Offsets in the international emissions market: Do buyers get what they pay for?
This paper analyses buyer preferences in the context of the market for emissions trading under the UNFCCC. The purpose of this paper is to investigate pricing of offsets (Certified Emissions Reductions or “CERs” under the UNFCCC) (through an empirical survey of two segments of the authorized CER buyer market) to understand the relationship between buyer preferences for CER carbon offsets in the context of wider policy debates surrounding the effectiveness of emissions trading markets. It is argued that decisions with respect to the environmental outcomes of emissions trading markets are being determined by specific factors associated with project risk by a small segment of the CER primary market, rather than the marginal cost of abatement or the various other factors which may potentially impact pricing (including regulatory risk, and the Chinese floor price for CERs). These factors are essentially stages in the development of the project and delivery terms associated with the sale contract. More importantly, many factors, which may impact value of CERs, are not being considered in the pricing of offsets. As a result, it is submitted that the environmental outcomes of the CDM offset market, and in particular the incentives associated with the existing scheme for valuing offsets, are reliant upon the small set of factors associated with pricing such credits in the market by this group of buyers. This conclusion suggests that demand for more certain reduction projects (with less risk) may ultimately dictate supply of those projects in the market.