SCANDINAVIAN FOREST ECONOMICS No. 41, 2006

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1 SCANDINAVIAN FORES ECONOMICS No. 41, 26 Proeedings of the Biennial Meeting of the Sandinavian Soiety of Forest Eonomis Uppsala, Sweden, 8 th -11 th May, 26 Lars Lönnstedt and Björn Rosenquist (eds.) Uppsala

2 Carbon redits and the forest setor Guillaume Pajot Abstrat In the ontext of Kyoto Protool, forests an be used to reate arbon redits. Contrary to the energeti setor where emissions redutions are onsidered as definitive, managing forests to mitigate limate hange has been rtiised beause of the risks of reversibility. Biologial arbon sinks are said to be non permanent. So, how an we ompare arbon emissions redutions to arbon sequestration by sinks? What is the value of the arbon redits issued from forestry? In this study, we onsider the debate surrounding arbon redits attribution. As a first step, we reall methods that have been suggested. Results of a ase study dealing with a forest loated in southwestern Frane are presented in the seond part of the paper. In a final disussion, we wonder about finanial impat of different geopolitial strategies. Keywords: Biologial sinks, sequestration non permanene, arbon sinks valuation. Introdution Climate hange is a ruial environnemental problem faed by human kind. emperature on Earth s surfae ould rise in an important way if nothing is made to redue GHG emissions. Kyoto Protool lays down sigantories ountries to not exeed some limits on their greenhouse gases emissions. o meet their ommitments at a lower ost, three types of tools an be used: exhange of arbon redits between Annex I ountries. Carbon redits are obtained by ountries that emit less than the amount that was imposed on them by Kyoto Protool (KP); those arbon redits an be sold to ountries wanting to emit more GHG than the amount fixed in KP; Joint Implementation allows Annex I ountries to obtain redits trough investments in arbon emissions redutions projets in another Annex I ountry; Clean Development Mehanism allows Annex I ontries to obtain redits trough investments in arbon arbon emissions redutions projets in a developping ountry. Energeti and industrial ativities are mainly onerned by those tools. But, onsidering the part played by forests in the arbon yle, forestry is onerned by attempts to mitigate limate hange. Under UNFCCC, ountries must inventory arbon emissions by soures and arbon sequestration by sinks. Under artile 3-3 of KP, ountries an obtain arbon redits trough ativities of afforestation or reforestation (plantation on lands that were not forested on deember 31st, 1989 (debits are reated for deforestation; lear utting implying a land use hange). For Frane, those ativities imply some debits (Petroula, 22). o ompensate, ountries an use forest management ativities under artile 3-4. We imagine that intentional management ativities (longer rotations, light thinning regimes et.) ould be implemented. In the two ases, ountries must prove that ativities have been undertaken under human ontrol, sine 199. Contrary to energeti setor where emissions redutions are onsidered as definitive, arbon sequestration by biologial sinks is non permanent. Atually, forests an beome Co2 soures, beause of natural risks or human ations. his non permanene harateristi is one of the most heavy ritiism against the use of forest resoures to mitigate limate hange. In this paper, we onsider the debate surrounding arbon rediting methods in the ontext of forestry ativities. With those methods, we try to ompare arbon redits obtained trough forestry ativities with arbon redits due to emissions redutions in energeti or industrial setor. In the first part of the paper, we reall methods that have been onsidered. In the seond part of the paper, we present the results of a 255

