Climate Policy

Climate Policy 4 (2004) 65–74

Research Article

Temporary sequestration credits: an instrument for carbon bears

Kenneth M Chomitz and Franck Lecocq

Received 6 June 2003 ; received in revised form 24 June 2004 ; accepted 25 June 2004

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 SO₂ allowance prices.

Keywords: Carbon sequestration; Carbon markets

download full article