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The additionality problem with offsets: Optimal contracts for carbon sequestration in forests

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  • Mason, Charles F.
  • Plantinga, Andrew J.

Abstract

Carbon offsets are a frequently discussed tool for reducing the costs of an emissions reduction policy. However, offsets have a basic problem stemming from asymmetric information. Sellers of offsets have private information about their opportunity costs, leading to concerns about whether offsets are additional. Non-additional offsets can undermine a cap-and-trade program or, if the government purchases them directly, result in enormous government expenditures. We analyze contracts for carbon sequestration in forests that mitigate the asymmetric information problem. Landowners are offered a menu of two-part contracts that induces them to reveal their type. Under this scheme, the government is able to identify ex post how much additional forest each landowner contributes and minimize ex ante its expenditures on carbon sequestration. To explore the performance of the contracting scheme, we conduct a national-scale simulation using an econometric model of land-use change. The results indicate that for an increase in forest area of 61 million acres, government expenditures are $5.3 billion lower under the contracting approach compared to a uniform subsidy offered to all landowners. This compares to an increase in private opportunity costs of just $110 million dollars under the contracts. Thus, the contracting scheme is preferable from society's perspective.

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Bibliographic Info

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

Volume (Year): 66 (2013)
Issue (Month): 1 ()
Pages: 1-14

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Handle: RePEc:eee:jeeman:v:66:y:2013:i:1:p:1-14

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

Related research

Keywords: Carbon sequestration; Incentive contracting; Offsets; Additionality;

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Cited by:
  1. van Benthem, Arthur & Kerr, Suzi, 2013. "Scale and transfers in international emissions offset programs," Journal of Public Economics, Elsevier, vol. 107(C), pages 31-46.
  2. May, Peter H. & Soares-Filho, Britaldo Silveira & Strand, Jon, 2013. "How much is the Amazon worth ? the state of knowledge concerning the value of preserving amazon rainforests," Policy Research Working Paper Series 6668, The World Bank.
  3. Knut Einar Rosendahl & Jon Strand, 2012. "Emissions trading with offset markets and free quota allocations," Discussion Papers 719, Research Department of Statistics Norway.
  4. Arthur van Benthem & Suzi Kerr, 2010. "Optimizing Voluntary Deforestation Policy in the Face of Adverse Selection and Costly Transfers," Working Papers 10_04, Motu Economic and Public Policy Research.
  5. Elberg Nielsen, Anne Sofie & Plantinga, Andrew J. & Alig, Ralph J., 2014. "Mitigating climate change through afforestation: New cost estimates for the United States," Resource and Energy Economics, Elsevier, vol. 36(1), pages 83-98.
  6. Bård Harstad, 2013. "The Market for Conservation and Other Hostages," CESifo Working Paper Series 4296, CESifo Group Munich.
  7. Alix-Garcia, Jennifer & Wolff, Hendrik, 2014. "Payment for Ecosystem Services from Forests," IZA Discussion Papers 8179, Institute for the Study of Labor (IZA).

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