Designing Markets for Carbon Offsets: A Field Experiment in Malawi

Revealing private information to improve allocation and pricing in carbon offset projects can help improve the competitiveness of developing country offsets on global carbon markets. This study provides the first evidence from a developing country to directly compare alternative allocation mechanisms: a uniform-price, sealed bid procurement auction and a posted offer market. The field experiment was conducted in Malawi for the allocation of tree planting contracts. Results reveal highly divergent outcomes for the two strategically equivalent mechanisms. The auction set the clearing price for both mechanisms and enrolled the 38 percent of the auction treatment group that bid below the price. In the posted offer treatment group, 99.5 percent of participants accepted the contract at the auction clearing price. Compliance results show significantly more trees surviving per contract allocated under the auction. At the clearing price, the auction achieves a better selection of high compliance landholders, but potentially at greater cost than the posted offer market. Results confirm the presence of information asymmetries in these markets and demonstrate that project design affects both the cost effectiveness and the environmental effectiveness of carbon offset projects.