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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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  • Mason, Charles F. & Plantinga, Andrew J., 2013. "The additionality problem with offsets: Optimal contracts for carbon sequestration in forests," Journal of Environmental Economics and Management, Elsevier, vol. 66(1), pages 1-14.
  • Handle: RePEc:eee:jeeman:v:66:y:2013:i:1:p:1-14
    DOI: 10.1016/j.jeem.2013.02.003
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    Cited by:

    1. Stefanski, Stephanie F. & Shi, Xiangying & Hall, Jefferson S. & Hernandez, Andres & Fenichel, Eli P., 2015. "Teak–cattle production tradeoffs for Panama Canal Watershed small scale producers," Forest Policy and Economics, Elsevier, vol. 56(C), pages 48-56.
    2. Harstad, Bård, 2016. "The market for conservation and other hostages," Journal of Economic Theory, Elsevier, vol. 166(C), pages 124-151.
    3. Woodward, Richard T. & Newburn, David A. & Mezzatesta, Mariano, 2016. "Additionality and reverse crowding out for pollution offsets in water quality trading," Ecological Economics, Elsevier, vol. 128(C), pages 224-231.
    4. Alice Favero & Robert Mendelsohn & Brent Sohngen, 2016. "Carbon Storage and Bioenergy: Using Forests for Climate Mitigation," Working Papers 2016.09, Fondazione Eni Enrico Mattei.
    5. 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.
    6. De Cara, Stéphane & Henry, Loïc & Jayet, Pierre-Alain, 2018. "Optimal coverage of an emission tax in the presence of monitoring, reporting, and verification costs," Journal of Environmental Economics and Management, Elsevier, vol. 89(C), pages 71-93.
    7. Strand, Jon, 2016. "Mitigation incentives with climate finance and treaty options," Energy Economics, Elsevier, vol. 57(C), pages 166-174.
    8. 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.
    9. Chiroleu-Assouline, Mireille & Poudou, Jean-Christophe & Roussel, Sébastien, 2018. "Designing REDD+ contracts to resolve additionality issues," Resource and Energy Economics, Elsevier, vol. 51(C), pages 1-17.
    10. 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.
    11. Gren, Ing-Marie & Zeleke, Abenezer Aklilu, 2016. "Policy design for forest carbon sequestration: A review of the literature," Forest Policy and Economics, Elsevier, vol. 70(C), pages 128-136.
    12. Knut Rosendahl & Jon Strand, 2015. "Emissions Trading with Offset Markets and Free Quota Allocations," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 61(2), pages 243-271, June.
    13. repec:eee:resene:v:50:y:2017:i:c:p:124-134 is not listed on IDEAS
    14. Charles F. Mason, 2018. "Optimal Contracts for Discouraging Deforestation with Risk Averse Agents," CESifo Working Paper Series 7067, CESifo Group Munich.
    15. Bento, Antonio & Ho, Benjamin & Ramirez-Basora, Mario, 2015. "Optimal monitoring and offset prices in voluntary emissions markets," Resource and Energy Economics, Elsevier, vol. 41(C), pages 202-223.
    16. Strand,Jon & Siddiqui,Sauleh, 2015. "Value of improved information about forest protection values, with application to rainforest valuation," Policy Research Working Paper Series 7423, The World Bank.
    17. 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.
    18. Alice Favero & Robert Mendelsohn, 2014. "Using Markets for Woody Biomass Energy to Sequester Carbon in Forests," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(1), pages 75-95.
    19. Alix-Garcia, Jennifer & Wolff, Hendrik, 2014. "Payment for Ecosystem Services from Forests," IZA Discussion Papers 8179, Institute for the Study of Labor (IZA).
    20. repec:spr:climat:v:144:y:2017:i:2:d:10.1007_s10584-017-2034-9 is not listed on IDEAS

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