The Effect of Temporary Certified Emission Reductions on Optimal Forest Rotations and the Supply of Sequestered Carbon

Abstract

This paper examines the effect of the regulations under the Clean Development Mechanism (CDM) in creating temporary certified emission reductions (tCERs) on optimal harvesting decisions and supply of carbon removal services in forest plantations. The paper develops a theoretical model examining optimal harvesting strategies when revenues from sequestered carbon dioxide are considered under the CDM guidelines. We find that the current CDM rules with 5-year verification intervals of tCERs may result in socially inefficient timber rotations because they do not fully internalize the carbon sequestration function of trees. Decreasing the intervals between carbon credit verification periods increases the optimal rotation lengths. Other factors that lengthen rotation intervals, such as decreasing timber price and increasing harvesting cost, will increase the supply of tCERs. Fast growing tree species with shorter rotation intervals have relatively more inelastic carbon credit supply curves than slow growing tree species with longer rotation intervals.