Double-dipping in environmental markets

Abstract

There is an increasing tendency to use markets to induce the provision of environmental services. As such markets increase in scope, potential market participants might sell multiple environmental services. The question we consider here is whether participants in such markets should be allowed to sell credits in more than one market simultaneously. Some have argued in favor of such "double dipping," because it would make the provision of environmental services more profitable. In practice, however, most programs do not allow doubledipping. We show that if the optimal level of pollution abatement is sought, then double-dipping maximizes societal net benefits. However, if pollution policies are set in a piecemeal fashion, then the caps for each market are unlikely to be optimal and, in this second-best setting, a policy prohibiting double dipping can lead to greater social net benefits. We explore conditions under which a singlemarket policy is preferred, or equivalently, where piecemeal policies are likely to yield particularly inefficient outcomes.

An Overview of Carbon Offsets from Agriculture

“…Woodward and coauthors explore possible benefits from allowing double dipping in offset programs in a first-best economy and a second-best economy (Woodward & Han 2004, Woodward 2011. Double dipping exists when providers of environmental credits are able to sell credits in multiple markets (Woodward 2011) associated with the same adoption of a conservation practice.…”

“…Double dipping exists when providers of environmental credits are able to sell credits in multiple markets (Woodward 2011) associated with the same adoption of a conservation practice. An example is the ability of a farmer to sell carbon credits from the adoption of no till in both a carbon market and a water-quality trading program.…”

“…If the marginal benefit curve is steep, then it is more efficient to prohibit double dipping. If the marginal benefit curve is flatter, then double dipping is more efficient (Woodward & Han 2004). As the marginal cost curve becomes flatter, double dipping becomes the less expensive way to achieve a level of abatement (Woodward 2011).…”

Water Quality Trading with Lumpy Investments, Credit Stacking, and Ancillary Benefits

“…Woodward () uses a theoretical framework with continuous and differentiable cost and benefit functions to analyze the welfare effects of credit stacking across markets for reductions in multiple pollutants. He finds that credit stacking can be welfare enhancing if the emission caps for all pollutants are set at their optimal levels (taking into account the fact that complementary production of multiple benefits from a single action lowers the marginal abatement costs and calls for more ambitious cleanup goals).…”

Economics of Forest Carbon Sequestration

“…Further, developing countries may well sell carbon offset credits to developed countries, but, since they are not bound by international targets, still credit the activities to their own emissions reduction, resulting in 'double-dipping' (Woodward 2011). …”