Temporary sequestration credits: an instrument for carbon bears

Kenneth M. Chomitz and Franck Lecocq ()

Climate Policy, 2004, vol. 4, issue 1, 65-74

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 SO 2 allowance prices.

Date: 2004
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DOI: 10.1080/14693062.2004.9685510

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