Assessing the Potential of Climate Offset Programs

Several researchers have suggested using some type of offset program as a way of getting selected countries or sectors to reduce greenhouse gas emissions. The reason for this interest is that offset programs have the potential to reduce the costs of achieving a given environmental target. For our purposes, one can think of an offset as a property right generated outside of the main regulatory system, which can then be used in the regulatory system to reduce the compliance burden and compliance costs for affected parties. This paper examines three international project-based mechanisms that have been used in the context of climate change. Two are offset programs implemented under the Kyoto Protocol - the Clean Development Mechanism and Joint Implementation. The third is a pilot program designed to test the implementation of these offset programs - Activities Implemented Jointly. Our purpose here is to provide an overview of these programs by reviewing the available literature. We find that the design of offsets programs will typically involve a tradeoff between cost savings and environmental quality, and that offset projects may reduce environmental quality because of problems with additionality and leakage. Moreover, there are likely to be significant challenges in scaling up offset programs. We believe that offsets will probably continue to play a role in future greenhouse gas mitigation strategies. Given their potential for reducing environmental quality and their relatively high administrative and transaction costs, offsets are not a panacea. However, evidence suggests that they have the potential to lower mitigation costs, and that there may be some constructive ways to deal with environmental quality concerns.