Domestic and International Forestry: Implications for the Carbon Market Ruben N. Lubowski Senior Economist, EDF EPA/RFF Workshop on Modeling the Costs and Volumes of GHG Offsets Washington, DC, May 12, 2009
What is the likely impact on GHG allowance prices of allowing forest carbon credits? How many such credits are likely to be available at prevailing prices? What is the profile of those credits over time? How could REDD work in practice? Hypothetical scenario for Brazil.
METHODOLOGY Our model solves for an intertemporal equilibrium for the period 2012-2050. Two conditions are met in every year: The market clears. The price rises at the market rate of interest. Policy scenario U.S. adopts Waxman-Markey targets: 4% below 1990 by 2020 and 69% below by 2050. Group 1 (EU, Japan, Canada, Australia, NZ): 60% below 1990 levels by 2050. Group 2: BAU until 2020, steady decrease to 1990 levels by 2050. No restrictions on trading.
ENVIRONMENTAL Allowance DEFENSE FUND Prices (rising at 5%) 2005$/tCO2e $140 $120 $100 $80 $60 $40 No forest carbon from developing countries No forest carbon from developing countries Reduced deforestation (REDD) Reduced defo restatio n o nly All international forest carbon afforestation/reforestationreforestation and changes in forest management) Reduced deforestation plus affo (REDD restatio plus n /refo afforestation/ n and changes in fo rest management -32% -45% $20 International forest carbon potentially powerful tool for cost containment. $0 2013 2018 2023 2028 2033 2038 2043 2048 Source: EDF based on offsets cost curves used in EPA s s preliminary Waxman-Markey draft analysis. International forestry curves are from Global Timber Model of Sohngen and Mendelsohn (2007).
100% Supp ly Scenario No forest carbon from developing countries Reduced deforestation (REDD) All forest carbon Carbon price in 2013 ($/ton CO2e) $22 $15 $12 % change versus no developing country forestry -32% -45% 50% Supply No forest carbon from developing countries Reduced deforestation (REDD) $24 $20-20% All forest carbon $17-29% 25% Supply No forest carbon from developing countries Reduced deforestation (REDD) $25 $22-12% All forest carbon $21-16% Source: EDF based on offsets cost curves used in EPA s s preliminary Waxman-Markey draft analysis.
Predicted US Abatement under Waxman-Markey Targets with Full International Forest Carbon Potential ENVIRONMENTAL DEFENSE FUND Other G2 forestry REDD Other G2 credits Domestic offsets US capped abatement 1. Total abatement exceeds demand in the first two decades. 2. The bank is comparable in magnitude to the quantity of forest carbon credits. Source: EDF based on offsets cost curves used in EPA s s preliminary Waxman-Markey draft analysis.
100% Supply Scenario Reduced deforestation (REDD) All forest carbon from developing countries Average annual US purchases 2013-2023 (billion tons CO2/year) 3.3 3.0 Average annual US purchases 2013-2050 (billion tons CO2/year) 1.4 1.8 Share of US abatement 2013-2050 23% 28% 50% Supply Reduced deforestation (REDD) All forest carbon from developing countries 1.8 1.9 0.8 1.0 12% 16% 25% Supply Reduced deforestation (REDD) All forest carbon from developing countries 0.8 0.8 0.4 0.5 6% 8% Source: EDF based on offsets cost curves used in EPA s s preliminary Waxman-Markey draft analysis.
Source: EDF based on offsets cost curves used in EPA s s preliminary Waxman-Markey draft analysis. International forestry curves are from Global Timber Model runs for Stanford Energy Modeling Forum (EMF).
ENVIRONMENTAL Domestic Forest DEFENSE FUND and Agriculture Offsets Scenario with full international forest carbon potential. 51% 41% Source: EDF based on FASOM model and other offset cost curves used by EPA (2009).
How Could REDD Work? Hypothetical Example based on Brazil Announcement ENVIRONMENTAL DEFENSE FUND
ENVIRONMENTAL Cap and DEFENSE Trade FUND Scenario for Brazil *2018-2050 EDF projections. If Brazil and the US trade exclusively through 2020, US could reduce 4-10% below 1990 levels by 2020, rather than reaching 1990 by 2020, at no added cost to US companies compared to no REDD. Source: EDF based on opportunity costs for Brazilian Amazon from Nepstad et al. (2007).
Summary Forest carbon from developing countries could lower the global allowance price by 12%-32% if deforestation only is included, and by about 16%-45% if all forest carbon is included, depending on realized potential of 25%-100%. Average US purchases over 2013-2050 range from 0.4-1.4 billion tons/year if deforestation only is included, and 0.5-1.8 if all forest carbon is included, depending on realized potential of 25%-100%. International forest carbon could be used to induce broader participation in the global carbon market to achieve greater and faster overall reductions for the same cost as a regime without forest carbon.