22383 Public Disclosure Authorized

ARGENTINA: Carbon and

Prepared by Roger A. Sedjo and Eduardo Ley Resourcesfor the Future

Public Disclosure Authorized 1616 P Street NW Washington. D. C.

December 4, 1995 Public Disclosure Authorized

Report Prepared for the Global Environmental Facility of the World Bank Public Disclosure Authorized

FILE COPY ARGENTINA: Carbon and Forests'

Roger A. Sedjo and Eduardo Ley Resources for the Future December 4, 1995 EXECUTIVE SUMMARY AND CONCLUSIONS

1. GLO13AL W ARM ING AND CARBO N ...... 1 1 THE CuRRENT SrruATIoN...... 5 1.2 TYPESOF H umAN REspoNsEs...... 6 13 TooLs To MTGATE THE BUILD-UP OF ATMOSPHERIc CARBON...... 6 2. MANAGEMENT: MITIGATION ACTIVITIES AND SINK ENHANCEMENT.... 8 2.1 How M ucH FOREST?...... 9 2.2 FoREST M EGATION POUCIES...... 9 3. ARGENTINA: CARBON AND FORESTS ...... 6...... 16 3.1 FoREsTs Iq ARGENTNA ...... 16 3.1.1 Native Forests...... 17 3.1.2 PlantationForests ...... 1 3.1.3 Biodiversity...... 19 3.1.4 The Role of PlantationsWorldwide and in Argentina ...... 19 3.1.5 M arket Conditions...... 21 3.2 Sum mSDIES FOR PLANTING jN ARGENTnA ...... 21 3.2 I The RationaleforTree PlantingSubsidies in Argentina...... 21 3.2.2 The Nature of Subsidies ...... 22 3.23 Biddingfor Subsidies ...... 24 4. POT.CY ALTERNATIVES FROM THE THE BASE LINE STUATION...... 28 4.1 OPpoRTu rnEs To SEQUESTER CARBON iN FoREss ...... 29 4.2 PR T'ECTION OF NATIVE FORESS...... 30 4.3 N ATURAL FOREST M ANAG ENT...... 31 4.4 ...... 34 4.4.1 Carbon and Cost Implications of An Even-Aged Regulated Forest...... 35 4.4.2 Cost Implications of a Plantationin M esopotamia ...... 37 4.4.3 Silv o-pastoral...... 39 4.4.4 Mixed Species Plantations...... 39 4.4.5 Carbon and Cost Implications of a IndustrialPlantation in PatagoniaOver a 5-year Period...... 41 4.4.6 M ixed Species Plantationsin ...... 4 4.5 SUMMARY OF CARBON SEQUESTERED AND COSTS...... 46 5. OTHER CON SIDERATION S ...... 48 5.1 O HER SCENARIOS...... 48 5.2 THE ROLE oF DiscouNTI4 ...... 48 6. SOME RECOMMENDATIONS FOR A GEF POLICY ...... 49

7. BIBLIO GRAPH IC REFEREN CES ...... 51

Report Prepared for the Global Environmental Facility of the World Bank.

i 8. APPEN DICES ...... 53

LIST OF TABLES

Table 1. Main categories of CO reduction options and related marginal abatement cost (MAC) in Denmark.

Table 2. Fast-Growing Industrial Plantations (circa the late 1980s)

Table 3. Cost1 Estimates of Sequestering Carbon Through Forest Projects: Selected Cases ($/ton)

Table 4. Establishment costs of cost-efficient practices

Table 5. Estimates of Marginal Cost1 of Carbon Sequestered by Tree Planting: Some Comparative Results for the U.S.

Table 6. Argentina: Native Forests

Table 7. Forests: By Region and Type

Table 8. Lands Suitable for Plantation Forests

Table 9. Maximum Payments for Plantation Establishment ($1ha)

Table 10. Tree Plantation Establishment by Region, 1993-1/11/94

Table 11. Implications for GEF Funding

Table 12. Summary of Carbon Sequestered and Costs

ii FIGURES

Figure 1 Sedjo /Solomon map

Figure 2. Protection of One Hectare of Native Forest

Figure 3. Time Profile of Carbon in One Hectare of Managed Native Forest

Figure 4. Time Profile of Carbon From Product of One Hectare of Managed Native Forest

Figure 5. Time Profile of Total Carbon Associate with One Hectare of Managed Native Forest

Figure 6a Mesopotamia: Forest Carbon, Wood and Silvo-Pastoral Plantations

Figure 6b. Mesopotamia: Wood Products Carbon, Wood and Silvo-pastoral Plantations

Figure 7. Mesopotamia: Total Carbon in Forest Stock and Wood Products: Wood Plantations and Silvo-pastoral

Figure 8. Carbon from Mixed Species Plantations (indefinite growth, no harvests)

Figure 9a. Patagonia: Plantations and Forest Carbon

Figure 9b. Patagonia: Wood Products Carbon

Figure 10. Patagonia: Total Carbon

Figure 11. Mixed Species Plantations in Patagonia (no harvest)

APPENDICES

Appendix A Literature Review

Appendix B Technical Appendix

Appendix C and Tree Plantations: A Case Study in Argentina

iii Executive Summary and Conclusions This Report examines the possibilities of using forests as a low cost means of carbon sequestration in Argentina. The first section presents a broad overview of the current situation involving global warming and carbon noting a variety of human responses and a number of tools that might be used to mitigate the build- up of green-house-gases (GHG), the major one of which is carbon.

The second section examines the potential of forests to play a significant role in carbon mitigation. It provides estimates of how much carbon would be required to seouester the global annual increase of atmospheric carbon. Although forests are, in themselves, unlikely to sequester enough carbon to offset the entire increases, they do have the potential to be a significant contributor in a program of global mitigation. In addition, forests offer what appear to be among the more low cost of the carbon sequestration techniques. Costs of carbon sequestration using forests commonly run in the range of $2 to $10 per ton. Additionally, most applications involve using a known technology to undertaken common tasks, e.g., tree-planting. Also, forests generate other useful services, such as wild-life habitat, water protection and recreation. Finally, since forests may be planted or managed for market values in the form of industrial wood, many situations offer the possibility of having some of the costs of carbon sequestration borne voluntarily by the private sector.

The third section begins by examining the specifics of the forest and carbon situation in Argentina. An overview is provided of native forests, plantation forests, biodiversity, the role of plantations both worldwide and in Argentina and market conditions. Although industrial forest plantations are becoming important sources of the world's industrial wood supply, Argentina's role in world markets is minimal, even though the majority of domestic production is provided from plantations. By contrast, some of Argentina's neighbors, especially and , are important world-wide suppliers of industrial wood. A major disadvantage to plantation forests in Argentina is the location of most of the plantation forests, which are typically a considerable distance from the ports. The report also discusses the recent policy reforms in Argentina and their likely long-term effects. this report then turns to a investigation of the nature of subsidies for tree planting in Argentina. Although the rationale is not well articulated nor necessarily consistent in Argentine documents, it appears to be largely a version of the "infant industry" argument. References to the experience of neighboring countries such as Chile and Brazil are common. Both of these countries are now

1 important exporters of industrial wood produces produced from their plantation wood base.

The nature of tree planting subsidies in Argentina is discussed. Large areas of land have been identified as potential plantation sites. Each province is given a certain maximum level of per hectare subsidy. Most are in the range of $400-$600 per hectare, or roughly one-half of the establishment cost of around $1000 per hectare. Individuals and firms present proposals, or bids, for tree planting activities they wish to undertaken and they propose a subsidy level not greater than the maximum designated for the province. Although the system is designed to provide competitive bidding to generate low subsidy requests, most of the subsidies are at about the maximum level. Experience has also shown that the total subsidy budget is not exhausted.

The major section of the report come next. It establishes, first, the baseline scenario as the situation in which the policies of the government are not creating resource distortions. In this case the focus is on land use. Our judgment is that the only significant distortion is that created by the plantation subsidy. Next it examines alternative carbon sequestration forest related activities from the perspective of the baseline scenario. The study examines a number of carbon sequestering activities noting which are unlikely to be undertaken by the private sector without subsidies, and therefore which are potential candidates for some types of GEF funding. It is noted that if native forests were fully protected from , then substantial amounts of carbon would not be released. However, with native forest area at about 40 million hectares and much of it in private ownership, protecting all of the forest would be a daunting task. It was suggested that protecting only certain pockets of forest runs the substantial risk of simply deflecting deforestation from one area to another.

Natural is another alternative explored. However, data are scarce on this activity in Argentina, in fact there is probably little natural forest management in Argentina. Furthermore, the underlying financial returns are probably not sufficient to generate voluntary market activities of this type.

Finally, a variety of forms of plantation management are examined. These include industrial, silvo-pastoral and mixed species plantations in Mesopotamia and industrial and mixed species in Patagonia. The industrial and silvo-pastoral plantations envisage industrial wood harvests that generate financial returns associated with this activity. The mixed species plantations are not expected to be harvested nor to generate financial returns. The study notes due to lack of sufficient financial returns, all the plantations in Patagonian and the mixed species plantations in Mesopotamia are unlikely to be undertaken by the private sector without a subsidy. Thus, subsidies that result in these ypes; of activities are likely to be fully additive in that all of the carbon they sequester is likely to constitute a ne-tduna-incremenI to total carbon sequestered.

For the industrial and silvo-pastoral plantations in Mesopotamia, however, the evidence is clear that some of these will be undertaken without subsidies. Furthermore, to the extent

2 that the institutional and policy reforms remove impediments to the successful operation and provide financial incentives for plantations, a subsidy would in part merely provide rents to private investors that would undertake the planting without the subsidy. Thus, some portion of the subsidy would not be additive and would not generate the sequestration of additional incremental carbon.

This section also estimates the costs of carbon sequestration under the various scenarios noting that the costs run from as high as $21.95 per ton for the mixed species alternative to as low as $3.44 per ton for the industrial plantation. The costs to the public sector could be lower if some of the costs are borne by private sector timber growers.

The fifth section examines some other considerations and qualifications. There is also a brief discussion of the role of discounting. This points out that if the carbon benefits are not discounted, financial considerations suggest delaying mitigation activities as long as possible.

Finally, a number of recommendations are made to the GEF:

First, we find that some type of forest set-aside, including perhaps natural forest management that would prevent deforestation are conceptually attractive means to sequester carbon. However, we cannot provide axworkable approach to preventing deforestation in which we would have much cotifidence. This is due to the difficulties inherent in attempting to directly protect very large areas of native forests while preventing the deflection of deforestation to other regions. '

Second, a system of industrial forest plantation establishment is a very efficient method to sequester carbon and also generates other local environmental services. Where industrial plantations generate adequate financial returns private firms provide the useful social function of carbon sequestration without incurring any additional social costs and without requiring a subsidy. GEF subsidies in this type of region, e.g., Mesopotamia, are likely to be not fully additive since much of the subsidy simply generates rents to private planters.

Third, mixed species plantations offer the benefit of being largely additive, but they are the highest cost of the plantation systems we examined. Also, if undertaken in areas where industrial plantations are financially viable, the opportunity cost of these lands is likely to be high.

Fourth, Argentina contains very substantial land areas with the potential for rapidly .growing plantation forests but where much of this land is poorly located with respect to markets. Under current economic conditions most of these areas are unlikely to develop into forest plantations by market forces alone, due primarily to their difficult access to markets. These regions may provide the GEF with an opportunity to establish plantations in areas that are largely submarginal for commercial wood alone, but this may be socially justified when the carbon sequestration values are considered. GEF investments in these

3 areas can be expected to be almost entirely additive with respect to creating new forests not likely to exist with GEF support.

Fifth, the above considerations suggest that, if additivity is important, the GEF consider .undertaking a policy which focuses its funding subsidies in regions that are now marginal for plantation establishment, even given the current subsidy levels, and are likely to be submarginal in the face of the policy reforms. Under this approach the GEF might chose an area like Patagonia, with tree-growing and carbon sequestration potential, but an area that is below the financial threshold that is likely to make it financial viable for private investors.

4 Global Warming and Carbon

In recent years there has been an increasing concern over the prospects of a general global warming. In nature, the transfer, storage and release of carbon among the ocean, atmosphere and the terrestrial system takes place continually. However, humans are significantly impacting the carbon system through land use changes, and even more importantly, through fossil fuel use. If uncontrolled, these activities that result in the build-up of carbon and other Greenhouse Gases (GHG) in the atmosphere, are anticipated to generate global warming and associated widespread damages. The international community has begun to respond to these concerns through activities like the creation of scientific groups such as the International Panel on Climate Change (IPCC), whose job is to examine and summarize the state of the science related with this issue. Additionally, the international agreements have been forged, most notably, the Framework Convention on Climate Change (FCCC), which was signed in Rio in 1992. The FCCC commits most of the developed countries to stabilize their emission of GHGs by 2000 to their 1990 levels.

The Current Situation

There are three major nature carbon stores (or natural "sinks" for carbon stocks). These are: a) the oceans; b) the atmosphere, and c) the terrestrial system, including forests, and geological forms (e.g., including fossil fuel stores). The major source of increased atlmDspheric carbon is undoubtedly fossil fuel burning which releases CO 2 into atmosphere. The second major human source of atmospheric carbon is land use change. Changes in land use, especially from forests to cropping, release CO 2 from the destroyed and disturbed soils.

In the past, these activities were not thought to alter the basic climate system. However, measurements of the level of CO2 in the atmosphere reveal a persistent long-term upward trend. The increase of CO2, together with other greenhouse gases (GHG) is now commonly expected to result in a gradual global warming. The effects of this warming have been modeled by Global Climate Models (GCMs). Although these models are recognized to be limited in their predictive capacities, it is widely recognized that a warming would have important effects on the terrestrial system. Warming would generate what are called global externalities, that is global costs (and sometimes perhaps benefits) that are distributed far beyond the region in which the carbon release actually occurs. For example, the burning of fossil fuels in any one region would create a global impact, via the warming effect, that will have impacts on all regions. With this warming there would be, in many or perhaps most cases, an associated cost, e.g., a warming in the central agricultural regions of the US would be expected to adversely affect agricultural production and "force" changes to crops of lesser values, e.g., wheat for corn.

5 Types ofHuman Responses

Broadly, there are two types of human responses to the "threat" of climate change. Human populations can adapt to the change, or it can attempt to mitigate the change. In fact, both approaches would also certainly occur.

At one level human populations can adapt to the change (e.g., see Rosenberg et al 1988). It has been shown in agriculture, for example, that the negative effects can be reduced by changing cropping patterns, the introduction of irrigation, and so forth. For human dwellings, for example, air conditioning and insulation, and other adaptations to different climates are pervasive.

The second approach, mitigation, involves a strategy of undertaking action to try to reduce or wholly offset the warming by controlling the levels of GHGs in the atmosphere. One response aimed at mitigation has been that in 1992 most countries signed the International Framework Convention on Climate Change. This convention involves a commitment by the industrial countries, including the U.S. and Canada, to reduce their net GHG emissions in the year 2000 to the levels of 1990. For the developing countries and the countries of the former Soviet Bloc, most have committed to monitoring their GHG releases with a view toward eventual control.

Tools to Mitigate the Build-up ofAtmospheric Carbon

In concept there are two approaches to mitigating the build-up of GHG in the atmosphere: These are a) the reduction of emissions, and b) the increase capture of carbon and other GHGs. Means to reduce emissions into the atmosphere are listed and discussed briefly.

Table 1 provides and example by presenting estimates of the marginal abatement cost of carbon dioxide reduction for Denmark of various options, on a spectrum running from the largest negative costs to the highest positive costs. Negative costs apply to situations where the circumstances are such that the changes are financially desirable even without considerations of the carbon benefits. Thus, for Denmark the substitution of natural gas will generate carbon emission reduction benefits even as it provides lower costs energy. These types of activities are often know as "no regrets." By contrast, the use of "fuel cells" at the bottom of the list results in a cost of $614.3 per metric ton of carbon dioxide sequestered. Energy conservation and efficiency improvement imply lower use of energy, and especially carbon emitting fossil fuels, in order to get a given amount of energy services. Thus, new technologies allow lower energy use to provide heat, air conditioning and other power and energy services.

The approaches to mitigating atmospheric carbon are varied and include fossil fuel switching, increased use of renewable energy including solar power and, nuclear energy, the capture and disposal of CO2 from fossil fuel use energy producing facilities, reduce

6 forest clearing and land-use conversions, tree planting and , and other land- use practices can also promote carbon sequestration in the soils.

7 Table 1. Main categories of C02 reduction options and related marginal abatement cost (MAC) in Denmark.

CO, reduction option reduction MAC (%) (US$)

Connection to natural gas network 0.5 -255.7 Connection to district heating network 2.0 -100.0 Electricity conservation in households 4.8 -70.0 Increased use of combined heat & power 1.5 -62.9 Electricity conservation in services 2.8 -55.7 Conservation in industry 1.6 -40.0 Conservation in agriculture 0.4 -38.6 Combined cycle - natural gas (100 MW) 3.8 -8.6 Biogasification (1500 MW) 7.6 -4.3 Wind turbines (1800 MW) 7.0 0.0 Central natural gas comb. (4000 MW) 9.4 12.9 Solar collectors for hot water 0.2 30.0 Insulation in office buildings 0.7 81.4 Photovoltaics (800 MW) 2.9 185.7 Fuel cells (1000 MW) 1.0 614.3

Total CO, reductions 48.9

Forest Management: Mitigation Activities and Sink Enhancement

Carbon is sequestered into the tree through the process of biological growth. Although there are some differences by species, the amount of carbon is roughly tied to the biological growth of the tree. A denser tree will have a greater carbon content. Carbon is released when the tree decomposes or is burned. Conceptually, for forestry to be effective in mitigating global atmospheric carbon, the global stock of forests must increase. If there is a global increase in the stock of forest, this will also indicate that there is an increase in the stock of carbon embodied in the forest. Generally, carbon in forests soils will increase with the time period over which the area has maintained forests and will decrease in the early years after clearing. If cleared forestland is rapidly reforested, the losses will be modest. For the global forest to increase its carbon stock, the forest stock must increase.

