From the Paris Agreement to a Low-Carbon Bretton Woods by Michele Stua

Author:Michele Stua
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

7.3 Interpretation and Use of Offsetting

Various offsetting approaches have been developed over time and their use may vary widely among different types of carbon markets. Traditional offsetting tends to discriminate between two categories (international and domestic offsetting) plus one possible sub-category that may co-exist with any of the previous two (sectoral offsetting), as well as one ‘quasi category’ represented by ETS linking. The original rationale for International offsetting and ETS linking is to be found in Article 17 of the KP, whereas sectoral and domestic offsetting have not been specifically referred to in the international climate regime. Therefore, international, domestic, sectoral offsetting and ETS linking represent four specific categories of trading for carbon markets and as such are now examined. As part of the analysis of sectoral offsetting, special attention is paid to Reducing Emissions From Deforestation and Forest Degradation (REDD+) as it represents a key case study for the whole category.

The international offsetting approach can be adopted by both pledge-based ETS and VCM. When adopted within compliance market systems, international offsetting implies for ETS stakeholders the opportunity to compensate for their excess emissions in a less costly way than buying allowances from other ETS stakeholders. International offsetting can therefore promote higher ambitions in the aggregate ETS pledges by reducing the marginal mitigation costs and expanding ETS liquidity (Mehling and Haites 2009; Erickson and Lazarus 2013). However, when applied to cap-and-trade schemes, international offsetting may undermine the price incentive and, on a more general level, the policies linked to ETS adoption (Trotignon 2012) by providing excessive liquidity or by discouraging investments in sectors explicitly targeted by the ETS policies but characterised by high marginal mitigation costs. To date, international offsetting has been widely used in several pledge-based ETS, including Europe (EU), Japan, Switzerland and New Zealand, which authorised international offsetting through the Certified Emissions Reductions (CERs) of the CDM.

Organized as a unilateral exchange system, where CERs could be transformed into ETS allowances but not offsetting units, CDM-related international offsetting suffered greatly from its exclusion by various ETS jurisdictions (Michaelowa 2014). The exclusion of some types of CDM projects and especially of CERs from specific host countries ended up undermining the functioning CDM system. The most important case was the decision by the EU to exclude from its ETS any CERs originated in rapidly developing countries. The decision, which entered into force in January 2013, led to a de facto market failure of CDM and the collapse of CER production, while at the same time increasing uncertainty and volatility regarding the EU-ETS system and its corresponding allowance price mechanism (Michaelowa 2014; Stua 2014). Although international offsetting represents only a limited share of the crediting recognised in traditional pledge-based ETS, which are mostly supported by allowances trading, its application is expected to spread widely (e.g. in the Chinese ETS), if not become the dominant crediting unit (e.g. in CORSIA) in the most recently designed compliance systems.

As a consequence of the lack of pledges, international offsetting represents the most typical source of trading within the VCM.

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