Understanding the effectiveness of environmental offset policies
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In the real world, taxes and cap-and-trade systems are rarely implemented in their pure form. In this paper, we examine a related approach that has been used widely in practice—which we refer to as an “offset.” The idea behind offsets is to encourage firms or entities that may not be a part of the main regulatory system to produce environmental improvements. These improvements can then be used to offset pollution reduction requirements for regulated entities. This paper analyzes how offsets are used in practice, and identifies key economic and political factors that help explain the use of offsets in certain situations. We find that offsets may often fail to take adequate account of environmental or ecosystem damages. We argue that the effectiveness of an offset policy depends on the political and institutional context in which it is developed.
JEL ClassificationEnvironmental economics (Q5) Law and economics (K) Industrial organization (L) Public economics (H) Microeconomics (D)
We would like to thank Don Carr, Michael Grubb, Dieter Helm, Al McGartland, Axel Michaelowa, Janet Peace, John Palmisano, Ian Parry, Robert Stavins, Tom Tietenberg, Alexander Vasa, David Victor and two anonymous referees for helpful suggestions. Emily Giovanni, Tengbo Li, Martin Mattsson, Stephanie Richards, Hemal Shah and Kelley Weddell provided valuable research assistance. The views expressed in this paper reflect those of the authors and do not necessarily reflect those of the institutions with which they are affiliated. 2012 by the authors. All rights reserved.
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