Forests as carbon sinks: How to remunerate this service?

Background and Objective

The federal government has decided in December 2006 to opt for an accounting of carbon sequestration in forests in the national GHG report according to Article 3.4. of the Kyoto Protocol (KP). The carbon sequestration service of forests therefore is subject to the rules of the KP from 2008 onwards. As a consequence, the sequestration service becomes economically valuable for the federal government; physically this value is caused by the enterprises‘ forest management. The responsible Federal Ministry for Food, Agriculture and Consumer Protection has announced that the respective potential revenues „will, to a substantial proportion, be allocated at forests and forest enterprises in Germany“. However it remained open by which mechanisms this allocation will take place. The ministry therefore has initiated a research project which aims at preparing the allocation decisions of the government by an analysis of appropriate policy instruments.

Approach

The analysis is based at three steps. First, we predict the quantity of carbon which will be accountable in the future  – that is, we determine by how much the carbon reservoir in German forests increases each year, and how much of this quantity can be accounted according to the respective rules of the Kyoto-protocol (Art. 3.3 and 3.4). Second, we elicit the prospective financial benefit per accounting unit; third, we calculate potential revenues in the first commitment period and contrast these with the respective opportunity costs. Afterwards we discuss possible criteria for the choice of benefit sharing instruments.  Finally we discuss which instruments seem advisable for the federal government under current conditions.

Data and Methods

For quantifying the sequestration service we apply forest growth and utilisation predictions. The accountable quantity is dermined by analysing the relevant rules of the Kyoto protocol. The assessment of financial benefits is based at price investigations in the intergovernmental trade, price analyses in emission markets, as well as model based forecasts of abatement costs.

Impacts on forest enterprises are determied by FAUSTMANN based model analyses.

Results

It turns out that Germany very probably will be able to fully exploit the assigned cap of 1.24 Mt C/a according to Art. 3.4 KP in the first commitment period. The economic value of this sequestration service can be put at about 450 mill. EUR; potentially this amount increases by about one third for the compensation of carbon losses due to afforestation/ deforestation according to Art. 3.3 KP. Because of the lack of information about the future institutional framework it is not possible to quantify sequestration values for commitment periods after 2012; however this question will become less important for the time from about 2030 onwards, since the net sequestration will turn negative at that time. Considering the price relations between sequestration and timber revenues, the resulting opportunity costs as well as the possibility of using wood for material and energy substitution purposes, it seems more advisable to run the risk of falling short of the quantitative sequestration target set by the assigned cap than exceeding this target. Therefore, additional incentives for increasing forest sequestration services would seem counterproductive in the first commitment period. This result need not hold for later periods; however, incentives for these periods cannot appropriately be targeted today due to the lack of knowledge about the future institutional framework. Consequently, distributive rather than allocative aspects come to the fore when deliberating about policy mechanisms for the first commitment period. It is therefore recommended to opt for a cost-efficient distribution mechanism as an interim solution. A long term decision should be designed not before the relevant international institutional framework is foreseeable. Moreover, political negotiations about a post-Kyoto agreement should aim at a more consistent handling of biological sinks (specifically, a mandatory accounting of forest sinks; an abandonment of the respective caps; and an inclusion of harvested wood products).

Beyond this, the incentive effects of possible instruments for a remuneration the carbon sequestration services are analysed at stand as well as at enterprise level, using carbon certificates as an example. The issuance of certificates for C sequestration (or of debits in the case of C releases, respectively) makes it economically more viable for forest owners to extend rotation periods; here the concrete specification of liability rules for C emissions is crucial. If already the extraction of wood from the C pool in the forests is debited as an emission, then management regimes with longer rotation periods are more advantageous than those with shorter rotation periods. If the debit is not allocated to the forest owner, the effect remains small.