Demand for offsetting and insetting in the EU Emissions Trading System
International carbon offsetting can help reduce compliance costs in emissions trading schemes and at the same time support carbon mitigation projects in developing countries. A surprising observation from the European Union Emissions Trading System’s experience with offsetting is that companies do not fully utilise offsetting for compliance despite the cost advantage in doing so. However, so far there has been limited research evaluating what factors influence companies’ decisions to utilise offsets. This paper fills this gap by investigating the demand for carbon offsets in tradable permit emissions markets. To do so, we use detailed firm-level data on 279 companies regulated under the EU ETS during 2008-2012. Our findings suggest that there are clear sectoral differences and that, contrary to expectations, transaction costs and over-allocation of free allowances are not the key determining factors. We find some evidence to support the existence of ‘insetting’, that is, companies with subsidiaries in key offset countries are more likely to use a larger share of their offset allowance for compliance. Semi-structured interviews with companies supported these findings.