Paying for Avoided Deforestation - Should We Do It?

Environmental Economics and Policy, Resource /Energy Economics and Policy, Q23, Q56, Q57,

How big is leakage from forestry carbon credits? Estimates from a Global Model

There is widespread recognition that forestry carbon credits can reduce the net emissions of carbon into the atmosphere. Designing systems to sequester carbon, however, has proven difficult due to a number of efficiency issues, including leakage. Leakage occurs when policy makers develop carbon projects in specific places which protect some parcels of land, but leave other parcels of land unprotected. This analysis uses a newly developed model of global land use change from an established forestry and land use model, described in Sohngen et al. (1999); Sohngen and Mendelsohn (2003); and Kindermann et al. (2008). To assess leakage we estimate carbon under storage under one scenario where the world is awarded carbon credits and another where tropical developing nations are awarded the credits. We focus our results on several regions, namely Brazil, the rest of South America, Sub-Saharan Africa and Southeast Asia. Carbon prices are assumed to be constant, and range from US$0 tC to US$900 tC. The model adjusts global land uses to these specific policies, and leakage is assessed by comparing carbon gains within the project areas to net global changes in carbon. A number of policy relevant results emerge. First, the estimates indicate that leakage ranges from 2% to more than 14%. Second, as carbon credits increase, leakage decreases across the world.Carbon Sequestration, Leakage, Carbon Credits, Environmental Economics and Policy, Land Economics/Use,

A Comparison of Timber Models for Use in Public Policy Analysis

In this paper, we compare and contrast two types of timber models that have been used for public policy analysis. These models have been variously used to predict price, inventory and market welfare impacts under different exogenous forces that impact timber markets. The framework and theory for each model type is presented and discussed. We then thoroughly test the two model types across six potential exogenous shocks to timber markets, ranging from instantaneous demand shocks to gradual supply adjustments. Our comparison indicates that these models predict potentially important differences in timber market behavior. These differences are important to consider for those who do public policy analysis.

Forestry Sequestration of CO2 and Markets for Timber

Forestry has been considered to have potential in reducing the atmospheric concentration of carbon dioxide by sequestrating carbon in above-ground timber and below-ground roots and soil. This potential has been noted in the Kyoto Protocol, which identified specific forestry activities for which carbon sequestration credits could be obtained. To date, a few forestry efforts have been undertaken for carbon purposes, but most of these efforts have been on a small scale. Proposals have been under discussion, however, that would result in the creation of very large areas of new forest for the purpose of offsetting some of the additional carbon that is being released into the atmosphere. Concerns are expressed, however, that large-scale sequestration operations might have impacts on the world timber market, affecting timber prices and thereby reducing the incentives of traditional suppliers to invest in forest management and new timber production. Such a "crowding out" or "leakage" effect, as it is called in the literature, could negate much or all of the sequestered carbon by the newly created sequestration forests. Accordingly, the purpose of this study is to examine and assess the interactions between carbon sequestration forestry, particularly, newly created carbon forests, and the markets for timber. The approach of this study involves utilizing an existing Dynamic Timber Supply Model (DTSM) to examine the interactions between newly created sequestration forests and the markets for timber. This model has been used to examine global timber supply and, more recently, has been modified to include carbon considerations. This study suggests that even without any specific sequestration efforts, commercial forestry offers the potential to sequester substantial volumes of carbon, approaching ten gigatons (Gt) (or petagrams (Pg)), in vegetation, soils and market products over the next century. At current rates of atmospheric carbon build up this is equal to about three years of net carbon releases into the atmosphere. This volume of carbon sequestration could be increased 50–100% by 50 million hectares (ha) of rapidly growing carbon-sequestering plantation forests, even given the anticipated leakages due to market price effects. Finally, the projections suggest that the amount of crowding out and carbon leakages are likely to be very modest. The 50 million ha of carbon plantations are projected to reduce land areas in industrial plantations, that is, crowd out, only from 0.2 to 7.8 million ha over the 100-year period. The addition of carbon sequestration forests offers the potential to increase the carbon sequestration of the forest system more than 50%, up to 5.7 Gts, above that already captured from market activity. This estimate assumes that crowding out and associated projected leakages will occur. At current rates of atmospheric carbon buildup, about 2.8% of the expected total buildup in atmospheric carbon over the next century could be offset by 50 million ha of carbon plantations.