-Also, carbon can be held captive stocks of forest products. Wood used in construction and furniture and other long-lived wood products continues to function as a carbon sink, even if the wood is separated from the forest. Short-lived products, such as , have a much shorter average period in which they continue to store carbon. Research is now being done to determine the average life-cycle of various types of wood products and hence the extent to which "wood products" in themselves constitute a significant carbon sink.

8 How Much Forest?

In order to gain a perspective as to how much forest might be required to sequester substantial portions of the carbon excess being released into the atmosphere annually, Sedjo and Solomon (1989) estimated that it would take an area roughly the size of the U.S. west of the Mississippi planted in fairly rapidly growing new forest to sequester annually an amount of carbon equivalent to that released by human activities (Figure 1). The establishment of such a forest was estimated to cost U.S. $186-$372 billion. Although costly, such expenditure levels are not unprecedented.

However, neither tree planting, nor indeed land-use activities generally can be viewed as the permanent remedy to carbon build-up in the atmosphere since there is probably some maximum forest volume that the globe can maintain. Once that level is reached, forests cannot be of further use as a carbon off-set It is best to view forests as a potential vehicle that can buy time to allow the development of permanent solutions, which are probably the widespread substitution of nonfossil fuels, e.g., solar energy.

More generally, it is not realistic to expect forests to offset the entire human generated carbon build-up. Surely, most reasonable policies would involve the use of a variety of tools. Nevertheless, forestry is a particularly attractive approach to carbon mitigation since:

a) forests have the potential to sequester large amounts of carbon; b) the technology for establishing large areas of additional forests already exists and has been tried and proven; c) forests have a number of environmental benefits aside from carbon sequestration; and d) most studies indicate that the costs of carbon sequestration using forest, at least for low levels of planting in a global context, are relatively modest.

Forest Mitigation Policies

Forest carbon mitigation policies fall into one of five categories. These are policies that:

1. increase in the standing inventory of forest and therefore sequester carbon; this approach can be subdivided further into deforestation and forest growth policies: a) Much attention has been given to the role that deforestation plays in releasing carbon into the atmosphere. By reducing the rate of deforestation and land conversion the carbon stocks will continue to remain captive in the forest biomass and thereby not contribute to carbon releases into the atmosphere. b) Also, forest plantations, forest management, may all have carbon implications. 2. increase the storage of carbon in long-lived forest products;

9 Figure 1. 465 million hectares of new closed forest, equivalent to the outlined area shown here, would be required to sequester all of the excess atmospheric carbon.

R.A, Sedjo and A.M. Solomon. 1989. pp. 105-120 in N.J. Rosenberg et al. Greenhouse Warming; Aliptomont. tint] Adnpta,ion, Ronourcea for the Future, Washington, DO. 3. substitute wood products for other material that emit more carbon; 4. substitute the utilization of biomass energy for fossil fuels, and 5. use trees for shading and windbreaks to reduce energy usage and consequent greenhouse gas emissions from the burning fossil fuels.

Table 2 provides some recent estimates of industrial forest establishment activities in various regions. Overall, forest plantations, restoration and management offer what appear to be among the more attractive means to mitigate global warming. Additionally, recent studies have estimated the costs of sequestering carbon via specific forestry activities, usually in developing countries. These include not only forest plantations, but activities and also. Some of these cost estimates are listed in tables 3 and 4. The costs listed tend to be the average costs for the particular project but can be viewed as incremental costs with respect to national or international carbon sequestration activities. Furthermore, in some cases not all the costs are included. For example, land and labor costs are sometimes ignored.

Recently, a number of more sophisticated studies for the US have begun overcome some of the limitations of the earlier studies. Moulton and Richards (1990), Adams et al. (1992) and Parks and Hardie (1994) have refined the approach of estimating the costs of establishing carbon sequestering tree plantations in a number of ways:

* Developing a cost function, rather than a simple point estimate, that estimates the rise in costs of capturing carbon associated with very large-scale tree planting. These studies recognize that large-scale investments in forests to sequester carbon would face rising costs as forests moved from lands with low productivity and/or low opportunity costs to lands with higher productivity and/or opportunity cost lands as with displacing agriculture with forestry.

* Recognizing that land had opportunity costs in the form of some type of use or rental payment

* Refining the tree plantation establishment cost estimates by recognizing differences in cost associated with location and site considerations.

* Utilizing discounting procedures.

The usual approach is to estimate an "annualized expenditure stream" by amortizing the initial establishment costs, using the appropriate discount rate over the relevant time period, and combining the amortized value with current expenditures, which include a measure of the opportunity cost of carbon. This provides an estimate of the annualized cost per ton (Richards and Stokes 1994). Using this approach Moulton and Richards (1990) developed the first rising cost function for the US by incorporating rising land rental costs into their annualized cost estimates. Table 2. Fast-Growing Industrial Plantations (circa the late 1980s)

Region/country Plantation areas (ha '000) Coniferous Non-coniferous Total North America (U.S. South) 12,000a 500 12,500

Brazil 1,600 2,300 3,900 Chile 1,140 60 1,200 Argentina 460 180 640 Venezuela 180 20 200 Mexico 60 20 80 Other 80 350 430 Latin America 3,520 2,930 6,450

Spain b 450 450 Portugal b 400 400 Europe-Iberia 3,520 2,930 6,450

Republic of South Africa 500 800 1,300 Angola 20 50 70 Congo - 40 40 Kenya 160 10 170 Zimbabwe 70 10 80 Other 550 330 880 Africa 1,300 1,240 2,540

New Zealand 1,180 20 1,200 Australia 900 60 960 Other 50 30 80 Oceania 2,130 110 2,240

Indonesia -c 100 100 China - 400 400 Other 170 170 Asia 670 670

World totals 18,950 6,300 25,250

Notes: a) The conifer plantations of the southern U.S.A are "border-line" fast-growing. b) Iberia also has up to 4 million ha of slow-growing conifers c) Indonesia has about 700,000 ha of slow-growing conifers Drawn from Bazett (1993)

12 Table 3. Cost1 Estimates of Sequestering Carbon Through Forest Projects: Selected Cases ($/ton)

REGION Tropical Temperate Borea

REGIME Agroforestry Plantation Plantation Plantation Protection source: (1) (2) (3) (4) (5)

Andrasko 3-5 3-6 0-2 (1991) Dixon et al. 4-16 6-60 2-50 3-27 1-4 (1993) Krankina and Dixon (1993) 1-7 1-8 1-3 Houghton et al. (1991) 3-12 4-37

Source: Dixon et al. (1993). 1 These costs are the average costs for the project but might be viewed as the marginal costs if large scale sequestration was being undertaken using a host of projects.

Their curve represents the "annualized costs" per ton of carbon for different volumes of carbon captured. The curve shows annual cost estimates that range from $5-$10 per ton of carbon for the first 60 million tons (about 9 million ha) increasing to $40 per ton as annual sequestration rises to 800 million tons and total land area involve approaches 130 million ha. Thus, the estimates capture the phenomenon of rising costs as additional volumes of carbon are captured as larger amounts of land are involved and higher opportunity costs are thus incurred.

The estimates of Moulton and Richards (1990) are roughly equivalent to the point estimate of Sedjo and Solomon (1988) and others for low levels of forest plantations but change substantially for higher levels of tree planting since they incorporate rising marginal costs as lands with higher opportunity costs are brought into forest plantation production. Both approaches used roughly the same assumption regarding the amount of carbon that would be sequestered per land area planted, i.e., about six tons per hectare per year.

The work of Adams et al. (1992) is similar to that of Moulton and Richards (1990) in that it estimates a rising cost function using annualized costs. The study estimates of sequestration costs are somewhat higher than Moulton and Richards (1990) being in the range of $16.30 per ton of carbon for low levels of carbon sequestration to $62 per ton of carbon for a US program that sequesters about one-half of annual US carbon emissions (roughly 750 million tons). The 1993 work of Adams et al. (1993), reported in table 4, revises the earlier cost estimates of the 1992 study upward.

13 Table 4. Establishment costs of cost-efficient practices

Forest Type/ Median $/tC Median $/ha Practices

Boreal: Natural Regeneration 5 93 (4-11)* (83-126) Reforestation 8 324 (3-27) (127-455)

Temperate: Natural Regeneration 1 9 (<1-1) (9-100) Afforestation 2 259 (<1-5) (41-444) Reforestation 6 357 (3-29) (257-911)

Tropical: Natural Regeneration 1 178 (<1-2) (106-238) Agroforestry 5 454 (2-11) (255-699) Reforestation 7 450 (3-26) (303-1183)

*Inter quartile ranges (middle 50% of observations) in parentheses Source: Turner et al. (1993), p 13.

14 Both of these studies used Birdsey's (1992) estimates of carbon sequestered in forest biomass. These estimates, however, have recently been revised, generally downward depending on the site conditions. This will lead to upward revisions in carbon sequestration costs in subsequent estimates (Richards et al. 1993).

A recent study by Parks and Hardie (1995) also estimates a rising cost curve for carbon based for a hypothetical program developed along the lines of the US Conservation Reserve Program (CRP), which is designed to encourage the planting of trees on eligible (environmentally fragile) farmlands to reduce both total agricultural output (which is in surplus) and to reduce environmental damages generated by practicing agriculture on these lands and to improve fish and wildlife habitat and is applicable to only a certain limited eligible agricultural lands. The hypothetical program uses a similar approach for carbon while limiting the size of the program budget. For the entire hypothetical program, the estimate of marginal sequestration costs increase from $10.14 per ton for 45 million tons to $82.49 per ton for roughly 120 million tons. The three sets of cost estimates appear in Table 5.

Table 5. Estimates of Marginal Cost1 of Carbon Sequestered by Tree Planting: Some Comparative Results for the U.S.

Total Carbon Sequestered (million tons per year)

45 120-140 280 420 700

MarginalCosts $/ton

Moulton/ Richards 9.00 16.57 20.69 23.24 34.73 (1990)

Adams et n.a. 18.50 25.11 37.21 95.06 al.(1993)

Parks/ Hardie 10.14 82.49 n.a. n.a. n.a. (1994)2

Source: Moulton and Richards (1990), appendix table lA; Adams et al. (1993) TABLE 1, page 79; Parks and Hardie (1994), figure 2.

lIThe costs are the "annualized expenditure stream" obtained by amortizing the establishment costs, using the appropriate discount rate over the relevant time period, and combining the amortized value with current expenditures, which include a measure of the opportunity cost of carbon, which is then divided by the annual tons of carbon sequestcred.

15 2/ Parks and Hardie identify these estimates as their "annual equivalent average" and as corresponding to the other estimatus of this table.

It is clear that the marginal cost schedule developed by Parks and Hardie shows substantially sharper increases in costs with increases in total carbon captured than that of either Moulton and Richards (1990) or Adams et al. (1993). The substantially higher costs found in the Parks and Hardie compared to these earlier studies can also be partly explained by their use of a) lower forest growth rates, b) higher opportunity costs of alternative land uses, and c) different period of capitalization over which the plantation costs are distributed.

Argentina: Carbon and Forests

In the following sections of this study we will examine the potential for forests to sequester carbon in Argentina. Estimates will be made of the long-term time profile of carbon sequestered by various forestry activities and of the costs associated with the carbon sequestration. In this study a benefit/cost framework will be applied. Sequestered carbon will be viewed as a benefit. Conceptually, carbon sequestered is a proxy for climate damage that is foregone since the specific nature of the damage function relating atmospheric carbon to environmental damages is not known. However, conformance with the guidelines of the GEF, our analysis will not attempt to value the benefits provided by carbon sequestration nor to discount carbon sequestered at some future time. Costs, however, will be discounted. Thus, in this study it is immaterial whether the carbon is sequestered in year one or year 50. However, as noted in Rosebrock (1993), since costs are discounted, there are advantage in delaying carbon sequestering investment. In a world with a positive discount rate, the longer the delay, the lower the costs. Although this may not be important to GEF projects that can not be postponed, it becomes important where investment timing discretion is allowed. Finally, much of the attention will be focused on the carbon implications of the forest activities in two future years, 2020 and 2070.

Argentine net carbon emissions were estimated to be about 30 million tons of carbon for 1990 (WRI 1994-95). This level was projected to rise 1 percent per year to 40 million tons of carbon by 2020 (Proyecto Forest AR, page 30; Borden et al. 1994). Below we will a) examine the role of forestry in the Argentine economy and b) assess the potential role of forests in the sequestration of carbon in Argentina.

Forests in Argentina

This section will discuss the situation of forests in Argentina. Forest in Argentina can be divided into two groups - native and plantation. In the following section we will examine

16 each of these forest groups with respect to its size, changes, carbon implications and relevant policies.

Native Forests

The estimates of the area of native forest in Argentina vary and a solid estimate is not available. A reliable has not been done. A recent World Bank report (World Bank 1993) estimates the number at between 35 and 45 million ha. However, the area of native forest is estimated at about 30 million ha of native forests by a government agency (table 6). An estimate by the FAO put the rate of deforestation at a very modest 0.093 percent annually (Allen and Barnes 1982). Even as the native forests have declined, plantation forests have expanded. Over the same period plantation forest area increased from about 90 ha to about 850 thousand ha currently. Thus overall we expect that in recent years the native forests have been a carbon source while plantations have been a carbon sink.

A very high proportion of Argentine forest land is in private ownership and no actual monitoring exists despite existing regulations restricting its use. Deforestation that has occurred both through a conscious effort to convert lands to agriculture and also gradually, and perhaps inadvertently, as the result of the gradual erosion of the forest due to the introduction of domestic animals, which graze and browse thus gradually converting the forest to pasture.

Table 6. Argentina: Native Forests

Parque Chaquefto 20 million Selva Misionera 1 million Selva Tulumano-Boliviana 3 million Bosques Andino-Patag6nicos 2 million Others 4 million Total 30 million

Approximately 70% in private hands and 30% public ownership.

Source: Direcci6n de Recursos Forestales Nativos, estimate.

Deforestation resulting in land conversion from forests to other uses almost always leads to the net release of carbon into the atmosphere. Where the forest is felled and burned, or gradually eroded away through animal use, carbon is released, as the biomass covering is not replaced. Although cropping initially generates some carbon losses in the soils, grazing areas generally retain the soil carbon (Brown et al 1992). In addition deforestation can endanger biodiversity. Local loss of species can occur from local deforestation. Also,

17 losses can occur for endemic species. Large scale deforestation can result in species losses as rationalized by the island biodiversity construct.

Assuming a forest area of 40 million ha and the estimate of deforestation occurring at almost 0.01 percent annually, the annual amount of deforestation is estimated at about 40,000 ha. Although the native forest of Argentine is quite diverse, a reasonable estimate of biomass carbon is 50 tons per ha (Wimjum et al. 1992). If the forest biomass does not substitute for fossil fuels and was not converted into long-lived wood products, the carbon released annually through the reduction in native forest in Argentina would be estimated at about 2 million tons.

Plantation Forests

Although most of the plantation forest has been established in eastern Argentina, largely in Mesopotamia, plantation forests appear to some extent in most regions (Table 7). Furthermore, as shown in Table 8, large land areas have been judged as suitable for the establishment of plantation forests. Most plantations that have been established use exotic, non-native species, particularly pine from North and Central America, and from Australia. Some poplar species are also planted. Very few native species have been established in plantations. The few that have been established are part of ongoing research projects. The only native species commonly used in plantations is araucaria, which are limited to a unique range and specialized site conditions. Araucaria plantation occur almost exclusively in Misiones.

Table 7. Plantation Forests: By Region and Type

Mesopotamia, Patagonia NW of A. Rest Total Delta, B.A.

Total (Ha) Eucalyptus 220,000 0 15,000 15,000 250,000 Connifers 300,000 30,000 8,000 60,000 398,000 Salicaceas 105,000 25,000 0 20,000 150,000 Total 625,000 55,000 23,000 95,000 798,000

Annual Plantation(Ha) Eucalyptus 4,425 0 240 95 4,760 ^Connifers 10,300 2,555 415 465 13,735 Salicaceas 1,480 0 0 565 2,045 Total 16,205 2,555 655 1,125 20,540

Source: Technical Unit, Project Forest AR, SAGyP, 1994.

18 In the mid 1950s about 10 percent of the timber harvest was from plantations. Today, approximately 70 percent of the industrial wood requirements of Argentina are met from the 4 percent of forests that are plantations (Crosson 1994). from native forests continues to provide a substantial but declining portion of Argentine's industrial wood output.

Table 8. Lands Suitable for Plantation Forests

Region Total Area Suitable Lands Protected Areas Mesopotamia Media 21,150,000 ha 4,550,000 ha 1,258,743 ha Buenos Aires 36,150,000 ha 8,825,000 ha 66,706 ha Paaon Andina 23,125,000 ha 3,934,000 ha 1,467,111 ha Total 80,425,000 ha 17,309,000 ha 2,792,560 ha

Source: Project Forest AR (SAGyP (1994c in Appendix A).

Biodiversity

The maintenance of biodiversity is now recognized as an important global externality. The theory of island biogeography makes the extent of forest biodiversity importantly a function of the area of the habitat. In Argentina risks to native biodiversity are probably most closely tied to losses of native forest habitat. Plantation forests, however, probably pose little risk to biodiversity since forests are rarely felled to clear land for plantation forests. Most plantations are established on lands that had previously been in agriculture. Where the lands had previously been in crops, the conversion to plantation forest expands the opportunities for more complex habitats, especially in the understory areas.2 Where plantations are established on natural grasslands, which have been previously used for grazing, the area converted to forest is typically only a very small fraction of the total area of grasslands, thus typically generating no threat to grasslands biodiversity while providing forest habitat that can enrich total biodiversity.

