Increasing Carbon Sequestration in private
forests: Design of a subsidy scheme
Peichen Gong
Center for Environmental and Resource Economics,
Department of Forest Economics
Swedish University of Agricultural Sciences
and
EFINORD
Uppsala, November 2013
Outline
1.
Background
2.
Socially optimal rotation age
3.
Design of subsidy scheme
4.
An example
5.
Conclusions
The role of forests in carbon cycle
• Carbon storage:
– The total amount of carbon in forests is approximately 652 Gt (FRA 2010)
• Living biomass 44% , Deadwood 11%, Soil 45%
– Carbon storage in HWP in 2002 (Perez-Garcia, et al. 2006)
• 4.5 Gt C in HWP products in use, increases by 1.2% per year
• 3.4 Gt C in HWP products in landfills, increases by 2.4% per year
• Substitution: Harvested biomass substitutes other materials (fossil
fuel, steel, concrete etc.)
• Carbon sequestration: forest growth sequestrates about 2 Gt carbon
annually
Forest carbon balance
• Change in carbon storage in forests =
carbon sequestration – harvest removal – deforestation
• Carbon sequestration = F(carbon storage in forests)
• Carbon in harvested biomass
 carbon storage in HWP

+

emission to atmosphere

• Magnitude of substitution effect depends on harvest of biomass
Potentials of using forests
to reduce CO2 emission
• Potential depends on costs
• Many studies, great variations in results
• Sedjo and Solomon (1989): 2.9 GtC/year, average cost USD 3.57 per ton
• Nordhaus (1991): 0.28 GtC/year, average cost USD 42-114 per
ton
• Richards and Stokes (2004): 2 GtC/year, average cost USD 10150 per ton
Strategies to enhance the role of forests
in climate change mitigation
• Increase carbon storage in forests
• Increase carbon storage in HWP
• Increase the substitution effect
• Require optimal balance between the growing stock in forests
and harvest of biomass
Strategies to enhance the role of forests
in climate change mitigation
• Afforestation and reforestation
• Reducing deforestation (REDD, REDD+)
• Increasing the use forest bioenergy
• Improving the use of “managed forests”
One of the Policy Issues
• Faustmann rotation (free market solution) usually is shorter
than the Maximum Sustained Yield rotation
• Increase rotation age would increase carbon storage in forests
and timber harvest in the long-run
• How to motivate forest owners to harvest at longer rotations?
– What is the socially optimal rotation age?
– What is the optimal design of policy?
Socially Optimal Rotation Age
T
max
T
LEV (T ) =
−C + ∑ pc g (t )e− rt + P(T )V (T )e − rT − pcV (T ) D(T )e − rT
t =0
1 − e− rT
C = regeneration cost (SEK/ha)
p(T) = stumpage price at age T (SEK/m3)
pc = social benefits of carbon sequestration (SEK/ton)
r = discount rate
V(T) = growing stock of timber at age T (m3/ha)
g(t) = sequestration at age t (ton/ha/year)
D(T) = Net emission of harvesting at time T (ton/m3)
Policy Options
• Tax levy on harvest
– Not necessarily sufficient because rotation usually is rather
insensitive to timber price changes
– May do more harm than good (reduce investment in forestry)
– Why punish forest owners for producing a public good?
• Full payment to forest owners for CO2 sequestration
benefits plus tax on emission from harvests
–
–
–
–
Commonly assumed to be efficient in the literature
Can be costly for the public
May work if there are markets for forest CO2 sequestration
Why full payment, when part of the benefits are free?
Our subsidy scheme
• Use Faustmann rotation as the baseline performance level,
payment to forest owners for over-performance and tax for under
performance
• Payment/tax at the time of harvesting
• The payment/tax is determined
S=
(T , s ) s[V (T ) − V (TF )]
V(T) = harvest at rotation age T
TF = Faustmann rotation
s = payment/tax rate
Optimization of the payment/tax rate
•
Maximize the sum of
– increase CO2 sequestration benefits and
– net change in tax income (change in forest tax income net of payment to forest
owners)
max =
WN ( s ) WC (T ( s )) − WC (TF )
s
 p(T ( s ))V (T ( s )) − C p(TF )V (TF ) − C 
τ
+
−
iTF
iT ( s )

e −1
e −1


s[V (T ( s )) − V (TF )]
−
eiT ( s ) − 1
T(s) = forest owners’ choice of rotation age
WC(T) = NPV of CO2 sequestration benefits
τ = forestry tax rate, i = social discount rate
Forest owners’ decision
• Maximize the NPV of after tax profits
max Π (T ) =−C +
T
[ p(T )V (T ) − C ](1 − τ ) s[V (T ) − V (TF )]
+
rT
e −1
e rT − 1
τ = forestry tax rate
r = private discount rate
An example
• Scots pine stand in Northern Sweden with the normal
regeneration and thinning program
• An increase of the growing stock of timber by 1 m3 reduces CO2 in
the atmosphere by 1 ton.
• The biomass will decay completely at a single time point (10 years
after clear-cutting).
• Discount rate for landowner: 2 %.
• Forestry income tax: 30 %.
The socially optimal rotation age (years)
CO2 price
(SEK/ton)
Discount rate (%)
1
1,5
2
3
0
101
95
90
82
65
106
101
97
90
130
112
109
105
100
325
135
142
147
151
650
>200
>200
>200
>200
60000
50000
40000
30000
acc car ben
LEV Total
20000
10000
0
72
92
112
132
152
CO2 price: 455 SEK/ton
Socially Optimal rotation = 211 years
Faustmann rotation = 90 years
172
192
212
Optimal subsidy/tax (SEK/m3) and the total NPV
in percentage of maximum (in parenthesis)
CO2 price
(SEK/ton)
Social discount rate (%)
1
1.5
2
65
21.22 (97)
21.22 (99)
21.22 (100)
130
21.22 (95)
47.63 (98)
47.63 (99)
325
69,67 (93)
99.46 (93)
99.46 (93)
650
129.55 (84)
129.55 (83)
129.55 (85)
Private discount rate = 2%
A closer examination of the solution
• Social discount rate: 1.5%
• Landowner’s discount rate: 2%
• CO2 price: 325 SEK/ton
• Social optimal rotation: 142 years
• NPV: 4656 for timber, 29433 for carbon
•
•
•
•
•
Subsidy: 99.46 SEK/m3
Landowner’s optimal solution: 101 years
NPV: 8522 for timber (3866 higher)
NPV of carbon: 23126 (6307 lower)
The total NPV is 7 % lower than the maximum possible.
Conclusions
• The socially optimal rotation age
– Is sensitive to social discount rate and the price of CO2
– could be much longer than Faustmann rotation
– could be economically non-sustainable
• The subsidy/tax scheme proposed in this paper
– can effectively change private forest rotation ages.
– much cheaper than full payments
– can be a practical option