Trade-Based Carbon Sequestration Accounting

This article describes and illustrates an accounting method to assess and compare “early” carbon sequestration investments and trades on the basis of the number of standardized CO2 emission offset credits they will provide. The “gold standard” for such credits is assumed to be a relatively riskless credit based on a CO2 emission reduction that provides offsets against CO2 emissions on a one-for-one basis. The number of credits associated with carbon sequestration needs to account for time, risk, durability, permanence, additionality, and other factors that future trade regulators will most certainly use to assign “official” credits to sequestration projects. The method that is presented here uses established principles of natural resource accounting and conventional rules of asset valuation to “score” projects. A review of 20 “early” voluntary United States based CO2 offset trades that involve carbon sequestration reveals that the assumptions that buyers, sellers, brokers, and traders are using to characterize the economic potential of their investments and trades vary enormously. The article develops a “universal carbon sequestration credit scoring equation” and uses two of these trades to illustrate the sensitivity of trade outcomes to various assumptions about how future trade auditors are likely to “score” carbon sequestration projects in terms of their “equivalency” with CO2 emission reductions. The article emphasizes the importance of using a standard credit scoring method that accounts for time and risk to assess and compare even unofficial prototype carbon sequestration trades. The scoring method illustrated in this article is a tool that can protect the integrity of carbon sequestration credit trading and can assist buyers and sellers in evaluating the real economic potential of prospective trades.