Economics of Forest Carbon Sequestration: a National Assessment

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Economics of Forest Carbon Sequestration a
National Assessment
Brian C. Murray Director for Economic
Analysis Nicholas Institute for Environmental
Policy Solutions Duke University Presented
at Terrestrial Carbon Sequestration Econ Policy
Forum University of Minnesota April 20, 2006
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Funding and Collaborators

• Primary Funding US EPA, Climate Change Division
• Collaborators
• FASOMGHG team Bruce McCarl (Texas AM), Darius
  Adams (Oregon State), Ralph Alig (US Forest
  Service), Brooks Depro (RTI), Dhazn Gillig
  (American Express), Heng-chi Lee (U Western
  Ontario)
• Assessment Report team Ken Andrasko Ben
  DeAngelo (EPA), Brent Sohngen (RTI, Ohio State),
  Allan Sommer (USDA/NRCS), Kelly Jones (RTI),
• Others Rob Jackson (Duke) Lydia Olander (Duke)
  Rich Birdsey, Linda Heath, Jim Smith (US Forest
  Service) Duke FACE site team

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Overview

• Policy context
• Biophysical aspects of forest carbon
  sequestration
• Economics concepts/models
• Results from national assessment report
• Ancillary effects forest structure, water
  quality, atmospheric feedback
• Conclusions

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Policy Context Carbon Offsets

• GHG emissions caps usually envisioned for certain
  sectors e.g., energy, transportation,
  manufacturing,
• But emission sources within the GHG constrained
  sectors could be allowed to purchase offset
  credits from outsiders as an alternative to
  continued (more expensive) reductions w/in sector
• Forestry and Agriculture often viewed as outside
  the system and a possible source of offset
  credits, esp carbon sequestration
• McCain-Lieberman
• Feinstein draft proposal
• Key Economic Issues
• How cost effective are they?
• How to ensure that you get what you pay for?
• What else do you get when you pay for the carbon
  i.e., co-effects (co-benefits and co-costs)

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Biophysical Aspects of Forest Carbon Sequestration
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Global Carbon Budget Role of Terrestrial
Ecosystems
Most of this sink is in forests
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Carbon fixing process in trees
Source US EPA http//www.epa.gov/sequestration/lo
cal_scale.html
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Forest Carbon Accounting over Time
Some of this carbon is stored for a long time in
product pools
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Carbon Saturation Attainment of a new
equilibrium
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Added complexity Harvest cycles, storage in
products and landfills, use in energy, emissions
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Forestry Practices that Sequester or Preserve
Carbon
Forestry Practices that Sequester or Preserve
Carbon
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Representative forest carbon sequestration rates
(tonnes CO2 per acre)
Shop and compare An automobile that is driven
12,000 miles per year and averages 25 miles per
gallon emits about 4.3 tonnes of CO2 per year.
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Economics of Carbon Sequestration

• Benefits of mitigation in forestry
• General reduced threat of climate change
• Forest carbon offset reduced cost of complying
  with GHG constraints
• Costs of mitigation
• Assume that current practices are optimizing for
  something other than carbon (e.g., crops, timber)
• New practices to optimize on carbon have
  opportunity costs for other outputs
• Carbon supply function How much can be
  sequestered at what cost per ton
• Co-effects
• Economic e.g., effects on consumers of ag and
  forest products
• Environmental e.g., effects on biodiversity,
  water quality, etc

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Carbon Supply Function How much can be
sequestered if offered a carbon price, v

• Economic incentives (v) can induce responses
• Intensive More carbon per acre through changes
  in management
• Extensive More acres in forest (afforestation
  and reduced deforestation)
• But there are important interactions with
• commodity markets(p),
• land characteristics (Z),
• fixed land base (L)

Intensive Margin More carbon Per unit of land
Extensive Margin More land in Carbon
intensive uses
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FASOMGHG Model links commodity markets and land
use
Agricultural Commodity Prices
Forest Product Prices
Land Allocation
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FASOMGHG Regions
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National Assessment of Mitigation Potential
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Forestry and Agricultural GHG Mitigation Report

• Funding Source EPA
• Objectives
• Identify mitigation options in forestry and ag
• Estimate potential
• Biophysical
• Economic
• Competitive
• Examine policy design issues (quantity vs price,
  activity targeting, per acre vs per ton)
• Address key policy implementation issues
• Permanence
• Leakage
• Assess environmental co-effects (water quality,
  biodiversity)
• Collaborators within RTI, Texas AM, Ohio State,
  EPA

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Simulating Effects of a GHG Price for Forest and
Agricultural Practices
Note CO2 being traded for 30/ton In EU
trading system
Prices Paid for GHG Mitigation (1-50 per t CO2)
FASOMGHG Economic Model of US Forest
and Agriculture Sector

• GHG Mitigation by
• Sector
• Activity
• Region
• Time Period
• Non-GHG Co-effects
• Erosion
• Nutrients
• Pesticides

