July 21, 2009
By Robert Stavins
With the development of climate legislation proceeding in the U.S. Senate, a key question is whether the United States can cost-effectively reduce a significant share of its contributions to increased atmospheric CO2 concentrations through forest-based carbon sequestration. Should biological carbon sequestration be part of the domestic portfolio of compliance activities?
The potential costs of carbon sequestration policies should be one major criterion, and so it can be helpful to assess the cost of supplying forest-based carbon sequestration. This is a topic which I've investigated in a series of papers with various co-authors over the past ten years ("Land-Use Change and Carbon Sinks: Econometric Estimation of the Carbon Sequestration Supply Function." Journal of Environmental Economics and Management 51(2006): 135-152, with Ruben Lubowski and Andrew Plantinga; "Climate Change and Forest Sinks: Factors Affecting the Costs of Carbon Sequestration." Journal of Environmental Economics and Management 40(2000):211-235, with Richard Newell; and "The Costs of Carbon Sequestration: A Revealed-Preference Approach." American Economic Review, volume 89, number 4, September 1999, pp. 994-1009.) Most useful for policy purposes is probably the 2005 report Kenneth Richards and I wrote for the Pew Center on Global Climate Change ("The Cost of U.S. Forest-Based Carbon Sequestration"). In that report, we surveyed and synthesized the best cost estimates from all available sources.
Human activities -- particularly the extraction and burning of fossil fuels and the depletion of forests -- are causing the level of CO2 in the atmosphere to rise. It may be possible to increase the rate at which ecosystems remove CO2 from the atmosphere and store the carbon in plant material, decomposing detritus, and organic soil. In essence, forests and other highly productive ecosystems can become biological scrubbers by removing (sequestering) CO2 from the atmosphere. Much of the current interest in carbon sequestration has been prompted by suggestions that sufficient lands are available to use sequestration for mitigating significant shares of annual CO2 emissions, and related claims that this approach provides a relatively inexpensive means of addressing climate change. In other words, the fact that policy makers are giving serious attention to carbon sequestration can partly be explained by (implicit) assertions about its marginal cost, or (in economists' parlance) its supply function, relative to other mitigation options.
Among the key factors that affect estimates of the cost of forest carbon sequestration are: (1) the tree species involved, forestry practices utilized, and related rates of carbon uptake over time; (2) the opportunity cost of the land-that is, the value of the affected land for alternative uses; (3) the disposition of biomass through burning, harvesting, and forest product sinks; (4) anticipated changes in forest and agricultural product prices; (5) the analytical methods used to account for carbon flows over time; (6) the discount rate employed in the analysis; and (7) the policy instruments used to achieve a given carbon sequestration target.
Given the diverse set of factors that affect the cost and quantity of potential forest carbon sequestration in the United States, it should not be surprising that cost studies have produced a broad range of estimates. Ken Richards and I identified eleven previous analyses that were good candidates for comparison and synthesis, and we made their results mutually consistent by adjusting them for constant-year dollars, use of equivalent annual costs as outcome measures, identical discount rates, and identical geographic scope. We also employed econometric methods to estimate the central tendency (or "best-fit") of the normalized marginal cost functions from the eleven studies as a rough guide for policy makers of the projected availability of carbon sequestration at various costs.
Three major conclusions emerged from our survey and synthesis. First, there is a broad range of possible forest-based carbon sequestration opportunities available at various magnitudes and associated costs. The range depends upon underlying biological and economic assumptions, as well as analytical cost-estimation methods employed.
Second, a systematic comparison of sequestration supply estimates from national studies produces a range of $25 to $75 per ton for a program size of 300 million tons of annual carbon sequestration. The range increases somewhat- to $30-$90 per ton of carbon-for programs sequestering 500 million tons annually.
Third, when a transparent and accessible econometric technique was employed to estimate the central tendency (or "best-fit") of costs estimated in the studies, the resulting supply function for forest-based carbon sequestration in the United States is approximately linear up to 500 million tons of carbon per year, at which point marginal costs reach approximately $70 per ton.
A 500 million ton per year sequestration program would be very significant, offsetting approximately one-third of annual U.S. carbon emissions. At this level, the estimated costs of carbon sequestration are comparable to typical estimates of the costs of emissions abatement through fuel switching and energy efficiency improvements. This result indicates that sequestration opportunities ought to be included in the economic modeling of climate policies. And it further suggest that if it is possible to design and implement a domestic carbon sequestration program, then such a program ought to be included in a cost-effective portfolio of compliance strategies when the United States enacts a mandatory domestic greenhouse gas reduction program. Large-scale forest-based carbon sequestration can be a cost-effective tool that should be considered seriously by policy makers.
Of course, this raises the question of whether a policy that will bring about such biological carbon sequestration cost-effectively can be developed, whether as part of a cap-and-trade system, a related offset scheme, or through some other policy mechanism. That is a question without easy answers (as I've noted in a previous post on the Waxman-Markey legislation), but the cost analyses I've reviewed in this post suggest that it is important to explore possible ways of incorporating biological carbon sequestration in future U.S. climate policy.