Russian Forests for Climate Change Mitigation: An Economic Analysis

The industrialized countries, including the United States and Russia, are assessing options to reduce their greenhouse gas (GHG) emissions. Right now, many OECD countries are interested in investing in carbon reductions in Russia and Eastern Europe where the cost might be considerably lower.

The form in which such transactions might emerge is still unclear. There is the possibility of buying and selling carbon credits between countries, which can lead to more cost-effective GHG reductions. These credits could only be exchanged when the selling country is below its reduction target. In a trading scheme, carbon reductions or sinks will have value that will be manifest in the price of carbon credits. Countries could limit their current emissions of greenhouse gases to a level below their obligated limit, or they could increase their allowable GHG emission limits by implementing projects that can capture and sequester carbon by means of forest projects, such as reforestation, afforestation, assistance to natural regeneration, and sustainable forest management. Because the types of sequestration projects that might be eligible for carbon credits are uncertain, this study will only focus on forestlands planted after 1990. Assuming this conservative constraint, this report analyzes how much carbon could be sequestered by biomass sequestration projects in Russia, given different prices for carbon reduction credits.

In this study, we developed a bottom-up model of Russia''s potential forestland. Our results show that sequestration is quite price sensitive, with a range from no carbon sequestration at prices under $20 per ton of carbon to over 500 million tons of carbon stored if the price for a ton of carbon is $50.

Russia''s potential carbon credit supply (million tons of carbon) given different prices for carbon, by regions, and total for Russia (during first budget period, 2008-2012)

It is also critical to note that positive revenue streams do not appear until 10-15 years into the project— a potential problem because almost all costs will occur in the first year, and the discount rate is relatively high (10%), so the economic value of the revenue stream is still close to zero after 20 years.

Conclusions

Timing issues are extremely important in making sequestration projects feasible. Almost all the costs are at the beginning, while the revenue stream for carbon permits is maximized 10-15 years in the future, and is only significantly positive if the price is above $25 per ton of carbon. Our conclusions from the study are as follows:

• Forward Sales Enhance Revenue Timing: Significant costs are incurred at the beginning of forest project implementation, but the first revenue would not be yielded earlier than 2008, when carbon credits could become a commercial commodity. After 2008, however, the revenue flow could become significant for Russia ($20-30 million annually). One possible solution to this problem of cost and benefit temporal distribution may be to allow forward sales— that is, sales of credits for sequestration that will occur in a later budget period and put that money toward costs that occur in an earlier period. For instance, it may be possible to sell second commitment period credits in the first commitment period, allowing the revenue to offset part of the initial cost of the project. It may also be possible to sell a portion of unused Russian carbon credits.
  
• Economic Choices vs. Ecological Choices: Due to the high discount factor, only carbon sequestered in the first twenty years (1999-2019) has any commercial benefit; the economic value of later carbon sequestration is close to zero. Therefore, one would not choose the species with the highest sequestration capacity over its lifetime, but rather those species with the highest sequestration capacity within the first 20 years. In the Russian boreal forest, these are soft-leafed, fast-growing species such as birch and aspen, rather than the slower-growing, carbon maximizing spruce and larch. This means that carbon sequestration potential will not be maximized, as long as forests are planted, then left to grow.
  
  However, the economic incentives for carbon maximizing reforestation activity can be improved by the reduction of planting costs, increases in productivity, accounting for non-timber products (NTP), and land tax abatements in the first 10 years. "Soft" loans (loans at below-market terms, loan-grant combinations, etc.) to implement forest projects can have a positive impact as well.
  
• Need for Established Market: Below $25 a ton for carbon, very little new forests for sequestration are planted. At $25 reforestation projects will only occur in European Russia. In Asian Russia, the initial costs are higher. No significant planting will occur until the cost of carbon is $30 per ton or higher, due to a more difficult climactic conditions and higher planting and access costs. However, the Asian regions may ultimately have much more carbon sequestration potential than those in the west.
  Finally, the value of carbon sequestration will remain uncertain and the transaction costs in certain regions may be high. It is in the interests of both Russia and the OECD countries to pursue efforts to reduce these uncertainties and transaction costs if Russia is to maximize its forest sequestration potential.