Economics of increasing afforestation and reforestation as a mitigation measure. G Cornelis van Kooten University of Victoria, Canada

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2 Economics of increasing afforestation and reforestation as a mitigation measure G Cornelis van Kooten University of Victoria, Canada

3 Background: Carbon Offsets Tree planting and activities that enhance tree growth clearly remove carbon from the atmosphere and store it in living and dead biomass. Two such forestry activities: Afforestation: establishment of a forest on land that has not in the recent past been forested and otherwise would not be planted Reforestation: tree planting on a previously forested site where it is unlikely that forest will be re-established Carbon offset: a reduction in CO 2 emissions, or an equivalent removal of CO 2 from the atmosphere, realized outside a compliance market and used to counterbalance GHG emissions from a capped entity. Clearly afforestation / reforestation activities create carbon offset credits

4 MC CO2 EmissionsAbatement $ per t CO 2 P 0 MC CarbonOffsets P * E * E = 0C * Derived D t CO E E * 0 C * 2 C t CO 2 Emissions Abatement Sector Carbon Offset (Forestry) Sector Carbon offsets (i) reduce emitters costs of complying with emission reduction targets, (ii) buy time to develop & adopt emission-reducing technologies, but (iii) reduce incentives to invest in such technologies while (iv) increasing uncertainty and corruption. van Kooten and de Vries (2014); van Kooten et al. (2015)

5 Marginal Costs of Creating CO 2 -Offset Credits through Forestry, Results from a Meta-regression Analysis ($/tco 2 ) Study means Mean of all obs Region and Scenario (68) (1047) Global $28.85 $25.10 Planting $29.80 $21.91 Planting & fuel substitution -$40.14 $19.88 Forest management $ $62.15 Forest management & fuel substitution $48.07 $60.12 Forest conservation $ $47.00 Europe $ $ Planting $ $ Planting & fuel substitution $ $ Forest management $ $ Forest management & fuel substitution $ $ Tropics (CDM Projects) -$26.20 $4.04 Planting -$25.26 $0.85 Planting & fuel substitution -$ $1.18 Forest management $62.95 $41.09 Forest management & fuel substitution -$6.99 $39.06 Forest conservation $ $25.94 Boreal Region $58.01 $8.77 Planting $70.19 $5.26 Planting & fuel substitution $0.25 $3.23 Forest management $ $45.50 Forest management & fuel substitution $88.46 $43.47 Source: van Kooten et al. (2009); van Kooten and Sohngen (2007)

6 Problems 1.Additionality: criterion dictating that an emission source can only obtain carbon offsets for emission reductions above and beyond what would occur in the absence of carbon offset incentives 2.Leakage: the extent to which a climate mitigation activity in a certain location increases CO 2 emissions elsewhere. 3.Double dipping: selling multiple environmental services, such as carbon offsets, in more than one market (e.g., Annex B country invests in tree planting project in China, with both countries claiming carbon reduction benefits) 4.Plethora of instruments: instruments available to Annex B countries (lack of commensurability duration problem): 1. reduce domestic CO 2 emissions, 2. purchase allowances from other Annex B countries (whose emissions are below target), 3. sequester carbon in domestic biological sinks, 4. purchase certified emission reduction credits (CERs) via CDM, 5. earn reduction units (ERUs = CERs) in economies in transition via Joint Implementation mechanism. CERs could also be earned for CO 2 removed from the atmosphere by afforestation/reforestation 5.Transaction costs and governance: costs of measuring, monitoring, enforcing and negotiating trades, and the means by which trades are made.

7 Closing Price ( per tco2) Collapse of European Carbon Market CER ERU EUA Aug-08 4-Feb Jul Jan Jul Jan-11 8-Jul-11 1-Jan Jun-12 Date

8 Kyoto Process Solution to Incommensurability Problem: Defining lcers and tcers from Forestry Activities tco 2 tcer 2 tcer 4 First rotation growth function Second rotation growth function lcer = tcer 2 tcer 1, or lcer = tcer 4 tcer 3 tcer 1 tcer 3 Release of CO 2 from harvesting ignored. 0 T 1 T 2 = T 1 +5 T 3 = T 2 +5 T 4 = T 3 +5 Time after first planting Source: van Kooten (2013, p.361)

9 Given planting, one cannot ignore the impact of harvests and alternatives: Never harvest: Conservation Store carbon in products and, when wood substitutes for concrete/steel in construction, count emissions avoided because these materials are not produced Use biomass for fuel (increasingly popular) see next slide How urgent is need to stop global warming? Low urgency 0% discount rate on physical carbon Great urgency high discount rate on physical carbon