The Role of Plantations Worldwide and in Argentina

'The past several decades has seen the role of newly established plantation forests as a global supply source of industrial wood increased dramatically, almost doubling its share

2 Although the conventional wisdom suggests that plantation forests do not support much biological diversity, recent work by Lugo et al. 1993 suggest that this is not correct and that the understory of plantation forests often provide a habitat that supports a large amount of biodiversity.

19 in the past one and one-half decades. The major suppliers have been countries with favorable growing conditions, relatively stable economic and political conditions and low cost access to world markets. Major new sources of supply include New Zealand, Chile and Brazil (Sedjo 1983 and 1995).

Thus far, Argentine has not been a major player as a world wood supplier. Although in recent years it has increased substantially its production of industrial wood, most of this production is for the domestic market. In recent years Argentina has increased its exports of logs, as the demand for eucalyptus logs rose in the Spanish market. However, by 1994 this market was reported to have essentially disappeared, due apparently to the severe economic difficulties in Spain. More generally, although in the latter part of the 1980s saw Argentina's wood, pulp and paper exports increase, the early 1990s saw a substantial decline in this trend (FAO 1994).

In this context it should be noted that the level of plantation establishment in Argentina, about 21,000 ha annually, is modest. By comparison, Chile and New Zealand, both much smaller countries in terms of area, are each planting well over 100 thousand ha annually and the US has been planting about 1 million ha annually in recent years. Thus, Argentina is not a region with a vast amount of investment in tree plantations. Rather, it is a region which has a huge biological potential but one in which the economics have yet to be established as unambiguously favorable, due in large part to unfavorable internal locational and transport situations. Tree plantations in Argentina are still in their fledgling stages, and the planting that occurs is quite modest in scope and tentative (see Appendix A).

A major difficulty confronting the Argentina wood products industry are the large distances between the major wood producing regions and both domestic markets and the ports providing access to international markets. Not only are the transport distances large, but the infrastructure is poorly developed with expensive and unreliable railroads, water ways not suitable for transport, and the roads system merely adequate. These location factors are particularly true for the Mesopotamian region, the region in which the vast majority of the plantation forests have been established. For example, is approximately 1000 km from the nearest Argentine port and major domestic market of Buenos Aires. In fact, the province of Misiones is substantially closer to Brazilian ports than to those in Argentina. However, no significant wood flows are reported going to or through Brazil. Despite major rivers, most of the waterways are not usable by transport vessels. Additionally, the railway system is inefficient and uncertain. Thus, the relatively low establishment costs and the biological advantages of climate and soils that give rapid tree growth are largely or wholly offset by poor access to markets imparted by location and a weak transport network.

There are now reports of discussions concerning the possibility of wood resource exports from Misiones to mills in Brazil as the result of a new "free trade' agreement among some South American countries. However, the importance of such a wood flow remains to be seen. Apparently, each country will have a large list of excluded items that will not be eligible for unrestricted trade and wood resources could be among the excluded items.

20 Market Conditions

In addition to the biological and locational advantages and disadvantages, the viability of any commercial tree plantation must be considered in the context of the world market for industrial wood. Industrial wood prices tend to move with the business cycle. Often solidwood prices lead in the cycle followed by pulpwood prices. Since the early 1950s, industrial wood real prices have shown little long-term trend, although they have exhibited a great deal of volatility. During the decade of the 1970s, industrial wood real prices, along with that of most natural resources, exhibited strong upward movement. However, prices of most natural resource commodities, including industrial wood, collapsed in the worldwide economic recession of the early 1980s. The decade of the 1980s and early 1990s was one of relatively stable international wood prices.

Beginning in late 1992 and persisting until today, industrial wood real prices have once again experienced a period of ascendancy, first with logs and solidwood and more recently with pulpwood. At its peak, log and prices in 1993 and 1994 more than doubled their level of the several preceding years. An analysts who believes that the recent price rises represent a fundamental change from the long-term trend would probably argue that the rising world market price for industrial wood will more than compensate the Argentine wood grower for the lose of the subsidy. We would also accept this assessment if we believed thatpast 2 years representeda fundamental change for the world's industrial wood prices.

However, it is our belief that the current price rises be simply a business cycle phenomenon, as has been the case in the past, and that the current price rises cannot be viewed as permanent.? In recent months the price of lumber and other wood resources has declined substantially, undoing more than 50 percent of its peak run-up of the past two and one-half years. Pulpwood prices, which rose with a lag of perhaps one year after solidwood, are still very strong. However, again we believe that what is occurring is simply the actions of the periodic business cycle and not some fundamental secular change. This analysis and assessment assumes that the long-term trend in real prices will continue to remain as in the 1950-1990 period, i.e., comparatively flat with at most a very modest long-term rise.

Subsidiesfor Tree Plantingin Argentina

The Rationale for Tree Planting Subsidies in Argentina

'Pulpwood and log prices as of November 1995 have shown weakness and are well below their recent highs.

21 One can identify three rationales for the tree planting subsidy 4 . First, the "infant industry" argument or variants of it which argue that for industries with long gestations periods some type of government assistance may be appropriate during the industry's infancy. Such are policy has been pursued by other countries that have successfully developed a commercial wood industry starting from a situation of poor forest resources but high potential based on biological conditions, etc.

Second, tree planting is often justified on the bases of the environmental services that the forest eventually provides. Although these services are typically not transacted, they are nevertheless socially important. Crosson et al. (1994) demonstrated that plantation forests in Argentina generate substantial environmental services.

Finally, one can separate from environmental services generally the global environmental services that forests can provide in the form of carbon sequestration benefits. Below we show that plantations in Argentina can provide substantial amounts of these services at costs which are low compared to international alternatives.

The Nature of Tree Planting Subsidies

As is common throughout South America and elsewhere, subsidies for tree planting have been available in Argentina for many years and have provided the financial basis for most of the forest plantation stock that now exist. In the 1989-91 period the subsidies were removed. Although specific data are not available, the consensus opinion is that planting rates became very small.

The rationale for forest plantations tree-planting subsidies, although not often articulated in these terms, appears to be an "infant industry" type of argument. This appears to be the case not only in Argentina, but also throughout South America and also in countries like New Zealand.s The argument is that a country with favorable growing conditions needs assistance in bridging the period between planting and harvesting. In addition, substantial investment is needed to provide efficient processing. Thus, there is a role for subsidies in starting this long-term process. The experience has been that after an extended period, usually after the country has acquired substantial processing capacity and become a force in world markets, the planting subsidies are withdrawn. Countries which have recently withdrawn some or all of their tree-planting subsidies include New Zealand, Chile and Brazil

In addition, tree-planting subsidies are often partly justified by their generation of local environmental externalities. Plantation forests are recognized as providing water-shed

The purpose of this section is not to defend subsidies to tree plantations but simply to discuss some of the arguments often raised. In many cases a number of different arguments are raised as the rationale for the policy without a clear indication of which one provided the bases for the countriy's subsidy policy.

SIt should be noted that many countries that initially had tree planting subsidies have discontinued them, including New Zealand.

22 benefits, erosion control, creation of certain wildlife habitat, as well as carbon sequestration benefits (see Crosson et al. 1994).

Argentina currently has a system whereby the central governmental provides plantation establishment subsidies. Currently subsidies are available in 15 of the 23 provinces, on lands designated by the Secretaria de Agricultura as suitable for tree plantations. The land area available to be subsidized is determined by a host of factors including the absence of native forests, soil quality and so forth. Subsidies are provided on the basis of area planted and vary by province with a predetermined maximum are available. A separate subsidy payment schedule is provided for irrigated tree planting projects in arid regions but will not be discussed further in this paper.

The level of the regional plantation subsidies is based on estimates of subsidy payments needed to equalize financial returns across regions (see table 9). However, the preponderance of plantation activities in a few regions suggests that the subsidies do not equalize financial opportunities. Discussion with government officials suggest that the actual focus of the subsidies is strongly weighted toward equalization of planting establishment costs, with little consideration given to location of markets and rate of tree growth (and thus the discount rate). In practice, almost 50 percent of the subsidized planting occurs in the province Misiones and 90 percent in just four provinces.

The lands suitable for plantation forestry as determined by the government were identified in table 8. Maps identify precisely the eligible areas, some of which are quite large, being order of magnitudes greater than the area of plantation establishment for any given year. For example, almost one-half of Misiones is eligible, large parts of Corrientes and Entre Rios are eligible, as well as large areas in Neuquen, Tucuman and other regions with relatively modest current planting activities. In short, the land area eligible for subsidy is many times greater than the 20,000 ha of subsidized annual plantings that have occurred in the last couple of years.

The current program calls for the subsidy to be paid 18 months after the project is authorized, and after establishment has been successfully accomplished. All of the funds are said to be used for the establishment of new plantations, although a definitive policy regarding the replanting of a previously harvested plantation has not yet been made. The current system began in 1992 with a limit of 500 ha per agent per year. This limit has been increased to the current maximum of 700 ha per agent per year.

Table 9. Maximum Payments for Plantation Establishment ($/ha)

Jurisdiction $/Ha

Buenos Aires 410 Cordoba 410

23 Corrientes 430 Chubut 460 Delta 610 Entre Rios 430 Jujuy 510 La Pampa 410 Mendoza - Misiones 610 Neuqu6n 460 Rio Negro 460 Salta 510 Santa F 430 Santiago del Estero - TucumAn 510

Source Regimen de Fromoci6n de Plantaciones Forestales 1994. Ministerio de Economfa y Obras y Servicios. Annex IIIV.

The amount of the subsidy varies by province and depending upon whether irrigation is required, as in some locations in more arid regions (see table 9). For un-irrigated plantations, which make up over 95% of the subsidized area, the value of the subsidy goes from a maximum of $610 pesos per ha, in Misiones and the Delta, to a low of $410 in and La Pampa. Corrientes and Entre Rios have a subsidy of $430, Neuquen and Rio Negro in Patagonia have subsidies of up to $460 per ha. There is a limit of 700 ha that can received a subsidy for each economic agent per year. The funds available for the subsidy are $20 million annually. However, the annual draw on these funds is only about $12 million.

Finally, it should be noted that some provinces also have tree planting subsidy systems of their own. Although there seem to be little detailed knowledge of these systems or their prevalence within the central government, some provinces did offer substantial additional subsidies beyond those offered by the central government Neuquen, for example, had a quasi-governmental corporation (85% owned by the province), which had an annual budget of about $1.5 million to establish tree plantations. This corporation, which has been planting about 3000 ha in recent years, also collects the central government subsidy for some of its establishments. Additionally, the provincial forestry service also is involved in plantation tree planting.

Bidding for Subsidies

The government has put in place an arrangement whereby it accepts bids (called offers) from various agents whereby they will establish tree plantations in return for subsidies. The agents are required to provide details of their plans, such as location, size, species and so forth The concept is that the government will chose the low cost subsidy offers thereby

24 allocating its scarce resources to the most efficient operations and planting the maximum area for a given funding. However, for political reasons, regional distributional factors also need to be considered.

Last year, 1993, a total of 21,000 ha of subsidized plantation offers were accepted for only $12 million, well less than the $20 million available for the plantation activity. As shown in table 10, almost one-half of the plantation area was in Misiones, with 3700 ha in Corrientes and about 2000 ha in Patagonia. It is believed that relatively few tree plantations are established without the subsidies, although, as noted, any planting over 700 ha per operations would not be eligible for the subsidy. Although the precise nationwide plantation establishment figures are not known, total plantation establishment in 1993 was estimated at about 25,000 by government officials to whom we spoke.

The evidence suggests that the bidding system for the subsidies is not particularly effective. In practice, according to government officials, all offers that meet the technical requirements are accepted. Also, almost all of the offer prices that are acceptable are approximately at the ceiling subsidy price. Few offers come in substantially below the ceiling price. Furthermore, the total funds available for subsidies exceed that demand for subsidies at the existing subsidy payment prices. A substantial surplus of subsidy monies, $8 million, remains unclaimed. These features indicated that the limit on the area of additional lands planted in forest each year is not due to the lack of availability of funds, but by the lack of offers under the subsidy payment schedule. Thus, competition for the subsidy at the existing funding levels is inadequate to exhaust the funding available. In total, these findings suggest: a) little desire by agents to expand plantation establishment beyond current levels for payments at or below the existing subsidy ceilings, and b) the bidding system adapts to the regional mix of offers made and does not provide an government directed subsidy allocation device. Finally, there is the question of possible collusion. Since there are approximately a thousand offers from around the nation, effective collusion appears unlikely, at least a the national level. However, there is some evidence of collusion, or cooperation, occurring at the local level however, it is unlikely to effect the bid price since the surplus budget allows funds to be reallocated to meet additional offers.

In summary, the fact that the bids are almost all at the ceiling price and that additional subsidy funds remain unclaimed suggests that plantations are being established up to the point where no rents remain at the margin. If additional rents were available, one

Table 10. Tree Plantation Establishment by Region, 1993-1111194

Region hectares

Buenos Aires 1,222.08 Catamarca 9.70 Cordoba 158.00

25 Corrientes 3,704.03 Chubut 497.20 Entre Rios 721.00 Formosa 12.90 Jujuy 405.00 La Pampa 23.38 Mendoza 564.49 Misiones 10,027.27 Neuquen 1,734.47 Rio Negro 268.48 Salta 250.05 San Juan 10.70 San Luis 4.50 Santa Cruz 35.98 Santa Fe 312.00 Sgo. del Estero 47.50 Tucuman 96.00 Delta Bonaerense 1,175.00 Delta Entreriano 32.00

Total 21,311.73

Source: Provided by the Direccion de Producci6n Forestal

would expect to see additional offers at the ceiling price and more of the subsidy funds exhausted. Also, if rents remained and subsidy funds were exhausted, one would expect substantial numbers of offers below the ceiling. Neither of these situations are currently being experienced.

Commercial Forest Plantations in Argentina

Commercial forest plantations in Argentina not only have great advantages but also substantial disadvantages when compared with production elsewhere. The advantages are found in the favorable biological conditions that result in rapid growth for plantation forests and in the large expanses of suitable land with low opportunity costs and therefor available at low prices. The disadvantages are first in the impediments to efficient low cost transportation and labor that are the results of distortions in the Argentine economy resulting from poorly conceived policies. The second set of impediments are the locational problems associated with the location of plantations vis a vis both domestic and international markets. Even with proper policies, most of Argentina's forest plantations -are far from both local markets and from ports. Tree planting in Mesopotamia is located far from both the major domestic market of Buenos Aires and surrounding ports, and planting in Patagonia is even farther from major domestic and usable ports. The Bank's 'Forest Sector Review" notes that Argentina's favorable biological conditions are offset by locational and transport infrastructure and concludes that "it becomes clear that a substantial gap exists in Argentina between the actual level of commercial forest production and growth and the potential level."

26 When comparing plantation forestry in Argentina with that elsewhere, the Bank's "Review" notes that Argentina planted far less forest than Brazil, or even than Chile, despite Chile's much smaller area. Countries like Chile, Brazil and New Zealand, three countries that have been very successful with commercial forest industries, have had very favorable biological tree-growing conditions, generally favorable policy regimes and superior access to both domestic and international markets. Whereas Chile, Brazil and New Zealand have most of their resource near international ports, most of the Argentinean plantations are located far from both ports and major domestic markets. However, in Argentina there does appear to be adequate land near ports to support an industry oriented toward international markets.6

Although some of these disadvantages are inherent, many are the result of policy. Sectors negatively impacted by perverse domestic policies include the ports, transport and labor.7 In recent years the policy distortions that have handicapped forest plantations in Argentina have been offset to some degree by the plantation subsidy. The subsidy payment in Argentina constitutes a payment of between 50% and 80% of the establishment costs of a plantation, and perhaps higher, depending upon the region and the conditions of the specific site. Analysis undertaken by the Secretaria de Agricultura indicates that the real, inflation adjusted, IRR of plantations in Argentina without a subsidy is in the range of 4.4 - 7.4 percent (see Appendix A, table 3). The rate of return on dollar time deposits in banks is currently about 7 percent," or about 4-5 percent real. The subsidies in place currently rise the expected IRR to an inflation adjusted 10-12 percent level. This level does not appear to be excessive considering the risks, biological, market and perhaps political, associated with plantation establishment.

As noted earlier, the fact that there are surplus subsidy funds left unclaimed suggests that investors are investing up to the margin where the expected returns are equated with the plantation costs, including the subsidy. This suggests that increases in the area of plantation establishment would require either higher subsidies, an expected substantial improved assessment of future markets and prices or improved financial prospects by virtue of reforms in domestic policies and infrastructure.

In very recent years Argentina begun to undertake serious reforms intended to remove the policy created distortions in its economy and replace it with a relatively free market approach. The Forest Sector Review documents some of the market oriented reforms that are currently underway in Argentina.9 These reforms suggest the rationalization of the market, the removal of many of the policy impediments, and the potential for financial gains for plantations.

' For example, parts of southwestern Buenos Aires province appear to have low cost land, good growing conditions and access to a major port. 'The Forest Sector Review states that "high transportation costs have also been among the critical factors hampering the development of commercial forestry" as well as labor market imperfections" (page iii). 2 In February 1995. 'These include reforms of various types in the ports, transport sector and labor sector.

27 Policy Alternatives From the The Base Line Situation

A baseline situation involves the conceptual exercise of the removal of all policy-generated distortions impacting land use in Argentina. We begin by establishing a "baseline" which shows what the allocation of natural resources would be over the coming years in the presence of an optimal policy regime for Argentina. Such a regime would involve the absence of policy-generated distortions.

After establishing this baseline, all proposed actions to sequester carbon are evaluated by assessing the degree to which they sequester carbon relative to the baseline and their cost effectiveness relative to other options evaluated and comparing their effects on biodiversity. We recognize that an optimal policy regime for Argentina need not necessarily be a global optimal.

