Identifying Cost-Effective Offset Projects to Mitigate Excess Emissions

The Situation

An “offset” is an incremental unit of emissions that is reduced, avoided, or sequestered to compensate for an increase in emissions that occurs or occurred in another location. Offsets have many roles in environmental policy, one of which is as part of the legal remedy to mitigate excess emissions caused by violation of an environmental permit or regulation. In one of the most prominent recent examples, offsets were part of the legal settlement of Volkswagen’s violation of the Clean Air Act wherein some of its diesel vehicle models were equipped with devices that disabled their emissions controls under real-world driving conditions. Companies, both large and small, are likely to need highly credible analytic support to identify ways to meet their offset obligations without excessive cost. Such support is important because potential offset projects that would be legally acceptable alternatives vary widely with respect to their cost-effectiveness (i.e., their cost per ton of emissions reduced), and hence the total cost faced by the company in meeting an assigned mitigation obligation.

NERA's Role

NERA was engaged by counsel on behalf of a client, an owner and operator of diesel-powered water pumps and pickup trucks that had been charged with a Clean Air Act violation, to identify a set of cost-effective Nitrogen Oxide (NOx) reduction projects that it could propose to offset the regulator’s estimate of the quantity of excess emissions emanating from the violation. Prior to NERA’s engagement, the regulator had also provided a report describing a couple of possible offset projects the company could undertake. NERA’s initial review of that report found that the regulator’s suggested type of offset action was far more costly than necessary to achieve the required amount of NOx emissions mitigation. It was recognized that offsets could be created more cost-effectively by retiring the pumps owned by the client early and replacing them with new pumps that have a lower emissions rate. 

In the first stage of the engagement, NERA attempted to identify how many such early replacements would be needed, which of the company’s fleet of existing pumps could produce the most offsets per replacement, and the total cost if the company were to take this approach to meeting its offset obligation. NERA prepared a spreadsheet model to evaluate the cost-effectiveness of various generic types of pumps that the company might have owned, given its operational history. This initial generic analysis served as guidance to help the company focus its search for candidate pumps that, in aggregate, meet the total excess emissions obligation. As the next step, NERA updated its analysis to reflect operational data for the specific list of pumps that the client provided and produced an affidavit documenting the basis that this list of specific pump replacements would satisfy the client’s excess emissions obligation.

In the second stage of the engagement, NERA carried out a search of publicly available reports and databases related to emission reduction offset opportunities to identify other types of offset projects that could be conducted on types of equipment that were outside the client’s corporate boundaries. NERA prepared an evaluation of the likely cost-effectiveness of these other options, again identifying those with the best prospects and comparing their cost-effectiveness to that associated with the analysis of replacement of their own pumps.

The Result

NERA estimated that the cost of the offset project proposal to replace a number of the existing diesel-fired pumps owned by company would be about a third to one-half of the cost of the offset project proposal in the regulator’s report. NERA determined that there also exist potential offset projects not involving the client’s assets that would cost about half as much per ton as the offset project concepts described in the regulator’s report. Counsel reported to NERA that the perceived quality of NERA’s analyses and conclusion resulted in about a halving of the penalty sought by opposing counsel in settlement discussions.