 What is the Optimal Offsets Discount under a Second-Best Cap & Trade Policy?Heather Klemick No 280907, National Center for Environmental Economics-NCEE Working Papers from United States Environmental Protection Agency (EPA) Abstract: Despite 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. Keywords: Environmental Economics and Policy; International Relations/Trade (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ags:nceewp:280907 Access Statistics for this paper More papers in National Center for Environmental Economics-NCEE Working Papers from United States Environmental Protection Agency (EPA) Contact information at EDIRC. |
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