Changes Required for the Baseline Scenario in Argentina

Our investigation of policies of Argentina indicates that, given some recent reforms, there now exist relatively few central government policies that would significantly distort land use.1o To our knowledge there are no major agricultural subsidies or taxes that would significantly distort land use. Thus, the areas of land put into cattle and crops appear to reflect the economic optimal level from the Argentine perspective. This would apply also the current levels of deforestation of the nature forest.

The major land use distortion generated by central government policy is found in the subsidy given for the establishment of tree plantations." This subsidy, as discussed in this paper, involves payments for the establishment of tree plantations, which vary by province (table 5). Thus, the existing plantation subsidy policy can be expected to skew investments towards excessive non optimal levels of establishment of plantation forests. Our baseline scenario is that situation in which the plantation subsidies had been removed in the context of an economy in which the aforementioned policy reforms had also been undertaken.

'a This assessment is consistent with that of the Bank as articulated in the Forest Sector Review (Report No. 11833-AR, dated April 26, 1993). u This picture, however, is complicated by policies at the provincial level. We do not know the range of provincial subsidies and other distortions and indeed officials in the central government had little knowledge of provincial distortions. However, in the case of the province of Neuquen there existed both a quasi-provincial tree planting corporation, which received funding from the province and a provincial forestry unit, which was involved in plantation establishment. However, since the quasi-provincial corporation received subsidy payments from the central government, it is clear that the removal of central government subsidies would go a substantial way toward removing the land use distortions.

28 The institution of the baseline scenario conditions would be expected to have two important effects. First, the elimination of the subsidy would substantially reduce the level of tree planting and plantation establishment throughout Argentina, other things being equaL In itself, the removal of the subsidy would reduce the internal rate of return (IRR) of the plantation project from the current 8 to 12 percent to 4 to 6 percent, or roughly by one-half. The existence of unclaimed subsidy funds indicates that investors are fully invested in plantations given the incentives, given current costs, subsidies and prospects, it appears likely that the absence of the subsidy would result in significant declines in private tree plantation investments. Tree planting would probably almost cease entirely in the Patagonia region as, in the absence of subsidies, few if any plantation activities are likely to be financially promising. In the regions closer to markets the impact is likely to be much smaller, since it is clear that some commercial planting would continue regardless of the subsidy. In addition, some rationalization in the location of new plantations is likely to occur since the distorting system of varying subsidies by region would be eliminated.

Second, the implementation of substantial reforms would provide an environment in which Argentina's advantages in tree growing would be revealed. In addition to the removal of subsidies discussed above, the reforms would involve the removal of many of the impediments to the transport and the marketing of wood that have raised producer costs including the high costs of utilizing the port facilities, the transport sector and the labor sector. If these reforms are successfully implemented, the plantation sector (as well as the overall economy) would be an expected beneficiary as market forces would take advantage of Argentina's inherent advantages in tree growing. The effect of policy reform, by itself, should reduce costs and promote the establishment of commercial plantations in locations that are economically efficient.

Opportunities to Sequester Carbon in Forests

The alternative forest management policies examined are:

1) Protection of native forests

2) Natural native forest management

3) Plantations in the Mesopotamia Region a) industrial b) silvo-pastoral c) mixed species

4) Plantations in Patagonia a) industrial b) mixed species

29 Protection of Native Forests

As we noted above the area of native forest in Argentina is not well documented due to the absence of a forest inventory. But the area is estimated to be between 30 and 45 million ha. For this exercise we will use the estimate of 40 million ha of native forests. The current rate of deforestation of the Argentina native forest has been estimated at about 0.01 percent (see Allen and Barnes 1982). These data generate a deforestation estimate of about 40,000 ha annually. Using an estimate that the average native forest contains about 50 tons of carbon per ha (Brown et al. 1992), the estimated level of deforestation suggests the annual release of about 2 million tons of carbon. This is about 6.7 percent of the total carbon releases estimated at 30 million tons annually (Proyecto Forest AR, page 30). A project that could eliminate the deterioration and conversion of all native forests would reduce emissions by 2 million tons annually.

Figure 2 shows the effect of successful protection of a ha of native forest If the native forest is successfully protected, the carbon would continue indefinitely in its sequestered state. We might note that set-asides in themselves do not guarantee that carbon is saved since providing protection of one site may simply deflect deforestation activities to another site. Although this may not be too critical if sites have unique features to be preserved, carbon releases would occur from any deforested site.

We have estimated that currently there are some 2 million tons of carbon being released annually through deforestation in Argentina. Many of our estimates that follow of the cost of sequestering carbon are below $6 per ton of carbon sequestered. Using this benchmark suggests that forest stabilization in Argentine should cost no more than about $6 or lower per ton of carbon saved from release. For 2 million tons this would provide about $12 million dollars or about 30 cents per ha of native forest.

Figure 2. Protection of One Hectare of Native Forest

Carbon (ons/Ha) ,sI 1 I 1

50

I I I I I I I I

-10 0 10 time

30 Natural Forest Management

Most of these lands are under private ownership and, as noted, appear to be utilized for a mix of logging and livestock grazing, with some of the land gradually being converted from forest to grazing lands. Unlike other parts of the world where logging occurs on government forests and therefore involves a degree of monitoring, in Argentine the logging occurs on private lands, widely dispersed largely in what might be characterized as a frontier, where there is little monitoring of forestry and where monitoring is likely to be difficult and costly. Furthermore, we were unable to find much information on or interest in these forestlands within the central government.

The World Bank (1993) estimates that the area of native forest in which natural forest management could be practiced is roughly 15 million ha. In recent years the harvest from native forests is estimated at about 7.5 million cubic meters, or roughly 2 cubic meters annually. Harvests of this magnitude, about 2 cubic meters per ha per year, are probably close to being within the sustainable yield potential of these forests and thus sustainable indefinitely with proper management, provided that the lands remain in forest

One approach to maintaining the integrity of the forest and thereby maintaining the carbon sink is through the use of natural forest management activities which allow selective logging harvests from the forest while maintaining their structure and sustainability. The viability of natural forest management in natural forest systems, especially in the tropics or other areas where a great deal of species heterogenity exists, has been somewhat controversial. While there appears to be a consensus that such management is technically feasible, it is also clear that in many (perhaps most) locations the financial returns often don't justify this type of land use.

In Argentina there appears to be little practice of natural forest management. This almost certainly reflects the poor financial returns likely to be generated by natural forest management in Argentine native forests. This current situation, however, represents the economically efficient "base line" situation with no policies that seriously distort resource allocation.

Nevertheless, the environmental benefits may be adequate to make sustainable natural forest management socially desirable. One option might be a subsidy for natural forest management that would increase the returns enough to justify the practice and therefore perpetuate the maintenance of that forest carbon sink.

A World Bank Study of the Indonesian forest sector (WB 1992) examined the implications of sustainable natural tropical forest management when the valued outputs included carbon sequestration as well as financial returns from timber. The study found that while logging reduces the net social returns by releasing carbon, the social losses are

31 small if regeneration and sustainability occur. By contrast, forest clearing without concern for future harvest may generate financial returns, but the social cost would be high in terms of the loss of the carbon sink and other environmental benefits.

For Argentina, it is very likely the case that the financial returns are inadequate to justify sustainable natural forest management. Thus, sustainable natural forest management in Argentina would almost surely require a subsidy. The carbon implications of such management depend upon the assumption of its alternative state. If natural management prevents deforestation, the benefits consist of both maintaining the forest and from carbon captured in the long-lived wood products.

The effects on carbon sequestration of applying native forest management to a ha of native forest are presented in figures 3 and 4. Figure 3 shows that the application of natural forest management in the form of a 50 year selective harvest cycle would be initially to reduce the carbon stock in the forest by 20 tons per ha, but over the 70 year regeneration cycle regrowth would eliminate that reduction. Furthermore, to the extent that the harvested timber found its way into long-lived wood products, an additional stock of carbon would be created. The case of a 50 year decay cycle is presented in Figure 4. Figure 5 combines Figures 3 and 4 to given a time profile of total carbon.

32 Figure 3. Time Profile of Carbon in One Hectare of Managed Native Forest

Carbon in Forest tTons/Ha) 50

45-

30 25 5 75 100 125 15O I I f i t Figure 4. Time Profile2 of Carbon From Wood Product of One Hectare of Managed Native Forest

CaLrbon in Wood Products (Tons/Na)

4 0 25 50 75 100 125 150

I I71

03

Fiur 4 lm PofleofCrbn ro oo Podcto Oe -lctr o Mnae Figure 5. Time Profile of Total Carbon Associate with One Hectare of Managed Native Forest

Total Carbon (Tons/Ha)

48 SO- 46

44

42

40

381

* 25 50 75 100 125 150

Plantations

Forest plantations have been seen to offer a substantial potential to sequester carbon. In the following sections we examine their carbon sequestering potential under various conditions. Variations on these alternatives are examined in Appendix B.

First plantations are examined in the Mesopotamia Region. Three alternative types of plantations are examined. These are a) industrial, b) silvo-pastoral, and c) mixed-species. In reality, the knowledge base associated with these varies considerably. The projections and cost estimates for the industrial plantations rest on the most complete empirical information, that for the silvicultural operations is based on somewhat less information, while the knowledge base for the mixed-species plantations is very modest since these types of plantations are now still confined to limited experimental plots. Additionally, the potential of plantations in Patagonia is examined.

The long-term carbon and cost implications of alternative forest plantation and management regimes examined include: a) the establishment of an even aged regulated forest from which the harvest will equal the net growth; b) the establishment of a forest over a five year period, reflecting a five-year grant by the GEF;

34 Carbon and Cost Implications of An Even-Aged Regulated Forest

The current rate of plantation establishment is about 20,000 ha per year. Below we examine some of the carbon sequestration implications of the continuation of that planting rate for 25 years, until the year 2020, at which time a "stylized" fully regulated even-aged forest has been created. This forest could result from any set of conditions that would generated the continuation of the current planting rates. In this case we treat the plantation as being generated by private sector investments over the 20 year period.

The regional focus of this exercise is the Mesopotamia region, which has very favorable tree growing conditions and can readily generate substantial stocks of forest biomass and thus associated carbon sequestration. If there were few industrial tree plantations being established in Argentina, as in the baseline case, the Mesopotamia region would certainly be considered for the establishment of new plantations. The scenario that follows assumes that GEF funding would generate a time path of plantations similar to that currently underway.

Figure 6a presents a stylized assessment of the results of a continuation of the current plantation establishment activity for 25 years until the year 2020. In the figure we assume that 20,000 ha of new plantation are established each year for 25 years, for a total of 500,000 ha in the year 2020. At that point the first harvest is made (thus there is a rotation of 25 years). It is assumed that each harvest it followed by the replanting of the area just harvested. In this context the result of this management scheme will be what call an even-aged regulated forest, where annual harvest equals annual growth. Since the forest stock is stable, the carbon sequestered within the forest will be essentially stable. (It can be argued that the forest soil carbon will continue to increase except where recent harvests have occurred where some carbon releases would be experienced. We treat these two factors as approximately offsetting.) In addition, the net growth will now be harvested annually and wood products produced. Assuming that one-third of the harvested volume goes into long-lived wood products with a straight line decay function, a stock of carbon will accumulate in long-lived wood products (Figure 6b). Given the decay function this stock will move to a steady state maximum in the year 2070, after which time it will stabilize as will its carbon stock. Thus, in the long-term two steady-state carbon stocks are created (Figure 7). This first is the carbon captured in the forest, which reaches is steady-state maximum in 2020 and maintains that carbon stock indefinitely thereafter. The second is the carbon in the steady-state stock of long-lived wood products, which reaches its steady state in the year 2070. After 2070 the stock of carbon in the forest/products system remains stable.

35 Figure 6a Mesopotamia: Forest Carbon, Wood and Silvo-Pastoral Plantations

Carbon in Forest

3.5 107

7 11 3. 10

7 2.5 10

2. 10

1.5 10 I 7 II

1. 10

6 1. 10:

2000 2020 2040 2060 2080 2100

Figure 6b. Mesopotamia: Wood Products Carbon, Wood and Silvo-pastoral Plantations

Carbon in Wood Products I I 7 2. 101.50

1. 10

5.10

_ _ I _ _ I _ 1_I

2000 2020 2040 2060 2080 2100

36 Figure 7. Mesopotamia: Total Carbon in Forest Stock and Wood Products: Wood Plantations and Silvo-pastoral

2. 10 7 002 4. 10 000 ~j

7 I

7 1. 10 02.0 I2

2000 2020 2040 2050 2080 210

Source: See Appendix B.

Cost Implications of a Plantation in Mesopotamia

This section examines the carbon implications of a continuation of the stylized analysis of current rate of plantation establishment as discussed above. For each year in which 20,000 ha of new plantation is established, that forest can be expected to generate an average of 104,000 tons of carbon annually in the industrial wood (20 m3/ha/yr x .26 tons/M3 x 20,000 ha) for 25 years or accumulating about 2.6 million tons of carbon over the 25 year growth period before harvest. If current plantation establishment rates continue for the 25 years until 2020, the cumulative for the 25 year period would be 500,000 ha of new forest area capturing 27.5 million tons of carbon in the industrial wood on the stand (note that what has been created is an even-aged forest with all but one of the age cohorts of which are less thai 25 years old) and roughly 0.4 more in the branches, roots, litter and soil carbon for a total of about 36 million tons of carbon. This represents the carbon capture in the steady-state even-aged forest established over the period 1995- 2020. If we now assume that the new planting would cease after 2020, but that the newly established forest would be annually harvested, in accordance with the 25 year rotations and replanted, the forest would create a steady state sink of about 36 million tons of carbon by 2020, i.e., the forest would be stabilized at a size that would maintain the carbon stock of 36 million tons continuously into the future. Note that the carbon sequester in this forest is roughly equal to the annual projected net carbon emissions of Argentina in 2020 (SAGyP 1994, page 30).

37 Assuming that the establishment costs have a present value of $1000 in the initial year, the total cost for the 20,000 ha established each year would be $20 million. Using a 10 percent discount rate and assuming that 20,000 ha would be replanted indefinitely, the PV of the 500,000 ha of plantations in year 1995 would be about $200 million. Thus for $200 million a total of 42 million tons of carbon would be sequestered by the year 2020 indefinitely (forever). The average cost per ton of carbon sequester forever would be would be about $5.56.

This is not the end of the carbon sequestration, however. As noted above, such a forest could produce roughly 10 million m3 of industrial wood annually from incremental growth (thus not reducing its total stock of timber or carbon) and thereby create an additional carbon sink. To the extent that the harvested wood were used for long-lived wood products, an additional sink would be created in the stock of long-lived wood products. Assuming that one-third of the industrial wood harvested from the Argentina forest were used in the long-lived wood products, 866,667 tons of additional carbon would be sequestered annually (i.e., 1/3 of 2.6 million tons), once harvesting from the new plantations had begun (in 2020). Assuming a straight line decay function whereby all of the carbon in the solid wood were released after 50 years (the wood would all be destroyed), a new wood products carbon sink would have been created that would reach a steady state carbon stock of about 21.5 million tons after 50 years.

Thus by the year 2070 this steady state forest and the steady state wood products stock would reach their joint steady state maximum in which the system would be sequestrating 58.12 million tons of carbon indefinitely. This would have been "purchased" for a present value of $200 million in year 1995 or for an average total cost of $3.44 per ton of sequestered carbon.

It will be noted that the calculation of the cost of the carbon includes the full costs of the plantation establishment but makes no provision for the wood products values produced. Thus the full costs are borne by the carbon benefits. In fact, of course, net costs associated with the carbon benefits should be calculated by adjusting the gross costs for the noncarbon benefits of the industrial wood produced.

Variations on these alternatives are examined in Appendix B. To do this let us assume that the initial expenditure of $1000 per ha can be divided into two components: 1) the cost incurred by the private forest owner and 2) the cost incurred by the GOA via the subsidy. Assuming that the $1000 cost is approximately equality divided between the two,' 2 and treating the GOA share as a subsidy to promote carbon sequestration in the pursuit of its international obligations, then the marginal cost of sequestering carbon is reduced by one- half, since the private expenditures of $500 per ha was provided only to produce industrial wood. In this case we argue that the incremental cost necessary to establish the steady state forest that permanently sequesters 36 million tons of carbon in 2020 does so for total present value of $100 million or only $2.78 per ton of carbon sequestered. When the a2This is equivalent to assuming that the current government subsidy continues and that the reforms are never effective.

38 stock of wood products reaches steady state in 2070, the total stock of sequestered carbon, 58.12 million tons, has be achieved at an average net cost of only about $1.72 per ton.

This activity does not appear particularly attractive from the GEF perspective since some portion of the plantations would be established by private sector investments and would be likely occur without the GEF's monies. This situation could be exacerbated if the effects on plantation establishment of the major policy reforms have some expansionary impact offsetting all or a part of the contractionary effects of the removal of plantation subsidy. the above plantions will be established voluntarily by the private sector with no subsidy requirements.

Silve-pastoral

The silvo-pastoral plantations generate very similar results and the results are presented together above. Using to the data provided by SAGyP, the silvo-pastoral regime generates precisely the same forest biomass through time and the establishment costs are comparable. The difference is that the financial rate of return is slightly higher due to the returns generated by the cattle operation. In fact, the differences are quite small and one would expect that the decision as to whether or not to introduce cattle depends upon site and firm specific conditions not captured in the aggregate data. This activity does not appear to be particularly desirable for the GEF for the same reasons as were presented for the industrial plantations above.

Mixed Species Plantations

Data on mixed species costs and growth in Argentina are not well developed. As noted, these activities are still in the experimental stage. Nevertheless, it is probable that the costs will be somewhat higher and the biomass growth somewhat more modest. Costs would be higher due to the complications associated with mixed species plaating, e.g., separate planting for each species, more complicated nursery operations associated with more species. Furthermore, the biomass values are likely to be lower that when one is allowed to chose the very best growing species for the site.

