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Carbon Dioxide Removal and the futures market

Coffman, DD; Lockley, AJ; (2016) Carbon Dioxide Removal and the futures market. Environmental Research Letters , 12 (1) , Article 015003. 10.1088/1748-9326/aa54e8. Green open access

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Abstract

Futures contracts are exchange-traded financial instruments that enable parties to fix a price in advance, for later performance on a contract. Forward contracts also entail future settlement, but they are traded directly between two parties. Futures and forwards are used in commodities trading, as producers seek financial security when planning production. We discuss the potential use of futures contracts in Carbon Dioxide Removal (CDR) markets; concluding that they have one principal advantage (near-term price security to current polluters), and one principal disadvantage (a combination of high price volatility and high trade volume means contracts issued by the private sector may cause systemic economic risk). Accordingly, we note the potential for the development of futures markets in CDR, but urge caution about the prospects for market failure. In particular, we consider the use of regulated markets: to ensure contracts are more reliable, and that moral hazard is minimised. While regulation offers increased assurances, we identify major insufficiencies with this approach—finding it generally inadequate. In conclusion, we suggest that only governments can realistically support long-term CDR futures markets. We note existing long-term CDR plans by governments, and suggest the use of state-backed futures for supporting these assurances.

Type: Article
Title: Carbon Dioxide Removal and the futures market
Open access status: An open access version is available from UCL Discovery
DOI: 10.1088/1748-9326/aa54e8
Publisher version: https://doi.org/10.1088/1748-9326/aa54e8
Language: English
Additional information: © 2017 IOP Publishing Ltd. Original content from this work may be used under the terms of the Creative Commons Attribution 3.0 licence . Any further distribution of this work must maintain attribution to the author(s) and the title of the work, journal citation and DOI
Keywords: Forward contracts, futures markets, carbon dioxide removal, negative emissions technologies, voluntary carbon offsets
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of the Built Environment
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of the Built Environment > The Bartlett Sch of Const and Proj Mgt
URI: https://discovery.ucl.ac.uk/id/eprint/1532841
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