Adverse Selection and Emissions Offsets
Programs where firms sell emissions ``offsets'' to reduce their emissions continue to provide important complementsto traditional environmental regulations. However in many cases, particularly with current and prospective climate change policy, they continue to be very�controversial. The problem of adverse selection lies at the heart of this controversy, as critics of�offset programs continue to produce evidence that these projects are paying firms for actions they�would have undertaken anyway, and are not producing ``additional'' reductions. This paper explores�the theoretical sources of non-additional offsets. �An important distinction arises between sales that indicate adverse selection and those that reveal information about aggregate emissions levels.��
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