Buying allowances as an alternative to offsets for the voluntary market: a preliminary review of issues and options

Abstract

As an alternative to offsets, voluntary buyers could instead buy and cancel allowances from compliance markets. The purchase and cancellation of allowances reduces the available allowances in a cap-and-trade system, ‘tightening the cap’ and, in principle, reducing the emissions that can be produced by covered sources. By this logic, purchasing and cancelling an allowance compels covered sources to achieve additional mitigation. This approach has the advantage of making offset quality issues such as additionality less of a concern. This article examines two different scenarios: (1) The voluntary actor purchases and cancels allowances with the aim of decreasing allowance supply, tightening the cap and spurring greater reductions at facilities covered by the cap-and-trade programmes. (2) The voluntary actor undertakes actions of their own (e.g. requiring or purchasing more efficient electric appliances) that indirectly reduce emissions from covered sources (e.g. electricity generators), and purchases and cancels allowances with the aim of avoiding a corresponding increase in emissions at other sources and ensuring that their actions have a net emission reduction impact. The article further shows that cancelling allowances will only increase emissions reductions to the extent that markets are not over-supplied and could have the indirect effect of increasing the use of offsets by covered entities.