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Temporary sequestration credits : an instrument for carbon bears

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  • Kenneth M. Chomitz
  • Franck Lecocq

Abstract

Temporary crediting of carbon storage is a proposed 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 with a permanent credit. The authors 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 sulfur dioxide allowance prices.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3181.

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Date of creation: 01 Dec 2003
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Handle: RePEc:wbk:wbrwps:3181

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Related research

Keywords: Payment Systems&Infrastructure; Montreal Protocol; Banks&Banking Reform; Environmental Economics&Policies; Financial Intermediation; Environmental Economics&Policies; Carbon Policy and Trading; Montreal Protocol; Banks&Banking Reform; Insurance&Risk Mitigation;

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Cited by:
  1. Olschewski, Roland & Benitez, Pablo C., 2005. "Secondary forests as temporary carbon sinks? The economic impact of accounting methods on reforestation projects in the tropics," Ecological Economics, Elsevier, vol. 55(3), pages 380-394, November.
  2. Sumeet Gulati & James Vercammen, 2005. "The Optimal Length of an Agricultural Carbon Contract," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 53(4), pages 359-373, December.
  3. Gulati, Sumeet & Vercammen, James, 2006. "Time inconsistent resource conservation contracts," Journal of Environmental Economics and Management, Elsevier, vol. 52(1), pages 454-468, July.
  4. David Cooley & Christopher Galik & Thomas Holmes & Carolyn Kousky & Roger Cooke, 2012. "Managing dependencies in forest offset projects: toward a more complete evaluation of reversal risk," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 17(1), pages 17-24, January.
  5. Andrew Coleman, 2011. "Financial Contracts and the Management of Carbon Emissions in Small Scale Plantation Forests," Working Papers 11_04, Motu Economic and Public Policy Research.
  6. Garcia-Barrios, Fernando & Bigsby, Hugh R. & Kerr, Geoffrey N., 2012. "Small forests owners and environmental sustainability in Guatemala: The potential of the Carbon Banking approach," 2012 Conference, August 31, 2012, Nelson, New Zealand 136045, New Zealand Agricultural and Resource Economics Society.

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