Carbon Subsidies, Taxes and Optimal Forest Management

24 Pages Posted: 31 Dec 2003 Last revised: 26 May 2014

See all articles by Graeme Guthrie

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Dinesh Kumareswaran

Frontier Economics Ltd

Date Written: February 16, 2008

Abstract

We consider the effect of carbon credit payment schemes on forest owners' land use and harvest decisions. We study two possible credit allocation regimes: one where credits are allocated according to the actual amount of carbon sequestered by the trees on a piece of land, and another where credits are allocated according to the long-run potential to sequester carbon on the land. Using a real options model with uncertain future timber prices, we examine the effect on the timing of harvests and the replanting-abandonment decision. We show that both schemes discourage deforestation. Compensating growers for actual carbon sequestration leads to longer rotation periods between harvests, while basing compensation only on the long-run potential level of sequestration induces shorter rotation periods. The former scheme leads to greater benefits of carbon sequestration at lower cost than the latter scheme. Although inducing moderate levels of sequestration is expensive under both schemes, the cost falls dramatically when the level of payments climbs above some threshold. Indeed, providing the payments are sufficiently generous, carbon credit payment schemes offer an effective means of increasing carbon sequestration.

Keywords: Optimal forest harvest policy, real options, carbon credits

JEL Classification: Q23, Q28, Q15

Suggested Citation

Guthrie, Graeme and Kumareswaran, Dinesh, Carbon Subsidies, Taxes and Optimal Forest Management (February 16, 2008). Environmental and Resource Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=482662 or http://dx.doi.org/10.2139/ssrn.482662

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

Dinesh Kumareswaran

Frontier Economics Ltd ( email )

71 High Holborn
London, WC1V 6DA
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
354
Abstract Views
2,100
rank
85,360
PlumX Metrics