The Additionality Problem with Offsets: Optimal contracts for carbon sequestration in forests

Speaker: Charles F Mason, department of economics and finance at University of Wyoming


Carbon offsets from forest expansion, or energy efficiency improvements in developing countries, are frequently discussed as a means of reducing the costs of an emissions reduction policy.

However, offsets have a basic problem stemming from asymmetric information.

Sellers of offsets have private information about their opportunity costs, leading to concerns about whether offsets are additional. Non-additional offsets can undermine a cap and trade program, or, if the government purchases them directly, result in enormous government expenditures.

We analyse contracts for carbon sequestration in forests that mitigate the asymmetric information problem.

Landowners are offered a menu of two-part contracts that induces them to reveal their type (i.e. opportunity costs).

Under this scheme, the government is able to identify ex post how much additional forest is contributed by each landowner, and minimise ex ante its expenditures on carbon sequestration.

To explore the performance of the contracting scheme, we conduct a national-scale simulation using an econometric model of land-use change.

The results indicate that for increases in forest area between 11 and 22 million acres, government expenditures are between $1 and $6 billion lower under the contracting approach, compared to a uniform subsidy offered to all landowners. This compares to an increase in private opportunity costs between $66 and $705 million dollars under the contracts.

Biography of Charles F Mason

Charles (Chuck) Mason is the H A “Dave” True, Jr Chair in Petroleum and Natural Gas Economics in the Department of Economics and Finance at the University of Wyoming.

He is an internationally-known scholar who specialises in environmental and resource economics. For the past three years he has served as the managing editor of the top international journal in this field, the Journal of Environmental Economics and Management.

Chuck earned a double BA in Economics and Mathematics in 1977 and a PhD. in Economics in 1983, all at the University of California at Berkeley.

He has been on the faculty at the University of Wyoming since 1982.

Keep in touch with the Grantham Research Institute at LSE
Sign up to our newsletters and get the latest analysis, research, commentary and details of upcoming events.