Benefits of pollution monitoring technology for greenhouse gas offset markets

Environmental economists have shown that tradable emission permit markets can reduce the costs to society of pollution reduction. However, when emissions are difficult to monitor and verify, offset credits from pollution reductions may be subject to price discounts that reduce social welfare. In this paper, we estimate the extent to which social welfare could be improved by using new technology to increase the accuracy with which pollution flows from agricultural fields can be monitored. We use a hypothetical case study of a situation in which farmers can reduce nitrous oxide (N2O) emissions from Midwest agricultural land parcels and sell the resulting offset permits in a greenhouse gas tradable permit market. We simulate market outcomes with and without an inexpensive technology that increases the accuracy of emission estimates, reduces the discount to which agricultural offset permits are subject, and improves the performance of tradable permit system. We find that the benefits from such technology range as high as $138 for a 100 acre field if N2O emissions are an exponential function of nitrogen application rates. However, variation in the benefits to farmers of eliminating price discounts may mean efficient technology adoption is not uniform across space.