E C O L O G I C A L E C O N O M I C S 6 6 ( 2 0 0 8 ) 3 0 9 – 3 1 8

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ANALYSIS

Economy and ecology of emerging markets and credits forbio-sequestered carbon on private land in tropical Australia

Colin Hunt⁎,1

Environmental Policy and Socio-economics Faculty, Centre For Rainforest Studies, School for Field Studies (Head Office Salem, Mass.),Yungaburra, North Queensland, Australia

A R T I C L E I N F O

⁎ Colin Hunt, 4 Oak Street, Yungaburra, QuE-mail address: colinhunt@bigpond.com.

1 Author's address: c/o SFS, PO Box 141 Yun

0921-8009/$ – see front matter © 2007 Elsevidoi:10.1016/j.ecolecon.2007.09.012

A B S T R A C T

Article history:Received 1 April 2007Received in revised form17 August 2007Accepted 11 September 2007Avaiable online 24 October 2007

A central question addressed is whether emerging carbonmarkets have the potential to providean economic incentive for private landholders to reforest without recourse to subsidy. A secondquestion iswhether bio-sequestration in theWet Tropics of Queensland is cost-competitivewithsouthern Australia. A third, given that plantations ofmonocultures also provide carbon sinks, is:are the goals of carbon sequestration and biodiversity mutually exclusive or complementary?Australia intends to meet its Kyoto greenhouse gas emissions target even though it has notratified the Protocol. While a national system of carbon emission cap and trade does not exist,unilateral action by some states to mandate industry caps has generated a demand for offsets.However, it is the voluntary market for offsets, stimulated by demand by companies andgovernmentdepartments that ismost active. The favourable climate and soils of theWetTropicsRegion of north Queensland have enabled the evolution of unique ecosystems. Deforestation ofthese has been greatly reduced byWorld Heritage listing of theWet Tropics. Neverthelessmuchof the landscape remains fragmented. An official priority is the encouragement of rainforestplantations on private landwith the aim of augmenting endangered ecosystems and the habitatof iconic species, but reforestation is heavily subsidised by the Australian government. Usingmethodology that allows the comparison of uneven streams of costs and benefits, it is foundthat –atpresentprices –payments for sequestered carbondefrayonly asmall proportionof costs,providing a level of incentive insufficient to stimulate restoration. Comparative analysis showsthat monocultures sequester carbon at a much lower price per tonne. However, despite therelatively high growth rates of monocultures in the region, their cost per tonne of carbon aregreater than costs in southern Australia. A decreasing supply of suitable land for bio-sequestration offsets in southern Australia may well force brokers to look to the Wet Tropics.In this event – the economic analysis suggests – land in areas that carried endangered orthreatened ecosystems will be devoted to monocultures rather than restored rainforest. Thepaper highlights the asymmetry between the availability of credits for carbon and of credits forbiodiversity and the need for public investment in conservation and restoration. Requiringfurther investigation is the potential demand for carbon offsets with high biodiversity benefits –so called “boutique abatements” – that could readily be supplied in the QueenslandWet Tropics.

© 2007 Elsevier B.V. All rights reserved.

Keywords:Sequestration economicsReforestationBiodiversityCarbon creditsCarbon costsAustralia

eensland 4884, Australia. Tel.: +61 7 40952523.

gaburra, Queensland 4884, Australia.

er B.V. All rights reserved.

310 E C O L O G I C A L E C O N O M I C S 6 6 ( 2 0 0 8 ) 3 0 9 – 3 1 8

1. Introduction

Australia, like the US, has not ratified the Kyoto Protocol and istherefore excluded from international emissions trading andjoint implementation which would stimulate in-countrycapture of carbon in forest sinks (bio-sequestration). Never-theless, Australia still intends tomeet its Kyoto target, and hasadopted Protocol accounting rules that specify that carbonstock changes between 2008 and 2012 are to be included in thecountry's accounts (Australian Greenhouse Office, 2006).

Given the high rate of increase of emissions from the powergeneration and transport sectors the Australian government isencouraging bona fide bio-sequestration projects (under Article3.3 of the Protocol) that can contribute to a reduction in thecountry's emissions. There is no Australia-wide cap and tradesystem governing emissions. Nevertheless, voluntary corporateactivity and unilateral action by states in the Australianfederation to cap emissions has stimulated the emergence ofmarkets for carbon. Some of the largest Australia-based multi-national companies, public corporations and state governmentdepartmentshaveentered intooffset contractswithprovidersof,or brokers in, bio-sequestered carbon (Ribón and Scott, 2007).

