Baselines in Environmental Markets: Tradeoffs Between Cost and Additionality
AbstractOver the past few decades, conservation programs have provided incentives to farmers to make production decisions that place a priority on environmental improvements in addition to production of commodities (Claassen et al., 2007). More recently, markets have been developed or proposed that allow farmers to sell “credits” for environmental improvements in water quality, carbon sequestration, wetlands restoration, and other areas. These markets use an environmental baseline to help determine whether the proposed improvements qualify for market credits, and, if so, the number that should be awarded. Selection of a baseline emissions level is often a critical and contentious element of program design for carbon or water-quality credit markets. Baselines help ensure that credits generated for sale through markets are “additional” (i.e., the environmental improvements qualifying for offset credits would not have taken place in the absence of the market or program incentive). Additionality is frequently cited as a requirement in defining the integrity of environmental improvement credits (Three-Regions Offsets Working Group, 2010). Giving credits or payments for changes that have already been implemented, or are likely to be implemented soon even in the absence of the program, can undermine the environmental gains expected from the program. Due to the complexity and costs associated with defining, measuring, and verifying environmental baseline levels across heterogeneous landscapes, program managers may face a tradeoff between the precision with which changes in environmental performance can be estimated and the cost of refining those estimates. Balancing these two considerations is often the motivation behind selection of a particular baseline in environmental market design. Other market design considerations include those related to program eligibility restrictions, scope of measurement (i.e., accounting for leakage), offset permanence, and measurement uncertainty.1 This brief focuses exclusively on baselines to clarify their role in the larger context of offset market design.
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Date of creation: Feb 2012
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Demand and Price Analysis; Environmental Economics and Policy;
This paper has been announced in the following NEP Reports:
- NEP-AGR-2013-01-07 (Agricultural Economics)
- NEP-ALL-2013-01-07 (All new papers)
- NEP-ENE-2013-01-07 (Energy Economics)
- NEP-ENV-2013-01-07 (Environmental Economics)
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