The Effect of Allowing Pollution Offsets with Imperfect Enforcement

Abstract

Several pollution control regimes, including climate change policies, allow polluters in one sector subject to an emissions cap to offset excessive emissions in that sector with pollution abatement in another sector. The government may often find it more costly to verify offset claims than to verify compliance with emissions caps, and concerns about difficulties in enforcement may lead regulators to restrict the use of offsets. In this paper, we demonstrate that allowing offsets may increase pollution abatement and reduce illegal pollution, even if the government has a fixed enforcement budget. We explore the circumstances that may make it preferable to allow offsets when enforcement is costly.

Keywords: Environmental Law and Economics, Climate Change, Emission Trading System

JEL Classification: K32, K42, Q53, Q54