Sizing the global GHG offset market

Abstract

By authorising the international exchange of allowances and reduction credits for greenhouse gas emissions, the Kyoto Protocol ‘flexibility’ mechanisms will spawn a global market for greenhouse gas emission offsets. If conditions for ‘supplementarity’ – the extent to which countries may use international mechanisms relative to domestic efforts – remain relaxed, market access and liquidity is expected to be high. This scoping paper aims to broadly assess market size and value. By comparing future allowances with varied economic growth-sensitive emissions projections for countries with emissions limitation commitments under the Protocol, we estimate the annual size of this global market offset to be ∼850–1500 MtC/yr during the 2008–2012 commitment peroiod. Further, we find no more than 1/3 of market demand can be satisfied through ‘hot air’ trading, ie, the exchange of certain countries' excess allowances. Variable costs for supply-side options in this global market, and uncertainty on how future supplementarity policies might limit free-market demand-side allocations, render a precise estimation of market value difficult. However, considering two supplementarity cases and cost data consistent with recent studies, we infer total market value to be ∼24–37 $b/yr during the commitment period, of which 9–17 $b/yr would take place through flexible mechanism transactions.