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The trouble with voluntary emissions trading: Uncertainty and adverse selection in sectoral crediting programs☆☆Special thanks to Suzi Kerr, Lawrence Goulder, Michael Wara, Arthur van Benthem, Lee Schipper, Chris Barrington-Leigh and two anonymous reviewers for helpful suggestions and comments on earlier drafts. I appreciate assistance with the predictive modeling from Mark Bryan and Vera Troeger. I also thank Sonny Kim and Kenny Gillingham for assistance with the GCAM modeling runs, and the Joint Global Change Research Institute for making GCAM available. This research was completed while I was an assistant professor in the Department of Geography and McGill School of Environment, McGill University. I acknowledge support from a U.S. Department of Transportation Eisenhower Graduate Fellowship, a William C. and Jeanne M. Landreth IPER Fellowship, and a David and Lucille Packard Foundation Stanford Graduate Fellowship

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  • Millard-Ball, Adam
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    Abstract

    Sectoral crediting has been proposed as a way to scale up project-level carbon offset programs, and provide sector-wide incentives for developing countries to reduce greenhouse gas emissions. However, simulations presented here suggest that information asymmetries and large uncertainties in predicting counterfactual business-as-usual (BAU) emissions are likely to render sectoral crediting an extremely unattractive mechanism in practice, at least for the transportation sector. The regulator faces a tradeoff between efficiency and transfers/environmental damage when setting the crediting baseline in relation to uncertain BAU emissions. A generous baseline promotes efficiency, as more developing countries participate and implement abatement measures. However, a generous baseline also produces large volumes of non-additional offsets, which lead to either increased global emissions, or transfers between developed and developing countries if developed country emission reduction targets are made more stringent in order to leave global emissions unchanged. I show that any crediting baseline that encourages a non-negligible number of countries to participate in a sectoral crediting mechanism results in environmental damage or transfers that are likely to be too high to be politically feasible.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

    Volume (Year): 65 (2013)
    Issue (Month): 1 ()
    Pages: 40-55

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    Handle: RePEc:eee:jeeman:v:65:y:2013:i:1:p:40-55

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    Web page: http://www.elsevier.com/locate/inca/622870

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    Keywords: Adverse selection; Risk-sharing; Carbon offsets; Sectoral crediting; Transportation;

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    1. Son H. Kim, Jae Edmonds, Josh Lurz, Steven J. Smith, and Marshall Wise, 2006. "The objECTS Framework for integrated Assessment: Hybrid Modeling of Transportation," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 63-92.
    2. Montero, Juan-Pablo, 2000. "Optimal design of a phase-in emissions trading program," Journal of Public Economics, Elsevier, vol. 75(2), pages 273-291, February.
    3. van Benthem, Arthur A. & Kerr, Suzi, 2010. "Optimizing Voluntary Deforestation Policy in the Face of Adverse Selection and Costly Transfers," 2010 Conference, August 26-27, 2010, Nelson, New Zealand 96813, New Zealand Agricultural and Resource Economics Society.
    4. Linderoth, Hans, 2002. "Forecast errors in IEA-countries' energy consumption," Energy Policy, Elsevier, vol. 30(1), pages 53-61, January.
    5. Millard-Ball, Adam & Ortolano, Leonard, 2010. "Constructing carbon offsets: The obstacles to quantifying emission reductions," Energy Policy, Elsevier, vol. 38(1), pages 533-546, January.
    6. Suzi Kerr & Adam Millard-Ball, 2012. "Cooperation to Reduce Developing Country Emissions," Working Papers 12_03, Motu Economic and Public Policy Research.
    7. Zhang, Chi & Shukla, P.R. & Victor, David G. & Heller, Thomas C. & Biswas, Debashish & Nag, Tirthankar, 2006. "Baselines for carbon emissions in the Indian and Chinese power sectors: Implications for international carbon trading," Energy Policy, Elsevier, vol. 34(14), pages 1900-1917, September.
    8. Richard Baron & Barbara Buchner & Jane Ellis, 2009. "Sectoral Approaches and the Carbon Market," OECD/IEA Climate Change Expert Group Papers 2009/3, OECD Publishing.
    9. Fischer, Carolyn, 2004. "Project-Based Mechanisms for Emissions Reductions: Balancing Trade-offs with Baselines," Discussion Papers dp-04-32, Resources For the Future.
    10. Winebrake, James J. & Sakva, Denys, 2006. "An evaluation of errors in US energy forecasts: 1982-2003," Energy Policy, Elsevier, vol. 34(18), pages 3475-3483, December.
    11. Suzi Kerr & Andrew Sweet, 2008. "Inclusion of Agriculture and Forestry in a Domestic Emissions Trading Scheme: New Zealand's Experience to Date," Working Papers 08_04, Motu Economic and Public Policy Research.
    12. Juan-Pablo Montero, 1999. "Voluntary Compliance with Market-Based Environmental Policy: Evidence from the U.S. Acid Rain Program," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 998-1033, October.
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