Logs or permits? Forestry land use decisions in an emissions trading scheme

Negative carbon emissions options are required to meet long-term climate goals in many countries. One way to incentivise these options is by paying farmers for carbon sequestered by forests through an emissions trading scheme (ETS). New Zealand has a comprehensive ETS, which includes incentives for farmers to plant permanent exotic forests. This research uses an economy-wide model, a forestry model and land use change functions to measure the expected proportion of farmers with trees at harvesting age that will change land use from production to permanent forests in New Zealand from 2014 to 2050. We also estimate the impacts on carbon sequestration, the carbon price, gross emissions, GDP and welfare. When there is forestry land use change, the results indicate that the responsiveness of land owners to the carbon price has a measured impact on carbon sequestration. For example, under the fastest land use change scenario, carbon sequestration reaches 29.93 Mt CO2e by 2050 compared to 23.41 Mt CO2e in the no land use change scenario (a 28% increase). Even under the slowest land use change scenario, carbon sequestration is 25.89 Mt CO2e by 2050 (an 11% increase compared with no land use change). This is because, if foresters decide not to switch to permanent forests in 1 year, carbon prices and ultimately incentives to convert to permanent forests will be higher in future years.