0885-B2

Economic analysis of carbon sequestration in northern red oak in the United States of America

Ching-Hsun Huang and Gary D. Kronrad ¹

Abstract

The increase of carbon dioxide in the atmosphere and the possible greenhouse effect on global climate has become one of today's major environmental issues. This study investigated the profitability and potential of sequestering carbon in northern red oak (Quercus rubra) stands planted on abandoned agricultural and pasture lands in Virginia, USA. Forest Management Optimizer (FORMOP), a decision-support system tool, was used to determine the profitability and carbon storage potential of afforesting these lands. Variables employed included: site indices from 50 to 110 (base age 50), thinning intensities of 20, 25, 30 or 35% of basal area removal, rotations up to 80 years in length, and a choice of 0, 1 or 2 thinnings. Cash flow analyses were conducted on the results of each possible thinning and harvesting regime using real alternative rates of return (ARR) ranging from 2.5 to 15.0%. The price of carbon was assumed to be US$0, US$10, US$50 or US$100 per ton. A total of 1919886 operable thinning and harvesting combinations and cash flow analyses, including soil expectation values, were calculated. Results indicate that when carbon is priced at US$10 per ton, a landowner who has a real ARR of 7.5% will generate maximum net present worths of -US$229.28 and US$101.76 per acre on site index 50 and 110 land, respectively. On site index 80 land, the total amount of carbon sequestered during the optimal management regimes ranges from 29 to 64 tons per acre.

Introduction

The approach of establishing a voluntary market for trading emissions of greenhouse gases (GHG), primarily CO₂, has drawn public attention. Emissions trading is efficient from both an environmental and economic standpoint because it allows polluting companies to reduce emissions at lower marginal costs than would otherwise be possible through government regulations, taxing or permitting systems. The U.S. SO₂ trading program is one of several large-scale successes which resulted in emissions reduction and environmental improvement at a lower cost. As international climate change concerns intensify, this trading model can be replicated and expanded to greenhouse gases. An estimated $500 million worth of carbon emissions-representing roughly 200 million tons-have changed hands since trading began in 1996. Current prices for worldwide trading of credits in CO₂ emissions linked to global warming have been as high as $16 per tonne (Reuters 2002). It is predicted that the global carbon credit market will expand to a "multi-billion dollars" market within seven years (Reuters 2002).

Even though the United States, the world's largest GHG emitter, has so far refused to ratify the Kyoto Protocol, the first U.S. voluntary pilot program for trading of greenhouse gases was created based on the belief that voluntary trading of greenhouse gas credits could help address climate change. In 2001, the Chicago Climate Exchange (CCX), with the goal of designing and implementing a voluntary "cap-and-trade" market for greenhouse gases, was funded. Twenty-five companies and non-profits organizations have agreed to participate in the market design phase. The CCX has proposed that participating companies voluntarily commit to emissions reductions and trading in all six greenhouse gases. A goal was set to reduce participants' greenhouse gas emissions by five percent below 1990 levels over five years, a limit roughly in line with the limits adopted under the Kyoto Protocol. Credits would be given for domestic and international emissions offset projects. The CCX aims to have commitments and trading among participants in the entire United States, Mexico and Canada in 2003, and to expand the exchange to include international participants in 2004 (Rosenzweig and Janssen 2002).

Project-based programs for CO₂ reduction have been active in the United States. One example is The Climate Trust, formerly known as the Oregon Climate Trust, which is a state-sanctioned nonprofit entity charged with securing offsets. The state of Oregon requires new power plants to offset a portion of their projected CO₂ emissions as a condition for obtaining an operating permit. Power plant developers must offset emissions that exceed a specified rate of output. To comply with the 1997 law, plants may choose to acquire qualifying offsets in the market (the project path) that achieve specified criteria or to pay $0.85 per metric ton of CO₂, as of September 2001 (the monetary path) to The Climate Trust. So far all power plants have utilized the monetary path for compliance (Rosenzweig and Janssen 2002).

Another approach for mitigating CO₂ in the United States is an emissions trading system. Massachusetts has become the first state to impose CO₂ emissions limits on old fossil-fired power plants, which have historically been subject to less stringent standards than new plants under the Clean Air Act. The April 2001 law imposes limits on four kinds of air emissions (SO₂, NO_x, mercury and CO₂) from six power plants in the state. The six plants will be required to reduce their CO₂ emissions by 10 percent from their 1997-1999 average emissions baseline. These plants must meet the emissions cap by October 1, 2004, and the output-based limit by October 1, 2006. This requirement can be met either through internal action such as repowering from coal to natural gas, or through the purchase of offsets from emissions reduction projects. Although specific rules for crediting of offsets have not yet been developed, at a minimum, those seeking to invest in offsite emissions reduction or sequestration projects must demonstrate to the satisfaction of the Massachusetts Department of Environmental Protection that the reductions are real, surplus, verifiable, permanent and enforceable (Rosenzweig and Janssen 2002).

Studies have suggested that carbon-sequestering forest activities may be one of the least expensive approaches to mitigate the build up of atmospheric carbon (Sedjo et al. 2001). Increases in biomass and organic matter on forestland added an average of 0.3 petagrams per year of stored carbon to forest ecosystems from 1952 to 1992, enough to offset 25% of U.S. emissions of CO₂ for the period (Murray et al. 2000). To some extent, a market for carbon credits already exists in the United States so evaluating the economic costs associated with the options that would mitigate the long-term increase in carbon dioxide is essential. Therefore, this study conducted economic analyses of carbon sequestration in northern red oak (Quercus rubra), the most important and widespread of northern oaks in the United States. The objectives of this study were to determine the profitability of managing northern red oak stands planted on abandoned agricultural and pasture lands in Virginia, U.S.A. for timber production and carbon sequestration, and calculate the total amount of carbon stored in the soils, forest floor and wood products.

METHODS

Forest Management Optimizer (FORMOP), a decision support system tool, was developed to determine the optimal number, timing and intensity of thinning(s), and the optimal rotation age, conduct cash flow analyses and calculate net present worth (NPW) and soil expectation values (SEV). FORMOP used the Forest Vegetation Simulator (Teck et al. 1996), a forest stand simulator, to predict stand growth data on diameter, height and volume from establishment to final harvest for northern red oak. Site indices of 50 through 110 feet (base age 50) were used in the analyses.

Six alternative rates of return (ARR), which span the range of before-tax earning rates available for most landowners, were chosen for the economic analyses. They were 2.5, 5.0, 7.5, 10.0, 12.5 and 15.0% in real terms, meaning that inflation has been removed. The annual real rate of price increase for northern red oak sawtimber and pulpwood were assumed to be 2% and 4.75%, respectively (Adams and Haynes 1996). Labor costs were assumed to increase at a real rate of 1.12% per year (Council of Economic Advisor 2001). The price of sawtimber was assumed to be $400 per thousand Doyle board feet, and pulpwood was priced at $7 per cord (Kronrad 2002). In this study, all current management costs came from a survey of forest consultants.

It was assumed that a market would be developed in which private companies, needing to offset their carbon emissions, would pay landowners for each additional ton of carbon that they sequester in their forests. Landowners would want to maximize the net revenue from the production of three products: sawtimber, pulpwood and tons of carbon. In these analyses, the price of carbon was assumed to be $10, $50 or $100 for each additional ton of carbon that landowners were able to sequester in their northern red oak plantation. Economic analyses for timber production management only ($0 carbon value) were also conducted to produce baseline data.

Carbon stored in wood products, soils and forest floor was estimated. For the above-ground tree biomass, only carbon stored in the useable portion of pulpwood or sawtimber qualified as carbon credits. Dry-weight equations developed by Clark and Schroeder (1986) were applied to pulpwood and sawtimber. It was then assumed that the roots of northern red oak account for 15.5% of the total (above- plus below-ground) tree biomass (Koch 1989). Because net amount of carbon in trees is estimated to be 50 percent of dry biomass (Dewar and Cannell 1992), the estimated amount of carbon was determined by multiplying the tree dry weight by 50 percent. Estimates of organic soil carbon and carbon on the forest floor and disposition patterns of harvested wood were derived from the study conducted by Birdsey (1996).

It was assumed that as trees grew larger and stored more carbon, landowners would receive an annual payment based on the amount of carbon sequestered and the price of carbon. When a stand's mortality was greater than its growth, or a thinning or final harvest was conducted, landowners would have to repay the carbon credit buyers for the loss of tree biomass in which the carbon was stored. This repayment was calculated based on how many tons of carbon were lost from the stand and how much each ton of carbon was worth. No repayment was required for wood used to produce long-lived wood products since they continue to sequester carbon. All financial gains and losses from carbon sequestration within the rotation were included in the discounted cash flow analyses.

RESULTS

A total of 1,919,886 operable thinning and harvesting combinations and cash flow analyses, including soil expectation values, were calculated. Table 1 indicates that as site index increases, total tons of carbon stored increases. As alternative rate of return increases, tons of carbon stored decreases due to the reduction in rotation length. Total tons of carbon stored are in the range of 28 to 45 tons when site index is 50, and between 60 to 80 tons when site index is 110.

When timber is the only commodity (C=$0/ton), forest management for northern red oak in Virginia is only profitable for landowners with ARRs of 2.5 or 5.0% (Table 2). However, when carbon credits are introduced as market commodity, even if the price of carbon is only $10 per ton, forest management becomes profitable for some landowners. For example, landowners with a medium ARR of 7.5% on site index 100 land will lose $114.78 per acre if they invest their money in timber growing but they will earn 7.5% on every dollar they invest plus an additional $31.02 per acre when the price of carbon is $10 per ton.

