Association for Public Policy Analysis & Management

Carbon offset schemes offer a critical tool to improve the economic performance and distributional fairness of international climate change agreements. Yet offset schemes also create major governance challenges for international institutions in a polycentric system to limit activity to that which achieves economic and fairness goals without compromising the environmental performance of the overall agreement. The carbon offset schemes of the 1997 Kyoto Protocol, most notably the Clean Development Mechanism (CDM), offer a wealth of experience from which to draw lessons for the governance of carbon offsets in a future international agreement. In this paper, we propose a set of design principles for a new carbon offset scheme under the 2015 Paris Agreement that builds on the lessons of the Kyoto offset mechanisms.

The offset schemes of the Kyoto Protocol, and the CDM in particular, provide nearly a decade of rich experience with the global governance of carbon offsets. Under Article 6.4 of the 2015 Paris Agreement, parties to the Agreement agreed to a new “mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development” that would in many ways serve as a successor to the Kyoto Protocol offset mechanisms. In the run up and in the period since the Paris Agreement was adopted, academics, governments, and non-governmental organizations have proposed new frameworks for international carbon offset schemes. These proposals vary in their mechanism design, governance structure, and capacity requirements for international institutions.
We systematically review proposals for an international carbon offset architecture under Article 6.4 of the Paris Agreement. These proposals fall into three categories:

1. Extending the project-based approach of the Kyoto mechanisms (crediting based on the emissions of a single project relative to counterfactual);
2. A sectoral-crediting approach (crediting based on an entire sector’s emissions relative to a sector baseline); and
3. A policy-crediting approach (crediting based on additional emissions reduced through implementation of a domestic climate policy).

This analysis applies theories from economics and international relations as well as empirical analysis drawing lessons from the Kyoto offset mechanism experience. Key dimensions for this comparative analysis are:

• The environmental performance of the proposed offset schemes: opportunities for strategic manipulation of additionality criteria, effectiveness of oversight and monitoring, possibility of achieving net mitigation;
• The institutional feasibility of the proposed offset schemes: compatibility with existing institutions under the UNFCCC, political feasibility of proposed arrangements in light of existing agreements and country positions;
• The economic performance of proposed offset schemes: cost-effectiveness of proposed methods of achieving emissions reductions, scope of mitigation opportunities; and 
• The capacity requirements of implementing the proposed offset scheme: requirements for robust accounting of transferred units, compatibility with nationally determined contributions under the Paris Agreement, appropriate reliance on knowledge of actors at different scales.