Towards a global carbon market
Offsets are an integral part of a broad market driven approach to reducing emissions. Whereas a carbon tax will always remain a domestic fiscal policy instrument with no real reach beyond national borders, a cap-and-trade system is very different. It is designed to deliver an environmental outcome at lowest cost to the economy and does so by working progressively through the potential portfolio of projects, always triggering the next best emissions reduction project to implement.
Cap-and-trade is based around emission allowances that are tradable between parties at the prevailing market price for carbon dioxide. An advantage of the system is that the legislation can be crafted to allow projects outside the traditional boundary of the economy to contribute to the overall goal of the system. Such projects may cost less to implement but still deliver real and measurable reductions. These reductions are then converted to offset certificates that can be used for compliance within the trading system, as an alternative to allowances. This has two immediate benefits:
It offers a broader range of projects for reducing emissions, which typically reduces the overall cost of the system to the economy as a whole.
It projects the carbon price from the cap-and-trade system into other parts of the economy where it is not present or into other economies that have no cap-and-trade system - normally developing economies. This encourages more widespread reduction of emissions.
The second point above is particularly important. Early exposure to carbon markets through offsets linked to the European cap-and-trade system is already helping developing economies manage emissions and preparing them for the day when their own domestic policy action comes into place. The international trading of offsets is now underway as a result of this and is a principal component part of the nascent global carbon market.
As long as offsets result in real offshore reductions, which can be measured and verified, they offer both economic and political benefits and should therefore be encouraged.
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