A prototype projection is provided in figure 8 using the same annual area of forest as in the wood and silvocultural case (Figure 6a) but with less rapid growth, without a harvest, and for only five years of plantings. In this scenario we reduce the average growth rate to 8 cubic meters per ha per year with the forest reaching maturity (approximately zero net growth) at 50 years.

Using the above parameters, the planting of a mixed species forest in Mesopotamia would be generated only as the result of a subsidy focused to plant mixed species. Our scenario

39 assumes that 20,000 ha are planted each year for five years at a cost of $1000 per ha beginning in 1995. In the year 2020 there would be 18 million m' of industrial wood or 6.55 million tons of carbon when adjust is made for branches, roots etc. By the year 2070 the forest would approximate maturity, i.e., no net growth with a stock of carbon of about 14 million tons. The present value of the cost would be roughly $100 million for an average cost of about $7 per ton of carbon sequestered.

However, the actual cost of sequestering carbon via these multi-species plantations is probably higher than our estimate for two reasons. First, to ensure continued growth of the forests, addition protection and management would almost surely be required beyond the establishment phase. Second, the opportunity costs of the land has been assumed to. be zero. However, this is almost surely incorrect since these lands are capable of

Figure 8. Carbon from Mixed Species Plantations (indefinite growth, no harvests)

Carbon in Forest

1.75 10 i

1.75 10 7 II II 1.5 10 1.510

7.5 10 5 10

6 2.5 10

0 r _ _1_ _ _ _i _ _ 2000 2020 2040 2060 2080 2100

producing an industrial wood or agricultural product. By contrast, in the case of the industrial plantations, the opportunity cost of the land was captured in the value of the value of the industrial wood products that were produced. However, for mixed-species plantations without harvests, these values are not produced. Finally, although a mixed- species plantation may be capable of producing outputs with market value, thus far the market test has revealed no such operations in Argentina, nor, to the best of our knowledge in Chile or Brazil.

This activity might well be undertaken by the GEF since the carbon sequestered would be additive and beyond what would be undertaken in the baseline scenario since it is clear that the private sector would not undertake this activity and the Argentine public sector is also very unlikely to do so.

40 The multi-species plantations, not being harvested, generate no financial return and hence we would not expect the private sector to undertake this type of activity. Nevertheless, the establishment of this type of plantation can generate substantial carbon sequestration. The total five year cost would be $100 million. As show in Summary Table 11, the total carbon sequestered by 2020 is 6.55 million tons at a discounted cost of $13.74 per ton. By the year 2070 the total carbon sequestered is 14 million tons at an discounted cost of $6.50 per ton.

Carbon and Cost Implications of a Industrial Plantation in Patagonia Over a 5-year Period

It appears unlikely that the GEF would undertake the subsidy of plantation establishment in any specific country over a period as long as 25 year period as envisaged in the above

Figure 9a. Patagonia: Pine Plantations and Forest Carbon

Carbon in Porest

7- 1.5 10

7 1.25 10

1. 10

7.5 10

6 5. 10

6 2.5 10

2000 2025 2050 2075 2100 2125 2150

Figure 9b. Patagonia: Wood Products Carbon

Carbon in Wood Products

8. 10 1

6. 10

4. 10

2. 10

0 2000 2025 2050 2075 2100 2125 2150

41 scenario. Thus, we would expect that the establishment of what is called a fully regulated even aged forest would be more likely to be financed from domestic funding sources.

However, a program promoting tree planting for a more limited period, perhaps 5 years, appears more feasible. Additionally, in Argentina, the GEF subsidy might best be applied somewhere other than in Mesopotamia, where most of the industrial plantation activity is now occurring. For example, suppose the GEF provided a subsidy of $20 million per year for 5 years to establish pine plantations, over the period 1995-2000, in less attractive tree growing areas, as in Patagonia.13 Assume that the subsidy was $1000 per ha for successful plantation establishment. Assuming a growth average of 13 m3/ha/yr for 25 years, by 2020, there would be 29.25 million m3 or 7.6 million tons of carbon in the industrial wood or 10.6 million tons in the forest system. Figure 10 provides an overview of the intertemporal carbon stock path.

As shown in figure 9a, if the forest with only five age classes were harvested with a 35 year rotation and immediately replanted, the highly skewed age distribution would result in sharp fluctuations in the intertemporal levels of carbon storage. The carbon sequestered would rise over the 35 year growth period, but decline dramatically over the 5 year harvest period, only to rise again upon replanting and to decline once again at the subsequent harvest. However, as in our earlier example, when a substantial portion of the industrial wood goes into long-lived wood products, a second stock of captive carbon will be created. The skewed harvest cycle will skew the age of the stock of wood products as shown in figure 9b. Note that although the stock of captive carbon exhibits fluctuations, there is a "floor" level below which it does not fall. The total stocks of sequestered carbon are represented in figure 10, which combines both the carbon sequestered in the forest and that sequestered in the stock of wood products.

Figure 10. Patagonia: Total Carbon

In terms of figure 1 in Appendix B, the GEF might want to subsidize a region likely to fall to the right of Q,

42 1.75 10

7 1.5 10 1

1.25 10

1. 10

7.5 10

6 5. 10

2.5 10

2000 2025 2050 2075 2100 2125 2150

Thus, at any future time the stock sequestered would be in a trough if the five year harvest cycle had just been completed and near a peak as the 5 year harvest cycle was approaching. The average costs of carbon sequestration would depend upon the point in time that was chosen to estimate costs.

Suppose that the carbon credit were based upon an estimate of the long-term average annual carbon held in sequestration. Thirty five years after the beginning of the five year period of forest establishment, the forest would have sequestered about 156 tons per ha or 15.6 million tons on the 100,000 ha, given that four of the age cohorts are slightly less than 35 years old. This volume is roughly consistent with an annual average volume of about 7.8 million tons, which is a approximation mean average on the site for all years. The PV of the establishment costs would be about $70 million. Thus the average cost per ton of carbon based on the average carbon captured on the site is about $8.97.

If fifty percent of the wood harvested makes its way into long-lived products, there would be 67 tons per carbon captured per ha of harvest or about 6.7 million tons. After 35 years this is reduced to about 2.01 million tons, after which new harvests occur and the total rises to 8.52 million tons. Thereafter the sequestered stock of carbon cycles, first declining over 35 years to 2.01 only to rise abruptly to 8.52 million tons after which it then declines back to 1.74 million tons and so forth. If we use an average of 5.27 million tons, the average through time of both sinks becomes 13.07 million tons at an average cost of $5.36 per ton of carbon sequestered.

How satisfactory is it to use an intertemporal average? In isolation one might question which level of sequestered carbon is appropriate for analysis, although even in isolation the way to treat the intertemporal volatility is not clear. However, if there are a number of similar projects underway in various countries, one might expect that when Argentina's carbon stock is low, some other country may have a high carbon stock. (See Appendix B.)

43 Additionally, it is well known among forest ecologists that nature disturbance systems may generate volatility in natural forest carbon sinks. For example, the evidence suggests that the Canadian boreal forest tend to have natural fire disturbance regimes of perhaps 120 years and that a very high portion of the forest is disturbed within only a few years. Thus, for example, there may be large releases of carbon from Canadian forests in the first quarter of the 21st century due to natural disturbances. A system such as is discussed above for Patagonia may serve a useful global function by sequestering its maximum carbon just when the new releases are the largest.

This activity could be undertaken by the GEF and the carbon sequestered would be additive and beyond what would be undertaken in the baseline scenario. It appears quite clear that the private sector would not undertake this activity without a subsidy and the Argentina public sector is also would not undertake this type of project under the base scenario conditions. Although under the base case the private sector would not invest in planting these trees, it is quite likely that they would be harvested when mature as an extractive activity.

In this situation if the GEF were to undertake a five-year project, spending $20 million per year, by 2020 about 10.6 tons of carbon would have been sequestered at an average cost of $7.6 per ton. By 2070 the long-term average would be 13.07 million tons at an average costs of $5.36. This would be all additive. It is worth noting that these carbon costs are bias upward since they do not account for that portion of the costs that are offset by future harvests.

Mixed Species Plantations in Patagonia

As noted earlier, the growth rate likely from mixed species plantations are likely to be less than those experienced for a single species selected for its rapid growth. In this scenario we assume an average growth rate of 5 m3 per ha per year and allow the plantation to grow to biological maturity in 70 years, after which it maintains its volume indefinitely (Figure 11).

Using the above parameters, the planting of a mixed species forest in Mesopotamia would be generated only as the result of a subsidy focused to plant mixed species. Our scenario assumes that 20,000 ha are planted each year for five years at a cost of $1000 per ha beginning in 1995.

In the year 2020 there would be 11.25 million m3 of industrial wood or 4.1 million tons of carbon when adjust is made for branches, roots etc. By the year 2070 the forest would approximate maturity, i.e., no net growth with a stock of carbon of about 12.7 million tons. The present value of the cost would be roughly $90 million for an average cost of about $7.8 per ton of carbon sequestered.

Figure 11. Mixed Species Plantations in Patagonia (no harvest)

44 Carbon in Forest

1.2 10 1. 10 i II a. 106 j I 6 6. 10

4. 10

2. 10

2000 2020 2040 2060 2080 2100

The cost of sequestering carbon via these plantations might be higher than estimate for two reasons noted in our earlier discussion of multi-species plantation in Mesopotamia, i.e., to ensure continued growth addition protection and management would almost surely be required beyond the establishment phase and the opportunity costs of the land has not been considered. In the case of the industrial plantations, the opportunity cost of the land was captured in the value of the value of the industrial wood products that were produced. In the case of mixed-species plantations without harvests, these values are not produced. Finally, although this type of plantation may be capable of producing outputs with market value, thus far the market test has revealed no such operations in Argentina, nor, to the best of our knowledge in Chile or Brazil.

Using the above parameters, the planting of a mixed species forest in Mesopotamia would be generated only as the result of a subsidy focused to plant mixed species. Our scenario assumes that 20,000 ha are planted each year for five years at a cost of $1000 per ha beginning in 1995. In the year 2020 there would be 18 million m3 of industrial wood or 6.55 million tons of carbon when adjust is made for branches, roots etc. By the year 2070 the forest would approximate maturity, i.e., no net growth with a stock of carbon of about 14 million tons, figure 11. The present value of the cost would be roughly $100 million for an average cost of about $7 per ton of carbon sequestered. For the reasons noted earlier for the case of mixed-species plantations, the cost of sequestering carbon is likely to higher than our estimates generated above.

This activity could be undertaken by the GEF and the carbon sequestered would be additive and beyond what would be undertaken in the baseline scenario. It appears quite clear that the private sector would not undertake this activity without a subsidy and the Argentina public sector is also would not undertake this type of project under the base scenario conditions. Although under the base case the private sector would not invest in planting these trees, it is quite likely that they would be harvested when mature as an extractive activity.

45 The carbon sequestered by a five year planting program funded at $20 million per year would be 4.1 million tons of carbon at an average cost of $21.95 per ton. In year 2070, total carbon sequestered would amont to 12.7 million ton at an average discounted cost of $7.87 per ton.

Table 11 summarizes the incrementality of the scenarios discussed above. Of the four alternative planting schemes examined, three clearly represent activities that would not be undertaken in Argentina under the base line scenario. These are the two mixed species plantations and the industrial plantation in Patagonia. The forth alternative, industrial plantations in Mesopotamia, would surely involve some degree of overlap with the private sector, although we cannot determine the precise degree of overlapl4

Table 11. IMPLICATIONS FOR GEF FUNDING

System Private Sector Activities GEF Additive

MESOPOTAMIA Industrial/Silvo-Pastoral SOME SOME Mixed Species NO YES PATAGONIA Industrial NO YES Mixed Species NO YES

Native forest protection NO YES

Summary of Carbon Sequestered and Costs

Table 12 summarizes the findings of the scenarios discussed earlier. By far the single greatest new carbon sink is that which would be created by the establishing the steady state forest through a planting level of about 20,000 ha annually in new industrial/silvo plantations in Mesopotamia until the year 2020. Additionally, this is also the low cost scenario because a) it involves planting in a high growth area, b) many of the costs are borne by the industrial timber grower, and c) the maintenance costs are borne by the industrial grower. However, some portion of these activities will undoubtly be undertaken by the private sector without any subsidy from either the government or the GEF.

" In appendix C we compare plantations in Mesopotamia and Patagonia under different assumptions concerning the discount rate and the evolution of the value of carbon storage. There we examine under what circumstances each region is the most effective in sequestering carbon in the face of a nonzero discount rate.

46 The other alternative involve activities that either generate not financial return, e.g., mixed species plantations or industrial type plantations in regions where the financial returns do not appear adequate to justify private investments. One consideration is that mixed species on high-quality lands in Mesopotamia may involve significant land opportunity costs that are not captured in the numerical estimates.

All of these options might be compared with the option of protecting the 40 million or so ha of native forest which, in the absence of change, is assumed to continue releasing about 2 million tons of carbon annually. This activity would not be funded under the base line scenario. If a low cost effective way could be found to protect the 40 million ha, substantial carbon benefits could be obtained.

A sense of the magnitude of the potential costs involved in protecting native forests can gleaned from the following example. If a cost of $5 per ton for capturing carbon were deemed appropriate, that would justify $10 million for protection activities. Although this seems like a large amount of funding, systemwide it only amounts to 25 cents per ha per year. Additionally, one must be very careful about focusing protection on a subset of the forests as deforestation pressures can probably readily be deflected from the protected area to a non-protected area.

It should be noted that the steady-state Mesopotania plantation forest offsets much,

Table 12. Summary of Carbon Sequestered and Costs

Carbon 2020 Cost/ton Carbon 2070 Cost/ton (tons) (tons) 1. Mesopotamia

1. Industrial/ Silvo-Pastoral Plantation 36 million $556 (2.78)* (25 years, 20,O0ba/yr, harvesting)

2. Industrial/Silvo-pastoral and Associated Wood Stocks 58 million $3.44 (1.72) (25 years, 20,000ba/yr, harvesting)

3. Mixed Species Plantation 655 million $13.74** 14 million $6.50** (5 years, 20,000ha/yr, no harvesting)

II. Patagonia

1. Industrial 10.6 million $7.6 13.07 million*** $5.36 (5 years, 20,000halyr, harvesting)

2. Mixed Species 4.1 million $21.95 12.7 million $7.87 (5 years, 20,000ha/ yr, no harvesting)

47 HL1. Natural Forest Protection

1. Deforestation of 40,000 ha annually 50 million 150 million

* one-half of the costs are attributed to industrial wood production ** doesn't include the opportunity costs of higher quality lands, ***long-term average

about 1.44 million tons per year on average by 2020, but not all of the carbon releases from the native forests. In addition, Argentina has some 800,000 ha of existing plantation forests. The assuming a growth of 20 m3 per ha per year gives a annual gross carbon capture of 7.28 tons per ha or 5.8 million tons of captured carbon for the Argentine forest plantation system, abstracting from the carbon losses associated with commercial logging of the plantations.

Other Considerations

Other Scenarios

Other scenarios are possible. It might be argued that the hypothesized Patagonia forest may not be harvested, and thus continue to grow beyond 35 years, thus increasing the carbon sequestered in the forest. But if it does not find its way into wood products, the carbon in that stock would, of course, be reduced to zero. Another question has to do with what happens to the forest after the first harvest. If reforestation is not undertaken, the forest will almost surely experienced substantial regrowth due to natural regeneration (which is common in the exotic pine species used). However, under this scenario, the forest stocking is likely to be lower and therefore subsequent carbon sequestration more modest at any point in time. Some of these scenarios are examined briefly in Appendix B. Other scenarios, which in our judgment offered little promise, were not examined in detail.15

The Role of Discounting

The very low costs of carbon sequestration are due in part to the large time distance required before much of the carbon is captured and the absence of the discounting of future carbon as directed by the GEF. In essence, we have undertaken a benefit/cost analysis where discounting is used on one side, for costs, but not on the other side, the "benefits" which appear as permanently sequestered carbon.

" For example, shrub planting was tentatively explored. However, the vegetative mass is a good proxy of carbon sequestration potential. Thus plants that acquire a large mass on the site are likely to perform better for sequestering carbon than plants, such as shrubs, which accumulate much less biomass.

48 In this example, since future costs are discounted, but future benefits in the form of sequestration carbon is not, the future cost necessary to maintain the forest system are negligible, while the future carbon sequestered maintains its value undiscounted, even when it is captured in 75 years.

Importantly, it should be noted that where discretion in the timing of the carbon sequestrating investment is permitted, the incentives are to delay incurring the investment costs and procrastination is rewarded. In short, why incur positive costs to sequester carbon today, when the same amount of carbon can be sequestered at some future time with no loss of benefits but a very substantial reduction in costs as measured by the discounted Present Value?

Some Recommendations for a GEF Policy

Below we briefly draw some recommendations from the findings above:

First, we find that some type of forest set-aside, including perhaps natural forest management that would prevent deforestation are conceptually attractive means to sequester carbon. Our estimate is that annually about 2 million tons of carbon are released as a result of deforestation and land conversion. However, we cannot propose an approach to preventing deforestation in which we would have much confidence. The difficulties inherent in attempting to directly protect very large areas of native forests are substantial. Protection of some areas, unless they are very large, does not guarantee reduced deforestation due to the fungibility of land use and the frontier conditions that exist in much of the country. It is difficult to envisage protecting a forest when the knowledge level is so primitive that an inventory does not exist

Given the paucity of information on logging, land conversion and the potential of natural forest management, however, does suggest that further investigation and data gathering activities do appear warranted. The implementation of preliminary prototype activities to subsidize natural forest management may be justified as a preliminary first step, perhaps in large part to begin to establish a knowledge base. In addition, if biodiversity conservation goals are included among the objectives, forest preservation which is focused on priority areas with rich or unique biodiversity, may become justifiable. At this time the most .suitable GEF program with natural forests appears to be one that focused on expanding the area of unique biodiversity in parks and reserves. An incidental benefit of this effort could be some maintenance of sequestered carbon.

