How should a forest carbon rent policy be implemented?

Abstract

Forest economics literature commonly uses two alternative ways to apply carbon payments to forest owners: a carbon rental policy and a policy where carbon compensations are based on subsidies and taxes. Conditions under which these two policy schemes lead to similar market outcomes are identified: We show that perfect capital markets and rational expectations over carbon prices are required for the equivalency of the two policy schemes. However, the basic principles with which the two policies would need to be implemented suggest that the carbon rent policy could be more easily put into practice. Furthermore, we suggest a way how to integrate the forest carbon policies into an emission trading scheme. We show that a fully compensatory carbon rent policy in the EU would require 10–50% of the emission trading revenues depending of the interest rate and expected carbon price inflation. If implemented at the global level, the policy would need even significantly higher shares of hypothesized global emission permit revenues. The policies can utilize baseline trajectories of forest carbon that reduce the costs at desired level, but distort forest owners' valuation of the carbon flows.