Discounting offsets: issues and options

Abstract

This article describes the different types of discounting, their objectives and their potential impacts on carbon markets. Discount factors can be used to strengthen the environmental integrity of offsets and to give preference to certain projects type or geographic regions. Applying a discount can also, in theory, enable the use of offsets to provide a net environmental benefit. At the same time, discounting could have potentially negative effects on the efficiency of carbon markets and might increase the fraction of nonadditional credits. All discounting approaches face the difficulty of having to establish the discount rate that is politically acceptable, maximizes benefits and minimizes negative effects. While discounting is no silver bullet (its potential pitfalls are significant) it should nonetheless be considered by policymakers as a mechanism to address specific objectives, in particular to remedy perverse incentives and to maximize the environmental benefit of offset markets.