Second, a system of industrial forest plantation establishment is a very efficient method to sequester carbon and also generates other local environmental services. Where industrial plantations generate adequate financial returns private firms provide the useful social function of carbon sequestration without incurring any additional social costs and without

49 requiring a subsidy. In such a situation, the private investor has an incentive not only to plant. but also to maintain and promote growth. In the process of generating useful industrial wood, the plantation sequesters carbon and also probably reduces pressures on native forests for commercial timber.

Third, mixed species plantations offer the benefit of being additive, but they are the highest cost of the plantation systems we examined. Also, if undertaken in areas where industrial plantations are financially viable, the opportunity cost of these lands is likely to be high.

Fourth, Argentina contains very substantial land areas with the potential for rapidly growing plantation forests but much of this land is poorly located with respect to markets. Under current economic conditions most of these areas are unlikely to develop into forest plantations by market forces alone, due primarily to their difficult access to markets. These regions may provide the GEF with an opportunity to establish plantations in areas that are largely submarginal for commercial wood alone, but that may be justified when the carbon sequestration values are considered. GEF investments in these areas can be expected to be almost entirely additive with respect to creating new forests not likely to exist with GEF support.

Fifth, the evidence suggests that the current Argentina subsidy budget is not fully because the subsidy per unit of land area is too low to encourage greater levels of establishment. That is, under current conditions, to increase planting requires not a larger budget for subsidies, but rather higher per unit payments. It will be of little value to increase the size of the funding budget unless the existing structure and size of payments per land area is increased since, as has been shown, the program already has more funds than it has demands for funds.16

Sixth, the above considerations suggest that the GEF consider undertaking a policy which focuses its funding subsidies on regions that are now marginal for plantation establishment, even given the current subsidy levels, and are likely to be submarginal in the face of reforms. Under this approach the GEF might chose an area with tree-growing and carbon sequestration potential, but an area that is below the financial threshold that is likely to make it financial viable for private investors. We have identified such an area Patagonia. The GEF could then focus its effort at these areas.

* A concern is that large areas could be planted and then abandoned after the planting payment were received. The obvious objective of any GEF involvement would be planting and survival of the plantations. Where the plantations have only modest commercial values, a subsidy program would need to subsidize not only planting but also growth and continued survival.

50 Bibliographic References

Adams, R.M., D.M.Adams, C.C. Chang, B.A. McCarl, and J.M. Callaway. 1993. "Sequestering Carbon on Agricultural Land: A Preliminary Analysis of Social Cost and Impacts on Timber Markets," Contemporary Policy Issues, Vol. XI, January.

Allen, Julia and Douglas Barnes. 1982. Deforestation, wood energy and development," Discussion Paper D-73N, Energy and Developing Country Series, Resources for the Future, Washington, D.C.

Bazett, Michael. 1993. "Industrial Wood," Shell/WWF Tree Plantation Review Study No. 3. WWF (UK), Panda House, Weyside Park, Godalming, Surrey.

Brown, S., A.E. Lugo and L.R. Iverson. 1992. "Processes and Lands for Sequestering Carbon in the Tropical Forest Landscape," in NaturalSinks of C02, edited by J. Wisniewski and A. E. Lugo, Kluwer Academic Publishers, Dordrecht.

Crosson, P., J. Adamoli, K. Frederick and R. Sedjo (1994): Potential Environmental and Other External Consequences of the Program to Increase the Area of Plantation Forests in Argentina by 400,000 Hectares," Final Report to the Secretarfa de Agricultura, Ganaderfa y Pesca, Gobierno de Argentina.

Dixon, R.L, J.K. Winjin, K.J. Andrasko, J.J. Lee, and P.E. Schroeder. 1993. Integrated Systems: assessment of promising agroforest and alternative land-use practices to enhance carbon conservation and sequestration, Climate Change.

Parks, P.J. and I.W. Hardie. 1995. "Least-Cost Forest Carbon Reserves: Cost-Effective Subsidies to Convert Marginal Agricultural Land to Forest," Land Economics, Vol 71, No. 1.

Merenson, C.E. (1994): "Balance Emisi6n-Fijaci6n de Carbono: Sistema Compensatorio Forestal," mimeo, Direcci6n de Recursos Forestales Nativos, Reptiblica Argentina.

Moulton, R. and K. Richards. 1990. "Costs of Sequestering Carbon Through Tree Planting and Forest Management in the United States," US Department of Agriculture Forest Service General Technical Report WO-58. 17 pp. Appendices.

Pandey, Devendra. 1992. 'Assessment of Tropical Forest Plantation Resources,' Swedish University of Agricultural Sciences, Department of Forest Survey, October.

Rosebrock, J. (1993): Time-Weighting Emission Reductions for Global Warming Projects -- A Comparison of Shadow Price and Emission Discounting

51 Approaches," mimeo, Harvard University, JFK School of Government, November 9.

SAGyP (1994a): Evaluaci6n Financiera de Modelos Forestales para Producci6n de Madera y Fijaci6n de Carbono en Regiones Seleccionadas," mimeo, Proyecto Forest AR, Secretarfa de Agricultura, Ganaderfa y Pesca, Reptiblica Argentina page 30.

Sedjo, Roger A. 1983. The Comparative Economics of PlantationForestry: A Global Assessment, Baltimore Maryland, John Hopkins Press for Resources for the Future, Washington DC.

Sedjo, Roger A. 1995. "The Potential of High-Yield Plantation Forestry for Meeting Timber Needs: Recent Performance and Future Potentials," RFF Discussion Paper 95- 08, Resources for the Future, Washington DC.

Sedjo, Roger A., Joe Wisniewski, Al Sample and John Kinsman. 1995. "The Economics of Managing Carbon via Forestry: Assessment of Existing Studies," forthcoming in Environmental and Resource Economics.

Turner, D.P., J.J. Lee, G.J. Koperper and J.R. Barker (editors), 1993. The ForestSector Carbon Budget of the United States: CarbonPools and Flux Under Alternative Policy Options, U.S. EPA ERL, Corvallis, 202 pages. (see p13).

United Nations, Food and Agricultural Organization. 1994. FAO Yearbook: Forest Products:1981-1992. UNFAO Rome.

Winjum, Jack K. Robert K. Dixon, and Paul E. Schroeder. 1992. "Estimating the Global Potential of Forest and Agroforest Management Practices to Sequester Carbon," in NaturalSinks of C02, edited by J. Wisniewski and A. E. Lugo, Kluwer Academic Publishers, Dordrecht.

World Bank. 1993. "Argentina Forestry Sector Review," Agriculture Operations Division, LA and Caribbean Regional Office, April 26.

World Bank. 1992. "Sustainable Forest Management: Indonesia's Forest Resources," By J. Blakeney and R.A. Sedjo, in "Indonesia Forestry Sector Review."

World Resource Institute. 1994. World Resources 1994-1995. Oxford. This level was projected to rise 1 percent per year to 40 million tons of carbon by 2020

52 APPENDICES

53 Appendix A

ARGENTINA: Carbon and Forests

Literature Review: Argentina

Eduardo Ley Roger A. Sedjo Resources for the Future, Washington DC

Version: November 28, 1995

Address. Resources for the Future, 1616 P St NW, Washington DC 20036-1400. Email: leygrff.org, [email protected]. Fax: (202) 939 3460. 1. RFF Study

Crosson et al. (1994) investigated the potential external effects that would follow the conversion of land into forests. The extensive list of possible consequences which they considered was:

[1] changes in carbon sequestered in woody biomass;

12] changes in the hydrological regimes of rivers downstream the plantation site and consequent changes in:

* downstream sediment changes;

* downstream flooding damages;

13] changes in wildlife habitat;

(4] changes in damages from use of fertilizers and pesticides;

15] changes in the social life of communities affected (especially human capi- tal).

Crosson et al. (1994) concluded that the only well-identified global externality was [1. They estimated the planting of 400,000 ha in selected areas worth be- tween US$ 100 million (at US$ 5/ton of carbon) to US$ 1 billion (at US$ 50/ton of carbon). The areas were selected on the basis of comparative advantage but also taking into account the prevention of negative effects on biodiversity and bydrological cycles. These three areas were: Mesopotamia, Buenos Aires and -Patagonia.

1 2. Project Forest AR

The bulk of the Argentinian-specific research on this field has been developed by the project Forest ARI at the Secretaria de Agricultura, Ganader[a y Pesca (henceforth SAGyP). The early research in SAGyP (1993, 1994a) develops the analytics and serves as a basis for SAGyP (1994b, 1995b).

SAGyP (1994a) classifies the lands which are identified as capable of support- ing rapid-growth plantations. This is a very detailed study which combines in- formation on ecological regions, protected areas and appropiate soil and weather conditions for rapid-growth plantations. Table 1 summarizes the areas which are suitable for forest plantations.

Table 1. Suitable lands for forest plantations in three ecological regions. Region Total Area Suitable Lands Protected Areas Mesopotamia Media 21,150,000 ha 4,550,000 ha 1,258,743 ha Buenos Aires 36,150,000 ha 8,825,000 ha 66,706 ha Patagonia Andina 23,125,000 ha 3,934,000 ha 1,467,111 ha Total 80,425,000 ha 17,309,000 ha 2,792,560 ha

SAGyP (1994b, 1995b) constructed 7 input-output models for the 3 rapid- growth areas selected in Crosson et al. (1994). They attempted to estimate the subsidy required to obtain a 10% real internal rate of return. Their estimates of the net profit rate before the subsidy lie between 4.4% and 7.4%. Table 2 summarizes the models considered and table 3 the subsidies per ha.

The column AAG shows the average anual growth (m'/ha/yr) for a rotation -of 20 years for Pine, and 10 years for Eucalyptus and Poplar. AR-FOR01 is a

1 ForestAR- the verb 'forestar' in Spanish means 'to forest.'

2 Table 2. SAGyP: Prototypical Models for Plantation Establishments. Model Location Current Use Potential Use Plants/ha AAG AR-FOR01 Corrientes/Entre Rios Cattle Pine/Cattle 1100 20 AR-FOR02 Corrientes/Entre Rios Cattle Pine 1100 20 AR-FORO3 Corrientes/Entre Rios Cattle Eucalyptus 1100 27 AR-FORO4 South of Buenos Aires Cattle Pine 1100 17 AR-FORO5 South of Buenos Aires Cattle Eucalyptus 1100 25 AR-FORO6 Center of Buenos Aires Cattle Poplar 1100 24 AR-FORO7 Patagonia Andina Cattle Pine 800 13

silvo-pastoral regime where 0.3 heads of cattle per ha are added to AR-FORO2, leaving all the rest the same.

The models developed by SAGyP (1994b, 1995b) are quite complete and incorporate detailed region-specific cost and income information. They omit, however, an important cost component: rent on land. This will bias downwards their estimate of the required subsidies. The internal rates of return without any subsidies, and the required subsidies to obtain a 10% internal real return are shown in table 3.

Table 3. IRR without subsidies and subsidies necessary to obtain 10% IRR. Model IRR w/o Subsidy Subsidy/ha AR-FORO1 7.35% US$ 327 AR-FORO2 6.60% US$ 438 AR-FORO3 6.36% US$ 299 AR-FORO4 5.72% US$ 319 AR-FORO5 6.89% US$ 184 AR-FOR06 4.65% US$ 650 AR-FOR07 4.44% US$ 779

SAGyP (1994b, 1995b) attempts to compute a social or external rate of

3 return when carbon is taken into account. With a value on carbon of US$ 10 a ton and using a coefficient of 0.26 to convert commercial wood into carbon, they calculate a 24.10% real internal rate of return by the year 2040. They do not account for the carbon captured in the total biomass or in the soil. Also, they do not take into account the carbon cycle and the decay of wood products which results in eventual carbon releases. These two omissions work in opposite directions. SAGyP (1994b) estimates the amount of carbon associated with a particular ha as t , = 0.26 E g, -r=1996 where gt is the anual growth at year t; while Sedjo and Ley (1995) instead prefer to compute t t= 0.2 6 ,E g - hr + -hO(t r=1996 t = 0.26,6 g , - (1 - y)h,,-,O(t - r) r=1996 where 6 converts commercial wood into total biomass, ht is the wood harvested at year t, y is the fraction of that wood that is used for long-lived wood products, and O(t - -r) is a wood-products decay function. Sedjo and Ley (1995) used j6 = 1.4, a value of -y of - for Mesopotamia and - for Patagonia, and a linear decay function over a period of 50 years, 0(t - r) = - max{0, 50 - (t - r)}.

On the basis of 6, SAGyP (1994b, 1995b) concludes that US$ 1 of subsidy sequesters 0.78 tons of carbon -or, put differently, 1 ton of carbon requires a subsidy of US$ 1.29.

SAGyP (1995a) is a first attempt to tackle the carbon-cycle problem. It dis- -cusses the possible uses for the commercial wood in different areas and under different exploitation regimes -which include native forests protection, sustain- able management, and plantation forests. The breakdown of the harvested wood

4 into pulp, , fuelwood, long-lived wood products, etc, is not documented on the basis of any studies or actual statistics and must be taken with cau- tion. Especially so since no modelling of future market conditions or scenarios is present. It is also assumed in their models that long-lived wood products do not decay over time.

3. Other Studies

We could only find one other carbon-related study outside the work done at SAGyP. This is a short nine-page paper by Merenson (1994), who is the director of the Direccidn General de Recursos Forestales Nativos (native Forests). This paper puts forward a proposal for an international compensatory system. The proposal calls for the fixation of (an arbitrary) one third of World emissions through a tax/emission credit system. Firms could choose between paying a carbon tax or, alternatively, sequestering the equivalent carbon of one third of their actual emissions. Merenson (1994) computes the carbon associated with one ha of forest as follows:

Ct = (a.-, -. -Y-)gt where gt is the anual average growth and the parameters are explained in table 4.

Table 4. Carbon Fixation Parameters in Merensson (1994). Parameter Meaning Values a Dry matter coefficient 0.30 0 Biomass Equivalent 2.18 -y Carbon Content 0.50 6 Incremental Soil Fixation 1.65

5 Table 5. AAG in Merensson (1994).

t 9t '0,1 0 m 3 /ha 2 3 m'/ha 3 11 m3 /ha 4 15 m'/ha 5 21 ms/ha 6 33 m 3 /ha 7 35 m'/ha 8 39 m 3 /ha 9 42 m3 /ha

On the basis of this simple model, a rotation of 10 years and an arbitrary sequence of gt's (shown in table 5), Merenson (1994) attempts to estimate the total area that would be required offset one third of World emissions (assumed to be 5.6x109 /year). He estimates about 530 Million ha would be required over the 10-year rotation at a total cost of approximately US$ 265 billion, which results in US$ 4.73/ton of carbon released. This model contains no Argentinian-specific details and it is rather simple in its treatment of the carbon cycle.

6 References

Crosson, P., J. Adamoli, K. Frederick and R. Sedjo (1994): "Potential Envi- ronmental and Other External Consequences of the Program to Increase the Area of Plantation Forests in Argentina by 400,000 Hectares," Final Report to the Secretaría de Agricultura, Ganadería y Pesca, Gobierno de Argentina.

Merenson, C.E. (1994): "Balance Emisión-Fijación de Carbono: Sistema Com- pensatorio Forestal," mimeo, Dirección de Recursos Forestales Nativos, República Argentina.

SAGyP (1993): "Diseño Preliminar del Proyecto de Desarrollo Forestal," mimeo, Proyecto Forest AR, Secretaría de Agricultura, Ganadería y Pesca, República Argentina.

SAGyP (1994a): "Evaluación Financiera de Modelos Forestales para Producción de Madera y Fijación de Carbono en Regiones Seleccionadas," mimeo, Proyecto Forest AR, Secretaría de Agricultura, Ganadería y Pesca, República Ar- gentina.

SAGyP (1994b): "Argentina: Evaluación de Modelos para la Fijación de Car- bono y Producción de Madera en Regiones Seleccionadas," mimeo, Proyecto Forest AR, Secretaría de Agricultura, Ganadería y Pesca, República Ar- gentina.

SAGyP (1994c): "Argentina: Análisis de las Regiones Ecológicas, las Areas Pro-

- tegidas y los Suelos de Aptitud en las Areas de Localización Elegibles para Bosques de Rápido Crecimiento," mimeo, Proyecto Forest AR, Secretaría de Agricultura, Ganadería y Pesca, República Argentina.

7 SAGyP (1995a): "Argentina: Estudio de Base sobre Opciones para Reforza- miento de la Capacidad de los Bosques como Sumideros de Carbono," mimeo, Proyecto Forest AR, Secretaría de Agricultura, Ganadería y Pesca, República Argentina.

SAGyP (1995b): "Argentina: Desarrollo de Modelos Forestales para Fijación de Carbono y Producción de Madera," mimeo, Proyecto Forest AR, Secretaría de Agricultura, Ganadería y Pesca, República Argentina. (Paper to be presented at the XX World Meeting of the IUFRO in Finland, August 1995.).

8 Appendix B

ARGENTINA: Carbon and Forests

Technical Appendix

Eduardo Ley Roger A. Sedjo Resources for the Future, Washington DC

Version: November 28, 1995

Address. Resources for the Future, 1616 P St NW, Washington DC 20036-1400. Email: [email protected], [email protected]. ON THE ASSUMPTION that climate change is a problem, and that it is largely driven by the accumulation of greenhouse gases in the atmosphere -mainly

CO 2 -, then carbon sequestering by trees can be seen as a pure public good.'

