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.
7/25/2016
1
Energy Independence and Security Act of 2007

Section 711

Section 712

Section 713

 resource assessment, geologic C sequestration
 resource assessment, terrestrial C sequestration
 maintain records on C sequestered within Federal
mineral leaseholds
Section 714
 recommendations for managing C sequestration
on public land
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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
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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
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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
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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
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Capital asset pricing model (CAPM)
E  Ri   R f   im  E  Rm   R f

where:
E  Ri  is the expected return on the capital asset
R f is the risk-free rate of sequestration
 im  the beta coefficient  is the sensitivity of the asset returns to
market returns, or im
cov  Ri , Rm 

var  Rm 
E  Rm  is the expected return of the market
E  Rm   R f is risk premium (the difference between the expected
market rate of return and the risk-free rate of return).
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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
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A Carbon Sequestration Market Portfolio
Highest Sharpe Ratio portfolio
Security Market Line
Expected Return
Efficient Frontier of
Risky Assets
C
A
B
Individual
Portfolios
Risk (standard deviation)
Portfolios can include combinations of emissions reductions, and terrestrial and
geologic sequestration.
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Portfolio A: low return, low risk
Climate
zone
Activity
Practice
Warm dry Grassland Grazing,
fertilization, fire
Cool dry Grassland Grazing,
fertilization, fire
Cool dry Cropland Tillage &
residue mngt
Cool dry Cropland Agro-forestry
Cool dry Bioenergy Soils only
Cool dry Cropland Nutrient
management
Warm dry Cropland Nutrient
management
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All GHG (tons CO2 eq/ha/yr)
Mean
Low
High
Range
0.11
-0.55
0.77
1.32
0.13
-0.54
0.79
1.33
0.17
-0.52
0.86
1.38
0.17
0.17
0.33
-0.52
-0.52
-0.21
0.86
0.86
1.05
1.38
1.38
1.26
0.33
-0.21
1.05
1.26
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Portfolio B: high return, high risk
Climate
zone
Activity
Practice
All GHG (tons CO2 eq/ha/yr)
Mean Low High
Range
Warm dry Organic soils
Restoration
70.18 7.33 124.31
116.98
Warm
Organic soils
moist
Cool moist Organic soils
Restoration
70.18 7.33 124.31
116.98
Restoration
33.51 3.67 54.65
50.98
Cool dry
Restoration
33.51 3.67 34.65
30.98
Organic soils
Cool moist Cropland
Set aside and LUC 5.36 1.17
9.51
8.34
Warm
Cropland
moist
Cool moist Degraded lands
Set aside and LUC 5.36 1.17
9.51
8.34
Restoration
8.51
8.19
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4.45 0.32
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Portfolio C: high return, low risk
Climate zone Activity
Practice
All GHG (tons CO2 eq/ha/yr)
Mean Low High Range
Cool moist
Degraded lands
Restoration
4.45 0.32
8.51
8.19
Cool dry
Cropland
Set aside & LUC
3.93 -0.07
7.9
7.97
Warm dry
Cropland
Set aside &LUC
3.93 -0.07
7.9
7.97
Cool dry
Degraded lands
Restoration
3.53 -0.33
7.4
7.73
Warm dry
Degraded lands
Restoration
3.45 -0.37
7.26
7.63
Warm moist Degraded lands
Restoration
3.45 -0.37
7.26
7.63
Manure/biosolids Application
2.79 -0.79
7.5
8.29
Warm moist Manure/biosolids Application
2.79 -0.79
7.5
8.29
Cool moist
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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 riskreturn tradeoff information
 Extension of “traditional” resource assessment

Relationship to supply curve
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A Resource Assessment
Identified
Undiscovered
Economic
Reserves
Resource Base
Subeconomic
Accessible
Resources
Jnaccessible
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A Carbon Sequestration Market Portfolio
Uncertainty Range of Security Market Line
Highest Sharpe Ratio portfolio
Security Market Line
Expected Return
Efficient Frontier of
Risky Assets
C
A
B
Individual
Portfolios
Risk (standard deviation)
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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.
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Methodology





Incremental approach, focus on DOI land resources first
Data




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



Stocks
Flows
uncertainty of stocks, flows
Recognize the role of incentives
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
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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
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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
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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
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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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