Download Dual discounting in forest sector climate change mitigation

Dual discounting in forest sector climate
change mitigation
Hanne K. Sjølie
Greg Latta
Birger Solberg
Forest sector modeling workshop
Nancy, France
May 31, 2012
2111
2005
Dual discounting in forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
Outline
 Discounting in climate policy analyses / forest sector
 Hypothesis
 Model
 Results
 Discussion
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Dual discounting in forest sector climate change mitigation
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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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Dual discounting in forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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).
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 The Review used a discount rate of 1.4%
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Dual discounting in forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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 costbenefit 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 forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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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Dual discounting in forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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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Dual discounting in forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
Analysis
 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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Dual discounting in forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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GHG
The forest sector model for Norway NorFor
Growth
Decay,
machines
Forest industry
Sawnwood (county)
Pulp, paper and
Processing
boards (mill)
Bioenergy (county)
Substitution,
storage
Combustion
Forest growth,
management:
Biomass supply
(9000 NFI plots)
Demand for final
products (county)
Trade
Transport
(counties
+ 2 foreign regions)
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Dual discounting in forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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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Dual discounting in forest sector climate change mitigation
Impacts on harvest
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Dual discounting in forest sector climate change mitigation
Investment in forestry
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Dual discounting in forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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Industrial production
Increase in
the long run
Decline in
the long run
Only marginal
impacts with
discount rate >= 4%
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NORWEGIAN UNIVERSITY OF LIFE SCIENCES
Dual discounting in forest sector climate change mitigation
GHG fluxes
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Dual discounting in forest sector climate change mitigation
GHG fluxes
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Dual discounting in forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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
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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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Dual discounting in forest sector climate change mitigation
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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
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judgements? Versus other parameters in the models
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Thank you!
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