The economics of halting biodiversity loss and preservingecosystems has been developed in response to the failure ofcost-benefit analysis to adequately account for the benefits offlows of environmental services or the costs of their irrevers-ible loss. The precautionary principle states that, where thereis a significant reduction or loss of biological diversity, the lackof full scientific certainty should not be used as a reason forpostponing measures to avoid or minimize such a threat. Theprinciple is central to the Convention on Biological Diversity.

A tool that incorporates the precautionary principle is thesafe minimum standard (SMS), advocated by Ciriacy-Wantrup(1968) and refined by Bishop (1978). The SMS draws adistinction between the private benefits that can result fromexploitation and the public benefits that are a function ofpreservation, and it attempts to achieve the social optimum.The application of the SMS avoids a situation where the

Fig. 1 –Wet Tropics of Qu

physical condition of an area is prevented from declining to astage where deterioration is inevitable or is uneconomical tostop. The opportunity costs incurred in such an interventionmay have been unnecessary to avert irreversible depletion.Nevertheless, delay confers an option value on preservedareas (Arrow and Fischer, 1974). The SMS concept is widelyadopted and was applied when some 900,000 ha of the WetTropics of Queensland was inscribed on the World HeritageList in 1988. However, in the Wet Tropics region (See Fig. 1),much biodiversity lies outside the World Heritage area infragmented forests on private land. The fragmentation is aresult market failure, in that landowners were not obliged toinclude public costs and benefits in their decisions to log andthen clear the rainforest for livestock farming and agriculture.

A prime example of an endangered ecosystem in the WetTropics is the complex notophyll vine (Mabi) forest listed as“endangered” by the Queensland government and “criticallyendangered” by the Australian government. The habitat liesmainly on private land with agriculturally productive basalticsoils. This type of forest has been reduced to a mere four percent of its original extent (Environmental Protection Agency,2007; Department of Environment and Water, 2007a).

The Mabi forest harbours the nationally threatened Large-eared Horseshoe Bat (Rhinolophus philippinensis) and SpectacledFlying-fox (Pteropus conspicillatus) together with the “rare”Lumholz Tree-kangaroo (Dendrolagus lumholtzi), Green RingtailPossum (Pseudocheirops archeri) and Herbert River RingtailPossum (Pseudochirulus hebertensis) (as classified under Queen-sland'sNature Conservation Act, 1992). TheMusky Rat-kangaroo(Hypsiprymnodon moschatus) and the nationally endangeredSouthern Cassowary (Casuarius casuarius johnsonii) once oc-curred inMabi Forest. However, the remaining patches of MabiForest are too small for animals' survival and the Musky Rat-kangaroo and Southern Cassowary have become locallyextinct (Mabi Forest Working Group, 2001; Department ofEnvironment and Water, 2007b).

The complex mesophyll vine forest (Hypsi) is less threat-ened. Nevertheless, less than 30% remains unaffected byweed

eensland, Australia.

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invasion and the disturbance effects of logging, and itsbiodiversity status under Queensland legislation is “of con-cern”. The Hypsi forest, as well as being habitat for theLumholtz Tree-kangaroo, is also habitat for the iconicSouthern Cassowary, the subject of a recovery plan (Depart-ment of Environment andWater, 2007c). The augmentation ofMabi forest and Cassowary habitat by replanting nativespecies are regional priorities for natural resource manage-ment investment. An additional regional priority is thereduction of terrestrial threats to the Great Barrier ReefWorld Heritage Area, in which reforestation has a major role(FNQ NRM Ltd, 2005).

Regulations now prevent landowners from incurring publiccosts by clearing forest in critical ecosystems. Moreover, theQueensland and Australian governments recognise the failureof themarket to generate an increase inendangeredecosystemsand habitat for threatened species in north Queensland and theneed for public intervention to augment endangered ecosys-tems by heavily subsidising the financial costs of reforestationon private land.

The design of restoration plots is aimed to achieve theeventual replication of the rainforest in the shortest possibletime. Emphasis is placed on the need to include a large numberof native species and,moreover, to enhance the ecological valueof the reforestation. For example, seedlings are grown fromseeds collected from the same forest provenance in whichenvironmental plantings are to take place, and at least 50species are planted.

Despite an investment of A$16.5 million in revegetatingsome 644 ha through the Natural Heritage Trust Stage 1 innorth Queensland, the rate of increase in habitat achieved byreforestation programs is considered by ecologists to be wellbelow what is required to guarantee the survival of endan-gered ecosystems or species. Catterall and Harrison (2006)estimate that to recover 30% of the former area of Mabi forestwould cost $80 million. But even if financial restraints areremoved, substantial agricultural opportunity costs remainand these are likely to increase as stocks of marginal landdecrease.

