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Value of land use for carbon sequestration: An application to the EU climate policy

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  • Gren, Ing-Marie Gren

    () (Department of Economics, Swedish University of Agricultural Sciences)

  • Elofsson, Katarina

    (Department of Economics, Swedish University of Agricultural Sciences)

Abstract

This paper applies the replacement cost method for calculating the value of stochastic carbon sequestration in the EU climate policy for mitigating carbon dioxide emissions. Minimum costs with and without carbon sequestrations are then derived with a safety-first approach in a chance-constrained framework for two different scenarios; one with the current system for emission trading in combination with national allocation plans and one with a hypothetical system where all sectors trade. The theoretical results show that i) the value of carbon sequestration approaches zero for a high enough risk discount, ii) relatively low abatement cost in the trading sector curbs supply of permits on the ETS market, and iii) large abatement costs in the trading sector create values from carbon sequestration for meeting national targets. The empirical application to the EU commitment of 20% reduction in carbon dioxide emissions shows large variation in carbon sequestration value depending on risk discount and on institutional set up. Under no uncertainty, the value can correspond to approximately 0.45% of total GDP in EU under current policy system, but it is reduced to one third if all sectors are allowed to trade. The value declines drastically under conditions of uncertainty and approaches zero for high probabilities in achieving targets. The allocation of value among countries depends on scenario; under the current system countries make gains from reduced costs of meeting national targets, under a sector-wide trading scheme buyers of permits gain from reductions in permit price and sellers make associated losses.

Suggested Citation

  • Gren, Ing-Marie Gren & Elofsson, Katarina, 2013. "Value of land use for carbon sequestration: An application to the EU climate policy," Working Paper Series 2012:4, Swedish University of Agricultural Sciences, Department Economics.
  • Handle: RePEc:hhs:slueko:2012_004
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    References listed on IDEAS

    as
    1. Gren, Ing-Marie & Carlsson, Mattias & Elofsson, Katarina & Munnich, Miriam, 2012. "Stochastic carbon sinks for combating carbon dioxide emissions in the EU," Energy Economics, Elsevier, vol. 34(5), pages 1523-1531.
    2. McSweeny, William T. & Shortle, James S., 1990. "Probabilistic Cost Effectiveness in Agricultural Nonpoint Pollution Control," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 22(01), pages 95-104, July.
    3. Valentina Bosetti & David Tomberlin, 2004. "Fondazione Eni Enrico Mattei," Working Papers 2004.102, Fondazione Eni Enrico Mattei.
    4. David Bigman, 1996. "Safety-First Criteria and Their Measures of Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 225-235.
    5. Stankeviciute, Loreta & Kitous, Alban & Criqui, Patrick, 2008. "The fundamentals of the future international emissions trading system," Energy Policy, Elsevier, vol. 36(11), pages 4272-4286, November.
    6. Gren, Ing-Marie & Carlsson, Mattias, 2013. "Economic value of carbon sequestration in forests under multiple sources of uncertainty," Journal of Forest Economics, Elsevier, vol. 19(2), pages 174-189.
    7. Antle, John & Capalbo, Susan & Mooney, Sian & Elliott, Edward & Paustian, Keith, 2003. "Spatial heterogeneity, contract design, and the efficiency of carbon sequestration policies for agriculture," Journal of Environmental Economics and Management, Elsevier, vol. 46(2), pages 231-250, September.
    8. Lubowski, Ruben N. & Plantinga, Andrew J. & Stavins, Robert N., 2006. "Land-use change and carbon sinks: Econometric estimation of the carbon sequestration supply function," Journal of Environmental Economics and Management, Elsevier, vol. 51(2), pages 135-152, March.
    9. Capros, Pantelis & Mantzos, Leonidas & Parousos, Leonidas & Tasios, Nikolaos & Klaassen, Ger & Van Ierland, Tom, 2011. "Analysis of the EU policy package on climate change and renewables," Energy Policy, Elsevier, vol. 39(3), pages 1476-1485, March.
    10. Pyle, David H & Turnovsky, Stephen J, 1970. "Safety-First and Expected Utility Maximization in Mean-Standard Deviation Portfolio Analysis," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 75-81, February.
    11. Valentina Bosetti & Ruben Lubowski & Alexander Golub & Anil Markandya, 2009. "Linking Reduced Deforestation and a Global Carbon Market: Impacts on Costs, Financial Flows, and Technological Innovation," Working Papers 2009.56, Fondazione Eni Enrico Mattei.
    12. Melania Michetti & Renato Nunes Rosa, 2011. "Afforestation and Timber Management Compliance Strategies in Climate Policy. A Computable General Equilibrium Analysis," Working Papers 2011.04, Fondazione Eni Enrico Mattei.
    13. McSweeny, William T. & Shortle, James S., 1990. "Probabilistic Cost Effectiveness In Agricultural Nonpoint Pollution Control," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 0(Number 1), pages 1-10, July.
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    More about this item

    Keywords

    carbon sequestration value; replacement cost method; uncertainty; safety-first; chance-constrained programming; EU emission target;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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