Geographic diversification of carbon risk—A methodology for assessing carbon investments using eddy correlation measurements

In the context of the international market for greenhouse gas emissions, I examine applications of portfolio theory for investment decisions regarding biological carbon sequestration projects. Using ecosystem-scale eddy correlation carbon flux measurements, I show how to determine how much financial risk of carbon is diversifiable. This method allows a quantitative assessment of the potential for geographical diversification of carbon sink investments. In a case study of six ecosystems in the temperate Northern hemisphere, a significant benefit from diversification is demonstrated even among sites that seem to have broadly similar characteristics. This benefit derives in part from differences in ecosystem response to varying weather conditions and differences in ecosystem type, both of which affect the sites’ covariances. In providing a quantitative common language for scientific and corporate uncertainties, the concept of carbon financial risk provides an opportunity for expanding communication between these elements essential to successful climate policy.