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“Monetary” rules for a linked system of offset credits

Author

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  • Kamleshan Pillay

    (University of Cambridge)

  • Jorge E. Viñuales

    (University of Cambridge)

Abstract

Three dominant issues have historically plagued climate negotiations: How to bypass issues of sovereignty, generate sufficient climate finance, and establish an agreement that is inclusive of the current major polluters. These issues are prevalent within the Clean Development Mechanism (CDM) under the Kyoto Protocol, and the CDM has provided policy makers with a useful starting point to understanding how offset credits can be utilised within a post-Kyoto framework. The primary aim of this research is to investigate how project-based offset credits generated by states would interact within a linked framework using monetary rules and exchange rates. The examination of a linked system, specifically, was owing to the structure of the proposed agreement to be finalised in Paris at COP 21 where nationally determined contributions would be submitted by each state, allowing for the possibility of linked domestic carbon market mechanisms. The certified emission reduction credits of the CDM were used as a model to investigate the trade of offset credits within a linked system which act as a unique climate currency of each domestic offset credit mechanism. These offset credits could be earned through the implementation of domestic projects or projects hosted in other states. From this research, we conclude that fixed exchange rates are more stable than flexible exchange rates in a climate currency framework. Fixed exchange rates reduce losses of capital (owing to uncertainty in the markets) and the prominence of asymmetric spatial price transmission associated with fiat offset credit prices. To encourage co-operation between developing and developed countries, it is recommended that a combination of currency area theory and trade blocs be implemented as opposed to a currency union. Currency areas are the most viable option as they maintain that the domestic offset credit mechanism is under the control of the state and retains a level of stability as individual state offset credit prices are fixed to the same price. Even though this research forms the basis for a new climate policy architecture, the overall effectiveness of the policy will be determined by the selection of appropriate discount schemes, increased participation and agreement by states, and most significantly, political will.

Suggested Citation

  • Kamleshan Pillay & Jorge E. Viñuales, 2016. "“Monetary” rules for a linked system of offset credits," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 16(6), pages 933-951, December.
    • Handle: RePEc:spr:ieaple:v:16:y:2016:i:6:d:10.1007_s10784-015-9312-7
    DOI: 10.1007/s10784-015-9312-7
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