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Resource Assessment: Terrestrial Carbon Sequestration

Resource Assessment: Terrestrial Carbon Sequestration. Richard Bernknopf US Geologic Survey, Menlo Park, California Benjamin M. Simon U.S. Department of the Interior, Office of Policy Analysis, Washington, D.C. Energy Independence and Security Act of 2007. Section 711

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Resource Assessment: Terrestrial Carbon Sequestration

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  1. Resource Assessment: Terrestrial Carbon Sequestration Richard Bernknopf US Geologic Survey, Menlo Park, California Benjamin M. SimonU.S. Department of the Interior, Office of Policy Analysis, Washington, D.C.

  2. Energy Independence and Security Act of 2007 • Section 711 • resource assessment, geologic C sequestration • Section 712 • resource assessment, terrestrial C sequestration • Section 713 • maintain records on C sequestered within Federal mineral leaseholds • Section 714 • recommendations for managing C sequestration on public land

  3. A portfolio approach to carbon sequestration: implementing sections 711-714 of the Energy Independence and Security Act of 2007 • Whose portfolio? • Individual investors • Private companies • NGOs • Society

  4. A portfolio approach to carbon sequestration: implementing sections 711-714 of the Energy Independence and Security Act of 2007 Components of the Portfolio Approach • Resource assessment to estimate sequestration capacity (USGS) • Carbon supply and uncertainty estimation (DOI and USGS) • Analysis of risk-return tradeoffs of alternative C sequestration portfolios (DOI and USGS) • Helps to understand the risks and returns to carbon sequestration markets • Potential to integrate the public lands into carbon offset markets

  5. Portfolio Approach -- Roadmap to Improving the Efficiency of Carbon Markets • Resource assessment, markets, and risk-return framework • Historical perspective on risk-return approaches to portfolio management • Contemporary perspective has explicit recognition of risk-return tradeoffs • Resource assessment underlies more sophisticated approach that includes risk-return tradeoffs because it provides information about the potential “returns” (volatility) for each asset that might be in a portfolio and the implications of including various assets in a portfolio • Portfolio approach – logical extension of the “traditional” resource assessment

  6. Defining the Market • Cap and trade market • This market works because of a cap on emissions • Cap essentially limits “supply” of C that can be emitted • Cap creates a scarcity value • Trading – carbon credits traded for emission allowances • credits denominated in tons for biological C sequestration (e.g., tree planting) traded for permission to emit tons of C • Portfolio diversification

  7. Capital asset pricing model (CAPM)

  8. Carbon CAPM • Portfolio • Expected return • Individual assets • Individual portfolio • Market portfolio • Risk free rate • Uncertainty/volatility • individual assets • Individual portfolio • Market portfolio • Asset correlation and diversification • Security market line

  9. A Carbon Sequestration Market Portfolio Highest Sharpe Ratio portfolio Security Market Line Efficient Frontier of Risky Assets B C Expected Return Individual Portfolios A Risk (standard deviation) Portfolios can include combinations of emissions reductions, and terrestrial and geologic sequestration.

  10. Portfolio A: low return, low risk

  11. Portfolio B: high return, high risk

  12. Portfolio C: high return, low risk

  13. Resource Assessment • RA provides capacity estimates • Assumes no restrictions on availability of assets that could be used to sequester carbon • Goal: integrate resource assessment with portfolio approach in order to develop risk-return tradeoff information • Extension of “traditional” resource assessment • Relationship to supply curve

  14. Identified Undiscovered Economic Reserves Accessible Subeconomic Resource Base Resources Jnaccessible A Resource Assessment

  15. Uncertainty Range of Security Market Line Highest Sharpe Ratio portfolio Security Market Line Efficient Frontier of Risky Assets Expected Return Individual Portfolios Risk (standard deviation) A Carbon Sequestration Market Portfolio B C A

  16. Methodology • Identify the set of ecosystems to be considered. • Estimate the distribution of the stocks and flows of carbon on the basis of a probabilistic range of values for certain ecosystem and management attributes. • Calculate a probabilistic estimate of carbon currently sequestered. • Aggregate the estimates for each ecosystem. • Evaluate the economic viability of sequestration potential.

  17. Methodology • Incremental approach, focus on DOI land resources first • Data • Stocks • Flows • uncertainty of stocks, flows • Recognize the role of incentives • Information on stocks, flows comes from the resource assessment • from biologists, geologists, hydrologists, engineers [not economists!] • Data could be combination of primary data collection or secondary sources • Analysis • CAPM – est SML; est efficient frontier; evaluate risk-return tradeoffs of individual representative portfolios • Supply curve estimation is integral to combining assets into a portfolio • Interpretation -- how does information on risks and returns impact policy alternatives? esp for DOI

  18. Whose Portfolio – Public and Private Publicly owned assets that supply carbon sequestration services Can be part of investors portfolios Can be part of society’s portfolio Magnitude of services may be such that would be expected to influence the carbon credit market USDA – forest management, ag policies for private land DOI – forest and land management responsibilities (BLM lands, FWS refuges, NPS lands, land management responsibilities of other bureaus). EPA – regulator, sets, influences caps Can influence the risk-free rate of return

  19. The DOI portfolio • DOI is steward of public lands that can be used for carbon sequestration • Resource assessment for estimating resources on public lands will be useful for private and public portfolios • Section 714 gives DOI responsibility to propose a leasing program • The leasing program will allow non federal entities to include publicly owned sequestration assets in their portfolios • The availability, or lack thereof, of assets that could potentially be used to sequester C on public land could potentially influence slope of SML for C sequestration markets • We care about the potential role of public lands because it can affect the return-risk tradeoffs • Can rule portfolios in or out, which affects the efficient frontier • Ultimately the shape and location of the frontier affects the SML

  20. Leasing program BLM leasing program (section 714) Possible components fair return to the public for its resources predictability of leasing regime identifying public land and natural resources for sequestration and lands unsuitable for sequestration risk sharing with private sector

  21. Next Steps • Develop draft methodology, publish, and seek public comment • Develop the integrated assessment • Systematic information on variability of sequestration potential for various assets • Possible use of satellite data to evaluate land use change • Investigate existing models, approaches to see if they can be generalized to large areas • Identify and fill information gaps

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