Evaluating Domestic Carbon Markets With Forest Sector Models

Gregory Latta Oregon State University

Sara Ohrel US Environmental Protection Agency

Darius Adams Oregon State University

presented at:

A Community of Ecosystem Services

ACES Meeting 2012

December 13, 2012

Fort Lauderdale, Florida

Disclaimer

• Thoughts & concepts expressed today are those of the presenters only and do not reflect any position or sentiment of the U.S. Environmental Protection Agency.

1

Objectives

• Market models • EPA’s GHG mitigation models

• What is a forest sector model? • My view and overview

• Model solution techniques

• What forest sector models are out there?

• The FASOM-GHG model • What is Forest and Agricultural Optimization Model with Greenhouse Gases

(FASOM-GHG)

• Carbon market modeling example • Use FASOM-GHG

• A few quick results

2

3

What is a Market Model?

•Equilibrium model

•Price endogenous (one to many regions, one to

many industries or sectors, one to many products)

Quantity

Pri

ce

P*

Q*

Demand Curve

Supply Curve

Market Models

4

• Computable General Equilibrium Models • Broad all inclusive models including many industries (sectors)

• Partial Equilibrium Models • Detailed models focusing on specific sectors

Broad Narrow

Sim

ple

C

om

ple

x

Sectoral Scope (eg. Industries Included)

Secto

ral D

eta

il (e

g. Technolo

gie

s)

Partial

Equilibrium

Models

General

Equilibrium

Models

EPA Models and Corresponding GHG Mitigation

5

Domestic Forest and Agriculture Inputs to Larger EPA analysis

6

Figure 1: Total Domestic Forest and Agriculture Offset MACs for constant (a) and rising (b) prices

(avg MtCO2e yr-1

)

$-

$10

$20

$30

$40

$50

0 200 400 600 800 1000

MtCO2e/yr

$/t

CO

2e

2010

2020

2030

2040

2050

$-

$50

$100

$150

$200

$250

0 250 500 750 1000 1250 1500

MtCO2e/yr

$/t

CO

2e

2010

2020

2030

2040

2050

(a) (b)

U.S. EPA, 2009. Updated Forestry and Agriculture Marginal Abatement Cost Curves. Memorandum to John Conti, EIA, March 31, 2009.

Marginal Abatement Cost Curves (MACs) - mitigation supply curves

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Forest Sector (partial equilibrium) Models by Solution Technique

•Dynamic Recursive

•Solves annual (typically) surplus, updates parameters, repeats

•Shorter-term

•Provides Most likely / Forecast type values

•Mill Manager Perspective

•Intertemporal Optimization

•Solves all time periods’ surplus simultaneously

•Longer-term

•Provides Potential / Possible values

•Forest Manager/Planner Perspective

8

Solution Technique

Quantity

Price

P*1

Q*1

Demand

Supply

Quantity

Price

P*2

Q*2

Demand

Supply

Quantity

Price

P*3

Q*3

Demand

Supply

P*1,2,3

Q*1,2,3 Quantity

Price

Demand1,2,3

Supply1,2,3

Recursive Dynamic

Intertemporal Optimization

Solve time period 1

Maximizing net surplus

Take harvest quantity

Associated with Q*1

Calculate

Inventory – Harvest + Growth

Shifts the supply curve

for the next period

Supply is the sum of

each possible

management in each

period. (steps of possible harvest values)

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Forest Partial Equilibrium Models

Dyn

amic

Re

curs

ive

TAMM Timber Assessment

Market Model

CGTM CINTRAFOR Global Trade

Model

EFI-GTM European Forest Institute

Global Trade Model

PAPYRUS Model of the North American Pulp and

Paper Industry

IIASA GTM International Institute for Applied

Systems Analysis Global Trade Model

NAPAP North American Pulp

and Paper Model

FASOM Forest and Agriculture Sector

Optimization Model

NTM Norwegian

Trade Model

GFPM Global Forest

Products Model

TSM Timber Supply

Model

NorFor Norwegian Forest

Sector Model

PNW-RM Pacific Northwest Regional Models

SRTS Subregional Timber

Supply Model

EUFASOM European Forest Sector

Optimization Model

USFPM United States Forest

Products Module

SF-GTM Finnish Forest Sector Model

FFSM French Forest Sector Model

Inte

rte

mp

ora

l Op

tim

izat

ion

A little about FASOM-GHG • Linked model of U.S. agriculture and forest sectors

• Utilizes a intertemporal optimization approach to simulate markets for agriculture and forest products

• Tracks a variety of agriculture and forestry resource conditions and management actions

