Evaluating Temporary Certified Emission Reductions in Reforestation and Afforestation Programs

Abstract

This paper investigates the social efficiency of creating temporary certified emissions reductions to internalize the carbon sequestration function of the forest under the Clean Development Mechanism of the Kyoto Protocol. We find that the regulations governing the creation of temporary certified emission reductions only partially internalize the carbon sequestration function of the forest. The amount of carbon re-released into the atmosphere during harvest and carbon sequestered after the project are not internalized by the landowner resulting in shorter rotation intervals than socially optimal. Furthermore, the value of carbon sequestered during the project is over-credited because credits generated in any earlier verification periods are also counted in future verification periods resulting in longer rotations intervals than socially optimal. We derive an optimal harvest tax during each rotation to obtain the socially optimal rotation interval in conjunction with the current regulation generating temporary certified emission reductions. Simulation results for the Philippines and Tanzania show that the difference in social welfare between the current policy and the socially optimal policy with the optimal harvest tax is only about 2% because of the countervailing effects of the inefficiencies on rotation interval choices.

Keywords: carbon sequestration, countervailing effects, Clean Development Mechanism, forest rotation, reforestation and afforestation, social welfare, temporary certified emission reductions

JEL Classification: Q2, Q54, Q23