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Accounting for uncertainties and time preference in economic analysis of tackling climate change through forestry and selected policy implications for Scotland and Ukraine

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Abstract

The paper discusses the development of economic techniques for dealing with uncertainties in economic analysis of planting trees to mitigate climatic change. In consideration of uncertainty, time preference and intergenerational equity, the traditional cost-benefit analysis framework is challenged with regard to the discounting/non-discounting of carbon uptake benefits, and because it usually uses a constant and positive discount rate. We investigate the influence of various discounting protocols on the outputs of economic analysis. The idea of using the declining discount rate is also considered. Several numerical examples dealing with the analysis of afforestation for carbon sequestration in Scotland and Ukraine are provided. We show that the choice of discounting protocols have a considerable influence on the results of economic analysis, and therefore, on the decision-making processes related to climate change mitigation strategies. The paper concludes with some innovative insights on accounting for uncertainties and time preference in tackling climate change through forestry, several climate policy implications of dealing with uncertainties, and a brief discussion of what the use of different discounting protocols might imply for decision making.

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Notes

  1. In this paper, the terms afforestation and reforestation are considered to be synonymous.

  2. The conversion factor from CO2e to C is 3.67 (i.e. 44/12).

  3. Because of the social science focus and the national level of this research, trade-offs between the accuracy and scale of the analysis were unavoidable. Therefore, a number of generalised assumptions and simplifications had to be made. These should not undermine the purpose and main results of this paper.

  4. The storage option (van Kooten 2004) presumes planting and growing of trees without considering future use of wood and land. Such a simplified assumption can only be made together with the assumption that by harvesting the trees, using the revenues to cover future costs of establishing new forests and storing carbon, both the gains and losses in physical and monetary values are well balanced.

  5. Woody biomass is being recognised as a renewable energy source with low GHG emissions (Matthews and Robertson 2003; Galbraith et al. 2006). Also, the building of more timber-rich houses and increasing the service life of wood products are considered to be valuable contributions to reducing carbon impacts (Read et al. 2009). However, the wood products sink may not be strong and/or last long, while energy substitution effects are debatable in the literature. These policy options, therefore, require further exploration (Bottcher et al. 2012).

  6. Carbon leakages (Dyer and Nijnik 2013) could be accounted for through risk analysis, insurance policies, deductions, and buffer pools, where discounting for risk has an important role (Chomitz 2002).

  7. For the most important species in Scotland (Sitka spruce YC14), the maximized NPV Forestry is equivalent to £732.75 per ha in 49 years, i.e. the nominal length of a commercial rotation.

  8. Although thinnings are not included in the simplified Eq. 1, they were considered in calculations.

  9. Several assumptions were made on our computation of NPV farming. Land price represents a capitalization of future net benefits. However, using of gross margins from farming activities as the measure probably overestimates the costs of carbon sequestration, since it only deducts variable costs from gross farm earnings. We therefore used an approach (Nijnik et al. 2013) based on land market values. We presumed a one-time tree planting (see endnote 4), considering that the carbon stock of the initial land use is small, and that the carbon stock in forestry is the ‘benefit’ used to calculate the cost-effectiveness.

  10. Due to the variety of conditions, there would be a decrease of soil carbon in some areas, and an increase in some others. It was assumed, therefore, that on average soil carbon would remain unchanged. The litter pool, which in Ukraine accounts for a small proportion of the total pool, was not reflected in this research.

  11. Multi-functional afforestation in Ukraine is analysed in (Nijnik et al. 2012).

  12. This is a simplified assumption. In reality, much of carbon returns to the atmosphere almost immediately after timber harvesting; and the rest of the carbon release follows a negative exponential curve, with cumulative loss over time. Carbon release paths largely depend on tree species; with oxidation rates for wood products being roughly 0.02 per year (van Kooten and Bulte 2000).

  13. Energy required for harvesting and processing of wood, costs of converting power plants to wood, production costs of coal, and changes in transportation costs were ignored. Also, given the purpose of this paper, the technological aspects of wood vs. coal, e.g. combustion techniques, efficiency of burners, or emissions from non-CO2 gases etc., were beyond the scope. The costs considered included: opportunity cost of land; tree planting, care, protection and replanting costs and those of timber harvesting.

  14. Institutional changes and future cash flows for and responses of farming enterprises merit attention but are beyond the scope of this paper. Also, shifting to forestry would depend on whether agricultural subsidies continue to hold up land prices and whether cultural values would affect the propensity to develop forest-based activities on private land, including those of tree-planting (Nijnik et al. 2013).

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Acknowledgments

The support from the Scottish Government (RESAS) Research programme is gratefully acknowledged. We are grateful for the reviewers of this paper for their helpful comments and to Sue Morris for the help with proofreading.

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Authors and Affiliations

  1. The James Hutton Institute, Aberdeen, UK

    Maria Nijnik & Guillaume Pajot

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  1. Maria Nijnik
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  2. Guillaume Pajot
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Correspondence to Maria Nijnik.

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This article is part of a Special Issue on “Third International Workshop on Uncertainty in Greenhouse Gas Inventories” edited by Jean Ometto and Rostyslav Bun.

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Nijnik, M., Pajot, G. Accounting for uncertainties and time preference in economic analysis of tackling climate change through forestry and selected policy implications for Scotland and Ukraine. Climatic Change 124, 677–690 (2014). https://doi.org/10.1007/s10584-014-1076-5

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  • DOI: https://doi.org/10.1007/s10584-014-1076-5

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