• Mitigation - four fundamental ways to mitigate emissions 1. Change land use

- Afforestation, grassland conversion… 2. Alter management practices

- Soil tillage practices, silviculture, extend timber rotations 3. Alter production levels and activity mix

- More/less animals or a different mix of grass fed / feedlot 4. Bioenergy

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A little more about FASOM-GHG

11

FOREST SECTOR

MARKETS AND FOREST

LAND BASE: INVENTORY

SILVICULTURAL REGIME

ROTATION

FOREST TYPE

MANUFACTURING

AGRICULTURE

SECTOR MARKETS

AND AG LAND BASE: CROPPING

TILLAGE METHODS

LIVESTOCK

ENERGY SECTOR

FEEDSTOCK MARKETS

LAND USE

CHANGES

FLOWS OF

FEEDSTOCKS

FOR

BIOPOWER &

ETHANOL

Carbon Market Modeling Example

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• Forest forest sector alone • Simplified – no land use change allowed

• Voluntary carbon market

• Based loosely on the Climate Action Reserves Improved Forest

Management Protocol • 100-year commitment to carbon project

• No land use change

• Payments for sequestration only when above average carbon stocking levels on current private forest

• Carbon stored in harvested wood products (HWP)evaluated at what remains after 50 years

• Caveats • Forest types (strata or stands) enrolled individually

• No baseline HWP values

• Land that does not participate has no control on emissions levels (no penalty)

Participation in Carbon Projects

Regional response differs

South not in at low C

prices

NE not much response

Quite a large enrollment

additionality?

Price CB LS NE PNWE PNWW PSW RM SC SE Total US

$/tonne CO2 ----------------------------------------------- percentage of private timberland base -----------------------------------------------

5 22 31 17 19 13 28 26 0 4 11

10 29 36 20 29 20 28 31 5 10 16

15 30 39 20 31 22 29 33 7 15 19

30 36 41 20 37 29 35 41 14 20 23

50 40 41 22 40 34 36 41 19 23 27

Potential Voluntary Market Participation on US Private Timberland

Forest Inventory Impacts

This was really the goal of the carbon project – you have to

increase the standing stock of trees

Forest Harvest Impacts

This is perhaps a side effect – when people are holding more

timber, harvests can fall

Forest Products Price Impacts

Yet another side effect – when harvests fall, forest products

production falls leading to higher prices

0

5

10

15

20

25

30

35

40

45

50

-60 -40 -20 0 20 40 60 80 100

C P

rice

($/

ton

ne

CO

2e)

Million tonnes CO2e per year

Forest Carbon MAC Scenario X

C_Total

Improved Forest Management Results

C_Total = All Carbon Pools ( both in and out of C market) = The net mitigation at a given price

C_In = All Carbon Pools (In C market)

C_Out = All Carbon Pools (Out of C market)

Tree and Product Carbon Only = The mitigation that the buyers paid for

0

5

10

15

20

25

30

35

40

45

50

-60 -40 -20 0 20 40 60 80 100

C P

rice

($/

ton

ne

CO

2e)

Million tonnes CO2e per year

Forest Carbon MAC Scenario X

C_In C_Total

0

5

10

15

20

25

30

35

40

45

50

-60 -40 -20 0 20 40 60 80 100

C P

rice

($/

ton

ne

CO

2e)

Million tonnes CO2e per year

Forest Carbon MAC Scenario X

C_In

C_Out

C_Total

0

5

10

15

20

25

30

35

40

45

50

-60 -40 -20 0 20 40 60 80 100

C P

rice

($/

ton

ne

CO

2e)

Million tonnes CO2e per year

Forest Carbon MAC Scenario X

C_In

C_Out

C_Total

Tree and Product Carbon Only

A

B C

Given that

•A is the quantity of

mitigation available

•Annual flux on

enrolled lands

And

•B is the net forest

sequestration

•Annual flux on all

lands

Therefore

•C is the quantity of

leakage

•Annual flux on

non-enrolled lands

Linking to the CGE’s

• How do we get these detailed results into an analysis of the economy at large?

• The MAC becomes the potential mitigation supply curve for the CGE

• How do we get the results from the economy at large into the detailed analysis • Linking models is a concept that deserves further exploration

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Conclusions from our Example

• Policy (or Protocol) structure is important in mitigation effectiveness

• Leakage and Additionality will remain issues

• We most likely won’t get rid of them, so we should design protocols that minimize them

• The problem is worse at low prices

• It is also not constant across C price levels (fixed leakage adjustment factors may not be appropriate)

• Either way – Simple rules will have benefits over complex accounting frameworks

• And – partial equilibrium models are a great way to explore the impacts of such rules

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