Carbon sequestration (carbon, henceforth) is produced jointly with other market or nonmarket goods. In the case of a park, the carbon is produced jointly with the recreational services that the park provides. In the case of a tree plantation, carbon is produced jointly with timber. Since there is no mar- ket for carbon, it is not taken into account in the individual producers' private profitability calculations. As a result, too little carbon sequestration will be supplied.

1. A Simple Static Model

Let us focus on plantations, and let us abstract from carbon decay and other issues for the moment. If p is the market price of one cubic meter of timber which is sequestering ce tons of carbon whose unit value is pa, the individual i is going to plant ;i according to

p = MC ). (1) while the optimal amount from a social perspective, xf, is going to be given by

P + CeP. = miVC(4)

1 A good is non-rival when each unit can be consumed by all agents. It is non-excludable when each unit has to be consumed by all agents. A good that has both characteristics is a pure public good.

1 since MC'(.) > 0 then2

i i (The implicit optimal amount of carbon would be given by C* = aX*.)

The total socially optimal amount of timber-carbon, X*, could be achieved if each individual producer received a payment -i.e., a subsidy- of apc for each unit of the joint product supplied.

We have assumed, however, that the value of one ton of carbon to society,

Pc, is known. Unfortunately, it is hard to estimate its value. Not only is it the public good dimension of the carbon that makes it a difficult task, there is also a great uncertainty associated with the probable effects of the accumulation of greenhouse gases in the atmosphere. While the majority of the research has focused on the cost of emission reduction (or carbon sequestration), there have also been some attempts to estimate the shadow price of CO2 . Most of this work is due to Nordhaus - see, e.g., Nordhaus (1982, 1991a, 1991b, 1993)- who concludes that the best estimate of the marginal damages from carbon emissions is in the range of US$ 5-20 per ton -i.e., Nordhaus (1993)'s carbon tax for economic optimum.

1.1. Differential Subsidies

A practical approach consists in choosing the aggregate expenditure, S, to be dedicated to carbon sequestration, and then spending it in the most efficient way from a carbon perspective. In this case, in general, as we shall show below,

2 While it is possible to have a flat marginal cost schedule for a single plantation, over some range, from a country's perspective the marginal cost is better approximated by a strictly increasing curve.

2 different producers should receive different subsidies. In practice, however, the difference in subsidies could only be based in geographical differences. If a subsidy of s- per m3 of timber provided by individual i is established, then equation (1) becomes P+ si = MCi(xi(s)). (2)

The planner's (GEF's) problem is given by

max acxi(si)

SAt. 3Sixii (5j) = S

The first-order conditions are, for all i,

ax (SD = A* [X (S!) S ±xi(8!)] (3)

the LHS shows the incremental addition of carbon and the RHS the incremen- tal cost of raising the subsidy to producer i. This last part is composed of two sources, the subsidy on the additional amount supplied and the additional subsidy on all the units supplied.

Equation (3) implies that for any two producers, i and j, the following must hold:

af1+ 7(7+ (xi (81))) =j1s;Q ±+ 77i(xj(sj*)>4.(4) where qj is the elasticity of i's supply to the subsidy,

77i (Si) Si

Equation (4) is a version of the well-known Ramsey's inverse-elasticity rule. Here, the more elastic the supply with respect to the subsidy, the higher the subsidy rate should be.

3 Equation (4) calls for different subsidy rates for different establishments. It also expresses the idea that subsidies should only be paid when they make a difference at the margin. Ideally, one would like to be able to tell the agent's 'type' when she applies for a subsidy. In practice, the best that can be done is to know the agent's geographical location. Geographical areas can serve as crude proxies of the agents' types and the subsidy rates can be based on the establishment's location. This notion is shown in figure 1.

subsidy S

S - -> carbon QO Q1 Q2 Fig. 1. Supply of Carbon

The schedule SS in figure 1 shows the supply of carbon for different subsidy rates. Note that the supply when there is no subsidy is Qo. With perfect discrimination, optimal subsidies would involve different subsidies for each unit produced -i.e., each unit would receive the vertical distance from 0 to SS. Suppose that the policy target amount of carbon is Q2; then a subsidy of S2 per unit is required at the margin. When a uniform subsidy of 32 is being paid to all suppliers, the amount QOS2 ± RQ2 - QO)s 2 is being wasted since it doesn't affect marginal decisions. Suppose now that we can associate suppliers with portions of the supply schedule. Assume that suppliers to the left of Qo are

4 mostly from geographical region A, suppliers in Qo-Q1 range can be associated with region B, and that suppliers to the right of Qi are mostly from region C. Then a subsidy scheme that pays no subsidy to plantation establishments in region A, pays a subsidy of s, to plantations in region B, and pays a subsidy of S2 to plantations in region C, achieves the goal with a much smaller waste -namely, (Qo - Qi)SI + (Q2 - Ql)S2-

Identifying the agent's type when perverse incentives prevent truthful rev- elation is often a problem in many economic situations. Here, however, since many of the most important attributes determining the producer's elasticity, 77j -e.g., weather, soil characteristics, proximity to markets, transportation infrastructure-, are closely linked to location which is readily observable then differential subsidies based on geographic areas are a feasible solution. In prin- ciple, one could establish an optimal subsidy scheme based on 'iso-elasticity' maps.

In the previous discussion, we have treated the carbon issue as a purely static problem. We turn now to the intertemporal issues involved.

2. Interternporal Carbon Model

Let c,,t the amount of carbon associated with one particular ha of site i at time t,

Ci,t = cei.zi,t + hi'oj( - -r)dr

in site - off site where zi,t is the stock of wood in the forest, cei is a coefficient that converts wood into carbon, hi,j,t is the amount of wood harvested for use j (waste will be included as a particular type of use). Oj (-) is the carbon 'survival' function for

5 use j; Oj (0) is a coefficient that converts j-type timber into carbon and Oj (x) gives the carbon which remains sequestered x years after the harvest. The stock of wood in this ha of forest, over the rotation, evolves according to:

= O(t - to) - hi,,t, t e (to, T)

where Oi(.) is a growth function, and T is the rotation length.

The individual producer i's net profits (per ha) from the time of planting, to, until the final harvest will be Ito+T Ii= J, -k,Te IJ0to (P,,Th d-

where r is the interest rate and pi,j,, is the price that i obtains for j-type wood at time t, and ks,,, represents the costs incurred, and T is the rotation length

(which a planter's control variable). Note that allowing pi,, to vary by producer it can reflect, among other things, location differences.

2.1. Social Profits

The absence of carbon considerations will have, at least, two important effects. First, too little planting will be realized. Second, the harvest times and the total rotation length, T, will be chosen from a timber perspective3 and might be sub-optimal from the social point of view when carbon is properly accounted

3 Essentially, the wood would be harvested when the growth rate of the commercial wood equals the interest rate.

6 for. At time T of the final harvest, the social profits are given by

rf= ri+ Pc,r a -1- ey,f( - t)tetr'dr to to

to+T

- T(pij,rhi,j,r - ki,,)e-rrdT. to timber

T T + 100, JPC-r I ciizi,t + E ~hij,t0j3(r-Od e-P-' ItoJ to i

carbon where Pc,t is the carbon's price at t, Oj() is product-j's carbon survival function, and pt is an appropiate, possibly time-dependent, discount rate -- see Rosebrock (1993) for the difficulties associated with this concept. The inclusion of carbon considerations will, in general, push to the future the optimal harvest time.

Therefore, in principle, different subsidies schemes must be directed to two distinct objectives:

[01] Increase plantation activities;

[02 Increase rotation times.

Presumably, the way to achieve [02] would be through a subsidy to postpone the final harvest a number of years after the time when it would have taken place in the absence of the subsidy. In practice, it would take the form of certain compensation for each year after the 'normal' harvest time for each type of tree. If the subsidy applies to current forests, the first problem is to determine the age of a particular forest applying for the subsidy. The second problem is that this scheme is going to disrupt the normal flow of timber to the mills constituting a shock to the production process. If, instead, the subsidy is applied to the forests

7 planted today these two problems potentially dissappear since a certification system could be implemented to keep records of the eligible forests' ages and mills could incorporate the subsidy existence in their planning.

3. Carbon Accounting Over a Cycle

In some of the projects shown below, the stock carbon sequestered fluctuates widely along a cycle -which is determined by the distribution of the tree co- horts, the regeneration process, and the decay function. There is then the ques- tion of how much carbon is associated with a particular project. If the value of carbon were known at each period and an appropiate discount method existed, then the answer would be straightforward. However that is not the case.

carbon

co JM - LPoect A_ Propiect B------

> time n/2 n 2n

Fig. 2. Projects A and B combined sequester Co.

Let us assume for a moment that there are two projects A (which starts at t = 0) and B (which starts at t = n/2) as depicted in figure 2. Each individual carbon-sequestering profile is periodic with period n and symmetric with respect to middle of the cycle. At each point of time multiple of n, project A has a net sequestering balance of zero. The same occurs for project B at times

8 multiples of n/2. However, after t = n/2, both projects taken together are always sequestering Co.

We think that it might be advisable to value each project's worth with regard to the GEF's whole portfolio of projects. In the example above, each project would be credited with Co/2. In a more comlex setting, something along the lines of the Shapley value could be computed. Thus, the carbon credited to project j would be:

Cj = (Carbon of Portfolio) - (Carbon of Portfolio without Project j).

Given that we do not have any information on any other carbon-sequestering projects, in the models below, we show the amounts of carbon sequestered until the year 2150. We also present some tables displaying the information at selected times over the cycles.

4. Some Prototypical Models

There are some parameters and functional relationships that will remain con- stant in this section. We use a biomass coefficient of 1.40 and a carbon coefficient, a, of 0.26 (see Crosson et al. (1994)).

The growth functions, O(.), used for the commercial wood are constructed to be consistent with the average anual growth figures in SAGyP (1994). Over the rotation period, they accumulate the same amount of commercial wood. We use a Logistic growth curve which is defined by

6i (t - to) = , = - -ei (5) dt1 aj where zi,j is the volume of commercial wood at site (region) i, at time t; which implies Zi,t 1 + C. (6) 1 9+ye-(to-0

9 Note that zi,to = 0 = C = -ai/(1 + ,3), in which case

lim Zt = ae + C = aei t-*oo 1 + A

The graph of zi,t is S-shaped symmetric about its inflection point. Table 1 shows the values of the different parameters for the two regions considered in the prototypical models that follow.

Table 1. Logistic growth function parameters: Single-Species i Region &4 A 7 AAG Rotation 1 Mesopotamia 706.21 45 0.20 20 m'/ha/yr 25 years 2 Patagonia 301.50 85 0.15 13 m'/ha/yr 35 years

The carbon sequestered in wood products is assumed to be declining linearly over a period of 50 years. So that the decay function is given by

1 - (t -r)} Vj (t-r) - 50 max{0,50

Row and Phelps (1995) have developed a sophisticated model (HARVCARB) which tracks wood carbon flows and storage after the timber harvest for different types of trees and regions. They use different (exponential) decay functions for each of 12 major end-use classes. Given the uncertainty of the destiny of the wood from the Argentinian regions here considered at the time horizons which we are looking at, we chose for a simple aggregate decay function. The linear decay over a 50-year period is on the conservative side. We are assuming that all carbon is released after 50 years while it is known that some wood products can have a life well over hundreds of years.

4 When C = O, the inflexion point is aj/2 -which corresponds to time In )3.

10 5. Mesopotamia

5.1. Mesopotamia: Even-Aged Single-Species Forest

We assume here that 20,000 ha of trees are planted during 25 years. The eco- nomic rotation (at a 5% interest rate) is assumed to be 25 years. The average growth of commercial wood over the rotation is assumed to be 20 ml/ha/yr (SAGyP (1994)). In equation (5), we set 8i = 45, yi = 0.20. With r = 5%, the optimal harvesting time is 25 years. Figure 3 shows this case (normalized with a = 1, note that ai only affects the scale of the vertical axis and it will be determined by the annual average growth assumed). We assume that one-third of the wood goes to long-lived wood products.

0.80.6

0.2

0 0 10 20 30 40

Fig. 3. The Logistic growth model for Mesopotamia (i = 45 and yi = 0.20).

Figure 4 shows the amount of carbon in the forest and in wood products. The total carbon is shown in figure 5.

Table 2 shows the status of the carbon sinks at different points in time. We show the amount just before and afterthe harvest is made for 2020, 2050 and 2070. Note that our model assumes that 2 of the carbon associated with the 3 Cacbon in Forest Carbon Ln wd Prod4ats

2. 10

2.5 107 1 07

2. 117 L.1 1010 5 1. 10

0 0

2000 2020 2040 2000 2040 2100 00 2020 200 20 3000 2100

Fig. 4. Mesopotamia: Carbon in the forest and in wood products.

5. 107I 7

4. 10 3 . 10

2. 10 II

1. 10

0 j _ 1 _ _ 1 _ 2000 2020 2040 2060 2080 2100

Fig. 5. Mesopotamia: Total carbon.

harvested wood is released at the time of the harvest. This causes the intra-anual variation shown in the plots. The steady state is reached at 2070.

12 Table 2. Mesopotamia: carbon sinks at different dates Carbon (millions of tons) year Forest Wood Products Total 12/2019 36.02 0.00 36.02 1/2020 32.22 0.87 33.09 average 34.12 0.43 34.55 12/2049 36.02 18.46 54.48 1/2050 32.22 18.81 51.03 average 34.12 18.63 52.75 12/2069 36.02 22.10 58.12 1/2070 32.22 22.10 54.32 average 34.12 22.10 56.22

13 5.2. Mesopotamia: Mixed-Species Plantation

We assume here that 20,000 ha of trees are planted during 5 years and no harvesting occurs. The average growth of commercial wood over the rotation is assumed to be 8 m3/ha/yr. In equation (5), we set O = 45, -yj = 0.20. Figure

6 shows this case. Figure 7 shows the amount of carbon in the forest.

1I

0.8

0.6

0.4

0.2

0 10 20 30 40 50 60 70 Fig. 6. The Logistic growth model for Mesopotamia: Mixed Species

(A = 45 and yi = 0.20).

Carbon in Forest

1.75 10 7 1.5 10 7 1.25 10

7 1. 10

7.5 10

5. 10

2.5 10I

0 -** 2000 2020 2040 2060 2080 2100

Fig. 7. Mesopotamia Mixed-Species: Carbon in the forest.

14 6. Patagonia

6.1. PatagoniaSingle-Species Industrial Plantations

We assume here that 20,000 ha of trees are planted during 5 years. The economic rotation (at a 5% interest rate) is assumed to be 35 years. The average growth of commercial wood over the rotation is assumed to be 13 m'/ha/yr (SAGyP

(1994)). In eq. (5), we set 13i = 85, y = 0.15 and an annual average growth of

13 m3 over the rotation period . With r = 5%, the optimal harvesting time is

35 years. Figure 8 shows this case. We assume that one-half of the wood goes to long-lived wood products.

0.8

0.6

0.4

0.2

0 I 0 10 20 30 40 SO 60

Fig. 8. The Logistic model for Patagonia ( 3 i = 85 and -y = 0.15).

Table 3 summarizes the status of the carbon sinks under different scenarios developed in the following sections.

15 Table 3. Patagonia: carbon sinks at different dates Carbon (millions of tons) year Forest Wood Products Total 2020 6.68 0.00 6.68 2029 15.64 0.00 15.64 2030 12.17 1.18 13.35 Patagonia I (100% regeneration) 2040 0.68 6.03 6.72 2050 3.57 4.61 8.18 2065 12.17 3.67 15.83 2085 3.57 4.61 8.18 2100 12.17 3.67 15.83 Patagonia 11 (0% regeneration) 2040 0.00 6.03 6.03 2050 0.00 4.61 4.61 2065 0.00 2.48 2.48 2085 0.00 0.00 0.00 2100 0.00 0.00 0.00 Patagonia III (50% regeneration) 2040 0.34 6.03 6.38 2050 1.78 4.61 6.40 2065 6.08 3.08 9.16 2085 1.78 2.30 4.09 2100 6.08 1.83 7.92 2120 1.78 2.30 4.09

16 6.2. Model I. 100% Regeneration

Caon in Forest Carbon in Wod Prodcca

1.5 10 8. 10

1.25 10 6. 106 3. 10

7.5 10 4. 10

2. 10 2. 106 2.5 10

1000 2025 2050 2075 2100 2125 2150 2000 2025 200 2075 2200 2135 250

Fig. 9. Patagonia with 100% Regeneration: Carbon in the forest and in wood products.

We assume here a 100% regeneration rate. Figure 9 shows the amount of

carbon in the forest and in wood products. The total amount of carbon in both

sinks is shown in figure 10.

1.75 10

1.5 10 7 1.25 10

7 1.10

'7.5 1.0 S .510

2.5 10

2000 2025 2050 2075 2100 2125 2150

Fig. 10. Patagonia with 100% Regeneration: Total carbon.

17 6.3. Model II: 0% Regeneration

Carbm in Pet C-xbom in tid Prodcts

1.3 10,7 I 6.110 1. 35 10 ,6 7 .. 5. 10to

.S 10

3. 6 10

5. 106 2. tor

2.5 log 2. 106

O * - 2000 2025 200 2075 2100 3135 2150 a 00 2025 20050 2175 2125 2150

Fig. 11. Patagonia with 0% Regeneration: Carbon in the forest and in wood products.

We assume here a 0% regeneration rate. Figure 11 shows the amount of

carbon in the forest and figure in wood products. The total amount of carbon

in both sinks is shown ine 12.

7 1.5 10

7 1.25 10

7 1. 10

6 7.5 10

5 .10

2.5 10

2000 2025 2050 2075 2100 2125 2150

Fig. 12. Patagonia with 0% Regeneration: Total carbon.

