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Bigger is Better: Avoided Deforestation Offsets in the Face of Adverse Selection
Abstract
Voluntary opt-in programs to reduce emissions in unregulated sectors or countries have spurred considerable discussion. Since any regulator will make errors in predicting baselines and participants will self-select into the program, adverse selection will reduce efficiency and possibly environmental integrity. In contrast, pure subsidies lead to full participation but require large financial transfers. We present a simple model to analyze this trade-off between adverse selection and infra-marginal transfers. We find that increasing the scale of voluntary programs both improves efficiency and reduces transfers. We show that discounting (paying less than full value for o ffsets) is inefficient and cannot be used to reduce the fraction of o ffsets that are spurious while setting stringent baselines generally can. Both approaches reduce the cost to the o ffsets buyer. The e ffects of two popular policy options are less favorable than many believe: Limiting the number of off sets that can be one-for-one exchanged with permits in a cap-and-trade system will lower the o ffset price but also quality. Trading ratios between o ffsets and allowances have ambiguous environmental eff ects if the cap is not properly adjusted. This paper frames the issues in terms of avoiding deforestation but the results are applicable to any voluntary off set program.
Citation
van Benthem, Arthur A., and Kerr, Suzi C. 2011. "Bigger is Better: Avoided Deforestation Offsets in the Face of Adverse Selection," PESD Working Paper #102, Program on Energy and Sustainable Development, Stanford University, Stanford CA.
Motu code: MYS0201
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