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Bigger is Better: Avoiding Deforestation Offsets in the Face of Adverse Selection

Research Seminar in the Development Research Group, Environment and Energy Team

Bigger is Better: Avoiding Deforestation Offsets in the Face of Adverse Selection

Presented by Arthur van Benthem, Stanford University and

Suzi Kerr, Motu Economic and Public Policy Research

World Bank, Room MC3-570

Wednesday, March 30, 10-11.30 am (NB note the time)


Voluntary programs to reduce emissions may be difficult or costly to implement because of asymmetric information about the true costs of emissions reductions, resulting in adverse selection. While a pure subsidy scheme is efficient in inducing emissions, it can be very costly to the regulator, and cost avoidance may be desirable for units where true abatement costs are low. This paper presents a simple model for analyzing the trade-off between adverse selection and infra-marginal transfers. The authors find that increasing the scale of voluntary programs is beneficial as it both improves efficiency and reduces implementation costs. Offset discounting (paying less than the full value of the offsets) is generally inefficient and cannot be used to reduce the fraction of offsets, while setting stringent baselines can. Both approaches reduce the cost of buying offsets. Limiting the number of offsets lowers the offset price but also quality; while trading ratios between offsets and allowances have ambiguous environmental effects if the cap is not properly adjusted. This paper focuses on avoiding deforestation, but its results are applicable to any offset program.

Bio, Arthur van Benthem:

Arthur van Benthem is a Ph.D. candidate in economics at Stanford University. His research is in environmental and energy economics. Prior to starting his Ph.D., he worked as an energy economist in the Shell global energy scenarios team in The Hague, Netherlands. He graduated with master's degrees in Econometrics (University of Amsterdam, 2003) and Management Science & Engineering (Stanford University, 2005). Arthur’s research interests are the (in)efficiency and unintended consequences of environmental legislation, with a particular emphasis on fuel economy and vehicle emissions regulations. In addition, he has worked on oil and gas taxation in developing countries, “energy leapfrogging” in the developing world, property rights in fisheries and the effects of freeway speed limits on pollution, health and accidents.

Bio, Suzi Kerr:

Suzi Kerr is a senior fellow at Motu Research, New Zealand’s leading non-profit economic and public policy research institute. She has a degree in economics from Canterbury University, and a Ph D in Economics from Harvard in 1995. From 1995 through 1998 she worked at the University of Maryland as an Assistant Professor. She has been a visiting scholar at Resources for the Future (USA), Victoria University, and at the Joint Center for the Science and Policy of Global Change at the MIT. She recently worked at Stanford University as a Visiting Professor in the Economics Department. Her current research involves theoretical analysis, simulation modeling, econometric analysis and policy design. Among her main topics are investigating domestic and international emissions trading issues with special emphasis on land use and climate change, in both the tropics and New Zealand; domestic carbon permit market design; and nutrient trading.

For further information on the presentation, contact Jon Strand, DECEE (, 202-458-5122.

The Joint Bank-Fund Brown-Bag Research Seminars on Environment and Energy is a joint initiative between the Development Research Group, Environment and Energy Team (DECEE), World Bank, and the Fiscal Affairs Department, IMF. Organizers of the series are Jon Strand and Hua Wang (DECEE), and Ruud de Mooij and Ian Parry (FAD/IMF). The seminars are held at lunch time, typically once every two weeks, and alternately in the Bank and Fund. Aims of the seminars are to raise attention to and interest in environment and energy issues in both institutions; to promote the interaction between the two institutions in these fields; and to improve the institutions' common work on policy guidance on environment and energy issues. Speakers will be from the two as well as outside institutions.


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