Abstract

This study attentively examines the role of the offset mechanism like the Clean Develop Mechanism (CDM) in mitigating global warming problems and considers its economic welfare implications in a theoretical offset environment. The CDM is a kind of offset trading scheme of carbon dioxide (CO₂) emissions between advanced and developing economies. Formulating the essence of the offset market into a simple model, we interpret the right to trade CO₂ emissions at an ideal price as rewards to advanced economies for investing in more CO₂ saving technologies and/or factories in developing economies. Our model shows that under some conditions the CDM can succeed in suppressing CO₂ emissions and become a second-best measure to mitigate global warming. Nevertheless, we also clarify that the prices of carbon offset in advanced economies are not generally sustainable without the help of the outside agencies such as the governments. This fact suggests that offset mechanism like the CDM incurs an additional burden, such as taxes to advanced economies for preserving the scheme, although the resultant transfer evidently equalizes the international income distribution.

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