The Role of Offsets in a Carbon Trading System

The USDA Economic Research Service, the Farm Foundation, and the Commodity Futures Trading Commission co-hosted a workshop on carbon market design in Washington, DC, on January 31 and February 1, 2011. The workshop considered lessons learned from existing environmental markets to inform policymakers about potential hurdles to the inception of a nationwide, domestic carbon market.

At the workshop, Adele Morris spoke about the role of offsets in a carbon trading system. Her presentation explained what an offset is, outlined the differences between the voluntary and regulatory markets, and explained the theory of how offsets control costs of a cap-and-trade program. It covered what drives supply and demand for offsets, and explained the policy and governance challenges to making offsets work reliably. Illustrative modeling results highlight the important but uncertain role of offsets in reducing the cost of cap-and-trade programs.