Gregory Latta, Darius Adams and Sara Ohrel Oregon State University and US Environmental Protection Agency

Texas A&M Bruce McCarl Jerry Cornforth Nicholas Institute, Duke Brian Murray Justin Baker Oregon State University Eric White USDA Ralph Alig William Hohenstein Jan Lewandrowski Rob Johansson EPRI Steven Rose RTI International Robert Beach

Brief Overview of FASOM model Recent carbon market developments Regulatory (HR2454, S1733, RGGI, AB32) Voluntary (CAR, VCS, ACR) Modeling carbon markets in a voluntary context Results from our first attempt Issues and challenges in modeling a voluntary policy Baseline, additionality and leakage A second modeling attempt Conclusion

4 FOREST AND AGRICULTURE SECTOR OPTIMIZATION MODEL with GREENHOUSE GASES (FASOM-GHG) FOREST SECTOR MARKETS AND FOREST LAND BASE: INVENTORY INVENTORY SILVICULTURAL REGIME ROTATION FOREST TYPE MANUFACTURING AGRICULTURE SECTOR MARKETS AND AG LAND BASE: CROPPING TILLAGE METHODS LIVESTOCK ENERGY SECTOR FEEDSTOCK MARKETS LAND USE CHANGES FLOWS OF FEEDSTOCKS FOR BIOENERGY AND ETHANOL

COMMODITIES (ENDOGENOUS) SOFTWOOD LUMBER, HARDWOOD LUMBER, SOFTWOOD PLYWOOD, OSB PAPER PRODUCTS (14), MARKET PULP (4), RECYCLED NATIONAL DEMAND FOR EACH COMMODITY REGIONAL AND IMPORT SUPPLIES PRODUCTION PROCESSES (PULP AND PAPER) ALTERNATIVE FIBER MIXES ALTERNATIVE TECHNOLOGIES (PULPING AND PRESSES) TIMBER INVENTORY DATED FROM ca 2000 TIMBER GROWTH MANAGEMENT CLASSES (11 IN SOUTH, 5 IN PNWW, 2 ELSEWHERE) FOREST TYPES (6 IN SOUTH, 3 IN PNWW, 2 ELSEWHERE) PARTIAL CUTTING SILVICULTURAL AND LAND CONVERSION COSTS

From: (EPA 430-R ) Inventory of U.S. Greenhouse Gas Emissions and Sinks:1990 –

Federal Regional (California)

U.S. EPA, Updated Forestry and Agriculture Marginal Abatement Cost Curves. Memorandum to John Conti, EIA, March 31, 2009.

One Way is to: Model Cap and Trade in a Voluntary Offset Context Forest sector not “capped” Sell offsets as carbon sequestered or emissions avoided

Make enrollment in the market Voluntary Land in the model would have to “opt in” Land that does not “opt in” will have no control on emissions levels (no penalty) Require a 100 year commitment Addresses permanence (makes model smaller as well) Include harvested wood product carbon

FROM: Estimates of Carbon Mitigation Potential from Agricultural and Forestry Activities Congressional Research Service, , R40236 Notes: EPA 2005 = EPA, Greenhouse Gas Mitigation Potential in U.S. Forestry and Agriculture, November ERS 2004 = USDA, Economics of Sequestering Carbon in the U.S. Agricultural Sector, Apr MS 2001 = Bruce A. McCarl and Uwe A. Schneider, “Greenhouse Gas Mitigation in U.S. Agriculture and Forestry,” Science, vol. 294 (December 21, 2001), pp. 2481–2482. R 1997 = Kenneth R. Richards, Estimating Costs of Carbon Sequestration for a United States Greenhouse Gas Policy (Boston: Charles River Associates, 1997). MR 1990 = Robert J. Moulton and Kenneth R. Richards, Costs of Sequestering Carbon Through Tree Planting and Forest Management in the United States, General Technical Report WO-58 (USDA, Forest Service, 1990).

Negative value indicates net deforestation Positive value indicates net afforestation

Modeling We need to pay attention to model users needs How we structure the policy in the model is important Results marginal cost curves of C are steeper in voluntary market--as some previous econometric studies have suggested optional offset sales entry leads to fewer acres of afforestation and less response from management of existing forests prices effects in traditional products markets are notable and exaggerated when C prices rise and are especially wide in a mandatory offset scheme Latta, G., D. Adams, R. Alig and E. White Simulated effects of mandatory versus voluntary participation in private forest carbon offset markets in the United States. Journal Forest Economics 17(2):

Baseline In mandatory market model baseline doesn’t matter In voluntary market model it does Why? Mandatory Every change in carbon stocks will be accounted for in the optimization Voluntary Baseline drives the decision of whether you want changes in carbon stocks accounted for in the objective function. Baseline is now important in policy effectiveness modeling

A breakdown of the offset supply curve from Latta etal by enrollment First Thoughts Given that A is the quantity of offsets available Annual flux on enrolled lands And B is the net forest sequestration Annual flux on all lands Therefore C is the quantity of leakage Annual flux on non-enrolled lands A C B

A breakdown of the offset supply curve from Latta etal by enrollment Next Thoughts Given that A is the quantity of offsets available Annual flux on enrolled lands And B is the net forest sequestration Annual flux on all lands Therefore C is the quantity of non-additional CO 2 e Annual flux on non-enrolled lands A C B

Good Guys Why low, or no leakage?MoreThoughts In the $0 run there are Good Guys (land sequestering C) and Bad Guys (land emitting C) Given that it is a model based on optimality a small change in C price sorts out the good and bad guys Given the policy design, you are paid (or pay) for your C flux at each point in time. If you are a Bad Guy (opting out) And want to be a Good guy (opt in) You must improve your C flux all the way to zero before you begin to get paid. Also, these are aggregate amounts fewer “opt out” acres = more emissions per acre Bad Guys Good Guys Bad Guys

Goals Minimize additionality issues Minimize leakage issues Eliminate baseline A simple effective policy Methods Use forest sector model only Pay for only tree and harvested wood carbon Above, but on existing forest only when past minimum harvest age (X) Above, but only when past minimum harvest on existing and regenerated forests (XN)

Pay for only tree and harvested wood carbon Above, but on existing forest only when past minimum harvest age Above, but only when past minimum harvest on existing and regenerated forests

Text here

C_Total – all forest accounts C_In – Enrolled land only FO – C payments for tree and HWP C only X – no payments on existing stands unless > minimum harvest age N - no payments on existing and regenerated stands unless > minimum harvest age

A third (future) modeling attempt? Use what was learned prior runs and … Relax permanence restriction Use stocking level instead of age as qualifier Combine with voluntary agriculture model