3 ase study involving a maritime pine forest, loated in Southwestern Frane. Even if Frane has deided to not subsidy forestry ativities in the ontext of limate hange management, this study should ontribute to put an eonomi value on arbon sequestration. In an inreasing number of ountries, foresters and landowners are paid for environmental servies provided by their forests, espeially for arbon sequestration (). 1. A survey of arbon rediting methods for forestry We present suessively four arbon rediting methods. Due to some problems to their implementation, the two first methods, ton year and average stok, have been abandonned. Stok hange approah will be used for verifying Annex I ountries ommitments and temporary redits approah will serve to value arbon redits in the ontext of Clean Development Mehanism. 1.1: he average stok approah his method has been onsidered for projets we an antiipate suessive harvesting replanting yles (Gabus, 21; Phillips, 22; Shlamadinger, 22). Establishing arbon redits on the average of stored quantities allows avoiding numerous transfers between redits and debits. Forest owner does not have to buy redits when he deides to ut the stand. Credits are given annually aording to arbon stoks inreases. When the average stok is reahed, let us all this moment X, arbon rediting stops. he Net Present Value of the inome reeived by the forest owner over one rotation is X rt Y p s( t) e dt with p the arbon prie, s ( t) the marginal flow of arbon at instant t and r the interest rate. he main advantage of this method is that it permits ompensating losses due to forest management by biomass growth without having to redit arbon stoks hanges eah year. But redits obtained with this method depend strongly of the duration hosen for the projet (Gabus, 21; Phillips, 22; Shlamadinger, 22). If this duration is too short, the quantity of arbon redits is important, reduing environmental redibility of the system. On the opposite, if this duration is too long, finanial attrativeness of projets will be redued and forestry to mitigate limate hange will not be an interesting option for landowners. Beause of the impossibility of hoosing an aeptable duration for the projets, this method has been abandoned. 1.2: he ton year approah: A ton of arbon emitted does not result in a permanent inrease in atmospheri Co2. Carbon dioxyde onentration in the atmopshere dereases trough time as arbon is naturally absorbed by the oeans and the biosphere. his lenght defines the global warming potential of arbon dioxyde; its environmental impat. Considering this element, we an define the time a ton of arbon must be sequestered to reah the environmental impat of an emission redution of one ton. his lenght is alled the equivalene fator(gabus, 21; Herzog and al., 23; Marland and al., 21; Sedjo and Marland, 23; Philips, 22; Shlamadinger and al., 22). If the equivalene fator is 1, this means that to reah the environmental impat of a non emission, arbon must be sequestered during one entury. Litterature on the subjet indiates some important disparities, the fator ould vary between 42 and 15. As for the preeeding method, the hoie of an equivalene fator is very ontroversial. A high level of the equivalene fator ould redue finanial attrativeness of the projets (Marland and al., 21). On the opposite, if this fator is too small, the quantity of arbon redits should be very important, reduing environmental redibility of the projet. Numerous unertainties 256

4 about the arbon yle and interations between GHG in the atmosphere have driven to renoune to this approah. Another important matter rising with this type of approah is liability issue. At the end of the projet, no one is held liable if arbon goes bak to the atmosphere; the forest owner an sell new arbon redits (or even hange land use) and the initial emitter has paid for his emissions. 1.3: he stok hange approah: his approah onerns Annex I Countries having to fae a limit on their GHG emissions. Carbon redits are attributed when arbon stoks inrease and debits must be paid when arbon stoks derease. he inome reeived by the forest owner over one rotation is F ( ) p () e s( t) e dt p () e s( ) e t rt t r where s ( ) is arbon stok onstituted in the forest at time and is the end of the rotation. If we onsider forest owner is liable for wood produts (so, emissions are weighted by wood produt length life), the inome is D rt ra F ( ) p s( t) e dt s( a) e da where D is the moment when wood produts are destroyed. As D r ra s ( ) e s( a) e da the inome reeived by the forest owner is superior with this seond approah. hose results are onsistent with onstant arbon pries. As numerous studies have shown, the introdution of suh a arbon rediting method in the objetive funtion of forest owners should inrease rotation lenghts. But authors generally do not onsider arbon pries hanges, that ould alter eonomi viability of projets. F ( ) p () e s( t) e dt p () e s( ) e t rt t r If we onsider arbon prie is not onstant, the first equation is written as rt F ( ) p ( t ) s ( t) e d t p ( ) s ( ) e r If p () is arbon prie at time and its growth rate (when we suppose it is known), F ( ) p () e s( t) e dt p () e s( ) e Rearranging, we have t rt t r F ( ) p () s( t) e dt s( ) e ( r ) t ( r ) We an underline the following results onerning finanial viability of projets. If r, p () s( t) e dt p () S ( ) e ( r ) t ( r ) beause ( r ) t e 1 and e ( ) 1 So, F ( ). From a finanial point of view, arbon sequestration is a neutral operation. If r, p () s( t) e dt p () S ( ) e ( r ) t ( r ) When t=, F()=. he derivative of F() with respet to time is equal to 257

