Cost not offset by ex ante forestry offsets

Net costs are incurred in the early years of an offset when the rate of MSC increase is greater than the marginal sequestration rate of C. At the certainty equivalent discount (Newell and Pizer, 2000) which declines over time from 4 percent to 2 percent over 100 years, 21.4 percent of present costs are not covered by the 100-year offset.

This effect of mismatch between the rate of increase of marginal costs and marginal carbon sequestration is exaggerated in a 30-year offset because there is very little growth in the first few years after tree planting, and these early years make up a far bigger proportion of the span of 30 years than they do of a span of 100 years. Hence the costs not offset are higher, with 26.4 percent of costs not offset at the certainty equivalent discount.

Figure 3.7 shows the marginal social costs offset over time by a 100-year forestry offset that achieves carbon neutrality in year 100, at the certainty equivalent discount. While incremental sequestration equals marginal costs at project expiry, marginal social costs are incurred in the interim.

Table 3.3 shows the costs not offset and offset by afforestation at various discount rates. The percentage of costs not offset in column 2 can be employed as a factor that needs to be applied to the effectiveness

Treponema Pallidum Antibody Igg Igm
Note: Carbon neutrality is achieved when the forest offset project has removed 1 tonne of carbon from the atmosphere in year 100. However, net social costs have been incurred in every year since year 1 when the emissions occurred.

Source: Hunt and Baum (2009: Figure 4).

Figure 3.7 Carbon-neutral offset where a 100-year afforestation/

reforestation project offsets 1 tonne of C emitted in year 1, certainty equivalent discount of a forestry offset, at a certain discount rate, when comparing it with a reduction of carbon emissions in year 1.

Alternatively, the inverse of the results in column 3 of Table 3.3 can be expressed as the enhancement of the area of forestry necessary, ceteris paribus, for a forestry offset to achieve 100 percent cost offset or 'cost neutrality'. This rate is 1.27 for a 100-year project at the certainty equivalent discount rate, as illustrated in Figure 3.6, and 1.36 for a 30-year project. Figure 3.8 shows how marginal costs are covered when the area of forestry is increased by a factor of 1.27 to achieve cost-neutrality.

A further component of the study by Hunt and Baum (2009) was a comparison between not harvesting hoop pine, harvesting hoop pine, and a consequent complete accounting loss of all the above-ground carbon, and harvesting where 35 percent of above-ground carbon is sequestered in product after harvest. It was found that harvesting increases the percentage of costs not offset compared with no harvesting. Where an allowance is made for the carbon sequestered in product, the percentage of costs not offset increases further. The effect of harvesting the hoop pine plantation, and of sequestering the product, is to delay reaching 1 tonne of C sequestered, leading to an increase in costs not covered.

Table 3.3 Present value and proportion of social costs not offset and offset by 100-year and 30-year afforestation/reforestation projects offsetting 1 tonne of C emitted in year 1

Present cost 1t C emitted ($)

Cost not offseta

$ (%)

100-year offset

Discount rate

0

55.9

6.6 (11.8)

49.3 (88.2)

0.01

28.9

4.3 (l4.7)

24.6 (85.3)

Cert Equiv

7.2

1.5 (21.4)

5.6 (78.6)

0.04

5.6

1.4 (25.8)

4.2 (74.2)

30-year offset

Discount rate

0

3.5

0.8 (21.7)

2.7 (78.3)

0.01

2.5

0.5 (21.4)

2.0 (78.2)

Cert Equiv

1.5

0.4 (26.4)

1.5 (73.6)

0.04

1.5

0.4 (26.7)

1.0 (73.3)

Note: a The profiles of the marginal social cost of C emitted and the removal of C by sequestration differ; the sequestration rate lags the rate of damage costs incurred. The table values the difference, which is 'costs not offset'. Higher discount rates generate higher costs not offset because of the mismatch between marginal costs and marginal sequestration rates. Costs not offset in the 30-year project are relatively high because the sequestration rate is slow in the early years.

Note: a The profiles of the marginal social cost of C emitted and the removal of C by sequestration differ; the sequestration rate lags the rate of damage costs incurred. The table values the difference, which is 'costs not offset'. Higher discount rates generate higher costs not offset because of the mismatch between marginal costs and marginal sequestration rates. Costs not offset in the 30-year project are relatively high because the sequestration rate is slow in the early years.

Source: Hunt and Baum (2009: Table 2).

As the length of the project diminishes, the proportion of emissions not offset increases, for a five-year project to almost 50 percent, as illustrated in Figure 3.9. In a short term offset the costs not offset are greater because in the early years trees grow and sequester carbon slowly, relative to the rate of damage costs being incurred.

No matter what climate model is adopted in estimating marginal social costs of emissions, it is likely that damage costs of a tonne of carbon increase more rapidly in the immediate years after release than carbon sequestration rates, and therefore not all social costs will be covered by an offset that achieves carbon neutrality sometime in the future.

Guide to Alternative Fuels

Guide to Alternative Fuels

Your Alternative Fuel Solution for Saving Money, Reducing Oil Dependency, and Helping the Planet. Ethanol is an alternative to gasoline. The use of ethanol has been demonstrated to reduce greenhouse emissions slightly as compared to gasoline. Through this ebook, you are going to learn what you will need to know why choosing an alternative fuel may benefit you and your future.

Get My Free Ebook


Post a comment