Designing Cap and Trade to Account for "Imperfect" Offsets

The use of offsets can potentially improve a cap-and-trade system by lowering the overall cost of compliance, encourage mitigation from outside of the cap, and function as a bridge strategy, giving the regulated sectors time to innovate new low-carbon technologies and business plans. But offset provisions can be imperfect, and decision makers must appreciate the implications of these flaws and design the national offset program accordingly. This paper discusses three policy options for addressing offset integrity issues that can cause effective aggregate abatement to fall below the optimum level set by a compliance cap, and assesses the efficiency and welfare implications—for offset buyers and suppliers—of these policy options.

Author(s): Brian C. Murray and W. Aaron Jenkins

Published: September 2010

download: working paper (.pdf) >