Antonio M. Bento

On the importance of baseline setting in carbon offsets markets

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.

Equity Implications of the COP21 Intended Nationally Determined Contributions to Reduce Greenhouse Gas Emissions

The recent Conference of the Parties to the UN Framework Convention on Climate Change (COP21) resulted in voluntary greenhouse gas (GHG) reduction commitments by 195 countries. The purpose of this paper is to analyze the equity implications of this “bottom-up” approach to climate change negotiations in two major ways. First we analyze the GHG reduction targets specified in the COP 21 agreement prior to any emissions trading in terms of the equity metrics of the Gini Coefficient and Atkinson Index. We also match the commitments with specific equity principles, such as the Egalitarian, Ability to Pay, Vertical, and Horizontal equity. Second, we analyze the equity and economic welfare outcomes after emissions trading takes place. We adapt a non-linear programming model well suited to this purpose, which determines the equilibrium emission allowance price, mitigation costs, and allowance purchases and sales between countries from trading. We also test the sensitivity of the results to macroeconomic conditions and technological change. Our findings are that the GHG reduction commitments made at COP 21 run counter to most equity principles. They are definitely a major departure from the Egalitarian, Vertical, and Rawlsian equity principles proposed for many years by developing countries.