PERFORMANCE-BASED VOLUNTARY GROUP CONTRACTS FOR NONPOINT SOURCE POLLUTION

Pollution from nonpoint sources (NPS), and agriculture in particular, remains as one of the largest sources of water quality impairments in the United States. As is well known in the literature, there are many difficulties with designing regulations for reducing nonpoint source pollution (i.e., Tomasi, Segerson, and Braden, 1994). Uncertainty and asymmetric information are the key regulatory difficulties in the control of NPS. The main goal of this paper is to describe a potential incentive scheme that can be applied in limited information situations. The incentive scheme involves a contract written between a point source of pollution and a small group of other nonpoint polluters in the watershed to reduce a specific load of pollution. The contract allows the nonpoint sources to enter the contract voluntarily. To handle the incentive problems typical in many principal agent problems, it incorporates joint liability, and peer pressure/monitoring to induce the nonpoint sources of pollution to meet their contractual obligations. For this paper, we propose a group contract built upon the ideas of Stiglitz (1990) and Varian (1990), and originally applied to micro-lending arrangements in developing countries. As we hypothesize with nonpoint source pollution, joint liability contracts for micro-lending assume that individuals have more information about each other than the principal has about them, and they take advantage of joint liability and peer monitoring concepts to eliminate or reduce the moral hazard problem. Joint liability contracts have been shown to be successfully applied in practice in several situations (Ghatak and Guinnane, 1999; Van Tassel, 1999). The contract proposed for this paper assumes that a principal (a point source of pollution) offers a contract that specifies a price for each ton of pollution abated by individuals who participate. The contract is offered to individual farmers in a specified sub-watershed upstream from the discharge point. Farmers in the watershed decide whether or not to participate, and if they decide to participate, they bid into the contract the level of abatement services they will provide. The principal will form the group from these bidders, and will agree to pay the total amount if they meet the target. Given the fixed price for the contract, the bids determine the sharing rule for payments at the end of the season. With this basic idea, this paper explores the implications of moral hazard under several contractual arrangements. In particular, we are interested in the trade-offs between participation in the contract and shirking. At one extreme, existing voluntary incentive programs involve fixed payments with no requirements for performance. They will thus lead to high levels of participation, but likely to large levels of shirking as well. For example, in a typical year all of the money available for existing federal conservation programs is used by farmers, but there is little evidence available to prove that pollution declines as a result. At the other extreme, one could write a contract that specifies that payments will only be made if the target is met, following Holmstrom (1982) or Segerson (1988). Such an extreme, nonlinear contract such as this likely would eliminate most shirking, but it may lead to little participation among farmers. This paper thus explores the relationship between the participation constraint in principal agent problems and moral hazard with a simple theoretical model and numerical simulations. First, we propose a contract with a fixed initial payment and a bonus payment if the farmers meet the agreed upon target. The effects of the fixed payments upon the participation constraint and the consequent implications for shirking are shown theoretically and numerically. Fixed payments enhance the likelihood that individual farmers join the group, but fixed payments can also induce incentives to shirk. Second, we hypothesize that farmers can engage in other nonpecuniary penalties to punish farmers who shirk their responsibilities. For example, if someone in the group shirks, we assume that the group members can figure out whom, and take appropriate action to punish him or her. The numerical simulations show how the success of the proposed mechanism depends crucially on size of the fixed and bonus payments, group structure (i.e. ability and willingness to monitor each other) and group size. While not having any direct penalty in the contract, and having fixed payment plus bonus can increase the participation for the program, it can also increase free-riding problems in the group. Group size is also important, in that groups that are too large cannot take advantage of nonpecuniary penalties. Regions that have strong social ties are the most promising candidates for this kind of group contracts. They can be better able to apply social pressure on potential shirkers (Prescott, 1997). In addition to showing a theoretical model, and numerical simulations, we provide some results from recent focus groups providing data from actual farmers on their willingness to participate in the types of contracts proposed in this paper.Environmental Economics and Policy,

