The additionality problem with offsets: Optimal contracts for carbon sequestration in forests

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.     

Economics of additionality for environmental services from agriculture

We present a model of additionality for offsets sold from agriculture to industrial sector sources regulated by cap-and-trade. We consider a potential policy where agricultural sources would not be covered by cap-and-trade requirements but would be eligible to receive offsets whenever their emissions fall below a policy-specified baseline, and would not be penalized for emissions above their baseline. Major results are: (1) The optimal baseline should be set above the average counterfactual emissions of participating farms, an unexpected result that has been missing from the literature. (2) The optimal trading ratio should be greater than one (a ton of offsets counts for less than a ton of covered emissions) even under emissions certainty. Previous research has justified such trading ratios by emissions uncertainty. (3) Emissions uncertainty does not justify a change in the baseline if the accompanying emissions model is unbiased. (4) An optimal combination of policies is to subsidize offsets and tighten the baseline relative to the no-subsidy case.     

Strategic climate policy with offsets and incomplete abatement: Carbon taxes versus cap-and-trade

This paper provides a first analysis of a “policy bloc” of fossil fuel importers which implements an optimal climate policy, faces a (non-policy) fringe of other fuel importers, and an exporter bloc, and purchases offset from the fringe. We compare a carbon tax and a cap-and-trade scheme for the policy bloc, in either case accompanied by an efficient offset mechanism for reducing emissions in the fringe. The policy bloc is shown to prefer a tax over a cap, since only a tax reduces the fuel export price and by more when the policy bloc is larger. Offsets are also more favorable to the policy bloc under a tax than under a cap. The optimal offset price under a carbon tax is below the tax rate, while under a cap and free quota trading the offset price must equal the quota price. The domestic carbon and offset prices are both higher under a tax than under a cap when the policy bloc is small. When the policy bloc is larger, the offset price can be higher under a cap. Fringe countries gain by mitigation in the policy bloc, more under a carbon tax since the fuel import price is lower.     

Co-benefits and additionality of the clean development mechanism: An empirical analysis

The Clean Development Mechanism (CDM) allows industrialized countries to comply with the Kyoto Protocol by using carbon offsets from developing countries. There are two puzzles within this carbon market: additionality (the proposed activity would not have occurred in its absence) and co-benefits (the project has other environmental benefits besides climate mitigation). This paper proposes an econometric approach to evaluate the CDM effect on sulfur dioxide emission reductions and assess its additionality indirectly. Our empirical model is applied to China's emissions at the prefecture level. We found that the CDM does not have a statistically significant effect in lowering sulfur dioxide emissions. This result casts doubt on additionality of these CDM activities, that is, they would have happened anyway.     

Increasing the impact of collective incentives in payments for ecosystem services

Collective payments for ecosystem services (PES) programs make payments to groups, conditional on specified aggregate land-management outcomes. Such collective contracting may be well suited to settings with communal land tenure or decision-making. Given that collective contracting does not require costly individual-level information on outcomes, it may also facilitate conditioning on additionality (i.e., conditioning payments upon clearly improved outcomes relative to baseline). Yet collective contracting often suffers from free-riding, which undermines group outcomes and may be exacerbated or ameliorated by PES designs. We study impacts of conditioning on additionality within a number of collective PES designs. We use a framed field-laboratory experiment with participants from a new PES program in Mexico. Because social interactions are critical within collective processes, we assess the impacts from conditioning on additionality given: (1) group participation in contract design, and (2) a group coordination mechanism. Conditioning on above-baseline outcomes raised contributions, particularly among initially lower contributors. Group participation in contract design increased impact, as did the coordination mechanism.     

Can pollution tax rebates protect low-wage earners?

