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Highlights of UESD 7th International Virtual Seminar

The presenter at the University of Environment and Sustainable Development (UESD) 7th International Virtual Seminar was Dr. Kenneth, J.D. Richards., a Professor at the O’Neill School of Public and Environmental Affairs, an Affiliated Professor at the Mauer School of Law, and an Affiliated Faculty at the Ostrom Workshop, Indiana University, USA. The seminar was patronised by members of faculty of the Schools of Sustainable Development and Natural and Environmental Sciences.

His presentation provided a conceptual and graphical overview of the important difference between appending an offset system to a carbon tax versus an ETS. Using a hypothetical case loosely based on emissions from India, the paper illustrates why understanding the implications of the price versus quantity distinction is critical for carbon offset adoption and design decisions.

Highlights of the presentation

Carbon pricing instruments (CPIs) broadly are either price-based (taxes) or quantity-based (emissions trading systems or ETS).  Many countries have opted to supplement their CPIs with offset provisions that create incentives for projects that lie outside the sources or gases covered by the CPI. The primary reason to add offset provisions is to lower the individual cost of compliance for covered entities and the social cost of hitting national GHG emissions targets. Experience also suggests that including offset provisions tends to ameliorate political resistance to initial adoption of the CPI. 

It is less commonly recognized that the effect of the offset provision can be very different, depending upon whether it is attached to a carbon tax or an ETS.   Specifically, the effect of offsets on net government revenue and total emissions reductions are different when attached to a price versus a quantity instrument, starting from the same price and quantity.  Moreover, the nature of the risk of an ill-functioning offset, one that does not deliver emissions integrity, is very different. Finally, by recognizing the true nature of a national offset system, it is possible to simplify the design of a carbon tax system, lowering transactions costs that often hinder project development.