Economic investigation of discount factors for agricultural greenhouse gas emission offsets

This dissertation analyzes the basis for and magnitudes of discount factors based on the characteristics of greenhouse gas emission (GHGE) offsets that are applied to the GHGE reduction projects, concentrating on agricultural projects. Theoretical approaches to discount factors, estimation and incorporation of discount factors procedures are developed. Discount factors would be imposed by credit purchasers due to noncompliance with regulatory program of the credits with GHG program including consideration of shortfall penalties and limited durations. Discount factors are proposed for (i) additionality, (ii) leakage, (iii) permanence, and (iv) uncertainty. Additionality arise when the region where an AO project is being proposed would have substantial adoption of the AO practice in the absence of GHG programs (business as usual GHGE offset). Leakage arises when the effect of a program is offset by an induced increase in economic activity and accompanying emissions elsewhere. The leakage effect depends on demand and supply elasticities. Permanence reflects the saturation and volatility characteristics of carbon sequestration. Carbon is stored in a volatile form and can be released quickly to the atmosphere when an AO practice is discontinued. The permanence discount depends on the project design including practice continuation after the program and the dynamic rate of offset. Also, consideration of multiple offsets is important. Uncertainty arises due to the stochastic nature of project quantity. The uncertainty discount tends to be smaller the larger the size of the offset contract due to aggregation over space and time. The magnitude of these discounts is investigated in Southeast Texas rice discontinuation study. The additionality and the leakage discounts are found to play an important role in case of rice lands conversion to other crops but less so for pasture conversions and yet less for forest conversions. The permanence discount is important when converting to other crops and short rotation forestry. When all discounts are considered, rice lands conversion to forest yields claimable credits amounting to 52.8% ~ 77.5% of the total offset. When converting rice lands to pasture, the claimable credits 45.1% ~ 64.2%, while a conversion of rice lands to other crops yields claimable credits 38.9% ~ 40.4%.