To me the most striking element of McCain’s just-released carbon cap-and-trade plan is that it would, at least at the outset, allow regulated entities to achieve 100 percent of their emission reductions through the purchase of domestic or international offsets. By way of comparison, the Lieberman-Warner climate bill headed for the floor of the Senate caps the contribution of offsets at 15 percent, and requires that all the offsets be from domestic projects.

This is a genuinely radical feature of McCain’s plan, and it isn’t getting nearly enough press.

The offsets provision does give McCain some cover with conservatives and coal state legislators. What they want is for mandatory emission reductions to wait on the development of technology to capture and sequester carbon — that’s the only hope the coal industry has in a carbon-constrained economy. They say: don’t make us reduce emissions until we have a way to do it, or we’ll get jammed with huge costs. In short, they want the coal tail to wag the climate policy dog.

McCain thinks he’s devised a way to mollify them. For the time being, coal utilities can meet their emission obligations through the purchase of offsets, which are, relatively speaking, cheap. The easy availability of cheap offsets will keep the price of a ton of carbon low for the foreseeable future, allowing coal utilities time to develop sequestration technology — or more precisely, allowing the federal government time to subsidize the development of the technology.

It’s a pretty sweet deal for Big Coal. How sweet? The EPA analysis of the Lieberman-Warner bill said that if the use of offsets were unlimited, the price of a pollution permit would fall by over 70 percent from the bill as written. A study from the carbon market analysts at New Carbon Finance predicted that a cap-and-trade program could hold carbon prices to $15/ton if it allowed compliance via offsets from developing countries.

Naturally carbon traders like JP Morgan and Natsource are lobbying Congress furiously to allow offsets into the plan. But the promise that prices could be held down, sectors not directly covered by the cap-and-trade program could be incentivized to reduce emissions, and developing countries could see a sustainable development aid stream has generated qualified support even from some progressives (see, e.g., this report from the Center for American Progress).

What could be wrong with a measure that a) holds prices down while b) reducing emissions and c) funding sustainable development in developing countries?

The problem is that there’s good reason to believe the use of offsets would do none of the above. A new report out of the Program on Energy and Sustainable Development at Stanford, by long-time carbon market analysts David G. Victor and Michael Wara, argues that "the theoretical benefits of lower costs and broader engagement of developing countries through the extensive use of offsets are an illusion. They are based on the assumption that it is possible to administer an offsets system so that it rewards only bona fide reductions. This assumption is valid for only a fraction of the real offsets market."

The basic tension Victor and Wara identify is between quality and quantity. Of the emission reductions that have been secured thus far under the CDM — which vastly outweigh direct domestic reductions undertaken in Europe — Victor and Wara argue "that many of these reductions could have been accomplished at a far lower price; that many credits are probably not backed by real reductions; and that the promise of such a massive supply of credits is extremely unlikely if even the current (poor) level of environmental quality of the program is to be maintained.” McCain’s plan would allow offsets to come from international sources like the CDM, so the U.S. would be buying into a program that’s already overtaxed and of dubious utility in reducing emissions.

How would a McCain administration ensure that domestic offsets are verifiable and additional? It would establish a private-public organization called the "Climate Change Credit Corporation," which would (among other things) vet offsets. This would mean:

  • many wealthy, politically connected industries would be highly desirous of inexpensive offsets — demand for cheap offsets would be enormous;
  • a partnership between private industry and a Republican administration would be in charge of applying rigorous standards to offset projects;
  • rigor would mean moving slowly, but immense pressure — from coal legislators, coal utilities, and coal ratepayers — would be levied on the CCCC to hurry up and increase supply to meet demand.

Under those circumstances, it is difficult to imagine a system free of rent-seeking, back-room arm-twisting, or outright corruption.

McCain’s plan stipulates that a) offsets would help keep carbon prices down, and b) all carbon offsets will be verified and real. But it might as well stipulate a magic pony. Under the dynamic that would be created, it’s highly unlikely that enough offsets could be verified to usefully smooth out price spikes, and those that are verified will have been approved under enormous pressure and persistent suspicion of chicanery.

McCain’s carbon policy will create a system that begs to be gamed and manipulated. The result will likely be many years of delay in generating the far-reaching changes the climate crisis requires.