5 ( r ) S ( ) e ( r ) and is negative in the ase where r. So, subsidies inrease at a smaller rate than the tax as inreases. Consequently, F ( ). In this ontext, arbon sequestration is not viable. If r, p () s( t) e dt p () S ( ) e ( r ) t ( r ) Atually, the derivative of F() with respet to time is positive in this ase. So subsidies inrease at a more important rate than the tax. Consequently, F ( ). Externalities related to the ontribution of forests to arbon yle are fully internalised but this approah presents several limits: it implies numerous transfers between debits and redits; he area is dediated to forestry and if the landowner deides to ut his forest stand, he is liable for arbon losses; so it implies a permanene of forest over. At the sale of ountries, it has been desribed as a onstraint upon their sovereignty and a threat to their food seurity (see Blano and Forner, 2, quoted by Marland et al., 21). Permanene in this ontext is insured, beause aounting for redits on an area involves following future events modifying arbon stoks on this area (Shlamadinger and al., 22; Gabus, 21). 1.4: he temporary redit approah: Another way to redit arbon sequestration ativities ould onsist in temporary rediting. his method will be used for valuing arbon redits issued from forest plantations in the ontext of Clean Development Mehanism. Forest owners sell to arbon emitters a temporary permit to emit GHG. At the end of the ontrat, Co2 emitters must redue their emissions, or buy a permanent redit on the market, or renew the temporary ontrat. his allows an intertemporal arbitration to Co2 emitters, aording to arbon pries hanges and tehnologial developments. Carbon sequestration is viewed as a temporary solution allowing to buy time, before buying for example a new tehnology. he fundamental differene omparing to the stok hange approah is that liability for Co2 emissions is the Co2 emitters one, not the forester s. Beause forestry is an alternative to Co2 emitters, we fous now on their behaviour; and the onditions that reate a demand for temporary redits issued from forestry. When an emitter is faed to a onstraint on his GHG emissions, he has three options: - reduing GHG emissions; - buying a permit on the market (said as a permanent redit); - buying a temporary redit issued from forestry ( he first option is a tehnologial solution. Co2 emitters an replae urrent tehnology by a less arbon intensive tehnology. But speifi onditions an make of this option an unattrative solution, for example, if new tehnologies are expensive. In this ase, he an think of the two other solutions. he seond and third solutions are market solutions. In the seond ase, Co2 emitter buys a arbon redit to other emitter that emits less than his quota. Co2 emitter buys the right to emit. Beause emissions redutions are onsidered as definitive, these arbon redits are said to be permanent. But the prie of these permanent redits ould be prohibitive. In this ase, Co2 emitter an buy a temporary redit to a forest owner, knowing that he will have to replae it by a permanent redit at the end of the ontrat. In this ase, Co2 emitter gives his liability to the forest owner during the length of a ontrat. At the end of the ontrat, liability for arbon emissions omes bak to the initial emitter, and he has to hoose one again between the three options (he an too renew temporary ontrats). Forest owner an freely 258

6 hoose future land use. He is only temporarily liable for arbon storage. Environmental integrity of the system is due to liability for arbon emissions that goes bak to the initial emitter at the end of the ontrat. he third option onsists so in buying a temporary redit now and a permanent redit in the future. A rational Co2 emitter will hoose this option if it is less ostly than for example, buying a permanent redit. he value of a temporary redit an be expressed as the delay obtained by the Co2 emitter faed to a limit on his GHG emissions. he willingness to pays of a Co2 emitter for a temporary redit is the maximum prie he will aept to pay for a temporary redit. When this prie is at a maximum, Co2 emitter is indifferent between the three options. o obtain a non arbitrary ondition, the following identity must be satisfied (when we suppose there are no transation osts). Buying a temporary redit now and a permanent redit in the future must ost the same amount as buying a permanent redit now (Subak, 23). p pmax p (1 r) p pmax p (1 r ) where p max is the willingness to pay of a Co2 emitter for a temporary redit, p is the urrent prie of permanent redits, p is the antiipated prie (at time ) of permanent redits, r is the disount rate. If we suppose that the arbon prie rises at a rate, we an write p (1 ) p and the willingness to pay of a Co2 emitter is written as (1 ) p max p p (1 r ) (1 ) p max p 1 (1 r ) We are faed to four situations; arbon prie rises faster than the disount rate ; arbon prie rises slower than the disount rate; arbon prie rises at the disount rate; arbon prie dereases to zero. p as In situation (1), it is not interesting for a Co2 emitter to buy a temporary redit. His willingness to pay is negative ( pmax ). Buying a temporary redit now and a permanent redit in the future will ost him more than buying a permanent redit now. One an expet to this type of situation when tehnologial developments are still experimental, or when more severe limati poliies are antiipated. In situation (2), it is interesting for a Co2 emitter to buy a temporary redit. he ost of buying a temporary redit and a permanent redit years after is smaller than the ost of buying a permanent redit. One an expet to this situation in the ase of low arbon intensive tehnologies running inexpensive, or in the ase of limati poliies beoming less severe. In situation (3), p max is equal to zero. Buying a temporary redit now and a permanent redit years after is the same amount as buying a permanent redit now; the Co2 emitter is indifferent. 259