Assessing the Uncertainty of Land Based Carbon Sequestration: A Parameter Uncertainty Analysis with a Global Land Use Model

This paper analyzes the effect of uncertainty in several key parameters on the marginal costs of carbon sequestration in forests. These parameters include the land supply elasticity, which governs the conversion of land from agriculture to forests and vice versa; parameters of the forest biomass yield function; parameters of the forest carbon density function; and parameters of the costs functions for accessing inaccessible land. Monte Carlo techniques are thus used to turn the global forest model with no probability (e.g., Sohngen & Mendelsohn, 2003; 2007) into a proper probability model through Latin hypercube sampling. For this paper, we have restricted our analysis to consideration of probability distributions for only two of the parameters described above. Specifically, these are the parameters of the forest biomass yield function and the land supply elasticity. The importance index and the least square linearization are used to determine the relative contribution of input parameters to the model results. Five hundred model runs in one simulation were performed with covariability among the parameters. The Monte Carlo simulations indicated that most of the uncertainty in forest area in developed countries relates to uncertainty in parameters of the biomass function while in developing countries, where deforestation is more important (e.g., Brazil), the simulation showed the parameters of land supply elasticity to have the most important implications for carbon supply. These results are perhaps not too surprising but they do point to the need to empirically estimate land supply elasticities in regions like Brazil, where such estimates are not currently available in the literature. The results also provide information that can be used to estimate uncertainty intervals for carbon sequestration cost functions.Uncertainty Analysis, Global Land Use Model, Carbon Sequestration, Monte Carlo simulations, Resource /Energy Economics and Policy,

Carbon Credits for Avoided Deforestation

Several important issues need to be addressed to make avoided deforestation (AD) a feasible option for climate change policy. Traditional questions associated with land-based sequestration options have largely been discussed in terms of project-based approaches to carbon sequestration. For country-level commitments these concepts remain important, but we argue in this paper that they can and should be addressed differently. In order to address AD, it is useful to begin by outlining the international climate control regimes under which AD could be included as an option. Two general alternatives are discussed - an arrangement that is a linear extension of the current Kyoto Protocol but that involves more countries with specific emission reduction targets, and an alternative expanded arrangement that requires that essentially all countries have greenhouse gas emission targets. We consider how AD would fit into these two general types of international agreements and address questions related to baselines, additionality, permanence, and leakage. We conclude that the key issues related to including deforestation in either of these arrangements revolve around measuring, monitoring (e.g., additionality), and the development of efficient incentives by countries to alter their land-use regimes.avoided deforestation, carbon, sequestration, credits, climate, warming

ESTIMATING DYNAMIC RECREATIONAL DEMAND BY THE HEDONIC TRAVEL COST METHOD

This research explores how recreational values change over time. Hedonic functions linking travel costs to site amenities are estimated using data on nearly 70,000 visitors to Ohio State Parks from 1997 to 2002. The results suggest substantial changes in recreational values over time. Effects are estimated to show the importance of capturing changes in the hedonic prices.Research Methods/ Statistical Methods,

Role of New Zealand Forests in Global Climate Change Mitigation

Environmental Economics and Policy,

Forestry and the Carbon Market Response to Stabilize Climate

This paper investigates the potential contribution of forestry management in meeting a CO2 stabilization policy of 550 ppmv by 2100. In order to assess the optimal response of the carbon market to forest sequestration we couple two global models. An energy-economy-climate model for the study of climate policies is linked with a detailed forestry model through an iterative procedure to provide the optimal abatement strategy. Results show that forestry is a determinant abatement option and could lead to significantly lower policy costs if included. Linking forestry management to the carbon market has the potential to delay the policy burden, and is expected to reduce the price of carbon of 40% by 2050. Biological sequestration will mostly come from avoided deforestation in tropical forests rich countries. The inclusion of this mitigation option is demonstrated to crowd out some of the traditional abatement in the energy sector and to lessen induced technological change in clean technologies.Forestry, Climate Policy, Technological Innovation