Discounting Offsets: Issues and Options
SEI Working Paper WP-US-1005
Emissions Trading & Offsets
Climate Mitigation Policy
This paper 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 types or geographic regions. All discounting approaches face the difficulty of having to establish the right 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 be considered by policy makers as a mechanism to address specific objectives, in particular to remedy perverse incentives and to maximize the environmental benefit of offset markets.