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Carbon allowances and the demand for offsets: a comprehensive assessment of imperfect substitutes

Published online by Cambridge University Press:  10 February 2015

Noah C. Dormady  and
Gabriel Englander Open the ORCID record for Gabriel Englander [Opens in a new window]
Noah C. Dormady
Affiliation:
John Glenn College of Public Affairs, Ohio State University, USA E-mail: dormady.1@osu.edu
Gabriel Englander
Affiliation:
Department of Economics, Ohio State University, USA
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Abstract

The efficient use of market-based policy instruments is an area of increasing importance as scholars and policymakers work to balance effective climate policy with economic growth. Carbon allowances and carbon offsets, despite being statutorily substitutable, behave in practice like imperfect substitutes. This paper provides a synthesis of extant work, market data and the regulatory frameworks of the world’s major carbon markets, and provides a comprehensive assessment of the drivers of demand for carbon offsets. It also provides a detailed assessment of the process through which international carbon offsets are produced, the UN’s Clean Development Mechanism. Demand for carbon offsets is heavily influenced by key programme design parameters that are specific to carbon market design and its implementation. These design parameters heavily influence the degree to which transaction costs, regulatory uncertainty and risk factor into the decisions of firms operating within the carbon trading programme. This paper also identifies key extra-statutory drivers that are outside of the policymaker’s control, which should be considered in both the policy design and the implementation process. This paper provides an instructive set of guiding criteria for policymakers and scholars for the design of future market-based environmental policy.

Keywords

carbon marketscarbon offsetsclimate changeEuropean Union Emissions Trading Systempolicy designQ58Q54Q48
Type
Field Essay
Information
Journal of Public Policy , Volume 36 , Issue 1 , March 2016 , pp. 139 - 167
Copyright
© Cambridge University Press, 2015 

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