Pollution taxes are believed to burden low-income households that spend a greater than average share of income on pollution-intensive goods. Some proposals offset that effect by returning revenue to low-income workers via reduced labor tax. We build analytical general equilibrium models with both high-skilled and low-skilled labor, and we solve for the change in real net wage of each group. Decomposition shows the separate effects of the tax rebate, higher product prices, and the changes in relative wage rates. We also include numerical examples. Even though the pollution tax injures both types of labor, in most cases we find that returning all of the revenue to low-skilled workers is still not enough to offset higher product prices. Changes in relative wage rates may further hurt low-skilled labor. Protecting low-income workers is possible in this model only if they are defined as those below a relatively low wage threshold, but we discuss many possible elaborations of this model that could affect those results.     

Inefficient environmental instruments and the gains from trade

The primary result from the trade and environment literature is that countries never lose from trade liberalization as long as they implement optimal pollution targets or if they hold emissions constant. These results are derived in models where the regulators use efficient instruments such as tradable permits or emission taxes. Regulators, however, continue to prefer command and control instruments. I show that regulation under these inefficient instruments (such as design standards or concentration standards) can lead to net losses under trade liberalization even if emissions are optimally adjusted for trade. Furthermore, holding the line on emissions need not guarantee welfare improvements either. The problem is that institutional distortions, the excess costs of inefficient instruments, can rise with trade and offset the material gains from trade. Hence the presumption that we can achieve gains from trade by considering only the level of emissions fails to recognize that the mode of regulation also matters.     

The Al Gore effect: An Inconvenient Truth and voluntary carbon offsets

This paper examines the relationship between climate change awareness and household behavior by testing whether Al Gore's documentary An Inconvenient Truth caused an increase in the purchase of voluntary carbon offsets. I find that in the two months following the film's release, zip codes within a 10-mile radius of a zip code where the film was shown experienced a 50 percent relative increase in the purchase of voluntary carbon offsets. During other times, offset purchasing patterns for zip codes inside the 10-mile radius were similar to the patterns of zip codes outside the 10-mile radius. There is, however, little evidence that individuals who purchased an offset due to the film purchased them again a year later.     

Urban expansion and its contribution to the regional carbon emissions: Using the model based on the population density distribution

The method is used for calculating regional urban area dynamics and the resulting carbon emissions (from the land-conversion) for the period of 1980 till 2050 for the eight world regions. This approach is based on the fact that the spatial distribution of population density is close to the two-parametric Γ-distribution [Kendall, M.G., Stuart, A., 1958. The Advanced Theory of Statistics, vol. 1.2. Academic Press, New York; Vaughn, R., 1987. Urban Spatial Traffic Patterns, Pion, London]. The developed model provides us with the scenario of urbanisation, based on which the regional and world dynamics of carbon emissions and export from cities, and the annual total urban carbon balance are estimated. According to our estimations, world annual emissions of carbon as a result of urbanisation increase up to 1.25 GtC in 2005 and begin to decrease afterwards. If we compare the emission maximum with the annual emission caused by deforestation, 1.36 GtC per year, then we can say that the role of urbanised territories (UT) in the global carbon balance is of a comparable magnitude. Regarding the world annual export of carbon from UT, we observe its monotonous growth by three times, reaching 505 MtC. The latter, is comparable to the amount of carbon transported by rivers into the ocean (196–537 MtC). The current model shows that urbanisation is inhibited in the interval 2020–2030, and by 2050 the growth of urbanised areas would almost stop. Hence, the total balance, being almost constant until 2000, then starts to decrease at an almost constant rate. By the end of the XXI century, the total carbon balance will be equal to zero, with the exchange flows fully balanced, and may even be negative, with the system beginning to take up carbon from the atmosphere, i.e., becomes a “sink”. The regional dynamics is somewhat more complex, i.e., some regions, like China, Asia and Pacific are being active sources of Carbon through the studied period, while others are changing from source to sink or continue to be neutral in respect the GCC.     

