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- Man-Keun Kim
- Joint Global Change Research Institute
- University of Maryland
- Bruce A. McCarl
- Regents Professor of Agricultural Economics
- Texas A&M University
- Brian C. Murray
- Director
- Center for Regulatory Economics and Policy Research
- RTI International
- Presented at USDA Symposium on
- Greenhouse Gases & Carbon Sequestration
- in Agriculture and Forestry
- March 2005 Baltimore, MD
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- Are offsets fungible?
- No, offsets are not fungible due to permanence issues such as saturation
and volatility
- So, permanence considerations could affect the terms of trade for
(potentially) land-based carbon sequestration and permanent emission
reductions (fuel change, direct reduction etc.)
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- Examine market consequences of permanence characteristics of biological
carbon sequestration
- Develop a grading standards approach
- Derive a permanence related grading standard discount
- Investigate the empirical magnitude of the grading standard permanence
discount
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- Approach to Equilibrium/Saturation - differential rate of accumulation
over time and a long run decline to a near zero rate of net
sequestration when carbon inputs and carbon decomposition reaches
equilibrium
- Volatility - sequestered carbon can be rapidly released back to the
atmosphere if practices are reversed
- Contract terms - influence offset value and involve
- project duration
- payment terms including possible maintenance
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- Absolute Change in the Annual Rate of Carbon Sequestered Following a
Change from Conventional Tillage (CT) to No-Till (NT) -
(West and Post 2002)
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- The question is whether the permanence concerns associated with
sequestration may alter the value of the resultant carbon offset to
purchasers in the market place
- Offsets are not fungible from an offset purchasers point of a view,
an impermanent sequestration asset may be worth a different amount than
permanent offset
- In turn prices may differentiate based on permanence characteristics
like a grading standard
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- Market grading standards
- Gasoline prices by octane level
- #2 Yellow corn, CD plywood, Long staple cotton etc
- Items receive a price premium/discount depending upon their
characteristics and the consumer value of those characteristics
- Biological carbon sequestration may have consumer characteristics in
terms of claimable quantity of offsets over time or cost due to permanence
/ dynamic flow of offsets
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- Suppose we consider two alternatives
- Perfect alternative without any permanence issues
- Imperfect alternative with permanence issues and a potentially
discounted price
- Equate the effective cost per ton and solve for discount
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- Take cost paid divided by tons obtained
- But tons and cost arise over time
- Effective cost per ton (PE) today for perfect (permanent) offset
- Pt current and future carbon price,
- Qt quantity of offset
- T is duration of the contract
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- Buyback - At the end of the sequestration contract or when things like
forest harvest occur, the purchaser has to buy new offsets to cover
those previously held through the sequestration contract
- Maintenance cost terms in the contract to compensate for efforts to
maintain sequestered carbon that are not a pure function of quantity by
year
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- Several relevant terms
- Price paid for carbon in year t
- Permanence discount
- Buyback after contract expires or when release occurs
- Maintenance cost independent of carbon quantity
- PE today
- Bt buyback,
- Mt maintenance cost,
- PDisc permanence discount
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- A perfect offset has PDisc=0, without maintenance cost or buyback
- Assume a constant carbon price, P0
- PE equals the price for the perfect prospect
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- Now suppose we equates the cost per ton from an imperfect with a perfect
prospect and solve for the permanence discount (PDisc):
- We assume a constant carbon price, P0
- This may be solved for solving for PDisc
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- Permanence discount (PDisc):
- When is discount zero
- - No Buyback
- - No Maintenance cost
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- Agricultural soil carbon sequestration
- 25 year lease with 100% buyback approximately 49% price discount
- Maintenance cost at $5/acre approximately 36% price discount
- Afforestation
- Harvest year 20 without reforestation 52%
- Harvest year 20 with reforestation 23%
- Harvest year 50 without reforestation 20%
- Harvest year 50 with reforestation 7%
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- Permanence discount indicates the amount that the offset price would be
reduced to reflect the alternative characteristics of the non-permanent
offset
- Permanence considerations could substantially affect the terms of trade
for (potentially) temporary carbon sequestration and permanent emission
reductions
- Temporary storage may be an interim strategy (bridge to the future) but
will face discounted prices if projects expire or maintenance costs
involved
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