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If large-scale domestic GHG markets are established and are hospitable to offsets (particularly international offsets), mechanisms to “share” the economic rent associated with offsets will likely be deployed. These mechanisms could include government aggregators serving as monopsonistic buyers of international offsets who would in turn sell the offsets in the domestic market, with the intent of using monopsonistic power to shift some of the economic rent from the offset supplier to the demander (Purvis et al. 2009). The economic results of this government intervention in the international offset market are to lower the offset sales price and reduce the profit to be earned by offset suppliers.

Conclusions

The future is highly uncertain for all offsets, including those from domestic and international sources, as well as existing CDM credits and proposed REDD and sectoral credits. The uncertainty emanates from unsettled domestic policy—primarily in the United States—and as-yet poorly shaped international policies that are developing for coordinated action on GHG mitigation.

If future international policy takes the form of bottom-up pledge and review, rather than an extension of the Kyoto architecture, then the usefulness and economic value of offsets generally depends on the breadth and depth of regional GHG markets (logically tied to cap-and-trade programs). While it is true that offsets could exist and have value absent formal markets, they would likely play a very small role in domestic and international climate policy.

References

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