Climatic Change

, Volume 137, Issue 3–4, pp 625–637 | Cite as

On the importance of baseline setting in carbon offsets markets

  • Antonio Bento
  • Ravi Kanbur
  • Benjamin LeardEmail author


Incorporating carbon offsets in the design of cap-and-trade programs remains a controversial issue because of its potential unintended impacts on emissions. At the heart of this discussion is the issue of crediting of emissions reductions. Projects can be correctly, over- or under-credited for their actual emissions reductions. We develop a unified framework that considers the supply of offsets within a cap-and-trade program that allows us to compare the relative impact of over-credited offsets and under-credited emissions reductions on overall emissions under different levels of baseline stringency and carbon prices. In the context of a national carbon pricing scheme that includes offsets, we find that the emissions impacts of over-credited offsets can be fully balanced out by under-credited emissions reductions without sacrificing a significant portion of the overall supply of offsets, provided emissions baselines are stringent enough. In the presence of high predicted business-as-usual (BAU) emissions uncertainty or low carbon prices, to maintain the environmental integrity of the program, baselines need to be set at stringent levels, in some cases below 50 percent of predicted BAU emissions. As predicted BAU emissions uncertainty declines or as the carbon market achieves higher equilibrium prices, however, less stringent baselines can balance out the emissions impacts of over-credited offsets and under-credited emissions reductions. These results imply that to maintain environmental integrity of offsets programs, baseline stringency should be tailored to project characteristics and market conditions that influence the proportion of over-credited offsets to under-credited emissions reductions.


Carbon offsets Crediting Environmental integrity 

Supplementary material

10584_2016_1685_MOESM1_ESM.pdf (705 kb)
(PDF 704 KB)