A central question in this paper is whether the new carbonmarkets have the potential to provide an economic incentivefor landholders to reforest without recourse to subsidy.

The second question addressed is how the cost of carbonsequestration in the Wet Tropics of north Queenslandcompares with the costs of bio-sequestration elsewhere inAustralia. This relationship will be influential in determiningthe relative attractiveness to investors of carbon credits andcarbon offsets in the Wet Tropics.

Thirdly, given the commercial softwood plantations alsoprovide carbon sinks: are the goals of carbon sequestrationand increase in biodiversity mutually exclusive or comple-mentary? Caparrós and Jacquemont (2003) expect that thecreation of economic incentives for carbon sequestration byafforestation and reforestation will yield a sub-optimal resultof over-planting of fast-growing alien species with a potentialnegative impact on biodiversity. “The Convention on Biolog-ical Diversity lacks economic incentives which would ensurethat agents will follow the optimal social strategy whereas theKyoto protocol creates economic incentives” (Caparrós andJacquemont, 2003:155).

2. Method

2.1. Estimation of bio-sequestration rates

Under Kyoto Protocol rules and under Australia's accountingapproach (Australian Greenhouse Office, 2006) carbon seques-tration credits are only available on land cleared of vegetationbefore 1990. In the modeling of carbon sequestration, thecleared land to be planted with trees is assumed to be underpasture, the now dominant land cover in north Queensland.

By synthesising allometric studies, the Australian govern-ment has developed predictive models of carbon flows inforest and agricultural systems. Accessible through a “Nation-al Carbon Accounting Toolbox” the model predicts, for anyarea of Australia capable of growing trees, the carbonsequestered over time both above and below ground, in bothmixed species and single species plantings (Australian Green-house Office, 2006).

In this study, toolbox models are used to compare total onsite carbon (above and below ground) sequestered in refores-tation plots of mixed species native trees with total carbonsequestered in afforested plots of hoop pine (Araucariacunninghamii) and blackbutt (Eucalyptus patens). The study iscentred on the basalt soils of the Wet Tropics. This soil typewas chosen for the comparison because its original vegetativecover was the critically endangered Mabi forest that has, andcontinues to be, the focus of considerable investment andcommunity action to augment Mabi remnants and createcorridors between remnants.

Rates of carbonuptake in forests followanexponential pathin the initial years, then slowwith age. Themodel predicts thatin 90 years plus the rainforest reforestation captures over250 tonnes per hectare of carbon. Hoop pine is the softwoodmonoculture modelled and this captures almost 250 tonnesbefore harvest at 44 years, but decreases with harvest. UnderKyoto and Australian rules only the carbon sequestered in theterrestrial carbon sink is counted. (However, it has beenestimated (Thamer, 2006) that 35% of the hoop pine timberthat is harvested, alongwith its carbon content, is transformedinto enduring wood products such as furniture or buildings,while the remaining waste decomposes.) The unharvestedhoop pine and unharvested blackbutt both sequester some350 tonnes of carbon per hectare (see Figs. 2 and 3).

2.2. Carbon accounting methodology

The challenge in modelling is to obtain a single numberrepresenting the cost-effectiveness of carbon sequestrationwhen there are annual perturbations around a long growthpath.

The key concept is the discount factor, which is the value ofan increment of consumption at a time in the future relative tothe present. The discount rate is the change in the discountfactor over time. Discounting is an economic technique relevantfor assessing projects such as in this paper that deal withtechnological choices between paths of carbon sequestration.Stern (2007) carried out a detailed review of the adoption ofdiscount factors and rates in non-marginal studies, such as onthe impact onwelfareof global climate change. The implications

Fig. 3 – Incremental carbon sequestered, total on site, WetTropics of Queensland plantations, tonnes per hectare.

Fig. 2 –Carbon sequestered total on site, Wet Tropics ofQueensland plantations, tonnes per hectare.

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of ethics and welfare theory taken together are found to lead toadoption of techniques very different from those normally usedin cost-benefit analysis. Stern embraces the arguments ofmanyeconomists that the discount rate should be variable and verysmall.

