The Economic Potential for Forest-Based Carbon Sequestration under Different Emissions Targets and Accounting Schemes*

Concern for the Earth’s changing climate, as a consequence of rising greenhouse gas (GHG) concentrations in the atmosphere, has led to policies aimed at reducing GHG emissions and increasing carbon sequestration. In Australia this has been acknowledged in the New South Wales Greenhouse Gas Abatement Scheme and the Carbon Farming Initiative, which provide price incentives for forest-based sequestration. However, the issue of the most appropriate accounting scheme to account for the impermanence of forest based sequestration has been debated and remains unresolved in policy documents. The objective of the paper is to investigate the economic potential for forest-based sequestration to reduce carbon dioxide concentrations in the atmosphere for three different accounting schemes. To this end, a model of the New South Wales forest sector is developed to simulate changes in land use from agriculture to forestry; and in forest management, for a range of carbon prices and accounting regimes. The model builds on previous modelling of forestry in Australia and that of forest-based sequestration by incorporating: endogenous timber prices; the probability of fire destroying a portion of the forest; and an increasing opportunity cost of agricultural land. Importantly, the paper improves our understanding of the sector wide potential for carbon sequestration for the different accounting rules.