The Economics of Forest Carbon Sequestration Revisited: A Challenge for Emissions Offset Trading

This paper provides an overview of the role that forestry activities play in mitigating climate change. The emphasis is on a comparison of carbon offset credits and a carbon tax/subsidy scheme for incentivizing reductions in the release of CO2 emissions and increase in sequestration of atmospheric CO2 through forestry. In addition to traditional issues related to additionality, leakages, and the transaction costs of determining and verifying how many carbon offsets are created, we investigate the importance of good governance and contracts. There are three options available to a public or private forestland owner for creating carbon offsets once tree reach maturity: (1) avoid or delay harvest; (2) harvest timber and use sawmill, logging and other residuals to generate electricity; and (3) sustainably manage the forest and carbon fluxes (i.e., post-harvest wood product carbon pools and avoided emissions from substituting wood for non-wood in construction or wood bioenergy for fossil fuels) to maximize net revenues. Delaying harvests or avoiding deforestation are considered important but outside the domain of a tax/subsidy or cap-and-trade scheme. With respect to bioenergy, the analysis suggests that, if there is a carbon dividend, it is likely to be small even if the life cycle of carbon is appropriately taken into account. Further, if there is some urgency to mitigate climate change, the use of wood bioenergy is more likely to result in a carbon debt, even with respect to coal, because of the need to weight CO2 according to when it is released to and removed from the atmosphere. Only holistic commercial forest management that is sustainable and incentivizes sequestration of carbon assures efficient mitigation of climate change. We demonstrate this by investigating carbon fluxes derived from an integrated forest management model and confirm this result more generally on the basis of a Faustmann rotation age model that explicitly includes benefits of storing carbon.