This study, however, is concerned with estimating at themargin the costs of bio-sequestered carbon in differentforestry regimes. Methods that can be employed to accom-plish comparisons of costs of carbon sequestered are reviewedby Stavins and Richards (2005). Briefly, the “flow summation”approach or “stock change”method simply divides the tonnesof carbon by the present value of costs regardless of whensequestration occurs. The method implies that the marginalbenefit of sequestration is increasing exponentially over timei.e. that the discount rate is negative. This is a validassumption when the environmental damage of atmosphericcarbon is increasing over time, and one that could be made innon-marginal policy analysis (Stern, 2007). A similarmethod isthe mean carbon storage method, where the present value ofcosts is divided by the numerical average annual carbonstorage.

In this study the discount rate is assumed to be constant asconsumption is assumed to be constant. The results arereported for the cost of carbon for a range of discount factorsgiven that different investors making choices between bio-sequestration strategies will have different views on the valueof an increment of consumption in the future. The benefit ofdamages avoided (i.e. carbon sequestered) and the costs ofavoidance are discounted at the same rate. The discountedpresent value of uneven costs is divided by the discountedpresent value of the uneven carbon flows to obtain the presentcost per tonne of carbon sequestered.

2.3. The treatment of costs of bio-sequestration byreforestation

The cash cost component of reforestation ismost oftenmet bysubsidies from the Australian government and in some casesby the corporate sector. The major cash costs are the cost of

seedlings, the cost of fertiliser, the cost of herbicide in sitepreparation and weed control for three years and the cost offencing to exclude livestock. In this study an imputed, oropportunity cost, of labour input by voluntary organisations of$33 per hour is adopted — a locally accepted labour cost. Thesource of cost data is the detailed records of a voluntaryorganisation, Trees for the Atherton and Evelyn TablelandsInc., in north Queensland, dedicated to environmental refor-estation (TREAT, 2007).

In the Wet Tropics, grass and weeds pose severe compe-tition for tree seedlings. Intensive weedicide applications arenecessary in the year of planting and in the following threeyears. The competition posed by grass and weeds is counteredby planting trees relatively close together, in this case 1.75 mspacing (or 3256 trees per hectare) so that a leafy canopy formsin three to four years. The cost per tree in the ground is A$5.40.

2.4. Relationship between tree density and tree plantingcosts per hectare

The relationship between tree spacing, or density, and costs isa crucial one and is explored in some detail. Analysis shows anexponential rise in costs with tree spacing (see Table 1). This isderived by number of trees times the cost per tree planted ateach spacing.

The analysis of cost of maintenance (grass and weedcontrol) in Table 1 shows its upward trend with spacing. Thecost/maintenance relationship is derived from the experienceof TREAT and is the cost of materials and labour per hectaretimes the number of maintenance treatments required to

Fig. 4 –Cost of trees plus cost of maintenance, per hectare ofenvironmental planting, by tree spacing, Wet Tropics ofQueensland, 0.05 discount.

Table 1 – Costs of trees and cost of maintenance requiredfor one hectare of environmental planting by tree spacing,Wet Tropics of Queensland, 0.05 discount rate

Years ofmaintenance

Treespacing,metres

Cost of trees, perhectare, atA$5.40 each

Cost ofmaintenance,per hectare,

A$

2 years 1 54,000 34,8413 years 1.25 34,560 47,5973 years 1.5 24,000 47,5973 years 1.75 17,633 47,5974 years 2 13,500 59,7464 years 2.25 10,667 59,7465 years 2.5 8640 59,7465 years 2.75 7140 59,7465 years 3 6000 67,4455 years 3.25 5112 67,445

Note: A$=Australian dollar.

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control weed and grass growth satisfactorily. The cost ofmaintenance is discounted at the rate of 0.05.

Fig. 4 shows the result of the synthesis of the two sets ofdata — cost of trees and cost of maintenance at different treespacings. The lowest cost is delivered by a spacing of 1.75 mbetween trees i.e. 3265 trees/hectare. Not only costs increasewith tree spacing. The chance of failure to deliver adequatemaintenance, and therefore the risk that tree survival will bejeopardised, increase with the number of years of mainte-nance required. Therefore the spacing at 1.75 m is preferred,and in fact similar intervals are adopted by most local treeplanting agencies.

2.5. Opportunity costs of reforestation and afforestation

Rainforest reforestation in the wet tropics of north Queens-land is usually carried out on areas of about one hectare or lesson private land. The operation is labour intensive andeconomies of scale are weak (Catterall and Harrison, 2006).Voluntary organisations committed to biodiversity conserva-tion aremost often the proponents of restorations, sometimesworking in a complementary way with state governmentdepartments and local governments. The voluntary organisa-tion contribute their labour which, if imputed, amounts tosome 70% of total costs.

