Carbon Offsets

Elizabeth A. Wilman and Mahen S. Mahendrarajah

Abstract

The Kyoto Protocol allows countries to credit their greenhouse gas inventory with the emissions captured from afforestation or reforestation, providing the potential for carbon polluters to pay tree planters to store carbon. Trades of sequestration services are complicated because of growing time and monitoring difficulties. A delayed-response, optimal-control model, considering both sequestration and emission reduction possibilities, is developed. The aim is to clarify the good that is being traded, and the role that time plays in defining the good, and the nature of related transactions. In general, principal-agent contracts, rather than arms-length trades, would be expected. (JEL Q25)