The Additionality Problem with Offsets: optimal contracts for carbon sequestration in forests
The Climate Change and Environment Seminar Series was hosted jointly by the Grantham Research Institute on Climate Change and the Environment, the Centre for Climate Change Economics and Policy (CCCEP), and the Department of Geography and Environment at the London School of Economics and Political Science (LSE).
Carbon Offsets from forest expansion or energy efficiency improvements in developing countries are frequently discussed as a means of reducing the costs of an emissions reduction policy. However, offsets have a basic problem stemming from asymmetric information. Sellers of offsets have private information about their opportunity costs, leading to concerns about whether offsets are additional.
\Non-additional offsets can undermine a cap-and-trade program, or, if the government purchases them directly, result in enormous government expenditures. We analyse contracts for carbon sequestration in forests that mitigate the asymmetric information problem. Landowners are offered a menu of two-part contracts that induces them to reveal their type (i.e., opportunity costs). Under this scheme, the government is able to identify ex post how much additional forest is contributed by each landowner and minimize ex ante its expenditures on carbon sequestration.
To explore the performance of the contracting scheme, we conduct a national-scale simulation using an econometric model of land-use change. The results indicate that for increases in forest area between 11 and 22 million acres, government expenditures are between $1 and $6 billion lower under the contracting approach compared to a uniform subsidy offered to all landowners. This compares to an increase in private opportunity costs between $66 and $705 million dollars under the contracts.
Other seminars Climate Change and Environment Series: