Climate Change 2001:
Working Group III: Mitigation
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4.6 Market and Non-market Options to Enhance, Maintain, and Manage Carbon Pools

4.6.1. Introduction, Taxes, and Quotas

There are a host of market and non-market options to manage carbon pools in the terrestrial biosphere. Some of the most relevant questions related to carbon sequestration deal with the types of instruments, policies, and mechanisms that could play a role in promoting increased sequestration and how the various arrangements would actually affect outcomes. Market mechanisms could be important in promoting or discouraging carbon sequestration. Potential mechanisms might include taxes or subsidies for activities that affect carbon directly or that affect activities with large carbon implications. The UK, for example, has proposed a “Climate Change Levy” to be adopted by the UK’s 2001 Budget. The Kyoto Protocol introduces flexible mechanisms allowing joint implementation, emissions trading, and the clean development mechanism. When dealing with terrestrial systems any policies that influence land use can affect carbon sequestration. Finally, there is the question of how the various instruments and policies are likely to influence leakage of carbon flows outside the targetted system.

Agricultural subsidies are common in many, if not most, countries. Agricultural subsidies and absent forestry subsidy policies can often be viewed as discouraging forest production and thus, inadvertently, discouraging some possibilities for carbon sequestration. Similarly, tax policies can promote or discourage certain types of land use. In some countries, however, subsidies do promote afforestation and reforestation. The movement of land from agriculture to forests generally leads to gains in the forest sector and losses in the agricultural sector. The cost of any additional carbon storage can involve a change in welfare across two sectors. Lower taxes for agricultural lands and subsidies for forest clearing may be part of the package of instruments to promote development.

To reach objectives for carbon sequestration, market mechanisms are important, but an appropriate institutional setting is also useful. In some tropical countries the profitability of maintaining forests could be improved in order to prevent conversion to alternative uses of the land. Success could entail revising policies that directly or indirectly subsidize cattle ranching (as has been historically the case in Latin America) or agriculture. Success in C sequestration could also entail technical and financial training and capacity building at the local level. It should be recognized, however, that in many tropical countries, particularly within Asia and Africa, forests are harvested and used according to the subsistence needs of local communities. In these cases, some have argued that approaches based on market mechanisms will not be effective. Also, non-timber forest products are an important component of the total demand for forest products and could be considered.

It is clear that some measures aimed at sequestering C in the biosphere have relatively low cost compared to other approaches for mitigating the atmospheric increase of CO2 (Section 4.5). However, to date only a small number of projects involving a small and varied group of stakeholders has been initiated in the terrestrial biosphere. These projects (forest expansion, forest management, soil carbon management, community forestry, and agroforestry) have covered, worldwide, an area of 3.6 to 6.4 million hectares in 1999 (for an overview see Brown et al., 2000). Incentives that would create projects aimed at carbon sequestration in the biosphere on a large scale are not yet in place.

An important change in motivating carbon sequestration has been the creation of the Kyoto Protocol, in December 1997. Although few countries have yet to ratify the Kyoto Protocol, it introduces ceilings and/or quotas for CO2 emissions for Annex B countries. In addition, the Kyoto Protocol explicitly recognizes afforestation, reforestation, and deforestation (ARD) as having carbon implications, and it provides credits (and debits) for these activities in meeting carbon-emissions targets. This arrangement has contributed to pressures to find ways to give sequestered carbon value in the market place. A detailed explanation of how the Kyoto Protocol might influence management of C stocks is given in the IPCC Special Report on LULUCF (IPCC, 2000a).

Through setting emissions targets and introducing taxes on CO2 emission in some countries, carbon gains monetary value and could become a new product for the forestry sector. From existing emissions taxes this value is estimated at US$200/tCO2 in Norway and US$100/tCO2 in the Netherlands (Solberg, 1997; Nabuurs, 1998). In the case of the Netherlands, this carbon value is equivalent to US$17.5/m3 of roundwood, more than the stumpage value of wood as a raw material. However, in the first trades of certified carbon credits, Moura-Costa and Stuart (1998) found that prices ranged between US$5–US$10/tC. More generally, Moura-Costa and Stuart (1998) found that the average price for carbon credits for carbon sequestered in developing countries ranged from US$0.19 to US$12/tC, and that these differences are very much linked to uncertainty about long term policy.

The Dutch Government is considering the introduction of CO2 certificates as part of a test of CO2 emissions trading. In this system, each economic sector and each firm could achieve its targets partly through certificates. Funds generated from these certificates would be used to establish forests.

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