Welfare changes associated with forest carbon offset credits in the United States

Abstract

This paper analyzes forest carbon offset credits arising under a possible cap-and-trade system in the United States and its effect on net revenue and commodity prices. A real option model determines the optimal switching from agriculture to forestry under uncertainty in both activities. The key aspects of the model are uncertainty, endogenously determined commodity prices, and spatially explicit modeling in a real option framework. The model is calibrated to counties in the contiguous United States and includes nine major crops and pasture. We show that the highest increase in net revenue occurs in the Southeast and the Northwest with small increases in the Corn Belt. Switching from agriculture to forestry starts occurring early in counties with low crop yields but does not manifests itself immediately in the crop price which results in smaller impacts on commodity prices than previously estimated.