Simulated effects mandatory versus voluntary participation in private forest carbon offset markets in the United States

Gregory Latta, Darius Adams and Sara OhrelOregon State University and US Environmental

Protection Agency

Texas A&MBruce McCarlJerry Cornforth

Nicholas Institute, Duke Brian MurrayJustin Baker

Oregon State UniversityEric White

FASOM Model Collaborators

USDARalph AligWilliam HohensteinJan LewandrowskiRob Johansson

EPRISteven Rose

RTI InternationalRobert Beach

Brief Overview of FASOM modelRecent carbon market developments

Regulatory (HR2454, S1733, RGGI, AB32)Voluntary (CAR, VCS, ACR)

Modeling carbon markets in a voluntary contextResults from our first attempt

Issues and challenges in modeling a voluntary policyBaseline, additionality and leakage

A second modeling attemptConclusion

Modeling the Carbon Offset Market

4

FOREST AND AGRICULTURE SECTOR OPTIMIZATION MODEL with GREENHOUSE GASES (FASOM-GHG)

FOREST SECTOR MARKETS AND FOREST LAND BASE: INVENTORY SILVICULTURAL REGIME ROTATION FOREST TYPE MANUFACTURING

AGRICULTURE SECTOR MARKETS AND AG LAND BASE: CROPPING TILLAGE METHODS LIVESTOCK

ENERGY SECTOR FEEDSTOCK MARKETS

LAND USE CHANGES

FLOWS OF FEEDSTOCKS

FOR BIOENERGY AND ETHANOL

COMMODITIES (ENDOGENOUS) SOFTWOOD LUMBER, HARDWOOD LUMBER, SOFTWOOD

PLYWOOD, OSB PAPER PRODUCTS (14), MARKET PULP (4), RECYCLED NATIONAL DEMAND FOR EACH COMMODITY REGIONAL AND IMPORT SUPPLIES

PRODUCTION PROCESSES (PULP AND PAPER) ALTERNATIVE FIBER MIXES ALTERNATIVE TECHNOLOGIES (PULPING AND PRESSES)

TIMBER INVENTORY DATED FROM ca 2000 TIMBER GROWTH

MANAGEMENT CLASSES (11 IN SOUTH, 5 IN PNWW, 2 ELSEWHERE)

FOREST TYPES (6 IN SOUTH, 3 IN PNWW, 2 ELSEWHERE) PARTIAL CUTTING

SILVICULTURAL AND LAND CONVERSION COSTS

Elements of FASOM Forest Sector

Policy BackgroundUS Greenhouse Gas Emissions

From: (EPA 430-R-11-005) Inventory of U.S. Greenhouse Gas Emissions and Sinks:1990 – 2009http://www.epa.gov/climatechange/emissions/downloads11/US-GHG-Inventory-2011-Complete_Report.pdf

The Emissions Cap

http://www.epa.gov/climatechange/economics/pdfs/EPA_S1733_Analysis.pdf http://www.arb.ca.gov/cc/capandtrade/meetings/121409/capcalc.xls

Federal

Regional(California)

http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf

Figure 1: Total Domestic Forest and Agriculture Offset MACs for constant (a) and rising (b) prices (avg MtCO2e yr-1)

$-

$10

$20

$30

$40

$50

0 200 400 600 800 1000

MtCO2e/yr

$/tC

O2e

2010

2020

2030

2040

2050

$-

$50

$100

$150

$200

$250

0 250 500 750 1000 1250 1500MtCO2e/yr

$/tC

O2e

20102020203020402050

(a) (b)

The End Goal – Domestic offsets (FASOM)

U.S. EPA, 2009. Updated Forestry and Agriculture Marginal Abatement Cost Curves. Memorandum to John Conti, EIA, March 31, 2009.

Putting It Together - HR2454 Analysis

Putting It Together - HR2454 Analysis

The Fallout

One Way is to:Model Cap and Trade in a Voluntary Offset Context

Forest sector not “capped”Sell offsets as carbon sequestered or emissions avoided

So How Can We Improve?

Make enrollment in the market VoluntaryLand in the model would have to “opt in”

Land that does not “opt in” will have no control on emissions levels (no penalty)

Require a 100 year commitmentAddresses permanence (makes model smaller

as well)

Include harvested wood product carbon

Modeling a Voluntary Carbon Offset Market

Forestry Marginal Abatement Cost Curves

Ever Increasing Marginal Cost Curve

FROM: Estimates of Carbon Mitigation Potential from Agricultural and Forestry ActivitiesCongressional Research Service, 7-5700, www.crs.gov, R40236

Notes: EPA 2005 = EPA, Greenhouse Gas Mitigation Potential in U.S. Forestry and Agriculture, November 2005. ERS 2004 = USDA, Economics of Sequestering Carbon in the U.S. Agricultural Sector, Apr. 2004. MS 2001 = Bruce A. McCarl and Uwe A. Schneider, “Greenhouse Gas Mitigation in U.S. Agriculture and Forestry,” Science, vol. 294 (December 21, 2001), pp. 2481–2482. R 1997 = Kenneth R. Richards, Estimating Costs of Carbon Sequestration for a United States Greenhouse Gas Policy (Boston: Charles River Associates, 1997). MR 1990 = Robert J. Moulton and Kenneth R. Richards, Costs of Sequestering Carbon Through Tree Planting and Forest Management in the United States, General Technical Report WO-58 (USDA, Forest Service, 1990).

