Carbon values,reforestation, and `perverse' incentives under the Kyoto protocol: An empirical analysis

Economic incentives for sequestering atmospheric carbon dioxide (CO₂) in forests may be an effective way to meet greenhouse gas (GHG) reduction commitments under the Kyoto Protocol (KP). But concerns have been raised that the KP may create unintended incentives to excessively harvest existing forests if regenerated forests qualify for carbon (C) credits under the reforestation provision of Article 3.3. This paper combines an analytical model of the optimal forest rotation with both timber and C as priced outputs with data on timber and C growth and yield to different forest settings in the U.S. C prices of $50 per megagram (Mg) – the highest price evaluated– can considerably lengthen forest rotations (40 years or more), raise forest land values (as much as $1,900 per hectare), and sequester more C in the long run (up to 60 percent per acre), relative to the base case of no C compensation. However, if C payments are made for the regenerated stand only, in some situations, it is optimal to immediately harvest an otherwise premature stand at C prices as low as $20/Mg. The strength of perverse incentives to accelerate harvesting of existing forest varies by forest type, region, C price level, and institutional factors relevant to the compensation system. If C compensation were extended to existing stands, as may be possible under Article 3.4 of the KP, the perverse incentives for prematurely harvesting existing stands would not exist.