Policy design for forest carbon sequestration: A review of the literature

Forest carbon enhancement provides a low-cost opportunity in climate policy, but needs efficient policy design to be implemented. This paper reviews studies in economics on efficient design of policies for forest carbon sequestration and compares their findings against design systems in practice. Specific design problems are associated with the heterogeneity of landowners, uncertainty, additionality, and permanence in carbon projects. Different types of discounting of the value of the forest carbon sink compared with emissions abatement are suggested in the literature for management of most design problems, together with optimal contract design and emissions baselines for managing additionality and permanence in carbon sequestration. Design systems in practice, where forest carbon corresponds to 0.5% of all carbon volume subject to a pricing mechanism, mainly rely on additionality tests by approved standards on a project-by-project basis, and on buffer credits for management of permanence. Further development of forest carbon sinks as offsets in voluntary and compliance markets can be facilitated by applying tools for contract design and offset baseline management recommended in the literature.