Exploring tax-based payment approach for forest carbon sequestration

We seek to determine if the tax-based payment approach is a valid alternative to existing incentive payment approaches for forest carbon sequestration. To achieve the objective, we test a hypothesis that waiving the property tax rate on forestland provides incentives to landowners for afforesting non-forested land or sustaining forests at risk of deforestation. We used a land use change model based on the Bureau of Economic Analysis (BEA) 88 area as a case study to test the hypothesis. The estimated effects of the waived property tax on forestland from the land use model were then used to simulate changes in afforestation and deforestation under the current level of property tax rate and under the hypothetical zero property tax. The ex-ante forecasts were then used to estimate the amount of carbon sequestered using a carbon model. Finally the estimated carbon sequestrations under the two scenarios were applied to estimate costs of supplying carbon sequestration using the tax-based payment approach. We summarize our empirical results with two key findings. First, the results show that an increase in net return from forestland by waiving the property tax on forestland increases the shares of forestland, which in turn increases accumulation of carbon in the forest ecosystem. Second, our finding suggests that annualized cost of supplying forest-based carbon sequestration was estimated to be $101.48 per ton, should the tax-based payment approach be adopted in the BEA 88. On a per-ton basis, this cost is on the high end of the estimated cost of U.S. forest-based carbon sequestration ($30 to $90 per ton) in the previous literature. Despite its lower cost efficiency, the tax-based payment approach is still worth consideration because the administrative resources and systems needed for utilizing the property tax as a tool to internalize the positive externality of the carbon sequestration of forestland are already in place and thereby can avoid costs in creating complex new institutional arrangements associated with existing incentive payment approaches.