Abstract
Temporary crediting of carbon storage is an instrument that allows entities with emissions reductions obligations to defer some obligations for a fixed period of time. This instrument provides a means of guaranteeing the environmental integrity of a carbon sequestration project. But because the user of the temporary credit takes on the liability of renewing it, or replacing it with a permanent credit, the temporary credit must sell at a discount compared to a permanent credit. We show that this discount depends on the expected change in price of a permanent credit. Temporary credits have value only if restrictions on carbon emissions are not expected to tighten substantially. The intuition is illustrated by assessing the value of a hypothetical temporary sulfur dioxide sequestration credit, using historical data on actual SO2 allowance prices.
Highlights
Carbon sequestration projects—such as plantations, agroforestry, improved agricultural techniques, or geological sequestration—offer potentially cost-effective ways of removing CO2 from the atmosphere, or of keeping it out of the atmosphere in the first place.But unlike abatement in the energy sector, each such project faces some risk of reversal
The risk of non-permanence has inspired a search for means of insuring the integrity of carbon credits based on sequestration projects (Watson et al, 2000)
One frequently discussed option is to provide for temporary crediting of carbon storage (UNFCCC, 2000, Sedjo and Marland, 2003, Locatelli and Pedroni, 2003)
Summary
Carbon sequestration projects—such as plantations, agroforestry, improved agricultural techniques, or geological sequestration—offer potentially cost-effective ways of removing CO2 from the atmosphere, or of keeping it out of the atmosphere in the first place. A project proponent would guarantee carbon sequestration for, say, five years, or from one Kyoto commitment period to the next. The holder suffers a debit on his carbon account, which he can make up for securing a reduction based on an energy project, by retiring an emissions allowance from the second commitment period, or by renewing the temporary credit if the sequestration project is still ongoing. Because temporary credits carry this liability, they are bound to sell at a discount compared to “permanent” emissions reductions from energy projects. We discuss alternative mechanisms to assure permanence of sequestration
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