Characteristics of a Federal Cap and Trade Scheme

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Reduction in future emissions in the US is made difficult by the fact that the country is likely to continue to be characterized by strong population growth and economic growth (subsequent to the economic downturn in 2008/2009), together with a reliance on carbon-based power generation. A range of sources suggests a rise in US emissions from 7 Gt of CO2e in 2005 to 10 Gt in 2020, that is an increase of some 30 percent. The US is a country with a very large land mass, much of which is capable of growing forests; Sathaye and Chan (2008) estimate that up to 66 million hectares could be suitable for tree planting.

The national potential of forests for climate change mitigation under a cap and trade scheme can be explored by examining the results of an analysis by the US Environmental Protection Agency (USEPA, 2008) of the prominent Lieberman-Warner Climate Security Act of 2008 S. 2191 (hereafter referred to as S. 2191). The significance of this bill is that it caps emissions from industry and is detailed enough in its specification to enable the forecasting of its impacts on US emissions and the contributions of different sectors of the economy, including forestry.

S. 2191 achieves coverage of 87 percent of US CO2e emissions, issuing allowances and allowing the trading of such allowances to industries such as oil refining, facilities that use more than 5000 tons of coal per year and industrial gas producers. Importantly, S. 2191 allows the purchase of domestic and international offsets, including from forestry, to each meet 15 percent of compliance obligations. Compared with a business-as-usual scenario, S. 2191 is projected to reduce total US CO2e emissions by some 50 to 60 percent by 2050 compared with 2010 levels. The ability of capped industry to purchase forestry offsets is crucial to reducing costs of compliance. The relaxation of the restraint of 15 percent on the use of international offsets reduces the cost at the margin by 26 percent, while the removal of the 15 percent use of domestic offsets increases costs at the margin by 34 percent. The relaxation of the offsets both domestically and internationally reduces costs by 71 percent (see Figure 7.1).

The USEPA (2008: 9) analysis estimates that no less than 46 percent of the abatement is achieved in year 2015 by the use of domestic and international offsets in S. 2191. This level reduces over time as the overall constraint of 15 percent of total use of offsets starts to bite. Land-use change, that is forestry combined with agriculture, makes by far the largest contribution of domestic offsets, making large annual reductions of around 400 Mt CO2e after the price of allowances reach $50 per tonne of CO2e, which is expected in years 2020 to 2025.

Modeling by USEPA (2005) of an unconstrained (that is without constraints on the use of offsets as in S. 2191) supply function for US forestry and agriculture showed that the opportunity cost of converting land to forestry is relatively high, and at lower prices for CO2e the cheaper options for carbon sequestration of forest management and soil management

Note: The bill specifies 15% use of domestic, plus 15% use of international offsets. The figure shows the increase or decrease in the marginal costs of abatement with the increase or decrease in the level of offsets allowed.

Figure 7.1 Change in the marginal cost of abatement with change in domestic and international offsets in the Lieberman-Warner Bill S. 2191

dominate. The modeling confirms that forest management is a low-cost activity, but as prices rise, afforestation and then biofuels become dominant (see Table 7.1). A study by McKinsey (2007) also found that forest sinks on private lands would increase with the price of CO2e.

As noted in Chapter 1 great caution is needed in interpreting the magnitude of the forestry's potential suggested by such top-down models. Bottom-up studies that take into consideration local barriers to implementation, estimate levels of CO2e removals for North America at less than a third of the top-down estimates (Nabuurs et al., 2007: Figure 9.13).

Table 7.1 also indicates biodiversity implications and reversibility problems of activities involving forestry. If only afforestation25 is included and forest management is excluded, the latter suffers, leading to carbon losses. To reduce this leakage both afforestation and forest management need to be included in a scheme. The USEPA (2005) emphasizes that forestry programs must also include liability provisions to minimize reversal. Other potentially important issues in mitigation by agriculture and forestry noted are the difficulties of measuring monitoring and verifying project-level effects and setting project baselines (USEPA, 2005). Whether President Obama's intent to reduce emissions (Obama, 2008),

Table 7.1 Characteristics of CO2e removal activities

Activity Price of CO2e necessary Environmental Reversal risk to induce activitya Co-effects

Activity Price of CO2e necessary Environmental Reversal risk to induce activitya Co-effects

Table 7.1 Characteristics of CO2e removal activities

Afforestation

Medium to high

Biodiversity either + or - depending on character of new forest and ecosystem replaced by new forest.

Water quality improvement.

High

Forest

Low to medium

Longer rotations

High

management

can provide critical habitat.

Biofuels

Medium to high

Biodiversity impacts depend on previous land use.

Low

Note: a Low prices are <$5 per tonne of CO2e, high pices are >$30 per tonne of CO2e. Source: USEPA (2005: Tables 8-1, 8-2).

Note: a Low prices are <$5 per tonne of CO2e, high pices are >$30 per tonne of CO2e. Source: USEPA (2005: Tables 8-1, 8-2).

or cap and trade legislation that passes Congress, will impact food prices depends on the provisions governing the use of forestry offsets by capped industries.

While US involvement in global GHG cuts is essential, the results of the USEPA (2008) study demonstrate that its contribution to reduction on a global scale can only be modest, confirming that a global approach is essential to achieve emission reductions that will avoid catastrophic climate change. Without action by the international community, S. 2191 would lower CO2 concentrations in the atmosphere by 2095 by 23 ppm, to 696 ppm; concerted international action assumed in the modeling lowers concentrations to 488 ppm (USEPA, 2008:19).

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