Sizing the global GHG offset market

By authorising the international exchange of allowances and reduction credi ts for greenhouse gas emissions, the Kyoto Protocol 'flexibility' mechanism s will spawn a global market for greenhouse gas emission offsets. If condit ions for 'supplementarity' - the extent to which countries may use internat ional mechanisms relative to domestic efforts - remain relaxed, market acce ss and liquidity is expected to be high. This scoping paper aims to broadly assess market size and value. By comparing future allowances with varied e conomic growth-sensitive emissions projections for countries with emissions limitation commitments under the Protocol, we estimate the annual size of this global offset market to be similar to 850-1500 MtC/yr during the 2008- 2012 commitment period. Further we find no more than 1/3 of market demand c an be satisfied through 'hot air' trading, ie, the exchange of certain coun tries' excess allowances. Variable costs for supply-side options in this gl obal market, and uncertainty on how future supplementarity policies might l imit free-market demand-side allocations, render a precise estimation of ma rket value difficult. However, considering two supplementarity cases and co st data consistent with recent studies, we infer total market value to be s imilar to 24-37 $b/yr during the commitment period, of which 9-17 $b/yr wou ld take place through flexible mechanism transactions. (C) 1999 Elsevier Sc ience Ltd. All rights reserved.