Voluntary opt-in programs to reduce emissions in unregulated sectors or countries have spurred considerable discussion. Since any regulator will make errors in predicting baselines and participants will self-select into the program, adverse selection will reduce efficiency and possibly environmental integrity. In contrast, pure subsidies lead to full participation but require large financial transfers.

We present a simple model to analyze this trade-off between adverse selection and infra-marginal transfers. We find that increasing the scale of voluntary programs both improves efficiency and reduces transfers. We show that discounting (paying less than full value for offsets) is inefficient and cannot be used to reduce the fraction of offsets that are spurious while setting stringent baselines generally can. Both approaches reduce the cost to the offsets buyer. The effects of two popular policy options are less favorable than many believe: Limiting the number of offsets that can be one-for-one exchanged with permits in a cap-and-trade system will lower the offset price but also quality. Trading ratios between offsets and allowances have ambiguous environmental effects if the cap is not properly adjusted. This paper frames the issues in terms of avoiding deforestation but the results are applicable to any voluntary offset program.

Effective strategies for managing the dangers of global climate change are proving very difficult to design and implement. They require governments to undertake a portfolio of efforts that are politically challenging because they require large expenditures today for uncertain benefits that accrue far into the future. That portfolio includes tasks such as putting a price on carbon, fixing the tendency for firms to under-invest in the public good of new technologies and knowledge that will be needed for achieving cost-effective and deep cuts in emissions; and preparing for a changing climate through investments in adaptation and climate engineering. Many of those efforts require international coordination that has proven especially difficult to mobilize and sustain because international institutions are usually weak and thus unable to force collective action...."