  1. Basu P (2009) Forestry: a green investment. Nature 457:144–146CrossRefGoogle Scholar
  2. Bento A, Kanbur R, Leard B (2015) Designing efficient markets for carbon offsets with distributional constraints. J Environ Econ Manag 70:51–71CrossRefGoogle Scholar
  3. Braun N, Fitzgerald T, Pearcy J (2015) Tradable emissions permits with offsets. SSRN Working Paper 2434984Google Scholar
  4. Brown K, Adger W (1994) Economic and political feasibility of international carbon offsets. Forest Ecol Manag 68(2-3):217–229CrossRefGoogle Scholar
  5. Busch J, Lubowski R, Godoy F, Steininger M, Yusuf A, Austin K, Hewson J, Juhn D, Farid M, Boltz F (2012) Structuring economic incentives to reduce emissions from deforestation within Indonesia. Proc Nat Acad Sci 109(4):1062–1067CrossRefGoogle Scholar
  6. Bushnell J (2012) The economics of carbon offsets. National Bureau of Economic ResearchGoogle Scholar
  7. Calvin K, Rose S, Wise M, McJeon H, Clarke L, Edmonds J (2015) Global climate, energy, and economic implications of international energy offsets. Clim Chang 133(4):583–596CrossRefGoogle Scholar
  8. Chameides W, Oppenheimer M (2007) Carbon trading over taxes. Science 315:1670CrossRefGoogle Scholar
  9. Dargusch P, Thomas S (2012) A critical role for carbon offsets. Nat Clim Chang 2:470CrossRefGoogle Scholar
  10. EPA (2009a) Data annex coverage and caps: Emissions inventory - Scenario 7.
  11. EPA (2009b) EPA preliminary analysis of the Waxman-Markey discussion draft.
  12. EPA (2009c) Processed marginal abatement cost (MAC) curvesGoogle Scholar
  13. EPA (2009d) Updated forestry and agriculture marginal abatement cost curves.
  14. Erickson P, Lazarus M, Spalding-Fecher R (2014) Net climate change mitigation of the clean development mechanism. Energy Pol 72:146–154CrossRefGoogle Scholar
  15. Fell H, Burtraw D, Morgenstern R, Palmer K (2012) Soft and hard price collars in a cap-and-trade system: a comparative analysis. J Environ Econ Manag 64 (2):183–198CrossRefGoogle Scholar
  16. Fell H, Morgenstern R (2010) Alternative approaches to cost containment in a cap-and-trade system. Environ Resour Econ 47:275–297CrossRefGoogle Scholar
  17. Ferraro P (2008) Asymmetric information and contract design for payments for environmental services. Ecol Econ 65(4):810–821CrossRefGoogle Scholar
  18. Fischer C (2005) Project-based mechanisms for emissions reductions: Balancing trade-offs with baselines. Energy Pol 33:1807–1823CrossRefGoogle Scholar
  19. Gillenwater M (2012a) What is additionality? Part 1: A long standing problem. Greenhouse Gas Management InstituteGoogle Scholar
  20. Gillenwater M (2012b) What is additionality? Part 2: A framework for a more precise definition and standardized approaches. Greenhouse Gas Management InstituteGoogle Scholar
  21. Gillenwater M, Broekhoff D, Trexler M, Hyman J, Fowler R (2007) Policing the voluntary carbon market. Nat Rep Clim Chang 711(6):85–87CrossRefGoogle Scholar
  22. Goulder L, Hafstead M, Dworsky M (2010) Impacts of alternative emissions allowance allocation methods under a federal cap-and-trade program. J Environ Econ Manag 60(3):161–181CrossRefGoogle Scholar
  23. Green D, Minchin L (2012) The co-benefits of carbon management on country. Nat Clim Chang Comment 2:641–643CrossRefGoogle Scholar
  24. Horowitz J, Just R (2013) Economics of additionality for environmental services from agriculture. J Environ Econ Manag 66(1):105–122CrossRefGoogle Scholar
  25. Jack B, Kousky C, Sims K (2007) Designing payments for ecosystem services: Lessons from previous experience with incentive-based mechanisms. Proc Nat Acad Sci 105:9445–9448Google Scholar
  26. Kile J (2009) The use of agricultural offsets to reduce greenhouse gases. Congressional Budget Office TestimonyGoogle Scholar
  27. Kintisch E (2008) California emissions plan to explore use of offsets. Science 321:23CrossRefGoogle Scholar
  28. Lehmann J (2007) A handful of carbon. Nature 447:143–144CrossRefGoogle Scholar
  29. Mansanet-Bataller M, Chevallier J, Herve-Mignucci M, Alberola E (2011) EUA And sCER phase II price drivers: Unveiling the reasons for the existence of the EUAsCER spread. Energy Pol 39(3):1056–1069CrossRefGoogle Scholar
  30. Maslin M (2011) Carbon trading needs a multi-level approach. Nature 475:445–447CrossRefGoogle Scholar
  31. Mason C, Plantinga A (2013) The additionality problem with offsets: Optimal contracts for carbon sequestration in forests. J Environ Econ Manag 66:1–14CrossRefGoogle Scholar
  32. Menges S (2003) Supporting renewable energy on liberalised markets: Green electricity between additionality and consumer sovereignty. Energy Pol 75:583–596CrossRefGoogle Scholar
  33. Meyers S (1999) Additionality of emission reductions from clean development mechanism projects: Issues and options for project-level assessment. Lawrence Berkeley National LaboratoryGoogle Scholar
  34. Millard-Ball A (2013) The trouble with voluntary emissions trading: Uncertainty and adverse selection in sectoral crediting programs. J Environ Econ Manag 65(1):40–55CrossRefGoogle Scholar
  35. Montero J-P (1999) Voluntary compliance with market-based environmental policy: Evidence from the U.S. acid rain program. J Polit Econ 107(5):998–1033CrossRefGoogle Scholar
  36. Montero J-P (2000) Optimal design of a phase-in emissions trading program. J Public Econ 75(2):273–291CrossRefGoogle Scholar
  37. Naegele H (2015) DIW Discussion Paper. Offset credits in the EU ETS: A quantile estimation of firm-level transaction costsGoogle Scholar
  38. Rentz H (1998) Joint implementation and the question of “additionality”– a proposal for a pragmatic approach to identify possible joint implementation projects. Energy Policy 26:275–279CrossRefGoogle Scholar
  39. Rubin J (1996) A model of intertemporal emission trading, banking and borrowing. J Environ Econ Manag 31:269–286CrossRefGoogle Scholar
  40. Schneider L (2009a) Assessing the additionality of CDM projects: Practical experiences and lessons learned. Clim Pol 9(3)Google Scholar
  41. Schneider L (2009b) A Clean Development Mechanism with global atmospheric benefits for a post-2012 climate regime. Int Environ Agreements: Polit Law Econ 9:95–111Google Scholar
  42. Siikamaki J, Sanchirico J, Jardine S (2012) Global economic potential for reducing carbon dioxide emissions from mangrove loss. Proc Nat Acad Sci 109:14369–14374CrossRefGoogle Scholar
  43. Trexler M, Broekhoff D, Kosloff L (2006) A statistically-driven approach to offset-based GHG additionality determinations. What can we learn? Sustain Develop Law Pol 6:31–40Google Scholar
  44. Van Benthem A, Kerr S (2013) Scale and transfers in international emissions offset programs. J Public Econ 107:31–46CrossRefGoogle Scholar
  45. Victor D (2012) National effects of a global policy. Nat Clim Chang 2:24–25CrossRefGoogle Scholar
  46. Warnecke C, Wartmann S, Hohne N, Blok K (2014) Beyond pure offsetting: Assessing options to generate net-mitigation-effects in carbon market mechanisms. Energy Pol 68:413–422CrossRefGoogle Scholar
  47. Zhang J, Wang C (2011) Co-benefits and additionality of the clean development mechanism: an empirical analysis. J Environ Econ Manag 62(2):140–154CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  1. 1.Sol Price School of Public Policy and the Department of EconomicsUniversity of Southern California and NBER Los AngelesLos AngelesUSA
  2. 2.Charles H. Dyson School of Applied Economics and ManagementCornell University IthacaIthacaUSA
  3. 3.Resources for the FutureWashingtonUSA

Personalised recommendations