Working Group III: Mitigation

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4.5 Social and Economic Considerations 4.5.1 Economics

The method of calculating costs for forestry and agricultural projects differs. Forestry almost always looks at private market costs. However, many, if not most, forestry projects have positive externalities (or ancillary benefits) in the form of erosion control, water protection, flora and fauna habitat, non-timber forest products, water protection, and so forth (Makundi, 1997; Frumhoff et al., 1998; Trexler and Associates, 1998). For agricultural projects the approach is typically tied to the idea that the carbon-sequestering projects are essentially productivity enhancing and therefore can be viewed as “no regrets” activities; these are actions that have benefits in themselves aside from climate mitigation, which make the project socially desirable even without its carbon benefits. Such “no regrets” activities generally take the form of soil management activities, which both generate increased sequestered carbon and improve agricultural productivity.

There are basically three different ways of estimating the costs of sequestration of forestry projects – point estimates, i.e., cost for a particular level of output; partial equilibrium estimates, e.g., a cost function construction with the prices of inputs being held constant; and more general equilibrium types of approaches, e.g., a market equilibrium model in which some other prices, such as the prices of land inputs and the relative price of all other goods, are allowed to change owing to market forces. Additionally, economic models can incorporate changing climate conditions to estimate changes in economic variables as the climate and ecosystem change. Early studies tended to look at individual projects, relating the private costs of establishing a project to the cumulative carbon sequestered over the life of the project (see Sedjo et al., 1995). Many of the point estimate type studies provide undiscounted private market cost point estimates of the carbon sequestration in afforestation projects. However, this approach usually reveals little about how costs might change if the project were expanded to involve truly large land areas, as they do not recognize rising costs required to increasingly bid land away from alternative uses. These types of estimates tended to be biased downwards, partly because the opportunity costs of the land (land rents) were often ignored.

Point Estimates: The cost estimates of actually sequestering carbon obtained in point estimate type of studies tend to be quite low; in the SAR (IPCC, 1996) a range was given of US$3-US$7 per tonne of carbon. Additionally, a large number of more recent point estimate country studies reported most unit abatement costs in this low range, or lower. The earlier IPCC estimates for SAR were that of an investment of US$ 168-220 billion required to mitigate 45-72GtC in the tropical regions. More recent work provides estimates that the cumulative investment required for mitigating 26.53GtC to be US$63.6 billion at an overall cost of US$2.4/tC (Sathaye and Ravindranath, 1998). The unit cost given in Table 4.3 shows that the investment cost of mitigation is generally quite low for carbon conservation options in selected developing countries and South Korea (e.g., US$0.10/tC in Vietnam, and US$1- 2/tC in Cameroon and Ghana). The mitigation cost is lower than US$2/tC for the majority of the options in Indonesia, the Philippines, Vietnam, and Mongolia.

Partial Equilibrium: Partial equilibrium involves a more complete estimation of a static cost function that estimates rising costs (e.g., as a result of land price increases as one moves to lands with higher opportunity costs) associated with increased sequestration activities. These studies generate marginal cost functions that tend to suggest most costs are higher than those of the simple point estimates. This is because, for example, they include in the cost estimates the opportunity costs of the land, and they recognize rising costs associated with additional planning activity and, for some, because they apply a discount rate to future physical carbon sequestered. The costs for modest amounts of carbon sequestered in specific areas are generally in the US$20-US$100/tC range (Moulton and Richards, 1990; Adams et al., 1995; Parks and Hardie, 1997;Stavins, 1999; Plantinga et al., 1999). Costs tend to depend on the forest growth rates anticipated and the opportunity costs of the land. Where projects are small, land prices would be expected to be stable. However, in regions where projects are large, land prices, and hence sequestration costs, will tend to rise.

Figure 4.9: Indicative curves of costs (US$/tC, cost of US$28/tC is equivalent to US$100 per tonne of CO2) of emission reduction or carbon sequestration by level of total reduction. The curves display how comparable options vary in costs between world regions. However, costs per option are also reported to vary widely at comparable total levels of reduction. This is mainly because cost studies have not been carried out in the same way. In some options net monetary profit may occur as well (i.e., costs may be negative as well) (Brown et al., 1996a, Hol et al., 1999; Jepma et al., 1997; Sedjo et al., 1995).

Market Equilibrium Models: This approach incorporates sectoral and general equilibrium interrelationships. It recognizes that expanding the forest for carbon sequestration purposes has implications for current and future industrial forest production and prices, and for agricultural production and prices. These price and production changes then generate feedbacks through the market to the forest and agricultural sector behaviour. Alig et al. (1997), for example, examine the effects on welfare costs of meeting alternative carbon sequestration targets by land re-allocations between agriculture and forestry in the USA. This model explicitly treats agriculture and wood production as interrelated. Allocating more land to trees to capture carbon has implications on the price and quantity of agricultural products, as well as on timber. Thus, the costs of carbon plantations are found both in the price of establishing the plantations and in the higher agricultural prices, and thus involve welfare shifts across sectors. A different approach, also recognizing sectoral interrelationships, is that of Sedjo and Sohngen (2000). This approach expands on earlier global timber supply models by explicitly incorporating the interrelations between the industrial wood sector and carbon plantations by recognizing the joint product nature of industrial wood and carbon. This approach finds that tree planting carbon sequestration activities tend to have a somewhat more modest effect than anticipated, since the tree planting for carbon purposes leads to an expected increase in future timber supplies and a corresponding decrease in expected future prices. Through the effects of price expectations on the timber market, carbon activities may discourage industrial timber investments and thereby lose some of the carbon gains made from the initial project. This is a form of leakage not often recognized.

Climate Feedback Models: These market equilibrium models incorporate the impact of the climate-driven changing ecology into their assessment of the potential and costs. Perez-Garcia et al. (1997) examine the effects of climate change, using a global trade model (CGTM). This approach imposes a global circulation model (GCM) and a terrestrial ecosystem model on the world’s industrial wood economy, and estimates the welfare effects on forest owners and forest consumers of such changes. Sohngen and Mendelsohn (1998) use a timber model of the USA to estimate the changes in the forest market sector that would be expected to occur with a climate warming using GCM and terrestrial ecosystem models. However, neither study considers the impacts of increased fuelwood demand to replace fossil fuels.

In summary, most studies, of all methodologies, suggest that there are many opportunities for relatively low-cost carbon sequestration through forestry. Estimates of the private costs of sequestration range from about US$0.10-US$100/tC, which are modest compared with many of the energy alternatives (see Table 3.9 and Figure 4.9). Additionally, it should be noted that most forest projects have positive non-market benefits, thus increasing their social worth. However, as the studies have become more sophisticated, incorporating both the full private opportunity costs of the land and market effects on land and resource prices, estimates of carbon sequestration costs have tended to rise. The cost estimates tend to vary for regions, with high costs generally associated with high opportunity costs for land. In the many regions that have low opportunity costs for land, including many subtropical regions, the costs tend to remain low.

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