7 In situation (4), arbon prie derease to zero; it ould happen if international regulation on arbon use would fail and stop in a few years; in this ase, buying a temporary redit (and so, no permanent redit years after) is the same thing as buying a permanent redit. o summarise, willingness to pay of Co2 emitters for buying temporary arbon redits depends on antiipations onerning arbon pries and the disount rate. An example of the value of temporary redits able 1 and Graph 1 present some examples of the value of temporary redits able 1: In this table, we show willingness to pay of Co2 emitters aording to several assumptions of arbon prie growth rate and lengths of ontrats. Carbon prie is assumed to be 6 euros per ton of arbon. Lengths of ontrats (years) Disount rate Beta % % 2% % 3% 3 7 3% 5% % -1% Value of temporary sequestration and ontrats lengths 1 maximum value of temporary ontrats (euros per ton) Beta= Beta=2% Beta=5% Beta=-1% Beta=3% -2 lengths of ontrats (years) Graph 1: We an see that inreasing lengths of ontrat make inrease Co2 emitter s willingness to pay for temporary redits (the upper limit is the prie of permanent redits, as the length of ontrats inreases). 2. he ase study:he afforestation projet: We suppose the stand is the result of a new forest (additional). he stand is harvested when it is 45 years old. Five thinning are planned during the rotation. his orresponds to a lassial silviulture of maritime pines. Volumes and arbon stoks are obtained with software 26

8 OptimFor, developed for maritime pine silviulture in SouthWestern Frane. he general approah funding the building of this software is dynami programming, based on Bellman s algorithm. It permits to optimise forest management aording to different riterions (eonomi, biologi et.), assess biologial and eonomi impats of management options or of exogenous events (storms, forest fires et.). Parameters that desribe growth of trees are those of Lemoine s model. Carbon stoks are diretly linked to wood volumes. We determine it as follows: an expansion fator gives total wood volume starting from marketable wood. As a seond step, we must alulate dry weight of the trees. As a third step, we need to know the arbon ontent of the dry weight of trees. he equation and oeffiients used in this study are, following Malfait et al. (23): S( t) v( t). E. D. Car (6) Where S(t) is the arbon stok at age t, E is the expansion fator; D is the part of the dry weight of trees and Car is the arbon ontent of dry weight. he values of parameters are: E=1,6; D=,5; Car=,43. We suppose arbon prie is 6 euros per ton, disount rate is 3%; and we deal only with the present value of arbon storage inomes. We omment results for eah method presented in the first part of the paper. I 2.1: he average stok approah: Credits are attributed marginally aording to fluxes (annual fluxes). When average stok is reahed, arbon rediting stops. In this example, average stok is 62 tons of arbon, and is reahed when the stand is 23 years old. Aording to this approah, inome of one rotation is 2 45 euros per hetare. 2.2: he ton year approah: We suppose an equivalene fator equal to 1. his equivalene fator has been hosen in KP to define equivalene between limati effets of different greenhouse gases. Carbon redits are attributed annually, and inomes weighted by the equivalene fator. he inome reeived by the forest owner is 657 euros per hetare during one rotation. Inomes obtained with this method depend strongly of the equivalene fator and are inversely proportional. For example, if the equivalene fator is 5 1, inome doubles (1314 euros). 2.3: he stok hange approah: Carbon redits are attributed aording to stoks hanges observed during the rotation. Inome obtained by a forest owner is euros per hetare. If we onsider lear utting of the stand (verifiation is made at year 46), the inome is euros per hetare 2.4: he temporary redit approah: We suppose the length of ontrats is 1 years, and pries of permanent redits are onstant. Value of temporary redits is euros per ton of arbon. Credits are attributed as follows: During the first ten years, redits are given aording to stoks hanges. he first ontrat finishes at year 1. At the end of this ontrat, a new ontrat begins and new redits are given aording to stoks hanges. But as long as the stand ontinues to sequester arbon, redits of the first ontrat are renewed and this proess follows for the other ontrats. he inome obtained by the forest owner is 2 25 euros per hetare. 1 his means that to obtain the limati effet of an emission redution of one ton, less effort is required ; arbon needs to be sequestered during only 5 years to reah the environmental impat of an emission redution. 261