In a study of the costs and benefits of 11 restorations onprivate land it was found that the average private orlandowner contribution to restoration costs (including animputed labour costs) was a mere $1000 per hectare (Hansel,2006). The total present cash costs and labour costs respec-tively at the 0.05 discount rate are A$14,840 and A$49,995 ofreforestation per hectare.

As well as a labour opportunity cost there is a landopportunity cost of the replacement of the existing landuseby carbon sinks. Beef cattle grazing on pasture is the dominantactivity replaced by forest. While there are other landusessuch as dairy and crops on the Atherton Tablelands notaccounted for in the study these are likely to be moreprofitable and hence have a higher opportunity cost thanbeef cattle fattening whose gross margin in the model is $200

per hectare. Sources of beef cattle gross margins are the NSWDepartment of Primary Industries (2006) and Smith (2006).

The opportunity costs of beef cattle, as in the case of labour,are incurred during year 0 when land is being prepared for treeplanting andare constant for different forest types. These year 0costs are entered at their undiscounted values. The presentopportunity cost of running beef cattle on land reforested orafforested, at 0.05%, isA$4,155. In the caseof theharvestedhooppine plantation, cattle grazing is displaced at establishment butis re-introduced into the plantation four years after establish-ment at half the stocking rate achieved prior to afforestation.

Previous studies investigating the past activities and futureprospects for increasing reforestation and afforestation innorth Queensland (Herbohn et al., 2000; Harrison et al., 2004;Harrison and Herbohn, 2006) have recognised opportunitycosts as an issue, but have not made them explicit. Theimportance of including opportunity costs in calculating costof carbon sequestration is emphasised by Stavins andRichards (2005) who found that cost estimates increased by 2to 3.5 times in studies that take opportunity cost into account.A similar ratio is found in this study.

In this study the displacement of agriculture by plantationsand consequent impacts on prices in the forest and agriculturalsectors are ignored. If large changes in land use were to beexpected then such sectoral benefits and costswould need to betaken into account in estimating costs of carbon sequestration.

2.6. Economic models

There follows the economic modelling that determines therelative costs of carbon sequestered in the reforestation andafforestation strategies.

The cost of raising a tree native to the area and getting it inthe ground is A$5.40 per tree, or A$17, 6310 per hectare in year 0(at a tree density of 3265 trees per hectare). Materials costs aremainly in the cost of trees in year 0. Inyear 0 thereare additionalcash costs of equipment hire, weedicide, fertiliser, mulchingand travel costs.

Weed and grass control are labour intensive in years 0, 1, 2and 3; the labour costs average some A$13,000 per year overthe four years. Where volunteer labour cost is used it isimputed at $33.00 per hour. Specialised labour for some

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specified activities is provided by the Queensland Parks andWildlife Service at A$49.50 per hour.

After tree planting in year 0, carbon sequestration com-mences in year 1. But the incremental increase in total onsitecarbon is negative in year 1 due to grass andweed control priorto planting.

The present total economic cost per tonne of carbon (C)sequestered in an environmental planting is represented inEq. (1).

PTCE ¼X94

n¼0ce þ 1e þ beð Þ= 1þ rð Þn=

X94

n¼1te= 1þ rð Þn ð1Þ

where:

PTCE present total cost of a tonne of C sequestered inenvironmental planting, A$

∑ sum ofe environmental plantationc cash costs per hectare, A$l labour cost per hectare, A$b beef opportunity cost per hectare, A$t C sequestered per hectare, tonnesr discount raten number of years after planting

Expansion of hoop pine plantations is one of the “morelikely” scenarios for development of forestry given that thereis an established resource whose silviculture is well known(Kanowski et al., 2005: 362). Moreover, there is a large mill inthe region geared to processing hoop pine. The timbermill willonly harvest plots in excess of 10 ha in size or greater,however, because of harvesting diseconomies of smaller plots.Establishment and maintenance of softwood and hardwoodplantations are therefore by contractor. There is therefore nounpaid labour (or labour opportunity cost) involved.

Where timber harvesting is contemplated, trees in planta-tions need to be widely spaced to obtain maximum growthandmaximum value per tree. Two harvests of hoop pine treeseach yield 400 m3 of millable timber at a farm gate price of $25perm3 in years 44 and 88; no income is generated by thinnings,which are left on the forest floor (Skelton, 2007). Tree plantingandmaintenance includes pruning in years 3 and 47, 6 and 50,9 and 53, and thinning in years 10 and 54, 13 and 57 and 16 and70 (Skelton, 2007). The cost of hoop pine seedlings ismuch lessthan the cost of rainforest trees and only 1000 or less areplanted per hectare. Weed control costs are however lowerthan for restoration plantings, being mechanised.

