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Abstract
This paper seeks to understand the mechanisms underlying the policies creating
incentives for carbon sequestration. The key difficulty in designing carbon policies
for forests is to take into account the ephemeral nature of carbon sequestration
and to accurately track the carbon flow entering and exiting forests. Among a
number of existing payment systems, carbon subsidy-tax system (CST) and
carbon rental system are the only two systems which both consider nonpermanence
and accurately track the forest carbon flow. In this paper, we derive
the optimal conditions for harvests under various carbon policies and simulate the
effects in a single region, multi age class timber market model. We find that
carbon policy will encourage afforestation if it create additional revenue but the
CST and carbon rental system are more effective than the others in extending
rotation ages. Another finding is that costs of carbon rental system are much
higher than that of CST system although they are efficiently equivalent.