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The Role of Forest Carbon Sequestration in Emissions Trading : Lessons from Practice

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Title: The Role of Forest Carbon Sequestration in Emissions Trading : Lessons from Practice
Author(s): Longi, Meri
Contributor: University of Helsinki, Faculty of Agriculture and Forestry
Degree program: Master's Programme in Agricultural, Environmental and Rescource Economics
Specialisation: Environmental and Natural Resource Economics
Language: English
Acceptance year: 2020
Forests can sequester large amounts of carbon with relatively low costs. Thus, they are an important instrument for climate policies. The forestry sector can be directly included in an emissions trading system (ETS). Another way is to exclude it but award offsets for additional carbon sinks. The awarded offsets can be used to cover a certain percentage of emissions under the ETS. Offset broaden the scope of an ETS and increase the overall emission reductions at lower cost. However, they face some issues. The main issues are non-additionality, non-permanence and carbon leakage, which are defined in the Kyoto Protocol and scientific literature. The approaches to these issues are compared in three ETS, which are the California Cap-and-Trade Program, the Regional Greenhouse Gas Initiative (RGGI) and the New Zealand Emissions Trading Scheme (NZ ETS). Three research questions are answered. First, how are the forestry related issues of non-additionality, non-permanence and carbon leakage considered in the California Cap-and-Trade Program, the RGGI and the NZ ETS? Second, how these approaches differ between the systems? And third, how could the forestry offset programs be improved in parts of the three main issues based on scientific literature? The approaches to all three issues are almost similar between the California's program and the RGGI. Both programs award only additional sinks. To account for the non-permanence issue, both programs require a 100-year monitoring period after credit issuance. They also require annual reporting and monitoring and a third-party verification every six years. They use a buffer account or reversal risk adjustments for unintentional reversals. Intentional reversals are covered by retiring offset credits in both programs, but the California’s program also requires a penalty. The carbon leakage risk for shifting cropland and grazing activities is determined the same way in both programs and is between zero and 50%. The secondary emissions resulting from these activities are based on the leakage risk, annual difference in actual onsite carbon and annual difference in baseline onsite carbon. The NZ ETS credits all sinks and has not implemented an ETS design to account for carbon leakage. However, non-permanence is addressed. Post-1989 forest owners must repay units if the forest is removed from the program, do a carbon sink inventory every five years and pay units if the number of sinks decreases. Pre-1990 forest owners must repay units in case of deforestation. The California’s program and the RGGI could improve the timing of accounting the onsite carbon sinks and leakage releases, which are inconsistent. Also, the reductions based on the estimated leakage risk may not be high enough because the actual leakage can be up to 80%. The long monitoring periods can be a barrier for participation especially for financially motivated forest owner. On the other hand, the additionality requirements can be a barrier for conservation motivated forest owners. The NZ ETS could be improved by crediting only additional sinks because crediting all sinks increases the government's expenditures, i.e. the taxpayer’s costs, without any environmental benefit. Carbon leakage should also be considered to gain environmental benefits.
Keyword(s): Forest carbon sequestration emissions trading forest offsets non-additionality non-permanence carbon leakage

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