Economic incentives for carbon sequestration: A review of the literature

Abenezer Aklilu () and Ing-Marie Gren ()
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Abenezer Aklilu: Department of Economics, Swedish University of Agricultural Sciences, Postal: Department of Economics, Box 7013, Swedish University of Agricultural Sciences, SE-750 07 Uppsala, Sweden
Ing-Marie Gren: Department of Economics, Swedish University of Agricultural Sciences, Postal: Department of Economics, Box 7013, Swedish University of Agricultural Sciences, SE-750 07 Uppsala, Sweden

No 2014:8, Working Paper Series from Swedish University of Agricultural Sciences, Department Economics

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.

Keywords: economic incentives; carbon sequestration; policy design; survey (search for similar items in EconPapers)
JEL-codes: Q52 Q54 Q58 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2014-11-03
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env, nep-ppm and nep-reg
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