Managing the cost of emissions for durable, carbon-containing products

Abstract

We recognize that carbon-containing products do not decay and release CO₂ to the atmosphere instantaneously, but release that carbon over extended periods of time. For an initial production of a stock of carbon-containing product, we can treat the release as a probability distribution covering the time over which that release occurs. The probability distribution that models the carbon release predicts the amount of carbon that is released as a function of time. The use of a probability distribution in accounting for the release of carbon to the atmosphere realizes a fundamental shift from the idea that all carbon-containing products contribute to a single pool that decays in proportion to the size of the stock. Viewing the release of carbon as a continuous probabilistic process introduces some theoretical opportunities not available in the former paradigm by taking advantage of other fields where the use of probability distributions has been prevalent for many decades. In particular, theories developed in the life insurance industry can guide the development of pricing and payment structures for dealing with the costs associated with the oxidation and release of carbon. These costs can arise from a number of proposed policies (cap and trade, carbon tax, social cost of carbon, etc), but in the end they all result in there being a cost to releasing carbon to the atmosphere. If there is a cost to the emitter for CO₂ emissions, payment for that cost will depend on both when the emissions actually occur and how payment is made. Here we outline some of the pricing and payment structures that are possible which result from analogous theories in the life insurance industry. This development not only provides useful constructs for valuing sequestered carbon, but highlights additional motivations for employing a probability distribution approach to unify accounting methodologies for stocks of carbon containing products.