Policy implications of the analysis for voluntary forestry offsets

The voluntary forestry offset is an increasingly popular instrument, marketed on the basis that contemporary greenhouse gas emissions will be offset over time by the carbon sequestered in plantations. Voluntary

Source: Hunt and Baum (2009: Figure 5).

Figure 3.8 Cost-neutral offset where a 100-year carbon-neutral afforestation/reforestation project is increased in area by 27%, certainty equivalent discount

Source: Hunt and Baum (2009: Figure 5).

Figure 3.8 Cost-neutral offset where a 100-year carbon-neutral afforestation/reforestation project is increased in area by 27%, certainty equivalent discount forestry offsets are more often than not sold ex ante on the basis of 30- to 100-year carbon neutrality. However, buyers are unlikely to be aware of the hidden costs of forestry offsets sold in advance of actual CO2e removals against contemporary emissions (or indeed the hidden costs of other offsets that do not immediately achieve neutrality).

For forestry offset projects to avoid incurring social costs they must avoid crediting to the present the removals of CO2e that will occur sometime in the future. Likewise, CO2e releases should occasion a debit in the year of release. The incremental amount of CO2e removed can be obtained by physical measurements of forest carbon, or its estimation according to the carbon sequestration models of afforestation, or a combination of both, where a model's estimates are validated by physical measurement.

The adoption of such incremental crediting and debiting of CO2e removals, expected in the future, aids the establishment of present values of CO2e removals needed to facilitate project financing; the present value of the credits and debits being compared with the present value of costs of the project. Moreover, the net present value of the project can then be compared with that of competing investments.

The proportion of costs offset is insensitive to the shifting up or down of the MSC profile. Rather, the proportion of costs offset is correlated with the shape of the profile of MSC of carbon emissions over time. Other emission damages models are likely to yield similar results given the slow initial

0 50 100 150

Years since planting

Note: Forestry offset projects that claim to be carbon-neutral over a short term fail to cover a higher proportion of the marginal social costs of emissions than long-term projects.

Source: Hunt and Baum (2009: Figure 6).

Figure 3.9 Proportion of present costs not offset by carbon-neutral reforestation/afforestation projects of 1 tonne of C, by length of project, certainty equivalent discount increase in annual CO2e removals from the atmosphere by sequestration relative to marginal damage cost increases. The policy recommendations that ensue from this analysis are two-fold.

1. Increments of CO2e removals actually achieved should be traded rather than removals in future years to ensure that forestry offset schemes are cost-neutral, instead of just carbon-neutral.

2. The seller should disclose the estimated annual incremental removal and release (for example in the case of harvesting) of tonnes of CO2e over the life of the offset. This allows a financier to put a present value on the expected stream of CO2e removals by the offset for comparison with other forestry projects and other types of offsets.

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