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GHG economic incentives change the way that land
is allocated
Over 100 mm acres of afforestation relative to
baseline
Baseline
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Land use change is not necessarily permanent
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National GHG Mitigation Totals by Key Activity
Annualized Averages, 20102110
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Cumulative mitigation peaks, reverses
(sequestration dynamics)
C reversal through harvesting and land
use reversion
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Potential is not uniform across regions
Opportunities primarily in the eastern US
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Top 10 region/activity combinations shift with
GHG price
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Pay per Acre vs per Ton(Paying for Practice vs
Performance)
Table 6-7 Per-Acre vs. Per-Tonne Payment
Approaches for Afforestation 2015 and 20102110
Annualized
Productivity- based per acre approach mimics per
ton in short-run
More sustained sequestration under pay per ton
Most efficient
Least efficient
More efficient
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Estimating Leakage
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Background

• Policy Context Offset-based approaches
  (projects) are targeted by
• Sector
• Activity
• Location
• Offset projects are voluntary
• Targeted/voluntary policies can cause leakage
• Defn Induced GHG releases outside the project
  boundaries
• Causes Market displaces emitting activity
• Crediting systems should adjust for this

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Background II

• Research Question
• What is the empirical magnitude of leakage from
  forest carbon sequestration projects/programs?
• Methods
• Run model paying for one activity only (e.g.,
  afforestation)
• Quantify
• How much is sequestered with the targeted
  payments
• The net GHG change in GHGs for the sector
• The difference is leakage

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Leakage is focused primarily in the forest sector
Leakage Estimates by Mitigation Activity at a GHG
Price of 15/t CO2 Eq. All quantities are on an
annualized basis for the time period 20102110.
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Leakage occurs across regions and activities
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Leakage () Results by RegionSource Murray,
McCarl, Lee 2004

• Forest Setasides
• Pacific Northwest west side 16.2
• South-central US 68.3

2. Avoided Deforestation
3. Afforestation
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Environmental Co-effects of Forest Carbon
Sequestration Strategies

• Forest Structure/Habitat
• Water quality
• Water quantity

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GHG Pricing Effects on Forest Structure
Carbon prices Lengthen timber rotations
Carbon prices Increase management Intensity
(plantations, Silvicultural inputs)
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GHG Mitigation and Water Quality Co-benefits

• Changes in land use to sequester carbon can
  reduce erosion, nutrient runoff, and pesticide
  use to the benefit of water quality

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Reduced runoff
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Changes in Water Quality Indices (WQI) by Reach
50/Tonne Scenario Compared to Baseline

• Linked national FASOMGHG model with RTI national
  water quality model (NWPCAM) to simulate water
  quality effects of GHG mitigation in Ag/land use
• Found overall improvements in water quality
  nationally and in most regions (blue is good
  bright red is bad pink is no change)

• Pattanayak et al, 2005 Climatic Change

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GHG Mitigation and Water Tradeoffs

• Jackson et al, Science 2005 (Dec 23).
• Water quantity effects from extensive plantation
  establishment for C Seq.
• Concerns
• Reductions in stream flow
• Increased soil salinization and acidification
• Methods
• Field research
• Observational synthesis
• Climate/economic modeling
• Findings
• Substantial potential reductions in stream flow
  (up to 50 in some places. 13 completely dried)
• Climate feedbacks unlikely to offset water losses

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Forest/grassland ET as a function of annual
rainfall
Holmes and Sinclair (1986) 19 catchments
Victoria Zhang et al (1999) process model output.
A R
100 afforestation increases annual ET
Source Vertessy, Zhang and Dawes (2003)
Australian Forestry
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a
Change in annual runoff
(mm)
b
()
Jackson et al. 2005 Science
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Do Recent Findings Undermine the Value of Forest
Carbon Sequestration?
Water stresses from plantations R.B. Jackson,
E.G. Jobbagy, R. Avissar, S.B. Ray, D.J.
Barrett, C.W.Cook, K.A. Farley, D.C. le Maitre,
B.A. McCarl, and B.C. Murray.Dec 2005. Trading
water for carbon with biological carbon
sequestration. Science. 3101944-1947.
Methane emissions from plants/trees Keppler,
J.T.G. Hamilton, M.Bras, and T. Rockmann. Jan
2006.Methane emissions from terrestrial plants
under aerobic conditions. Nature. 439187-191.
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Field Research How will future higher CO2 levels
affect forest growth rates?
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Duke FACE site elevated CO2 experiments

• FACE Free Air CO2 Enrichment
• Location Duke Forest, Durham NC
• Observations since 1994
• Protocol
• Control sites ambient CO2
• Experiment ambient 200 ppm
• Spatial and temporal synchronization
• Findings
• CO2-enriched sites have higher biomass increment
  than ambient CO2
• Effect weakens in nutrient-limited soils
• Effect may diminish over time
• Good wood grows faster, but so do weeds
• Implications
• May be some positive synergies between future
  elevated CO2 and carbon sequestration rates, but
• Biophysical limitations to the extent
• Not a fix would only offset a small amount of
  atmospheric build-up
• The issue is not so much whether we rely on
  existing forests to soak up more CO2 rather,
  whether forest area/stocks should be increased

I am not part of the FACE research team. See
http//face.env.duke.edu/main.cfm for more detail.
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Summary

• Forests have tremendous biophysical potential to
  offset GHG emissions
• Cost per ton is less than many alternatives for
  emission reduction
• Most forest C opportunities concentrated in the
  South and Midwest
• Targeted programs can cause leakage which
  undermines net benefits
• Recent scientific findings do not substantially
  undermine value of forest C sinks as a mitigation
  strategy