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Dual discounting in forest sector climate change mitigation
Hanne K. Sjølie
Greg Latta
Birger Solberg
Forest sector modeling workshop
Nancy, France
May 31, 2012
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Outline
Discounting in climate policy analyses / forest sector
Hypothesis
Model
Results
Discussion
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Basis for discounting
Social opportunity costs (SOC): Costs of capital
Social time preference (STP):
– per capita economic growth (g),
– the elasticity of marginal utility of consumption (η) and
– pure time preference (“impatience” of individuals) (p)
– STP = g×η + p
”Should be” the same, but differ due to i.a. taxes, externalities, information
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Discounting in climate policy analyses
The discount rate is very important in climate policy analyses
However, among scientists there are large disagreements regarding the magnitude of the discount rate as well as the rationale of the appropiate rate
Ex. Stern Review and the following debate:
The Review advocates for strong, rapid mitigation action as the benefits of action greatly exceed the costs
The conclusions diverge from many other economic assessment of climate policies
Moreover, “the difference stems almost entirely from its technique for calculating discount rates and only marginally on new science or economics” (Nordhaus, 2007, p. 201).
The Review used a discount rate of 1.4%4
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Low and dual discount rate
Stern (and many others) use arguments as ethics / intergenerational equity as arguments for using a low discount rate
Discounting environmental and non-environmental goods likewise is based on the assumption of perfect substitutability
Kula and Evans (Kula, E., Evans, D., 2011. Dual discounting in cost-benefit analysis for environmental impacts. Environmental Impact Assessment Review 31, 180–186) argues for the use of dual discount rate: One for monetary values and a lower for carbon
Their argument being as the scarcity of environmental values increases with economic growth, such values should not be included in the economic growth part of the STP
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Dual discounting in forestry
Kula and Evans compare the NPV of a forestation project in Nothern Ireland using hyperbolic discount rate starting at 3.5% for all values with a dual discounting scheme where monetary values discount rate starts at 3.5% and carbon at 1.5%
The NPV of the project is negative with the single discount scheme and positive with the dual
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Hypothesis
Do the results of Kula and Evans hold in all kinds of carbon mitigation projects in forestry?
More specifically, do the results hold in projects with an initial carbon stock?
Or could a low discount rate lead to initial harvests being offset by later carbon sequestration to a higher degree, thereby leading to less short-term carbon sequestration?
Hypothesis: When having initial carbon stocks, a lower discount rate on carbon yields less CO2 emission reductions in the short run
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Analysis
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Using a partial equilibrium model of the Norwegian forest sector
Carbon discount rates: 0%, 2%, 4%, 6% and 8%
Monetary discount rate: 4%
Carbon price: 12.5 €/ton CO2eq
Discount rate and carbon price are constant over the horizon
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The forest sector model for Norway NorFor
Demand for final products (county)
Forest growth, management:Biomass supply(9000 NFI plots)
Forest industrySawnwood (county) Pulp, paper and boards (mill) Bioenergy (county)
Trade(counties + 2 foreign regions)
Decay, machines
Growth
Transport
Substitution, storage
Combustion
Processing
Demand
GHG
Forest growth, management:Biomass supply
Forest growth, management:Biomass supply
Demand
Forest industry
Trade
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NorFor
Perfect foresight
Rational agents: consumers, industry, forest owners
Elasticity of foreign supply: 0.8 (logs), 5 (products)
Elasticity of foreign demand: -0.8 (logs), -5 (products)
20 5-year periods run, 19 analyzed
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Impacts on harvest
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Investment in forestry
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Industrial production
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Decline in the long run
Increase in the long run
Only marginal impacts with
discount rate >= 4%
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GHG fluxes
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GHG fluxes
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Discussion
Not discounting carbon yields lower GHG emission reductions in the short term but considerably higher in the long term
Carbon price harvest is below Base levels for all periods with a single discount scheme
Short-term harvests are higher with zero carbon discount rate than in both Base and 4% carbon disccount rate but considerably lower in the long run
Future carbon sequestration offsets early harvest to a higher extent with low carbon discount rate
Much more investments in forestry with low discount rate
Large shifts in industry with low carbon discount rate as NPV of substitution effects becomes relatively larger than producer surplus
Leakage is substantial particularly under low carbon discount rate but direction of results still hold with fixes trade levels
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Discussion
Discounting carbon less with the aim to allocate more resources to climate change mitigation does not necessiraly yield the desired results
Main difference from the Kula and Evans study is the initial carbon stock
Important to test a new scheme on a varity of assumptions
Basic assumption of dual discounting: non-substitutable goods
Instead of dual discounting, future scarcity of environmental goods can be reflected in increasing prices – but prices can be difficult to assess due to lack of markets
Discounting in models: Market observations or policies or ethical judgements? Versus other parameters in the models
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