The economics of including carbon sinks in climate change policy. Evaluating the carbon supply-curve through afforestation in Latin America

After the inclusion of carbon sinks in the Kyoto Protocol, greenhouse gas mitigation policies should account for abatement measurements in both the energy and forestry sectors. This report deals with the development of a methodology for estimating cost-curves of carbon sequestration with afforestation activities and its combination with existing cost-curves of carbon abatement in the energy sector, with an application to the Latin American region. For deriving the carbon supply-curves, a bottom-up approach is used where the costs of carbon sequestration are first estimated at a grid-level (georeferenced area of 50 x 50 km) and later aggregated in a single cost curve. In evaluating the carbon sequestration benefits of forests, we intend to capture the life-cycle of the sequestered carbon by accounting the carbon uptake during forest growth, the carbon emissions during the harvest periods and the residual carbon storage in short and long-lived products. From the evaluation of Latin America, we conclude that 1. under reasonable considerations of land and timber prices and using a discount rate of 5%, the cumulative carbon sequestration by 2010 will be about a fourth of the yearly emissions in the region’s energy sector, when the carbon price is $20/tC 2. the Latin American region on its one could fulfil the Kyoto Protocol demand on CDM-sinks for 2008-2012 at a carbon price of$26-32/tC 3. when the supply-curves of afforestation and energy are combined, the total emission reductions in 2010 are at least 15% larger than in the case of the energy sector alon