The Costs of Carbon Sequestration: A Revealed-Preference Approach

Abstract

Increased concem by policy makers with the threat of global climate change has brought with it considerable attention to the possibility of encouraging the growth of forests as a means of sequestering carbon dioxide (National Academy of Sciences [NAS], 1992; James P. Bruce et al., 1996).1 The Kyoto Protocol to the United Nations Framework Convention on Climate Change (1997), which establishes emission reduction targets for the United States and other industrialized nations, states that carbon sequestration can be used by participating nations to achieve their targets. Moreover, even before the Kyoto agreement, this approach had become an explicit element of both U.S. and intemational climate policies (U.S. Department of Energy, 1991; United Nations General Assembly, 1992; William J. Clinton and Albert Gore, 1993). This high level of interest has been due, in part, to: suggestions that sufficient lands are available to use the approach to mitigate a substantial share of annual carbon dioxide (C02) emissions (Greg Marland, 1988; Daniel A. Lashof and Dennis A. Tirpak, 1989; Mark C. Trexler, 1991); and claims that growing trees to sequester carbon is a relatively inexpensive means of combating climate change (Roger A. Sedjo and Allen M. Solomon, 1989; Daniel J. Dudek and Alice LeBlanc, 1990; NAS, 1992). In other words, the serious attention given by policy makers to carbon sequestration can partly be explained by (implicit) assertions about respective marginal cost functions. I develop and demonstrate a method by which the costs of carbon sequestration can be estimated on the basis of evidence from landowners' behavior when confronted with the opportunity costs of alternative land uses. The simplest of previous economic analyses derived single point estimates of average costs associated with particular sequestration levels (Marland, 1988; Sedjo and Solomon, 1989; Dudek and LeBlanc, 1990; Edwin S. Rubin et al., 1992; Omar Masera et al., 1995). Often it has been assumed that land (opportunity) costs are zero (G. van Kooten et al., 1992; J. K. Winjum et al., 1992; New York State Energy Office, 1993; Robert K. Dixon et al, 1994). Another set of studies-essentially engineering/costing has constructed marginal cost schedules by using information on revenues and costs of production for altemative uses on representative types or locations of land, and then sorting these in ascending order of cost (Robert J. Moulton and Kenneth R. Richards, 1990; Richards et al., 1993). Simulation models include a model of the lost profits due to removing land from agricultural production (Peter J. Parks and Ian W. Hardie, 1995), a mathematical programming model of the agricultural sector and the timber market (Richard M. Adams et al, 1993), a related model incorporating the effects of agricultural price support programs (J. M. Callaway and Bruce McCarl, 1996), and a dynamic simulation model of forestry (Susan Swinehart, 1996). Lastly, an analysis by Andrew J. Plantinga (1995) adopts land-use elasticities from an econometric study to estimate sequestration costs. We draw on some of the best features of the previous studies, including the carbon levelization method of Moulton and Richards * John F. Kennedy School of Government, Harvard University, 79 John F. Kennedy Street, Cambridge, MA 02138, and Resources for the Future. Richard Newell supplied excellent research assistance; and valuable comments on a previous version were provided by Lawrence Goulder, William Nordhaus, Andrew Plantinga, Kenneth Richards, two anonymous referees, participants in seminars at the Universities of California at Los Angeles and Santa Barbara, the University of Maryland, the University of Michigan, the University of Texas, Harvard University, Stanford University, Yale University, Resources for the Future, and the National Bureau of Economic Research. The author alone is resDonsible for any errors. 1 After fossil-fuel combustion, deforestation is the second largest source of carbon dioxide emissions. Estimates of annual global emissions from deforestation range from 0.6 to 2.8 billion tons, compared with slightly less than 6.0 billion tons annually from fossil-fuel combustion, cement manufacturing, and natural gas flaring, combined (R. A. Houghton, 1991; T. M. Smith et al., 1993).