18 Appendix C

Carbon Sequestration and Tree Plantations: A Case Study in Argentina

Eduardo Ley and Roger A. Sedjo Resources for the Future, Washington DC 20036, USA

Version: November 28, 1995

Abstract. This study undertakes two tasks. First, it estimates the car- bon sequestering potential for two alternative tree plantations programs in two regions of Argentina, which have markedly different carbon seques- tering potentials. While it estimates the physical volume of the carbon sequestered, unlike a host of other studies it does not try to estimate the costs of sequestration. Second, the study then develops a method for evaluating the comparative benefits of the carbon sequestered in the two cases based upon the price (value) of the external benefits, the growth of this price over time, and the discount rate. Estimates of the comparative benefits or value provide guidance as to the optimum comparative size of subsidies for the two regions.

Keywords. Carbon Sinks, Discount Rate, Carbon Storage Value

Address. Resources for the Future, 1616 P St NW, Washington DC 20036-1400. Email: [email protected], sedjoCrff.org. 1. Introduction

Argentina is currently developing its program for carbon sequestration as called by the Framework Convention on Climate change. Such a program will involve a variety of measures to reduce carbon releases and/or increase carbon seques- tration. Included in the mix of carbon sequestration measures will be forestry activity including forest preservation and natural forest management, as well as plantation establishment.

It has been recognized for some time that tree plantations have the potential to sequester large amounts of carbon (Sedjo and Solomon, 1989). Furthermore, a recent study indicates that the costs of carbon sequestration using forestry projects might be quite modest compared to other approaches (Sedjo et al., 1995).

This study involves an assesment of anticipated effects of the use of tree plan- tations to sequester atmospheric carbon in Argentina. It examines the carbon sequestration implications of two plantation establishment approaches. The first involves the establishment in Mesopotamia of an even-aged regulated forest with a rotation of 25 years. The other envisages the establishment of plantations in Patagonia with a 35 year rotation. The methodology involves keeping tract of carbon in forest ecosystems as well as in long-lived wood products. The ap- proach suggests that the absence of a value for sequestered carbon will result in too little planting from a social perspective. The per ha time profiles of the

We thank the World Bank's GEF for funding our study on "Argentina: Carbon and Forests" that raised some of the issues which we explore here, and to the Vetlesen Fund for partially financing this research. We gratefully acknowledge the assistance from the Secretaria de Agricultura, Ganaderfa y Pesca (SAGyP), Reptiblica de Argentina; especially Jose Luis Darraidou, Hugo Iza, Mirta Rosa Larrieu, and Ricardo Larrobla. We also benefitted from many helpful discussions with Luis Constantino, Charles Feinstein, Bob Kirmse, Mike McCarry, Jens Rosebrock, and comments from Joel Darmstadter and three anonymous referees.

1 captive carbon are developed for each case. The results are presented in figure

1.

While the study estimates the physical volume of carbon sequestered, unlike a host of other studies it does not try to estimate the costs of sequestration. Rather, study develops an innovative method for evaluating the comparative benefits of the carbon sequestered in the two cases based upon the 'price' of the benefits, the growth of this price over time and the discount rate. Estimates of the comparative benefits or values provide guidance for policy makers as to the optimum comparative size of subsidies in the two regions.

2. Interternporal Carbon Model

Let ci (t) the total stock of carbon associated with the biomass in one particular ha of site i at time t,

c(t) = cIjz(t) +j_ ,(s)Oj(t - s)ds (1)

forest wood products where zi(t) is the stock of commercial wood in the forest,' ci is a coefficient that converts commercial wood into total associated-biomass carbon, hi,j(t) is the amount of wood harvested for use j (waste will be included as a particular type of use). We capture the carbon decay phenomenon by the function j (.) which is a carbon 'survival' function for use j, thus Oj (0) is a coefficient that converts j-type timber into carbon and Oj (At) gives the carbon which remains sequestered At years after the harvest. The stock of wood in this ha of forest,

1 We use 'commercial wood' as the numemire because it is the unit of most of the forestry research.

2 over the rotation, evolves according to:

dt

where O0&() is a growth function, to is the initial planting time, and T is the rotation length.

The individual producer i's net profits (per ha) over the rotation are:

to+T

1i=]I' ~(jj(s) hj(s) - ki (s)) e`ds (2)

where r is the interest rate and pjj (t) is the price that i obtains for j-type wood at time t,2 and k-(t) represents the costs incurred. Note that T, the rotation length, is a planter's control variable.

2.1. Social Profits

Provided that carbon sequestering has a positive social value, the absence of forest carbon sequestration considerations will have, at least, two important effects in the private choices involved. First, too little planting will be realized. Second, the harvest times and the total rotation length, T, will be chosen from a timber perspective3 and might be sub-optimal from the social point of view when carbon is properly accounted for. At time T of the final harvest, the social

2 Allowing the pij~(t)'s to vary by producer they can reflect, among other things, location differences.

3 Essentially, the wood would be harvested when the growth rate of the commercial wood equals the interest rate.

3 profits are given by

I = Ii + Pc(S) aizi(t) + hi,j(t)O(s - t)dt e-P"ds to ito

to+T - E(pij(s)hi,j(s) - ki(S))ersds

rI=commercial wood

+ Pc(S) aizi (t) + j hi,i(t)O(s -t)dt e-P-ds to at i

ri?=carbon where pc(t) is the carbon's price at t, and p is an appropriate discount rate - see, e.g., Arrow et al. (1994) and Rosebrock (1993) for the difficulties associated with this concept in this context. The inclusion of carbon considerations will, in general, push to the future the optimal harvest time -see, e.g., van Kooten et al. (1995). (Note that the integrals in (3) are forward-looking while the integral in (1) is backward-looking.)

In principle, carbon-sequestering policies can involve subsidy schemes directed to two distinct objectives: (i) Increase plantation activities, and (ii) Increase rotation times. In the remaining discussion, we shall focus only on (i).

3. Prototypical Models for Argentina

In this section we develop two models used for Argentina. Lacking specific empirical growth models we use a logistic function fitted to anticipated forest growth. The carbon coefficient is handled in the common way for an analysis of this type -see, e.g., Marland (1988), Crosson et al. (1994).

Here we present prototypical models for two Argentinean regions: Meso- potamia (subtropical) and Patagonia (temperate). We use a biomass coeffi-

4 Growth Function: Nesopotamia (cubic meters/ba) Carbon in Forest (tons/ha): Mesopotamia 700

600 150 So

40M 100 300 200 so 100,

0 10 20 30 40 so 2000 2050 2100 2150 2200

Carbon in Wood Products (tons/ha): Mesopotamia Total Carbon (tons/ba): 14esopotamia

80 200

40- 100

20 so

2000 2050 2100 2150 2200 2000 2050 2100 2150 2200

Growth Function: Patagonia (cubic meters/ha) Carbon in Forest (tons/ha): Patagonia

70

250 60

200 so

150 40 30 100. 20 50 0

0 10 20 30 40 50 2000 2050 2100 2150 2200

Carbon in Wood Products (tons/ha): Patagonia Total carbon (tons/hal: Patagonia 40 so.

30 60

20 40

10 20

2000 2050 2100 2150 2200 2000 2050 2100 2150 2200

Fig. 1. Examples of forest carbon sinks over time. 5 (Years on the horizontal axis.) cient of 1.40 and a carbon coefficient, of 0.26 (Crosson et al., 1994) so that cei = a = 0.26 x 1.4. Only two types of harvest types will be considered here: waste and commercial use -i.e., hi,j will represent waste and short-lived wood products, and hj,2 long-lived wood products.

The growth functions, 0(*), used for the commercial wood are constructed to be consistent with the average annual growth figures in SAGyP (1994).4 Over the rotation period, they accumulate the same amount of commercial wood as the models in SAGyP (1994). We use a logistic growth curve which is defined by

0(t - to) dz(t) TiziW(t)(ai - zi(t)) dt ae where zi(t) is the volume of commercial wood at site (region) i, at time t; which implies

zi = ai C 14+ 3e-Yj(to -t)

Note that zi(to) = 0 = C = -ai/(1 + I3 ). The graph of zi(t) is S-shaped symmetric about its inflexion point -- see figure 1. Table 1 shows the values of the different parameters for the two regions considered in the prototypical models that follow. The column AAG represents the annual average growth over the rotation.

Table 1. Logistic growth function parameters of two prototypical models of forest carbon sequestration i Region a i I AAG Rotation 1 Mesopotamia 706.21 45 0.20 20 m 3 /ha/yr 25 years 2 Patagonia 301.50 85 0.15 13 m 3 /ha/yr 35 years

4 SAGyP stands for Secretar-(a de Agricultura, Ganadera y Pesca of the Republic of Ar- gentina.

6 The carbon sequestered in wood products is assumed to be declining expo- nentialy, so that the survival function is given by

-) 02 (t - S)- s)0.2-0.030(t-3)=_ 0. 26eoos

After 50 years, about 22% of the carbon remains sequestered, less than 5% remains after 100 years and only a bit over 1% stays sequerested after 150 years.s We assume that the carbon associated with waste (which includes dead trees and limbs on forest floor) and other short-lived wood products is released immediately, i.e., q5 (t - s) = 0.

3.1. Valuing Carbon Flows

Figure 1 shows the status of the potential carbon sinks per ha in two different regions of Argentina: Mesopotamia and Patagonia. Mesopotamia with better growth conditions produces substantially more sequestering sooner in time. We assume that a larger proportion of the commercial wood goes into long-lived wood products in Patagonia than in Mesopotamia (I versus 1) but this cannot compensate for the natural conditions favoring Mesopotamia. We ask here where (if anyplace) tree-planting should be subsidized for the carbon-sequestering ser- vices that it renders.

We therefore turn now to compute the 'carbon' part, IIf, in equation (3). In order to do that, we assume that the social value of one-year carbon sequestering evolves according to pc(t) = poe".

5 Row and Phelps (1995) have developed a sophisticated model (HARVCARB) which tracks wood carbon flows and storage after the timber harvest for different types of trees and regions. They use different (exponential) decay functions for each of 12 major end-use classes. Given the uncertainty of the destiny of the wood from the Argentinean regions here considered at the time horizons which we are looking at, we chose for a simple aggregate decay function.

7 We can then compute the ratio of carbon benefits from one ha in Mesopotamia to the carbon benefits of one ha in Patagonia: II/II'. This ratio is a function of the difference between the growth rate for carbon prices and the discount rate. Table 2 shows both the absolute values and the ratio for different values

of (-7r - p). (Note that for the integral in Hf to converge we need (7r - p) < 0.)

Table 2. Economic valuation of the forest carbon-sequestering services of 1 ha in two proptotypical models Mesopotamia Patagonia (r - p) II /PO II12/C IP I /II2 -0.01 94750.00 29605.30 3.20 -0.02 24039.80 7376.22 3.26 -0.03 10195.60 3010.73 3.39 -0.04 5433.32 1528.75 3.55 -0.05 3287.46 876.98 3.75 -0.06 2157.07 544.53 3.96 -0.07 1497.92 357.91 4.19 -0.08 1085.06 245.85 4.41 -0.09 812.36 175.09 4.64 -0.10 624.65 128.58 4.86

Let us focus on the last column in table 2. When (r-p) = -0.01, the value of the carbon-sequestering services of 1 ha in Mesopotamia is 3.20 times its value in Patagonia. When there is more impatience, e.g., (i7 - p) = -0.10, the ratio goes up, to 4.86. Suppose, at (r - p) = -0.10, that the effective subsidy per incremental ha was 5 times lower in Patagonia. Then, it would pay to choose Patagonia over Mesopotamia despite Mesopotamia's higher yield.

Table 2 shows that Mesopotamia is 3 to 5 times more effective in sequestering carbon per Ha. This means that Mesopotamia can therefore afford to be 5 to 3 times less "incremental" than Paragonia. Thus, while practically all the planting in Patagonia is incremental (i.e., it would not occur in the absence of subsidies), that is not the case in Mesopotamia where some plantation activities

8 would likely take place in the baseline scenario when no subsidies are present. However, since Mesopotamia has so much better growing conditions, even when some of the subsidies are simply transformed into rents and affect no behaviour whatsoever it can still be a better option than Patagonia.

For instance, the first row of table 2 indicates that in the case most favourable to Patagonia (when the discount rate is low relative to the rate of change of the value of carbon storage), the discounted present value of carbon benefits in Mesopotamia is 3.2 times larger than in Patagonia. Suppose that it takes $X to get an extra (truly incremental) Ha in Patagonia while it costs $Y in Mesopotamia. If Y < 3.2X then Mesopotamia is a better option, otherwise Patagonia is the most cost effective. In other words, suppose that $1 gets an extra Ha planted in Patagonia. Suppose that in Mesopotamia we must pay $3 (say that for every 3 Ha claiming the subsidy only 1 is incremental and the other 2 would have been planted anyways). In this case, Mesopotamia would still be the most cost-effective alternative. If instead we needed $4 to get the incremental Ha in Mesopotamia, then Patagonia would be the best option.

SAGyP (1994, 1995) estimated the required (one lump sum) subsidies to make tree-planting activities financially attractive for Mesopotamia and Patagonia: US$ 438/ha versus US$ 778/ha. We stress here the notion of effective subsidies per incremental ha planted. Because of political and informational constraints, uniform subsidies must be offered within each region. As a result, the subsidy must be paid to all the ha's planted regardless of whether they are incremental or not -see Ley and Sedjo (1995) for a more detailed discussion. Suppose, for the sake of argument, that in Mesopotamia the subsidy doubles the annual planting -i.e., half of the subsidized planting would have occurred in the absence of any subsidy- while in Patagonia no planting would occur without the subsidy.

9 Then, the effective subsidy per incremental ha would be US$ 876 (= 438 x 2) in Mesopotamia while it would remain at US$ 778 in Patagonia.

What about the absolute value of If'? Table 2 shows II?/po. What is a reasonable value for po? Suppose that the optimal carbon tax today was Sr/ton, then: po = r(p - 7r); since a carbon tax preventing the release of 1 ton is equivalent to the eternal sequestration of 1 ton. As an example, if (ir - p) = -0.05, and -7 = $5/ton (Nordhaus, 1993); we get po = 0.25 so that the value of the carbon services would be worth US$ 821.75/ha in Mesopotamia (= 0.25 x 3287.46) and US$ 219.25 (= 0.25 x 876.98) in Patagonia.

We should note that the application of the above is made difficult by the problems associated with the estimate of the "effective subsidy." In our example, for a given effective subsidy, Mesopotamia will always be chosen. However, it is also clear that the effective subsidy will vary by region with location, value of commercial wood, access to the market, and so forth. Thus, this approach provides a basis for subsidizing plantations in regions that might not be favored by commercial considerations.

4. Concluding Remarks

This study undertakes two tasks. First, it estimates the carbon sequestering po- tential for tow alternative tree plantations programs in two regions of Argentina, which have markedly distinct carbon sequestering potentials. Second, the study develops an innovative method for evaluating the relative benefits of the carbon sequestered in the two cases based upon assumptions about the evolution of the shadow price of carbon and the discount rate. Estimates of the comparative benefits or value provide guidance as to the optimum comparative size of sub- sidies for the two regions. Alternative assumptions could be used in a similar framework to explore other scenarios.

10 The approach demonstrates that the more efficient plantation subsidy may go to the region that is disadvantaged commercially, since the subsidy will not be allocated to activities that would be undertaken anyway without the subsidy.

References

Arrow, K., W.R. Cline, K.-G. MWner, M. Munasinghe and J.E. Stiglitz (1994): "Intertemporal and Equity Discounting," Chapter 3 in the forthcoming IPCC report on Climate Change.

Crosson, P., J. Adamoli, K. Frederick and R. Sedjo (1994): "Potential Envi- ronmental and Other External Consequences of the Program to Increase the Area of Plantation Forests in Argentina by 400,000 Hectares," Final Report to the Secretaria de Agricultura, Ganaderia y Pesca, Gobierno de Argentina. van Kooten, G. Casey, G. Cornelis, Clark Binkley and Gregg Delcourt (1995): "Effect of Carbon Taxes and Subsidies on Optimal Forest Rotation Age and Supply of Carbon Services," American Journal of Agricultural Economics, 77:August, forthcoming.

Ley, E. and R.A. Sedjo (1995): "Differential Subsidies and Equity Considerations in Carbon Policy," Environmental and Resource Economics, , this Volume.

Marland, G. (1988): "The Prospect of Solving the CO 2 Problem Through Global Reforestation," DOE/NBB-0082, U.S. Department of Energy, February.

Nordhaus, W.D. (1993): "Reflections on the Economics of Climate Change," Journal of Economic Perspectives, 7:4, 11-26.

11 Rosebrock, J. (1993): "Time-Weighting Emission Reductions for Global Warm- ing Projects -A Comparison of Shadow Price and Emission Discounting Approaches," mimeo, Harvard University, JFK School of Government.

Row, C. and R.B. Phelps (1995): "Wood Flows and Storage after Timber Har- vest," unpublished.

SAGyP (1994): "Evaluaci6n Financiera de Modelos Forestales para Producci6n de Madera y Fijaci6n de Carbono en Regiones Seleccionadas," mimeo, Proyecto Forest AR, Secretarfa de Agricultura, Ganaderia y Pesca, Repfiblica Ar- gentina.

SAGyP (1995): "Argentina: Desarrollo de Modelos Forestales para Fijaci6n de Carbono y Producci6n de Madera," mimeo, Proyecto Forest AR, Secretaria de Agricultura, Ganaderia y Pesca, Republica Argentina. (Paper to be presented at the XX World Meeting of the IUFRO in Finland, August 1995.).

Sedjo, R.A. and A.M. Solomon (1989): "Climate and Forests," in Greenhouse Warming: Abatement and Adaptation, ed. N.J. Rosenberg, W.E. Easterling, P.R. Crosson and J. Darmstadter. Washington, DC: Resources for the Future.

Sedjo, R.A., J. Wisniewski, A. Sample and J.D. Kinsman (1995): "Managing Carbon via Forestry: Assesment of some Economic Studies," Environmental and Resource Economics, 5:8, forthcoming.

12