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Economic incentives for carbon sequestration: A review of the literature

Author

Listed:
  • Aklilu, Abenezer

    () (Department of Economics, Swedish University of Agricultural Sciences)

  • Gren, Ing-Marie

    () (Department of Economics, Swedish University of Agricultural Sciences)

Abstract

The main purpose of this study is to review studies in economics on policies for carbon sequestration. Specific design problems are associated with heterogeneous land holders, additionality and permanence in carbon projects, and the risk of leakage. It was found that a large part of the literature, which started in the late 1980s, has been focused on the calculation of costs for carbon sequestration, mainly in forests, and on calculations of cost savings from its introduction in climate programs. Results from the literature point to cost savings of up to 40%. The small body of literature on transaction costs, mainly attributed to monitoring and verification, indicates that these costs are modest. The literature on policy design is much more scant, and the main part suggests discounting of the carbon sink value to account for the uncertainty. Assessment of equilibrium prices in the many existing voluntary and regulatory carbon sink markets shows a lower price of carbon sink compared with certain abatement of fossil fuels. This can be explained by risk discounting. A few studies suggest contract design for self-enforcement of efficient carbon projects. This has not yet been implemented in carbon sink offsets in practice, the carbon trade of which corresponds to approximately 0.3% of all carbon trade.

Suggested Citation

  • Aklilu, Abenezer & Gren, Ing-Marie, 2014. "Economic incentives for carbon sequestration: A review of the literature," Working Paper Series 2014:8, Swedish University of Agricultural Sciences, Department Economics.
  • Handle: RePEc:hhs:slueko:2014_008
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    File URL: http://pub.epsilon.slu.se/11622/
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    Keywords

    economic incentives; carbon sequestration; policy design; survey;

    JEL classification:

    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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