10 Change in stored CO 2 (t/mwh) 0 M N Time Cumulative carbon fluxes (tco 2 ) associated with fossil fuel and biomass sources for generating electricity Time to Equal Cumulative Carbon Flux Biomass CO 2 Debt Relative to Fossil Fuel Change in Forest CO 2 Uptake Biomass CO 2 Surplus Relative to Fossil Fuel CO 2 Released from Burning Fossil Fuel Per Unit of Energy Change in 0.0% Stored CO 2 1.0% 5.0% Bituminous Coal No urgency No urgency Years Great urgency Great urgency lodgepole pine (pinus contorta) white spruce (picea engelmannii) Source: Johnston and van Kooten (2015)

11 More Information? Contact G Cornelis van Kooten Department of Economics University of Victoria PO Box 1700, Stn CSC Victoria, BC, Canada V8W 2Y2 Phone: (voice) Emai: kooten@uvic.ca Web:

12 FURTHER INFORMATION: U.S. Department of Agriculture Forest Service, Do Carbon Offsets Work? The Role of Forest Management in Greenhouse Gas Mitigation, Science Findings, Issue 155, August. Portland, OR: Pacific Northwest Research Station. van Kooten, G.C., Economic Dynamics of Tree Planting for Carbon Uptake on Marginal Agricultural Lands, Canadian J of Agricultural Economics 48(March): van Kooten, G.C., Biological Carbon Sequestration and Carbon Trading Re-visited, Climatic Change 95(3-4): van Kooten, G. C., Biological Carbon Sinks: Transaction Costs and Governance, The Forestry Chronicle 85(3): van Kooten, G.C. & A.J. Eagle, Forest Carbon Sinks: A Temporary and Costly Alternative to Reducing Emissions for Climate Change Mitigation. In Institutions, Sustainability, and Natural Resources: Institutions for Sustainable Forest Management, Vol. 2. (pp ) S. Kant & R.A. Berry (eds). Amsterdam: Kluwer. van Kooten, G.C. and B. Sohngen, Economics of Forest Carbon Sinks: A Review, International Review of Environmental & Resource Economics 1(3): van Kooten, G.C. and F.P. de Vries, Carbon Offsets, pp 6-8 in Encyclopedia of Energy, Natural Resource and Environmental Economics, Volume 1, edited by J. Shogren. Amsterdam, NL: Elsevier. van Kooten, G.C., C.S. Binkley and G. Delcourt, Effect of Carbon Taxes and Subsidies on Optimal Forest Rotation Age and Supply of Carbon Services, American J of Agricultural Economics 77:

13 FURTHER INFORMATION (cont): van Kooten, G.C., A. Grainger, E. Ley, G. Marland and B. Solberg, Conceptual Issues Related to Carbon Sequestration: Uncertainty and Time, Critical Reviews in Environmental Science & Technology 27: S van Kooten, G.C., E. Krcmar-Nozic, B. Stennes and R. van Gorkom, Economics of Fossil Fuel Substitution and Wood Product Sinks when Trees are Planted to Sequester Carbon on Agricultural Lands in Western Canada, Canadian J of Forest Research 29(11): van Kooten, G.C., B. Stennes, E. Krcmar-Nozic and R. van Gorkom, Economics of Afforestation for Carbon Sequestration in Western Canada, The Forestry Chronicle 76(1): van Kooten, G.C., S. Shaikh and P. Suchánek, Mitigating Climate Change by Planting Trees: The Transaction Costs Trap, Land Economics 78(November): van Kooten, G. C., A.J. Eagle, J. Manley and T. Smolak, How Costly are Carbon Offsets? A Metaanalysis of Carbon Forest Sinks, Environmental Science & Policy 7(4): van Kooten, G.C., S. Laaksonen-Craig and Y. Wang, A Meta-Regression Analysis of Forest Carbon Offset Costs, Canadian J of Forest Research 39(11): van Kooten, G.C., C. Johnston and Z. Xu, Economics of Forest Carbon Sequestration. Chapter 16 (pp ) in Handbook of Forest Resource Economics edited by Shashi Kant and Janaki Alavalapati. Oxon, UK: Routledge. van Kooten, G.C., T. Bogle and F. de Vries, Forest Carbon Offsets Revisited: Shedding Light on Darkwoods, Forest Science published online 5/6/14 13