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On the Importance of Baseline Setting in Carbon Offsets Markets

Listed author(s):
  • Bento, Antonio

    ()

    (University of Southern California, Sol Price School of Public Policy and NBER)

  • Kanbur, Ravi
  • Leard, Benjamin

Incorporating carbon offsets in the design of cap-and-trade programs remains a controversial issue because of its potential unintended impacts on emissions. At the heart of this discussion is the issue of crediting of emissions reductions. Projects can be correctly, over- or under-credited for their actual emissions reductions. We develop a unified framework that considers the supply of offsets within a cap-and-trade program that allows us to compare the relative impact of over-credited offsets and under-credited emissions reductions on overall emissions under different levels of baseline stringency and carbon prices. In the context of a national carbon pricing scheme that includes offsets, we find that the emissions impacts of over-credited offsets can be fully balanced out by under-credited emissions reductions without sacrificing a significant portion of the overall supply of offsets, provided emissions baselines are stringent enough. In the presence of high predicted business-as-usual (BAU) emissions uncertainty or low carbon prices, to maintain the environmental integrity of the program, baselines need to be set at stringent levels, in some cases below 50 percent of predicted BAU emissions. As predicted BAU emissions uncertainty declines or as the carbon market achieves higher equilibrium prices, however, less stringent baselines can balance out the emissions impacts of over-credited offsets and under-credited emissions reductions. These results imply that to maintain environmental integrity of offsets programs, baseline stringency should be tailored to project characteristics and market conditions that influence the proportion of over-credited offsets to under-credited emissions reductions.

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File URL: http://www.rff.org/research/publications/importance-baseline-setting-carbon-offsets-markets
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Paper provided by Resources For the Future in its series Discussion Papers with number dp-16-11.

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Date of creation: 21 Mar 2016
Handle: RePEc:rff:dpaper:dp-16-11
Contact details of provider: Web page: http://www.rff.org

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  1. Mansanet-Bataller, Maria & Chevallier, Julien & Hervé-Mignucci, Morgan & Alberola, Emilie, 2011. "EUA and sCER phase II price drivers: Unveiling the reasons for the existence of the EUA-sCER spread," Energy Policy, Elsevier, vol. 39(3), pages 1056-1069, March.
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  10. Erickson, Peter & Lazarus, Michael & Spalding-Fecher, Randall, 2014. "Net climate change mitigation of the Clean Development Mechanism," Energy Policy, Elsevier, vol. 72(C), pages 146-154.
  11. Fell, Harrison & Burtraw, Dallas & Morgenstern, Richard D. & Palmer, Karen L., 2012. "Soft and hard price collars in a cap-and-trade system: A comparative analysis," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 183-198.
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  14. repec:dau:papers:123456789/5109 is not listed on IDEAS
  15. Bento, Antonio M. & Kanbur, Ravi & Leard, Benjamin, 2015. "Designing efficient markets for carbon offsets with distributional constraints," Journal of Environmental Economics and Management, Elsevier, vol. 70(C), pages 51-71.
  16. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
  17. Warnecke, Carsten & Wartmann, Sina & Höhne, Niklas & Blok, Kornelis, 2014. "Beyond pure offsetting: Assessing options to generate Net-Mitigation-Effects in carbon market mechanisms," Energy Policy, Elsevier, vol. 68(C), pages 413-422.
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