Uncertainty Discounting for Land-Based Carbon Sequestration" Submitted to Canadian

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. Key Words: carbon seqestration, discount, uncertainty JEL Classifications: H43, Q54 Reduction of atmospheric carbon dioxide (CO2), a major greenhouse gas (GHG), is central to addressing the climate change problem and in the formation of policies that aim to limit atmo-spheric GHG levels (see discussion in IPCC 2007a,b). Land-based carbon sequestration—a process whereby plants and trees, through pho-tosynthesis processes, trap atmospheric CO2 and fix carbon into soil and plant body mass—has drawn attention as a strategy for GHG reduction. If GHG emissions reductions are pursued, a carbon market may be created as advocated for example in the Kyoto Protocol (UNFCCC) or potential legislation like Lieberman-Warner bill (Lieberman and Warner Bill) where entities se-questering carbon may be able to generate GHG reduction credits that buying emitters can use to offset their emissions (as discussed in Butt and McCarl; Kim and McCarl). Various studies have explored the potential of land-based carbon sequestration strategies such as afforestation, reforestation and other land use changes (Adams et al.; Parks an