Uncertainty Discounting for Land-Based Carbon Sequestration
Journal of Agricultural and Applied Economics
The effect of stochastic factors on soil carbon makes the quantity of carbon generated under a sequestration project uncertain. Hence, the quantity of sequestered carbon may need to be discounted to avoid liability from shortfalls. We present a potentially applicable uncertainty discount and discuss difficulties that might arise in empirical use. We insist that the variance in historical crop yields across geographical areas is used to derive a proxy variance for forming an uncertainty discount for carbon projects. Application of our approach suggests that project level uncertainty discounts would be 15-20% for the East Texas region.
Kim, M-K., and B.A. McCarl (2009) “Uncertainty Discounting for Land-based Carbon Sequestration” Journal of Agricultural and Applied Economics 41(1):1-11 .