9 Disussion In this analysis, we assume arbon prie is onstant during the rotation. In a real environment, arbon prie would be subjet to long term trends. ehnologial developments, international regulations, politial strategies influene arbon pries. In the following analysis, we suppose arbon redit pries will be influened by tehnologial development and demand of arbon redits oming from large emitters ountries as China, India, Brazil and USA. Currently, those ountries are not onstrained by KP 2. If they ome into the proess, they will demand arbon redits and arbon prie will rise. in a first ase, we ould imagine that tehnologial developments as hydrogen will arrive in a few years and that USA, China, India and Brazil stay outside KP. We would expet to a relatively small and dereasing arbon prie. From the point of view of a forest owner, stok hange approah would give positive finanial results as shown in the first part of the paper. Conerning the demand for temporary redits, it would be positive too, if we assume that arbon prie grows at a smaller rate than the disount rate; in a seond ase, we assume that tehnologial development will arrive in a moment that exeeds the horizon of human life (and eonomi alulations);and that China, India, Brazil and USA ome into Kyoto proess. Carbon prie would inrease beause of the important demand for redits. he stok hange approah would give negative results while the demand for temporary would be negative. Carbon sequestration would not be an output of forestry ativities. Even if Frane has deided to not subsidy arbon sequestration ativities, forests represent an important point in the Plan National de Lutte Contre les Changements Climatiques. his plan insists on afforestation strategies, use of wood as building material, or as a substitute to fossil fuel ombustion and forest management (artile 3-4) should be used to reah Frane s Kyoto ommitments. As the greatest artifiial forest area of Europe, this forest ould ontribute to help Frane meeting her goal. Referenes: Chomitz Kenneth M. (22), Baseline, leakage and measurement issues: how do forestry and energy projets ompare, Climate Poliy 2 pp Dutshke Mihael, Shlamadinger Bernhardt (23), Pratial issues onerning temporary arbon redits in the CDM, HWWA Disussion Paper 227, Hamburg Institute of International Eonomis. Dutshke Mihael, Shlamadinger Bernhardt, Wong Jenny, Rumberg Mihael (24), Value and risks of expiring arbon redits from CDM afforestation and reforestation, HWWA Disussion Paper 29, Hamburg Institute of International Eonomis. Gabus André (21), Markets disounts for sinks: A onept for restriting forest ontributions in aounting for emission redutions, International Institute for Applied Systems Analysis, Interim Report 1-12 (mars 21). Herzog Howard, Caldeira Ken, Reilly John (23), An issue of permanene: assessing the effetiveness of temporary arbon storage, Climati Change n 59, pp Malfait Jean-Jaques, Pajot Guillaume, Point Patrik (23), Le puits de arbone landais, Communiation au VIIième Colloque Arbora, déembre 23, Bordeaux (Frane). Marland Gregg, Fruit Kristy, Sedjo Roger (21), Aounting for sequestered arbon: the question of permanene, Environmental Siene and Poliy volume 4 (21) pp Petroula,. 22. Sinks as an option to meet CO2 emission redution targets in Europe, Report 551/22. he Netherlands: RVIM. 2 China, India, Brazil are Annex II ountries while the US have not ratified KP. 262

10 Sedjo Roger A., Marland Gregg (23), Inter-trading permanent emissions redits and rented temporary arbon emissions offsets : some issues and alternatives, Climate Poliy volume 3 issue 3 pp Subak Susan (23), Replaing arbon lost from forests: an assessment of insurane, reserves, and expiring redits, Climate Poliy 3 pp Phillips Gareth (22), Luluf Projets in the CDM Aounting regimes and proposals for simplified rules and modalities, Disussion Paper for the International Emissions rading Assoiation (IEA) produit par SGS, mai 22. Shlamadinger B., Aukland L., Berg S., Bradley D., Ciarese L., Dameron V., Faaij A., Jakson M., Marland G., Sikkema R., (22), Forest-based arbon mitigation projets : Options for arbon aounting and for dealing with non permanene, 263

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