The economic model of the present total cost incurred pertonne of C in the case of harvested softwood (hoop pine) isdepicted in Eq. (2)

PTCHS¼X94

n¼0chs þ bhs � bgm� �� yhsTphsð Þ� �

= 1þ rð Þn=X94

n¼1ths= 1þ rð Þn

ð2Þwhere:

PTCHS present total cost of a tonne of C sequestered in aharvested softwood plantation, A$

∑ sum of

hs harvested softwood plantationc cash costs per hectare, A$b beef opportunity cost per hectare, A$bgm beef grossmargin, cattleunderplantation,perhectare,

A$y yield of timber per hectare, m3

p farm gate price of timber per m3, A$t C sequestered per hectare, tonnesr discount raten number of years after planting

Planting softwoods, but foregoing a harvest and the sale oftimber to achieve higher yields of carbon, is an option alsoexplored. While income from running beef cattle under treesis also foregone, there are on the other hand cost savings inthat the trees are not thinned or pruned as they would need tobe in a timber plantation. Hence the cost of establishment andmaintenance costs falls to $5800 per hectare at a discount rateof 0.05. The total economic cost per tonne of C sequestered isderived in Eq. (3).

PTCUS ¼X94

n¼0cus þ busð Þ= 1þ rð Þn=

X94

n¼1tus= 1þ rð Þn ð3Þ

where:

PTCUS present cost of a tonne of C sequestered in anunharvested softwood plantation, A$

∑ sum ofus harvested softwood plantationc cash costs per hectare, A$b beef opportunity cost per hectare, A$t C sequestered per hectare, tonnesr discount raten number of years after planting

Planting hardwoods (blackbutt) and foregoing a harvest inorder to achieve higher yields of carbon is the final optionexplored. As in the case of unharvested softwoods, incomefrom the sale of timber and from running beef cattle undertrees is foregone, but there are cost savings in that the treesneed not be thinned or pruned. It is assumed that hardwoodplantations are of sufficient scale to require establishmentand maintenance by contractor. The total economic cost pertonne of C of this alternative is derived in Eq. (4).

PTCUH ¼X94

n¼0cuh þ buhð Þ= 1þ rð Þn=

X94

n¼1tuh= 1þ rð Þn ð4Þ

where:

PTCUH present cost of a tonne of C sequestered in anunharvested hardwood plantation, A$

∑ sum ofuh unharvested hardwood plantationc cash costs per hectare, A$b beef opportunity cost per hectare, A$t C sequestered per hectare, tonnesr discount raten number of years after planting

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3. Results

3.1. Costs of carbon sequestered

The results for tonnes of carbon sequestered and cost pertonne for the four types of forest are summarised in Table 2.The total economic cost, including cash, labour and landopportunity costs, per tonne of carbon sequestered in anenvironmental planting at a 0.05 discount rate is A$1065. Thetotal economic cost per tonne of carbon in the case ofsoftwood harvested, softwood unharvested and blackbuttunharvested are much lower than that for the environmentalplanting, at A$160, A$75 and A$89 respectively.

The choice of discount rate has a marked influence on thecost of carbon. Higher discount rates raise the costs per tonneof carbon because sequestration is over a long period of time;thus its present value decreases with higher discount ratesrelative to costs that are incurred in the first few years.However, a discount rate of 0.025 delivers the lowest cost forharvested softwood because the tonnes of carbon sequesteredis maximised relative to the present costs of thinning andpruning.

3.2. Comparison with U.S. carbon sequestration costs

The cumulative sequestration of 364 tonne per hectarereported by for permanent (unharvested) loblolly pine in theMississippi Delta at 80 years (Stavins and Richards, 2005:10) is

Table 2 – Tonnes of carbon per hectare and cost per tonnesequestered in plantations, Wet Tropics of Queensland,various discount rates

Discount rate

1% 2.5% 5% 10%

Environmental plantingCarbon sequestered (t/ha) 144 102 65 32Cash cost (A$/t) 106 147 229 454Cash plus labour cost (A$/t) 475 654 1001 1914Cash plus beef opportunity cost (A$/t) 191 219 294 523Cash plus labour, plus beef opportunitycosts (A$/t)

560 726 1065 1982

Harvested softwood (hoop pine)Carbon sequestered (t/ha) 65 82 72 46Cash cost (A$/t) 119 103 124 251Cash plus beef opportunity costs (A$/t) 221 154 160 230

Unharvested softwood (hoop pine)Carbon sequestered (t/ha) 232 168 111 60Cash cost (A$/t) 26 35 52 93Cash plus beef opportunity costs (A$/t) 54 60 75 110

Unharvested hardwood (blackbutt)Carbon sequestered (t/ha) 216 151 94 46Cash cost (A$/t) 28 39 61 121Cash plus beef opportunity costs (A$/t) 58 67 89 143

Note: A$=Australian dollart=1 metric tonneha=1 hectare

similar to the 350 tonne sequestered in unharvested hooppine. Reports from the United States, cited by Stavins andRichards (2005), suggest that the cost of sequestration incommercial plantations is between $A38 and $A114 per tonneof carbon. The cost of unharvested hoop pine found in thisstudy lies in the middle of this range.

