Carbon Incentives and Canada0 Managed Forest under Risk

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Carbon Incentives and Canada00 Managed Forest under Risk 

Foothills Research Workshop

Jan 30, 2003 

Grant Hauer

University of Alberta 

 
 
 
 
 

Outline 

Basics of Carbon Credit Trading Contract Empirical Model Results Natural Disturbance Risk Policy Implications  
 
 
 
 

Key Criteria 

Net sequestration/surplus/additionality Baseline establishment Permanence Leakage  
 
 
 
 

The Structure of a Carbon Contract: Credits and Debits 
 

time 

C 
 
 
 
 

Credits 

C0 

Baseline 

Permanent storage 

Contract

ends? 

Contract

begins

 
 
 
 
 

The Structure of a Carbon Contract: Credits and Debits 
 

time 

C 
 
 
 
 

Credits 

C0 

Baseline 

Debits 

Contract

ends 

Contract

begins

 
 
 
 
 

Carbon Credits  
When the Baseline is Increasing  

time 

C 
 
 
 
 

Credits 

C0 

Baseline 

Contract

ends 

Contract

begins

 
 
 
 
 

Can Carbon Credits be Generated When the Baseline is Decreasing?  

time 

C 
 
 
 
 

Credits 

C0 

Baseline 

Contract

ends 

Contract

begins

 
 
 
 
 

Alternative Contract Arrangements 

Long term nature of sequestration leads to long term contracts Buyers buy credits only Supplier responsible for future debits Buyer buys temporary storage Debits built into the contract Price is lower  
 
 
 
 

Empirical Model 

Math Programming Model Weldwood FMAs in the Foothills Timber harvest scheduling Carbon management Optimization model  
 
 
 
 

Empirical Model 

Economic objective function Timber and carbon values Carbon values include credits and debits Discounted net revenues Harvest scheduling options Alternative regeneration prescriptions Extensive, basic, intensive  
 
 
 
 

Empirical Model 

Carbon budget model (Kurz and Apps 1992, 1999) Soil, living biomass (above and below ground) Multiple products and carbon storage in products (Apps and Kurz 1999) Disturbance Rates Regulatory constraints AAC  
 
 
 
 

Carbon Stock Baseline Determination

 
 
 
 
 

Carbon Stock Baseline Determination 

Assumptions

Maximize NPV with no carbon incentives Current Regulatory constraints 0% disturbance rate  
 
 
 
 

Carbon Stock Response to Carbon Price

 
 
 
 
 

Carbon Stock Response to Carbon Price 

Maximize NPV of timber and C values Activities chosen to balance objectives Current regulatory constraints 0% disturbance rate Long term C incentives  
 
 
 
 

Carbon Supply Curves

 
 
 
 
 

Carbon/Timber Supply Tradeoffs

 
 
 
 
 

Stand carbon over time 

time (yrs) 

C t/ha 

t

 
 
 
 
 

Carbon Incentives: Debits on harvest 

time (yrs) 

C t/ha 

t 

pc00/font>v 

Carbon Emission Fee 

Carbon emission fee on  remaining C decay

 
 
 
 
 

Sensitivity Analysis of Intensive Management on Yield Increase Assumption 

Low  

High

 
 
 
 
 

Relaxing the Regulatory Constraints

 
 
 
 
 

Relaxing the Regulatory Constraints

 
 
 
 
 

The effect of an increase in disturbance rate on C stocks

 
 
 
 
 

Underestimating the natural disturbances 

Baseline 

Debits

 
 
 
 
 

Correctly forecasting disturbance rates 

Baseline 

Credits

 
 
 
 
 

Economic Consequences Under Risk 

Annual Area Burned 

Source: Armstrong G.W. 1999

 
 
 
 
 

Decision Making Under Natural Disturbance Risk 

NPV of Carbon Carbon Price = $10/t  
 
 
 
 

Policy Implications  

Intensive management Carbon price > $20/ton Minimal short term impact on carbon stocks Larger long term impact on carbon stocks Change in Harvest Emphasis Proportion of harvest by species group  
 
 
 
 

Policy Implications  

Timber/Carbon Stock Tradeoff Reduced harvest Largest influence on carbon stocks given disturbance rate Forest carbon reserves (eg. SaskPower/SaskEnv trade) Barriers to option FMA holders have limited rights to control of harvest levels  Regulated to harvest within percentage of AAC Quota holders Short term efficient use of capital stocks  
 
 
 
 

Policy Implications  

Regulatory Flexibility Risk Management Strategies Declining baselines Carbon discounts Insurance Design Incentive Mechanisms to Reduce Risk Fire, Insect and Disease Protection  

If have a loss of carbon in forest then that has to go to adjust the cap again. That means a price must be charged for the release of the carbon.  If you had a seamless trading system might mean you have to go out on the market and buy up some permits. 

 

If have a loss of carbon in forest then that has to go to adjust the cap again. That means a price must be charged for the release of the carbon.  If you had a seamless trading system might mean you have to go out on the market and buy up some permits. 

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