DISCUSSION

The results of this study show that, with proper and intensive forest management, sequestering carbon in northern red oak on marginal agricultural lands is cost efficient and will capture great quantities of CO₂ in natural carbon sinks and enhance the storage of carbon in living plant biomass and longer-lived wood products. The economic analysis of carbon sequestration can be further explored by examining the situation in which timber is the only saleable product of forest management. In the timber growing business, timber is the major product, and carbon storage is just a by-product. From this point of view, the cost of storing carbon depends on the profitability of timber management. When timber management is profitable, carbon can be stored for free. However, when timber management is not profitable, the loss of revenue will be the cost that has to be paid for storing carbon. Table 3 presents the average net timber revenue per ton of carbon stored. All the positive numbers on this table are the net timber revenues received per ton of carbon stored. The negative numbers represent the cost of storing each ton of carbon, which cannot be offset by timber revenue. For example, for landowners who have 5.0% ARR and own site index 80 land, traditional timber production alone, with its associated accumulation of carbon, can be financially attractive, and each ton of carbon sequestered will earn them $7.37 solely from the sale of the timber products. Yet, for landowners with 7.5% alternative rate of return on site index 80 land, it will cost them $3.72 for storing a ton of carbon because the timber growing business is not profitable for these landowners. Even though the global carbon credit market is expected to more than triple by the end of 2002 to an estimated 67 million tons as companies prepare for the Kyoto treaty to limit carbon pollution (Reuters 2002), relatively few carbon traders in the new market are willing to do business with unstable Third World nations. This study shows that, if and when the U.S. signs the Kyoto Protocol, sequestering carbon in U.S. forests presents an attractive alternative for American companies to combat global warming.

REFERENCES

Adams, D.M., and R.W. Haynes. 1996. The 1993 timber assessment market model: structure, projections and policy simulations. U.S.D.A. Forest Service. Pacific Northwest Research Station. General technical Report PNW-GTR-368. 59pp.

Birdsey, R.A. 1996. Carbon Storage for Major Forest Types and Regions in the Conterminous United States. Pages 1-26 in Forest and Global Change Vol.2. Washington, DC: American Forests.

Clark, A., and J.G. Schroeder. 1986. Weight, Volume, and Physical Properties of Major Hardwood Species in the Southern Appalachian Mountains. U.S.D.A. Forest Service. Southeastern Forest Experiment Station. Research Paper SE-253. 63pp.

Council of Economic Advisor. 2001. Economic Report of the President. U.S. Government Printing Office, Washington, DC. 402pp.

Dewar, R.C., and M.G.R. Cannell. 1992. Carbon sequestration in the trees, products and soils of forest plantations: an analysis using UK examples in Tree Physiology 11:49-71.

Koch, P. 1989. Estimates by Species Group and Region in the USA of: I. Below-ground Root Weight as a Percentage of Ovendry Complete-tree Weight; and II. Carbon Content of Tree Portions. Unpublished Consulting Report. 23pp.

Kronrad, G.D. 2002. The 2002 survey of private consultants in western Virginia. Unpublished research documents.

Murray, B.C., S.P. Prisley, R.A. Birdsey, and R.N. Sampson. 2000. Carbon sinks in the Kyoto Protocol, potential relevance for US Forests in Journal of Forestry 98(9): 6-11.

Reuters. October 18, 2002. Global carbon credit market seen tripling this year. Available at: http://www.twincities.com/mld/twincities/4317813.htm

Rosenzweig, R., and J. Janssen. 2002. The Emerging International Greenhouse Gas Market. Prepared for the Pew Center on Global Climate Change. 64pp.

Sedjo, R.A., B. Sohngen and P. Jagger. 2001. Carbon sinks in the post-Kyoto world. Pages 134-142 in M.A. Toman (ed.) Climate Change Economic and Policy, Resources for the Future, Washington, DC.

Teck, R., Moeur, M, and Eav, B. 1996. Forecasting ecosystems with the forest vegetation simulator in Journal of Forestry: 94(12):7-10.

Table 1. Total tons of carbon stored per acre in northern red oak stands.

Real Alternative Rates of Return (%)

Table 2. Net present worth of the financially optimal schedules for northern red oak stands.

Real Alternative Rates of Return

Table 3. Net timber revenue earned for each ton of carbon stored in northern red oak stands.

Real Alternative Rates of Return (%)

¹ Arthur Temple College of Forestry, Stephen F. Austin State University, Box 6109, SFA Station, Nacogdoches, Texas 75962, USA. [email protected]