4. Discussion

4.1. Incentives to landowners for environmental plantings

Presently, most restoration is funded through governmentgrants because it is costly and generates no direct income forthe landowner. Moreover, the landowner cannot claim thecarbon rights under this arrangement. The question iswhether the prospect of payment for carbon rights willstimulate private investment in restoration.

Current farm gate prices being offered by governmentschemes to landowners in Victoria and New South Wales forsequestered carbon are between $31 and $59 per tonne ofcarbon (Government of Victoria, 2007; Carbon Smart, 2007).Figs. 5 and 6 show the average carbon price against the cost ofcarbon for the plantation alternatives at the discount rates0.01 and 0.05. It is apparent that over the range of discountrates the costs of sequestration exceed the price of carbon by asubstantial margin. Environmental plantings are usually lessthan a hectare in size. If landowners provide their own labourat zero opportunity cost, and adopt a low discount rate of 0.01,then present cash costs are still over A$100 per tonne (seeTable 2) i.e. more than double the present price of carbon.

4.2. The question of the mutual exclusivity of increasingbiodiversity and of carbon sequestration

Theresultsofanalysis indicate strongly thatat lowdiscount ratesunharvestedmonocultures sequester carbon at a total economiccost comparable with the current carbon price at farm gate.

At first glance it is surprising that the cost of carbonassociated with the periodic harvesting of timber is greaterthan where the plantation remains unharvested. This sameresult is obtained byNewell and Stavins' (2000) study of factorsaffecting the costs of carbon sequestration in the U.S.However, it is apparent that silviculture costs, incurred rela-tively early in the life of a plantation (avoided in unharvestedplots) that contribute to the cost of carbon, outweigh the dis-tant and therefore more heavily discounted benefits of timbersales.

The level of interest among private landowners in estab-lishing small-scale plantations in North Queensland, withouta subsidy, is presently very low. Yet the notion persists thatsmall-scale farm forestry will become a significant industry. Ithas been suggested that impediments to plantation establish-ment are cultural, lack of public policy initiatives and lack ofmarkets (Herbohn, Harrison and Herbohn, 2000). Certainlythere is a complete lack of markets for biodiversity. Given thatthere is as amarket for hoop pine themodel tested the value ofsales of softwood against the costs of establishment. Thepresent costs exceeded benefits, even at a discount rate of 0.01

Fig. 6 –Costs per tonne of carbon sequestered and price pertonne of carbon, Wet Tropics of Queensland, 0.01 discount.

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and where there are no land opportunity costs. The economicanalysis explains why there are few hoop pine plantationsbeing establishment in the region.

The results suggest that landowners intent on generatingincome from carbon sequestration are likely to considerunharvested monocultures of softwoods and hardwoods,rather than softwoods for harvest or environmental plantings.The contribution of monocultures to habitat will be small.While fauna may be sighted in pure stands of trees, they areless likely to be species that depend on rainforest habitat and,when they are, their presence is related to nearby remnantnative forest (Catterall and Harrison, 2006; Lindenmayer andFischer, 2006)). Both on-site and offsite (for example waterquality) biodiversity values are considerably greater forenvironmental plantings than for hoop pine monoculture(Kanowski et al., 2005).

Monocultures and biodiversity increase are mutuallyexclusive. A concern is that monocultures will occupy thelimited areas of land that could otherwise be dedicated toreforestation of the endangered type 5b forest.

4.3. The costs of carbon bio-sequestration in the WetTropics compared with costs elsewhere in Australia

Two farm gate prices paid for bio-sequestered carbon werequoted above (A$31 and A$59 per tonne). A broader picture ofprices being paid can be gained by examining the cost ofpurchasing bio-sequestered carbon offsets in the Australianmarket. Eight providers charged betweenA$8.50 andA$23 and amedian of just over A$12 per tonne of CO2 (Ribón and Scott,2007).This translates toaprice rangeper tonneofcarbonofA$34to A$84 and a median of A$45. Some suppliers were ‘for profit’and some ‘not-for-profit’. However all these companies wouldneed to cover their costs of administration, so that the farmgateprices for acquiring the rights to bio-sequestered carbon wouldbe somewhat lower than the prices for offsets on offer.

