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Replacing carbon lost from forests: an assessment of insurance, reserves, and expiring credits

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  • Susan Subak

Abstract

Concern over the "non-permanence" or reversibility of carbon sequestration projects has been prominent in discussions over how to develop guidelines for forest project investments under the Clean Development Mechanism (CDM) of the UNFCCC Kyoto Protocol. Accordingly, a number of approaches have been proposed that aim to help ensure that parties do not receive credit for carbon that is lost before project obligations are fulfilled. These approaches include forest carbon insurance, land reserves, and issuance of expiring credits. The potential costs of each of these different approaches are evaluated using a range of assumptions about project length, risk and discount rate, and a comparison of costs is ventured based on the estimated reduction in value of these credits compared with uninsured, and permanent credits. Obstacles to participation in the different approaches are discussed related to problems of long-term commitments, project scale, rising replacement costs, and low credit value. It is concluded that a system of expiring credits, which could be coupled with insurance or reserves, could guarantee obligations that span time-scales longer than that of conventional insurance policies while maintaining incentives for long-term sequestration.

Suggested Citation

  • Susan Subak, 2003. "Replacing carbon lost from forests: an assessment of insurance, reserves, and expiring credits," Climate Policy, Taylor & Francis Journals, vol. 3(2), pages 107-122, June.
    • Handle: RePEc:taf:tcpoxx:v:3:y:2003:i:2:p:107-122
    DOI: 10.3763/cpol.2003.0315
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    Cited by:

    1. Patrice Loisel & Marielle Brunette & Stéphane Couture, 2020. "Insurance and Forest Rotation Decisions Under Storm Risk," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(2), pages 347-367, July.
    2. Trotter, Ian Michael & da Cunha, Dênis Antônio & Féres, José Gustavo, 2015. "The relationships between CDM project characteristics and CER market prices," Ecological Economics, Elsevier, vol. 119(C), pages 158-167.
    3. Wong, Jenny L.P. & Dutschke, Michael, 2003. "Can Permanence Be Insured? Consideration of Some Technical and Practical Issues of Insuring Carbon Credits from Afforestation and Reforestation," Discussion Paper Series 26270, Hamburg Institute of International Economics.
    4. Sell, Joachim & Koellner, Thomas & Weber, Olaf & Pedroni, Lucio & Scholz, Roland W., 2006. "Decision criteria of European and Latin American market actors for tropical forestry projects providing environmental services," Ecological Economics, Elsevier, vol. 58(1), pages 17-36, June.
    5. Hultman, Nathan E. & Pulver, Simone & Guimarães, Leticia & Deshmukh, Ranjit & Kane, Jennifer, 2012. "Carbon market risks and rewards: Firm perceptions of CDM investment decisions in Brazil and India," Energy Policy, Elsevier, vol. 40(C), pages 90-102.
    6. G. Cornelis van Kooten, 2008. "Biological Carbon Sequestration and Carbon Trading Re-visited," Working Papers 2008-04, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group.
    7. Grover, Mansi & Bosch, Darrell J. & Preisley, Stephen P., 2005. "Effects of Private Insurance on Forest Landowners' Incentives to Sequester and Trade Carbon under Uncertainty: Impact of Hurricanes," 2005 Annual meeting, July 24-27, Providence, RI 19516, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Christopher Galik & Brian Murray & Stephen Mitchell & Phil Cottle, 2016. "Alternative approaches for addressing non-permanence in carbon projects: an application to afforestation and reforestation under the Clean Development Mechanism," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 21(1), pages 101-118, January.
    9. Pajot, Guillaume, 8. "Carbon credits and the forest sector," Scandinavian Forest Economics: Proceedings of the Biennial Meeting of the Scandinavian Society of Forest Economics, Scandinavian Society of Forest Economics, issue 41, May.
    10. Brunette, M. & Holecy, J. & Sedliak, M. & Tucek, J. & Hanewinkel, M., 2015. "An actuarial model of forest insurance against multiple natural hazards in fir (Abies Alba Mill.) stands in Slovakia," Forest Policy and Economics, Elsevier, vol. 55(C), pages 46-57.
    11. Olschewski, Roland & Benitez, Pablo C., 2005. "Secondary forests as temporary carbon sinks? The economic impact of accounting methods on reforestation projects in the tropics," Ecological Economics, Elsevier, vol. 55(3), pages 380-394, November.
    12. Wong-Leung, Jenny P. & Dutschke, Michael, 2003. "Can Permanence be Insured? Consideration of some Technical and Practical Issues of Insuring Carbon Credits from Afforestation and Reforestation," HWWA Discussion Papers 235, Hamburg Institute of International Economics (HWWA).
    13. Ye Song & Hongjun Peng, 2019. "Strategies of Forestry Carbon Sink under Forest Insurance and Subsidies," Sustainability, MDPI, vol. 11(17), pages 1-13, August.
    14. Susan Subak, 2002. "Forest certification eligibility as a screen for CDM sinks projects," Climate Policy, Taylor & Francis Journals, vol. 2(4), pages 335-351, December.
    15. Nijnik, Maria & Bizikova, Livia, 2008. "Responding to the Kyoto Protocol through forestry: A comparison of opportunities for several countries in Europe," Forest Policy and Economics, Elsevier, vol. 10(4), pages 257-269, February.
    16. David Cooley & Christopher Galik & Thomas Holmes & Carolyn Kousky & Roger Cooke, 2012. "Managing dependencies in forest offset projects: toward a more complete evaluation of reversal risk," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 17(1), pages 17-24, January.
    17. Dutschke, Michael & Schlamadinger, Bernhard & Wong, Jenny L.P. & Rumberg, Michael, 2004. "Value and Risks of Expiring Carbon Credits from CDM Afforestation and Reforestation," Discussion Paper Series 26347, Hamburg Institute of International Economics.
    18. Sacchelli, Sandro & Cipollaro, Maria & Fabbrizzi, Sara, 2018. "A GIS-based model for multiscale forest insurance analysis: The Italian case study," Forest Policy and Economics, Elsevier, vol. 92(C), pages 106-118.
    19. Dutschke, Michael & Schlamadinger, Bernhard & Wong-Leung, Jenny P. & Rumberg, Michael, 2004. "Value and Risks of Expiring Carbon Credits from CDM Afforestation and Reforestation," HWWA Discussion Papers 290, Hamburg Institute of International Economics (HWWA).

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