Land Movement Between Forest and Agriculture

Negative value indicates net deforestation

Positive value indicates net afforestation

Price Period CB GP LS NE RM PSW PNWW PNWE SC SE Total0 2010-2030 -783 0 -1,877 -179 -2 0 0 -13 -2,242 -1,658 -6,75315 2010-2030 -783 0 -1,877 918 1,700 400 0 187 -865 -921 -1,24230 2010-2030 267 0 -1,873 3,849 1,700 400 0 187 4,295 -910 7,915

Price Period CB GP LS NE RM PSW PNWW PNWE SC SE Total0 2010-2030 -783 0 -1,877 -179 -2 0 0 -13 -2,242 -1,658 -6,75315 2010-2030 -606 0 -882 3,862 1,300 303 0 185 2,698 -79 6,78030 2010-2030 3,278 0 350 5,162 1,800 303 0 192 13,185 3,638 27,907

Voluntary

Mandatory

Product Price Impacts

300

320

340

360

380

400

420

440

2000 2010 2020 2030

$/m

bf

US Softwood Lumber Price

$0 CO2e

$15 Mandatory

$30 Mandatory

$15 Voluntary

$30 Voluntary

Modeling We need to pay attention to model users needs How we structure the policy in the model is important

Results marginal cost curves of C are steeper in voluntary market--as some

previous econometric studies have suggested optional offset sales entry leads to fewer acres of afforestation and

less response from management of existing forests prices effects in traditional products markets are notable and

exaggerated when C prices rise and are especially wide in a mandatory offset scheme

First Modeling Attempt Conclusion

Latta, G., D. Adams, R. Alig and E. White.  2011.  Simulated effects of mandatory versus voluntary participation in private forest carbon offset markets in the United States.  Journal Forest Economics 17(2): 127-141.

Baseline In mandatory market model baseline doesn’t matter In voluntary market model it does

Why? Mandatory

Every change in carbon stocks will be accounted for in the optimization

Voluntary Baseline drives the decision of whether you want changes in carbon stocks

accounted for in the objective function.

Baseline is now important in policy effectiveness modeling

Issues and Challenges in modeling a voluntary policy

Issues and Challenges in modeling a voluntary policy

A breakdown of the offset supply curve from Latta etal. 2011 by enrollment

First ThoughtsGiven that

• A is the quantity of offsets available• Annual flux on enrolled lands

And

• B is the net forest sequestration• Annual flux on all lands

Therefore

• C is the quantity of leakage• Annual flux on non-enrolled lands

AC

B

Issues and Challenges in modeling a voluntary policy

A breakdown of the offset supply curve from Latta etal. 2011 by enrollment

Next ThoughtsGiven that

• A is the quantity of offsets available• Annual flux on enrolled lands

And

• B is the net forest sequestration• Annual flux on all lands

Therefore

• C is the quantity of non-additional CO2e• Annual flux on non-enrolled lands

ACB

Good

Guys

Issues and Challenges in modeling a voluntary policy

Why low, or no leakage? MoreThoughts• In the $0 run

• there are Good Guys (land sequestering C)• and Bad Guys (land emitting C)

• Given that it is a model based on optimality a small change in C price sorts out the good and bad guys

• Given the policy design, you are paid (or pay) for your C flux at each point in time.• If you are a Bad Guy (opting out)• And want to be a Good guy (opt in)• You must improve your C flux all the way to zero before you

begin to get paid.

• Also, these are aggregate amounts• fewer “opt out” acres = more emissions per acre

Bad Guy

s

Good

Guys

Bad Guy

s

Bad Guy

s

Bad Guy

s

Bad Guy

s

Bad Guy

s

Bad Guy

s

GoalsMinimize additionality issuesMinimize leakage issuesEliminate baselineA simple effective policy

MethodsUse forest sector model only

Pay for only tree and harvested wood carbonAbove, but on existing forest only when past minimum

harvest age (X)Above, but only when past minimum harvest on existing

and regenerated forests (XN)

A Second Modeling Attempt

Results With Forest Sector Only

Pay for only tree and harvested wood carbonAbove, but on existing forest only when past minimum harvest ageAbove, but only when past minimum harvest on existing and regenerated forests

Results With Forest Sector OnlyFlux on existing stands only when greater than minimum harvest age

Text here

Results With Forest Sector OnlyFlux only when greater than minimum harvest age

Text here

Results With Forest Sector Only

C_Total – all forest accounts

C_In – Enrolled land onlyFO – C payments for tree

and HWP C onlyX – no payments on

existing stands unless > minimum harvest age

N - no payments on existing and regenerated stands unless > minimum harvest age

A third (future) modeling attempt?Use what was learned prior runs and …Relax permanence restriction

Use stocking level instead of age as qualifier

Combine with voluntary agriculture model

Conclusion