It is clear that environmental plantings, with costs pertonne of carbon several times greater than farm gate pricesoffered, are nowhere near competitive. Table 2 shows thatunharvested softwood and hardwood plantations in the WetTropics could conceivably supply bio-sequestered carbon ataround A$50 to A$90 per tonne. The Wet Tropics does notappear to have a clear cut economic advantage over southern

Fig. 5 –Costs per tonne of carbon sequestered and price pertonne of carbon, Wet Tropics of Queensland, 0.05 discount.

Australia in carbon sequestration, even in the case ofmonocultures.

Another reason to be sceptical about the level of potentialinvestment in carbon sequestration in the Wet Tropics is thechance of cyclone damage to plantations. Landholders arelikely to allow for this uncertainty by applying a higherdiscount rate to future benefits. Table 2 shows that at a 10%discount rate the costs of carbon rise steeply to well in excessof carbon prices.

A question that arises from the results is whether the costsof establishment andmanagement can be lowered sufficientlyto make the economics of planting trees for environmentalreasons more attractive to landowners. Catterall and Harrison(2006) suggest that improved technology might enable largerareas to be restored. While environmental plantings arecommonly on land that has a low or zero opportunity cost, forexample on patches that are costly to work or areas subject toflooding that posea threat to cattle.Whilegrowingcostsmaybelowered if planting and maintenance can be mechanised,larger-scale plantings are likely to take up not just marginalland but land with higher agricultural opportunity costs.

The labour-intensive nature of raising rainforest trees andthe need for close spacing make it unlikely that major costsavings can be made to reduce the cost of getting trees in theground of some A$17,000 per hectare. If weed control can bemechanised without jeopardising seedling survival rates thenthe huge cost of maintenance labour of some $50,000 may beable to be reduced. However, the cost of establishingenvironmental plantings are always likely to be much morethan for monoculture plantations which in this study, is someA$5800. Even this cost is above those in southern Australia,where it is claimed that the cost of establishment ofcommercial plantations on farms is between A$1000 and A$4000 trees at stocking rates of 1000 trees per hectare (NewEngland-North West Forestry Investment Group, 2002; UrbanEcology Australia, 2007).

5. Conclusions

Despite the fact that the community and the Australiangovernment have devoted substantial human and financialresources to restoration, the level of augmentation achieved

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may be insufficient to guarantee the survival of ecosystems andspecies in the Wet Tropics of Queensland.

Given that relatively high tree growth rates can be achievedin the region, the paper discusses the economics of supply ofbio-sequestered carbon and the implications for reforestation.

Theeconomicanalysis shows the importanceof accountingfor opportunity costs.

It is found that, at current prices, payments for sequesteredcarbon rights are likely to cover a proportion only ofreforestation costs, even on land that is marginal foragriculture and therefore carries low land opportunity costs.While monocultures are cheaper to establish than environ-mental plots, the Wet Tropics region does not have a marketadvantage in supplying bio-sequestered carbon.

If carbon prices were to rise substantially to say three orfour times present level – in the wake of caps on Australianemissions – then the outlook for private investment inenvironmental reforestation in north Queensland is brighter.However, investment is likely to flow to monoculture projectsrather than to reforestation. But monoculture plantationshave been shown to contribute little to biodiversity and indeedwould take up land critical for reinstatement of the originalbut now endangered rainforest.

The paper serves to highlight the mismatch between theavailabilityof credits for carbonandthegeneral lackofpaymentsfor biodiversity. Governments need to continue to attempt toachieve a social optimum, and counter the effects of theasymmetry by investing in forest conservation and restoration.

An area for further investigation, because of its potential tostimulate demand for reforestation, is the extent of the latentdemand for carbon offsets that at the same time have highbiodiversity. Tourism is the largest single industry in northQueensland, based on the Great Barrier Reef and Wet TropicsWorld Heritage Areas. Local tourism businesses may see amarket advantage in being able to claim that they are not onlyoffsetting their emissions but doing so by creating habitat.Indeed businesses Australia-wide may be prepared to pay apremium for carbon offsets in the Wet Tropics because theycan claim that they are contributing to the survival ofendangered ecosystems and species.

Acknowledgements

The author thanks an anonymous referee for constructivecomments andCarlaCatterall andAlastair Freeman for helpfulresponses to an earlier draft.

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