Designing Cap and Trade to Correct for Non-Additional Offsets

Duke Environmental and Energy Economics Working Paper EE 13-05

35 Pages Posted: 19 Jul 2014

See all articles by Brian C. Murray

Brian C. Murray

Duke University

Jonah Busch

Center for Global Development

Richard T. Woodward

Texas A&M University - Department of Agricultural Economics

Aaron Jenkins

Duke University - Nicholas Institute for Environmental Policy Solutions

Date Written: September 2013

Abstract

Offsets lower the cost of cap-and-trade programs but must be considered imperfect if they cannot exclude “non-additional” emissions reductions or sequestration gains that would have occurred in their absence. Non-additionality can be addressed by requiring project-level additionality tests, by adjusting the mandatory emissions cap, or by imposing a trading ratio requirement on offset credits. Additionality tests most completely put the welfare impact on non-additional abaters but are challenging to implement. A cap adjustment is simple but places the entire welfare impact on the capped sector. A trading ratio, also simple, spreads the welfare impact across the capped and uncapped sectors. A trading ratio may either increase or decrease the welfare of the uncapped sector. When the quantity of non-additional abatement is uncertain, a cap adjustment has lower aggregate costs than a trading ratio, whereas a trading ratio has less variance with respect to quantity of emissions reduced.

Suggested Citation

Murray, Brian C. and Busch, Jonah and Woodward, Richard T. and Jenkins, Aaron, Designing Cap and Trade to Correct for Non-Additional Offsets (September 2013). Duke Environmental and Energy Economics Working Paper EE 13-05. Available at SSRN: https://ssrn.com/abstract=2467670 or http://dx.doi.org/10.2139/ssrn.2467670

Brian C. Murray (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Jonah Busch

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

Richard T. Woodward

Texas A&M University - Department of Agricultural Economics ( email )

College Station, TX 77843-4218
United States
(409) 845-5864 (Phone)

Aaron Jenkins

Duke University - Nicholas Institute for Environmental Policy Solutions ( email )

Box 90328
Durham, NC 27708-0328
United States

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