A Practical Approach to Offset Permits in Post Kyoto Climate Policy

In recent years, the parties of the United Nations Framework Convention on Climate Change (UNFCCC) failed to negotiate a follow‐up agreement of the Kyoto Protocol. The commitment period of the Kyoto Protocol ends in 2012. Without a post Kyoto agreement there are neither binding emissions reduction targets for the period from 2012 onwards, nor is there a clear framework for the generation of carbon offset credits from emission reduction actions in developing countries and emerging economies. In this paper we analyse the possible demand and supply for offsets for the period from 2013 to 2020. The analysis is based on the assumptions that developed countries (Annex I) implement the emissions reduction pledges made after the 15th Conference of the Parties in Copenhagen (“Copenhagen Pledges”). Further we assume that international emissions trading will be continued after 2012. For the Copenhagen Pledges to be achieved, Annex I countries need to introduce domestic greenhouse gas regulation schemes. This can be done by quantity regulation (emissions trading scheme) or by price regulation (tax) when the countries are able to purchase international offset credits. In addition, we assume that Annex I countries aim to keep the costs of regulation (e.g. price per emissions permit or tax) below a certain ceiling price for cost containment to prevent a harsh impact on consumers and industry. Recent proposals for greenhouse gas regulation schemes in the USA, Australia and Japan support this assumption. Given the assumptions outlined above, we calculate the potential annual demand for offset permits in Annex I countries based on the PACE model. Since some countries pledged a range of possible emissions reduction in their Copenhagen pledges, the demand for offset permits varies accordingly. Annual demand from the EU27, the USA, Canada, Japan, Australia and New Zealand will be 627 to 667 MtCO2e on average. To address the supply side, we calculate marginal abatement cost curves (MACs) for six regions of potential offset suppliers (Africa, Brazil/Mexico, China/India, South Korea/ Indonesia/Malaysia, the rest of Latin America and the rest of Asia). The annual demand for offset permits of 667 MtCO2 can be met at costs of about EUR 10 excluding transaction costs. The highest potential for offset generation stems from China and India followed by the rest of Asia. Latin America will be the smallest supplier, given that there is no scheme that allows for offset generation from REDD activities. Current offset schemes, i.e. the Clean Development Mechanism, will not be able to generate a sufficient amount of offsets to meet overall demand. Given that high potentials for offset generation are present in China and India, we conclude that alternative offset schemes like sectoral crediting, should be considered. Emissions reductions in smaller and less industrialised regions could be achieved by implementing a scheme of bi‐ or multilateral credited National Appropriate Mitigation Actions (NAMAs) in addition to the Clean Development Mechanism (CDM).

Heindl, Peter and Sebastian Voigt (2011), A Practical Approach to Offset Permits in Post Kyoto Climate Policy, ZEW Discussion Paper No. 11-043, Mannheim.