CCS-Bonds as a superior instrument to incentivize secure carbon sequestration

Abstract

Geological sequestration of CO2 on a massive scale implies that large area fractions of the underground could become flooded by CO2, imposing a unprecedented regulatory challenge to environmental authorities. Therefore we propose carbon sequestration bonds as complementary, market-based instruments that should further help to manage the risk of decadal-scale CO2 leakage. Such bond schemes address market failures that could occur if the investment behavior of operators under uncertainty differed from society’s preference. For a stylized setup we demonstrate that our bond system has the potential to simultaneously address regulatory challenges stemming from information asymmetries and diverging orders of preference.