Discounting Offsets: Issues and Options
July 2010, SEI Working Paper WP-US-1005
Anja Kollmuss, Michael Lazarus, Gordon Smith

The 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. Applying a discount can also, in theory, enable the use of offsets to provide a net environmental benefit.

At the same time, discounting could have potentially negative effects on the efficiency of carbon markets and might increase the fraction of non-additional credits. 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.

SEI: Discounting Offsets - Issues and Options