Intra-industry trade in intermediate products, pollution and internationally increasing returns

This paper examines the relationship between intra-industry trade in intermediate products, pollution and increasing returns. We develop a two-country model in which production occurs in two stages, final and intermediate good production. Intermediate goods are produced under monopolistic competition and final good production exhibits increasing returns with respect to the number of varieties of intermediates. Pollution occurs in the production of the final good when polluting intermediates are used. We analyze the effects of international trade in intermediate products on pollution, output and welfare under an endogenous tax scenario and with two types of pollution functions. The results show that, because of increasing returns, international trade either leads to lower total pollution in each country or lower pollution per unit of output in at least one country. In addition, intra-industry trade causes countries to import the environmental quality of their trading partners.     

A model on the carbon cycling in Lake Taihu, China

A model of the carbon cycling in Lake Taihu was developed based on the previous developed model EcoTaihu Model, which couples the hydrology, the nutrient cycling and a number of biological processes. The carbon cycling model (abbreviated CCM) has in addition to the states variables of the EcoTaihu Model, the carbon in phytoplankton, zooplankton, fish, macroplant, hydrogen carbonate carbon, carbonate carbon, dissolved carbon, abiotic organic carbon in water, organic carbon in sediment, soluble organic carbon in pore water, inorganic carbon in sediments, soluble inorganic carbon in pore water and pH. The calibration and validation of the CCM showed that the model results are in good accordance with the observations (from the period February17 to December. 5, 2003). It implies that the model can be used to assess the variation of the carbon dioxide flux at the water-air interface, and to find the pH value of the lake water as function of time. According to the model, the carbon dioxide flux at the water-air interface has clear, diurnal variations. Eutrophied water is a sink for the atmospheric carbon dioxide due to the phytosynthesis during the summer. Due to the terrestrial input of carbon to the lake, Lake Taihu is, however, a source of atmospheric carbon dioxide. The total annual flux is almost equal to the terrestrial input of carbon to the lake.     

Crediting uncertain ecosystem services in a market

The margin of safety (MOS) approach is an increasingly prevalent tool for ensuring the integrity of market-based programs for providing ecosystem services. Over-crediting is reduced by setting aside mean estimates of uncertain services in favor of a more conservative estimate. Like many environmental policy problems, ecosystem service markets involve the aggregation of uncertainty over multiple scales, e.g. from landowners to market intermediaries to the overall market. We examine how the MOS instrument affects, and is affected by, an ecosystem services market. We show that the common bottom-up approach of imposing risk preferences at a local, disaggregated level—held over from earlier development in the context of toxics and command and control-style health risk regulation—leads to several unintended consequences. Furthermore, discounting landowner services can actually increase their profits, conditional on the elasticity of credit demand. We illustrate theoretical insights with an empirical application to greenhouse gas offset crediting in agriculture.     

Economic Growth and Biodiversity Loss in an Age of Tradable Permits

Abstract:  Tradable permits are increasingly becoming part of environmental policy and conservation programs. The efficacy of tradable permit schemes in addressing the root cause of environmental decline—economic growth—will not be achieved unless the schemes cap economic activity based on ecological thresholds. Lessons can be learned from the largest tradable permit scheme to date, emissions trading now being implemented with the Kyoto Protocol. The Kyoto Protocol caps neither greenhouse gas emissions at a level that will achieve climate stability nor economic growth. If patterned after the Kyoto Protocol, cap-and-trade schemes for conservation will not ameliorate biodiversity loss either because they will not address economic growth. In response to these failures to cap economic growth, professional organizations concerned about biodiversity conservation should release position statements on economic growth and ecological thresholds. The statements can then be used by policy makers to infuse these positions into the local, national, and international environmental science-policy process when these schemes are being developed. Infusing language into the science-policy process that calls for capping economic activity based on ecological thresholds represents sound conservation science. Most importantly, position statements have a greater potential to ameliorate biodiversity loss if they are created and released than if this information remains within professional organizations because there is the potential for these ideas to be enacted into law and policy.