the CDM: parties in NA1 countries could carry out GHG mitigation which could be paid for by parties in A1 countries, thereby equivalently reducing the GHG emissions obligation in the latter. Since GHG mitigation costs have been far lower in non‐Annex 1 countries than in A1 countries, such trades have been highly beneficial to both groups. The aggregate amount of CER issuance under the CDM by today is more than 1,600 million tons CO2‐e; see UNFCCC (website).

A similar rationale and functioning can be found for JI. Within A1, some countries were effectively left with surplus emissions quotas which were not utilized (“hot air”) as the allocated caps, calculated on the basis of 1990 emissions, had turned out to be overly generous. This implied that, in countries with surplus emissions rights, costs of abating GHG emissions were very low for some projects, making offset trading favorable with countries that experienced effective emissions constraints, and where marginal emission reduction costs were much higher. The JI market has, however, turned out to be far less active than the CDM market, with smaller aggregate volumes for emissions reduction units (ERUs) so far. Still, as of today more than 850 million tons of CO2e has been reached in terms of issuance. A further issue with these reductions was less careful control of emissions reduction additionality (under “Track 1” for the JI; see further discussion of additionality below), raising the question of the integrity of these credits in a global emissions reduction context.

The CDM is by many considered a success as it likely has reduced the costs of implementing a given reduction in GHG emissions (below the given “baseline”, defined by what GHG emissions would have been in the absence of any KP agreement whatsoever), substantially. Important in the context of the analysis in this paper, however, and for the general issue of net mitigation, offsets under the CDM do not directly reduce global emissions, at least not for given “ambition” of overall mitigation by the policy‐ bloc countries. The CDM mechanism then only shifts a given level of allowed emissions from countries without caps (NA1 countries) to countries with caps (A1 countries), and makes the burden of complying with the initial mitigation agreement (here, the KP) easier.

Today the outlook for following up on old offset mechanisms, or establishing new future mechanisms, seems less clear. Due to a lax cap on emissions rights under the EU‐ETS, the GHG emissions trading price within the EU‐ETS has fallen to a low level, and with it the demand for CDM and JI offsets. In fact, over the brief period since 2013, offset demand has virtually evaporated. This has led to increased pessimism about the future of offset mechanisms; and substantial human capital has moved or is in the process of moving out of this activity.

A question is then whether changes in future climate architectures could revive these mechanisms and make them relevant, and what form they might take under a new architecture.

This paper addresses some issues related to the future operation of offset mechanisms that have recently attracted attention, in particular in Europe, and among European policy makers. The topic addressed is _whether such or similar offset mechanisms might enhance global emissions reductions beyond the ambitions defined by a cap under a cap‐and‐trade (c‐a‐t) system for GHG emissions reductions_ ; a topic to which I come back in more detail below. This will be studied in terms of the basic incentives of the main actors (the countries establishing a c‐a‐t policy); and in terms of global efficiency.

Section 3 below discusses these issues with basis in the (mainly, analytical) literature on climate agreements and offset markets. The focus will be on discussing the support from this literature, if any, for “net mitigation” as a rational outcome.

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