What is the Optimal Offsets Discount under a Second-Best Cap & Trade Policy?
AbstractDespite concerns about additionality, leakage, permanence, and verification, carbon offsets have been proposed as a core component of recent cap-and-trade proposals in order to contain costs, involve uncapped sectors in GHG reduction goals, and build mitigation capacity in developing countries. Discounting the value of offsets relative to GHG allowances (i.e., setting a trading ratio less than one) has been suggested as one approach to protect the integrity of the cap. This paper presents a simple theoretical model to derive the optimal trading ratio between offsets and allowances when coverage of emissions by the cap-and-trade and offsets programs is incomplete. I discuss the relationship between the trading ratio and the GHG cap and offsets baseline, which jointly determine the stringency of the policy. While a discount for leakage is always optimal, one notable result is that if “hot air” is introduced by setting either the baseline cap or the cap too leniently, an extra discount is warranted.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Center for Environmental Economics, U.S. Environmental Protection Agency in its series NCEE Working Paper Series with number 201204.
Length: 27 pages
Date of creation: Jul 2012
Date of revision: Jul 2012
Contact details of provider:
Postal: 1200 Pennsylvania Ave., N.W., Washington, D.C. 20460
Web page: http://yosemite.epa.gov/ee/epa/eed.nsf/webpages/homepage
More information through EDIRC
offsets; additionality; leakage; baseline; cap and trade; second-best theory;
Find related papers by JEL classification:
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-14 (All new papers)
- NEP-ENE-2012-07-14 (Energy Economics)
- NEP-ENV-2012-07-14 (Environmental Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Aldy, Joseph E. & Pizer, William A., 2011.
"The Competitiveness Impacts of Climate Change Mitigation Policies,"
Working Paper Series
rwp11-047, Harvard University, John F. Kennedy School of Government.
- Joseph E. Aldy & William A. Pizer, 2011. "The Competitiveness Impacts of Climate Change Mitigation Policies," NBER Working Papers 17705, National Bureau of Economic Research, Inc.
- Aldy, Joseph Edgar & Pizer, William, 2011. "The Competitiveness Impacts of Climate Change Mitigation Policies," Scholarly Articles 5688779, Harvard Kennedy School of Government.
- Marshall, Liz & Kelly, Alexia, 2010. "The Time Value of Carbon and Carbon Storage: Clarifying the terms and the policy implications of the debate," MPRA Paper 27326, University Library of Munich, Germany.
- Brian C. Murray & Bruce A. McCarl & Heng-Chi Lee, 2004.
"Estimating Leakage from Forest Carbon Sequestration Programs,"
UWO Department of Economics Working Papers
20043, University of Western Ontario, Department of Economics, revised Mar 2003.
- Brian C. Murray & Bruce A. McCarl & Heng-Chi Lee, 2004. "Estimating Leakage from Forest Carbon Sequestration Programs," Land Economics, University of Wisconsin Press, vol. 80(1), pages 109-124.
- James B. Bushnell, 2010.
"The Economics of Carbon Offsets,"
NBER Working Papers
16305, National Bureau of Economic Research, Inc.
- N. Wear, David & Murray, Brian C., 2004. "Federal timber restrictions, interregional spillovers, and the impact on US softwood markets," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 307-330, March.
- Gan, Jianbang & McCarl, Bruce A., 2007. "Measuring transnational leakage of forest conservation," Ecological Economics, Elsevier, vol. 64(2), pages 423-432, December.
- 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.
- Shortle, James S., 1987. "Allocative Implications Of Comparisons Between The Marginal Costs Of Point And Nonpoint Source Pollution Abatement," Northeastern Journal of Agricultural and Resource Economics, Northeastern Agricultural and Resource Economics Association, vol. 16(1), April.
- 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.
- Harrison Fell & Dallas Burtraw & Richard Morgenstern & Karen Palmer, 2012.
"Climate Policy Design with Correlated Uncertainties in Offset Supply and Abatement Cost,"
University of Wisconsin Press, vol. 88(3), pages 589-611.
- Fell, Harrison & Burtraw, Dallas & Morgenstern, Richard & Palmer, Karen, 2011. "Climate Policy Design with Correlated Uncertainties in Offset Supply and Abatement Cost," Discussion Papers dp-10-01-rev, Resources For the Future.
- Knut Einar Rosendahl & Jon Strand, 2014.
"Emissions Trading with Offset Markets and Free Quota Allocations,"
CESifo Working Paper Series
4603, CESifo Group Munich.
- Rosendahl, Knut Einar & Strand, Jon, 2012. "Emissions trading with offset markets and free quota allocations," Policy Research Working Paper Series 6281, The World Bank.
- Knut Einar Rosendahl & Jon Strand, 2012. "Emissions trading with offset markets and free quota allocations," Discussion Papers 719, Research Department of Statistics Norway.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Cynthia Morgan).
If references are entirely missing, you can add them using this form.