from a source not covered by an emission reduction program. An estimate of the quantity and type of offset projects that might be available as a compliance option would provide for a more informed debate over the design elements of a cap-and-trade program. It is difficult to estimate the supply of offsets that might be available in a cap-and-trade system, because the supply is determined by many variables, including:
Mitigation potential. Mitigation potential estimates are the raw data that feed into models estimating offset use in a cap-and-trade program. Recent estimates contain considerable uncertainty.
Policy choices. The design of the cap-and-trade system would be critical to offset supply. Particularly relevant design choices include which sources are covered; which types of offset projects are allowed; whether or not offset use is limited; and the degree to which set-aside allowances are allotted to activities that may otherwise qualify as offsets. Policymakers' treatment of international offsets would play a major role.
Economic factors. The development and market penetration of low- and/or zero-carbon technologies would likely have substantial effects. These technologies could lower the costs of the cap-and-trade program, making fewer offset projects cost effective.
Emission allowance price. The allowance price would determine the supply and type of offsets that would be economically competitive in a cap-and-trade system. As the price increases, more (and different types of) projects would become cost effective. Allowance price estimates are difficult to predict, as they are dependent on numerous variables, including offset treatment.
Other factors. Non-market factors, such as social acceptance, may influence offset use. In addition, information dissemination would likely be an issue, because some of the offset opportunities exist at smaller operations, such as family farms.
Although economic models have generated estimates of offsets that would be developed and used in a cap-and-trade system, the estimates are rife with uncertainty. This report examines the multiple variables that would help shape offset supply.