4.6.2 Carbon Offsets, Tradable Permits, and Leakage
Markets created for carbon credits from management of the biosphere, of course,
will be heavily influenced by the many other commodities produced by the biosphere
(food, wood, etc.). Food security may, for example, be a reason for a government
to continue its policy of agricultural subsidies in the absence of forestry
(carbon) subsidies. On the other hand, some studies (e.g., Callaway and McCarl,
1996) have shown that when diverting agricultural subsidies to carbon payments,
the net impact on the national budget could be zero. In tropical countries,
the institutions and subsidies for forest clearing may remain as part of the
package to promote economic development. Only if the monetary value of carbon
stocks and sinks is recognized and paid for will markets be efficient in encouraging
C sequestration. Some developing countries see markets for C offsets as providing
resources to facilitate capital inflows to finance conservation and other activities.
An emerging instrument that is likely to have a large effect on carbon sequestration
is the tradable emissions permit. Tradable permits to deal with environmental
pollutants have precedents in other areas. In the USA, for example, there is
an active market for sulphur emissions permits (Burtraw, 2000). Firms with excess
emissions permits can trade these to firms in need of additional permits. Thus,
incremental emissions are no longer free, but incur additional costs to the
firm. Firms that have excess permits can either sell those permits or forego
the opportunity of receiving a payment an opportunity cost. Such an approach
allows the market to reallocate emission permits, and thus emissions, to the
users that receive the highest return from the permits, thereby distributing
carbon emissions permits to the most efficient users. This approach is beginning
to be contemplated in addressing the problem of increasing atmospheric carbon
and is endorsed in the Kyoto Protocol.
Currently, there are a series of brokers prepared to trade carbon credits in
the USA and Europe, e.g., Natsource and Canto Fitzgerald (Stuart and Moura-Costa,
1998), and the Sydney Futures Exchange in Australia is planning to begin trading
in the latter part of 20001).
In addition to tradable carbon emission permits, the door is open for consideration
of an analogous instrument, tradable carbon offsets. Activities,
such as planting and protecting forests, could provide carbon sequestration
services that could be sold or traded.
To date there is only limited experience with certified carbon offset instruments.
In the USA, the electrical power industry, through the Edison Electric Institute
(EEI - an association of private electrical power companies), has formed the
Utility Carbon Management Tree Program whereby the various member companies
invest money into a project fund to develop or purchase carbon offset credits
(Sedjo, 1999a). Another market approach has been created, the Certified Tradable
Offsets, issued by the Costa Rican government, and the first carbon-backed securities
worldwide (Stuart and Moura-Costa, 1998). These offsets are like JI or CDM as
defined in the Kyoto Protocol, but would be tradable.
A potentially serious problem with carbon offsets is that there may be carbon
leakage. Leakage refers to the situation in which a carbon sequestration activity
(e.g., tree planting) on one piece of land inadvertently, directly or indirectly,
triggers an activity which, in whole or part, counteracts the carbon effects
of the initial activity. It can be shown that most of these types of problems
arise from differential treatment of carbon in different regions and circumstances,
and the problem is not unique to carbon sequestration activities but pervades
carbon mitigation activities in the energy sector as well.
In land use, leakage can occur from either protection or planting activities.
Suppose, for example, that a forest or wetland that was to be cleared is instead
protected. Protection of one such forest or wetland may simply deflect the pressure
to another piece of land that is not protected and will be cleared instead.
Leakage can occur across both spatial and temporal boundaries. Additionally,
a forest protected in one year is subject to the possibility of clearing in
A similar situation may also exist with activities such as tree planting. Trees
provide at least two services: producing industrial wood and sequestering carbon.
Trees planted for carbon sequestration, because they may eventually be used
for wood, can affect expectations about future industrial wood prices, thereby
influencing the planting decisions of forest products companies. If carbon credits
are provided to carbon forests but not to industrial forests, and if some carbon
forests are anticipated to enter future timber markets, then forest industrial
firms may reduce investments in new forests. Such a reduction would partly offset
carbon sequestered in the newly planted carbon forest, thereby reducing the
net total carbon that would have accumulated by both industrial and carbon forests
(Sedjo and Sohngen, 2000). This leakage effect would not occur if both industrial
and carbon forests could expect to receive payment for both their carbon and
Leakage from industrial forests, resulting from forests established for carbon
purposes, has been estimated by Sohngen and Sedjo (1999) to be about 40%, globally,
assuming that all carbon forests are made available to the timber market. This
compares with estimated leakages in the energy sector of about 5%20%.
No estimates of leakage generated from protection activities are available,
but it is suggested that it may vary by country and site, unlike planted forests
that are linked through the global timber market.
The leakage problem may be addressed reasonably well within nations by caps
imposed on total emissions, but leakage of emissions across national boundaries
may still occur in the absence of global coverage.
Conceptually, a permanent net carbon offset should be equivalent to a tradable
emissions permit. If a new activity permanently reduces net atmospheric carbon
by one tonne, the climatic implications are the same as if the tonne of carbon
was never released. Thus, a carbon-offset credit would be equivalent to a tradable
emission credit. However, since carbon offset can quickly be liquidated, offset
credits have greater liability problems. One approach might be treated on an
annual (or decadal) basis as the rental of (perhaps temporary) carbon sequestering
services. Although different from carbon emissions permits, they nevertheless
would expand the number of credits available, and thus have a mitigating
effect on the market price of the credits. A discussion of some of the options
is presented in IPCC (2000a).