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Baselines in Environmental Markets: Tradeoffs Between Cost and Additionality

  • Marshall, Elizabeth P.
  • Weinberg, Marca

Over 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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File URL: http://purl.umn.edu/138922
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Paper provided by United States Department of Agriculture, Economic Research Service in its series Economic Brief with number 138922.

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Date of creation: Feb 2012
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Handle: RePEc:ags:uerseb:138922
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  1. North, Douglass C., 1989. "Institutions and economic growth: An historical introduction," World Development, Elsevier, vol. 17(9), pages 1319-1332, September.
  2. Qureshi, Muhammad Ejaz & Connor, Jeffery D. & Kirby, Mac & Mainuddin, Mohammed, 2002. "Economic assessment of acquiring water for environmental flows in the Murray Basin," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(3), September.
  3. Booker J. F. & Young R. A., 1994. "Modeling Intrastate and Interstate Markets for Colorado River Water Resources," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 66-87, January.
  4. McCann, Laura & Colby, Bonnie & Easter, K. William & Kasterine, Alexander & Kuperan, K.V., 2005. "Transaction cost measurement for evaluating environmental policies," Ecological Economics, Elsevier, vol. 52(4), pages 527-542, March.
  5. Hearne, R.R. & Easter, K.W., 1995. "Water Allocation and Water Markets. An Analysis of Gains-from-Trade in Chile," Papers 315, World Bank - Technical Papers.
  6. Heidecke, Claudia & Kuhn, Arnim & Klose, Stephan, 2008. "Water pricing options for the Middle Drâa River Basin in Morocco," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 2(2), September.
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