Washington - At the Joseph Farms dairy in Atwater (Merced County), farmers aren't just transforming milk into cheese. They've also figured out how to turn manure into fuel - and a paycheck.

    By storing waste from the dairy's 5,000 cows in a covered 7-acre lagoon and removing methane from it using sophisticated equipment, the farm is generating power that keeps refrigerators, lights and pumps running at its cheese plant.

    The project keeps the heat-trapping greenhouse gas methane out of the atmosphere, thereby netting the farm another payback in the form of carbon credits traded on the 6-year-old Chicago Climate Exchange and the voluntary California Climate Action Registry, a nonprofit organization formed by the state.

    Across the nation, dairy operations such as Joseph Farms, as well as landowners growing trees on previously empty land and vegetable farmers who plant seeds over old crops without tilling their fields, could win big under climate-change legislation advancing on Capitol Hill.

    The measure, which might be considered by the House this week, would force businesses to meet steadily tightening limits on carbon dioxide and other greenhouse gas emissions blamed for global warming. To meet the new caps, companies could cut their emissions or buy allowances from the federal government or other businesses to spew more of the pollutants.

    But the legislation also would allow companies to "offset" as much as 2 billion tons of their emissions each year by investing in pollution-reducing projects.

    Although Joseph Farms would not disclose confidential financial data, its manure-treatment system, installed four years ago at a cost of about $3 million, has been found to sequester about 25 thousand metric tons of carbon dioxide or its equivalent each year.

    With recent trading prices in single digits and estimates that the price could rise to $10 if Congress mandates a carbon-trading scheme, the potential payback is significant.

    Without that revenue, general manager Carl Morris said it would be a tough investment to sustain.

    "It makes a big difference," he said. "These things are costly, and there are a lot of operational and logistical issues getting them up and approved and running and operating. The revenue stream from carbon offsets is very important."

    Generous Offset Program

    Businesses that generally back the climate-change bill - including NRG Energy Inc., ConocoPhillips and the Dow Chemical Co. - have insisted that their support hinges on a generous offset program that could help cushion companies from higher costs of complying with the new emission limits.

    But the bill's offset plan has been battered by environmental activists as too generous. They argue that the offsets would undermine the new greenhouse gas emissions limits that would be mandated by the legislation.

    The fear, said Emily Figdor of Environment America, is that if carbon offsets are cheap and readily available, companies may purchase them instead of cutting their pollution.

    As a result, U.S. emissions might not dip for years - and could even increase in the short term - despite new greenhouse gas limits.

    "The fact that 2 billion tons of offsets were included puts in jeopardy the environmental goals of the bill," Figdor said.

    An analysis by the Breakthrough Institute, a think tank in Oakland, found that if polluters purchase the "relatively cheap carbon offsets ... emissions in supposedly capped U.S. sectors (could) rise by up to 9 percent between 2005 and 2030."

    Although carbon-offset trading in the United States is in its infancy - and an entirely voluntary market - a mandatory carbon market has existed in Europe for years.

    Carbon offset champions say the programs they reward play a valuable role in capturing potentially devastating greenhouse gases. For instance, reforestation projects can ensure carbon dioxide-loving trees are returned to once-lush Central American jungle areas.

    Manure Lagoons

    And covers over livestock manure lagoons can trap methane - a gas believed to be more environmentally damaging than carbon dioxide - so sophisticated equipment can turn that waste into electricity.

    But offsets sometimes have been criticized as providing illusory benefits.

    If foresters are able to sell carbon offsets for trees they would have planted on their own or if farmers are paid for practices they would have employed anyway, there's no new benefit to the environment, said Patrick McCully, executive director of International Rivers in Berkeley. He questions the efficacy of existing international offsets in developing countries.

    "It is very likely that most (of those) offsets are from business-as-usual projects," McCully said. "Because they do not represent emission reductions, most carbon offsets are junk 'subprime' carbon that allow big polluters to avoid cutting their emissions while tricking the public into believing action is being taken."

    The climate legislation advancing in the House of Representatives so far dodges the tough political questions of what kinds of activities could qualify as offsets. Instead, Reps. Henry Waxman, D-Los Angeles, and Ed Markey, D-Mass., the bill's lead drafters, decided to leave those decisions to the Environmental Protection Agency and a new offsets integrity advisory board that the measure would establish.

    Scientific Approach

    Offset skeptics have applauded that move, saying it would help ensure the validity of U.S. carbon-cutting programs.

    "It's the right approach to leave the scientific and technical decisions to the scientists," Figdor said. "Congress should not get into the weeds of some of the extremely technical issues with how they set up offset programs."

    But farmers are worried that their interests will be overlooked if the EPA is at the helm. Their advocates on the House Agriculture Committee are insisting that the legislation give the U.S. Department of Agriculture a seat at the table when it comes to judging potential carbon-offset programs.

    EPA officials "don't get agriculture. They don't get rural America," said Rep. Dennis Cardoza, D-Atwater (Merced County). "They form their views of the world in large cities. I'm not so sure the EPA can understand the dynamics of rural America."

    Farming groups also are pressing Congress to ensure that early adopters who have already launched carbon-cutting projects - like Joseph Farms - aren't disqualified from offset trading in the future.

    "Why in the world would you want to punish some innovative farmer?" asked Ken Nobisof the National Milk Producers Federation.