Food, Fuel, Forests and the Pricing of Ecosystem Services

We investigate how demand for alternative ecosystem services, as agricultural and biofuels production, recreation and carbon storage, may be complementary or competitive. We also assess how pricing of all of new services may affect land use, food prices, and the prospects for biofuels production. We expand the Emissions Prediction and Policy Analysis (EPPA) model, a recursive dynamic general equilibrium model of the world economy, to explicitly represents the recreation value of ecosystems, formulated through the expansion of traditional economic accounts to represent outdoor recreation services used by the household. We also extend this model to represent the carbon storage value of alternative ecosystem services. Another innovation introduced in the model is to be able to price carbon uptake or emissions from land use change. We consider the decision to invest in biofuels as a dynamic problem, since the land use changes needed to produce biomass result in an initial carbon debt that is eventually repaid through repeated harvests that continue to offset fossil fuel use. We simulate several experiments, considering CO2 prices on fossil fuel use, land use emissions and credits for carbon uptake from land use changes. We find that growth in demand for biofuels increases with implementation of CO2 pricing policies and that leads to increased CO2 emissions from land use conversion if CO2 prices only cover energy emissions and are not extended to emissions from land. If we extend CO2 pricing to land use emissions that provides sufficient economic incentive to avoid most of the deforestation that would otherwise occur. If we further extend CO2 pricing to provide credits for increasing the stock of carbon we find significant reforestation such that globally land use becomes a large net sink for CO2, with a substantial increase in CO2 storage in vegetation and soils at the expense of other land uses, especially pasture and grazing. Our analysis suggests that land transitions occurring over the century if CO2 storage is credited would eventually store CO2 equal to as much as a third the entire global energy emissions over this coming century assuming these emissions are controlled by climate policy. With at least two new large non-food demands for land (CO2 storage and biofuels) that compete with land for food the need to assure that low income households worldwide have food or the resources to afford it becomes critical. Finally, we simulate scenarios where different coalitions of countries impose policies penalizing land use emissions and crediting land use uptakes to investigate whether leakage is an important phenomenon in land use emissions.