Carbon trading is being implemented on international, national and sub-national scales in most places where greenhouse gas (GHG) emissions targets are enacted. The appeal of carbon trading is efficiency, lowering the cost of climate mitigation by allowing the market to find the least expensive sources of reduction. In this dissertation I probe the assumptions that carbon trading is efficient and effective through grounded case study.

A multi-year study on how the Kyoto Protocol’s Clean Development Mechanism (CDM) – the world’s largest carbon offsetting program – is working in practice in the Indian power sector (Chapter 2) documents large uncertainties associated with the emissions reduced by the program. This uncertainty has resulted in large numbers of CDM projects that do not actually reduce emissions (are “non-additional”) and regulatory uncertainty that undermines the effectiveness of the program in supporting new projects. In the medium- and long-term, even if the quality of offsetting projects can be assured, the purported efficiency of offsetting must be weighed against ways that offsetting at large scale makes international climate change cooperation more difficult over the next decades.

There has been a lot of interest in continuing offsetting by ensuring that the credits generated represent real emissions reductions. Chapter 3 examines the prospects for developing a more rigorous “additionality test” for filtering out proposed CDM projects that are business-asusual and therefore do not represent real emissions reductions under the program. Through in depth case studies of additionality testing for wind, biomass and hydropower projects in India, I conclude that at today’s carbon prices there is no accurate verifiable indicator of whether CO2 reduction projects would be built without the CDM.

Chapter 4 probes the effectiveness of carbon crediting in incentivizing emissions reductions. A focused look at the history of support for bagasse cogeneration in India reveals that a range of shifting barriers have impeded the development of this cost effective technology. A carbon price alone would not have overcome the barriers to this technology, and parallel support efforts were needed to spur this technology.

Post-2012 climate change agreements and legislation include provisions for replacing CDM additionality testing with standardized project eligibility criteria and indicate a shift away from project-based offsetting towards offsetting on a sectoral level as ways to retain the efficiency of offsetting, but avoid the current problems with the CDM. I examine this range of proposals for reforming or replacing the CDM with a study of the design of a sectoral crediting programs in the cement sector in Shandong province in China. This study indicates that for most 2 conceptions of sectoral crediting programs, the problems with the CDM documented in Chapters 2, 3 and 4 risk being even worse when offsetting is implemented on a sectoral level.

I conclude with a brief discussion of how some of the inefficiencies of offsetting may feature in carbon trading generally by tracing parallels between the design and implementation of the CDM and California’s Low Carbon Fuel Standard. I end with a policy discussion of the political space within which offsetting is being negotiated internationally, and within the US, and alternatives to the CDM and offsetting that might fulfill political and environmental goals together.