F orest and A griculture S ectors O ptimization M odel

1. Estimation of Economic Opportunities for Carbon Sequestration in Forest and Agriculture Sectors Using FASOM Forest and Agriculture Sectors Optimization Model Presented at Forestry and Agriculture Greenhouse Gas Modeling ForumShepherdstown, WVOctober 2, 2001 Presented by Darius Adams Bruce McCarlRalph Alig Brian Murray

2. Organization of the Presentation I. FASOM Model Structure • Forest and agriculture sectors • Sector linkage and land transfers • Carbon accounting II. Policy Applications of FASOM • Kyoto Protocol Articles 3.3 and 3.4 • Policy design impacts • Leakage • Synergies: Climate change productivity, carbon pricing, and sequestration

3. I. FASOM Model Structure

4. FASOM Dimensions • Merger of: • log-level forest sector model (substantial detail on the forest inventory) and • multi-commodity ASM agriculture sector model (substantial detail on cropping and livestock production options) • with interaction at the land base level • Optimizing, intertemporal, quasi-spatial market model • Simulates resource management decisions, commodity production-consumption, trade and prices • 100 year time horizon in decade time steps • 11 US regions

5. FASOM Regional Depiction

6. Forest Sector: General Form • Maximize sum of present value of producers’ and consumers’ surplus in the log market (no secondary products) over projection period • consumers’ surplus measured under demand curves, • producers’ surplus computed relative to harvest, transportation, costs of establishing forests, and management costs of logs derived from forest inventory • Softwood/hardwood species; sawtimber, pulpwood and fuelwood products • 9 producing regions / 1 demand region

7. Forest Sector: Demand • Demand relations shift over time, derived from analysis with TAMM/NAPAP/ATLAS models—represent 10-year demand behavior • Product substitution (sawtimber > pulpwood> fuelwood) • Residues from sawtimber processing available to pulping demand • Capacity for processing (bound on log demand) also endogenous

8. Forest Sector: Log Supply • Two classes of private owners (industry and NIPF) differentiated by initial inventory • Inventory stratified by region, species, suitability for agriculture/ past use history, owner, age class and management regime (4 preset regimes), the latter assigned at time of regeneration • Inventory represented by age with clear cut harvesting (only even-age management at present) • Log supply is volume harvested in each period, so endogenous decisions at forest level are: • Length of rotation • Management regime to regenerate harvested area • Species for regeneration • Public harvest exogenous

9. Agriculture Sector • Intertemporal welfare maximization approach similar to forest sector with activity in each decade assumed constant. Dynamic updating based on past yield and consumption trends • Recognizes both primary production and secondary processing/conversion: 36 primary and 39 processed commodities • Primary commodities derived from set of 2000 possible production budgets for field crops, livestock and biofuel products • Primary commodities converted to secondary products via processing activities with associated costs (soybean crushing to meal and oil, livestock to meat and dairy, etc.) • Primary production competes at regional level for price-sensitive factors: irrigation water, grazing and labor • Processed and some primary products sold to national level demands

10. Sector Linkage • Sector surpluses added in overall objective and treated as NPV • Portion of land base in both forest and agriculture suitable for either use • Land can move in either direction, previous use tracked • Only NIPF ownerships can shift uses in forest sector • Extent of convertibility limited by region

11. FOREST CONSUMPTION FOREST PRODUCTION LAND FROM FOREST TO AG LAND FROM AG TO FOREST AG PRODUCTION AG CONSUMPTION AG INPUT SUPPLY GHG INCENTIVE CARBON OBJECTIVE – NPV VALUE MAX +INTEGRAL UNDER DEMAND -COST -TRANSFORM COST - COST +INTEGRAL UNDER DEMAND - COST +PRICE FOREST HARVEST +1 - PRODUCTION  0 FOREST LAND BALANCE +1 -1 +1  FL AG OUTPUT +PRODUCTION +1  0 AG LAND BALANCE +1 -1 +1  AL AG INPUTS +USE -W  AV AG > FOR LAND MAX +1 -1  AFMAX FOR > AG LAND MAX -1 +1  FAMAX LAND TRANSFER CARBON AND OTHER GHG  GHG IN FOREST  GHG IN AG +1  0 FOREST SECTOR AGRICULTURE SECTOR Condensed Tableau of FASOM

12. Modeling — Dynamics and Terminal Conditions • Because we have a multiperiod model we need to reflect initial and terminal conditions as well as the way that we weigh economic activities across time. • The latter is done in NPV terms using a 4% discount rate. • The initial conditions are the existing inventories. • The terminal conditions assume the sectors repeat final period activity infinitely multiplying the NPV of agriculture in the last period by the NPV of an infinite annuity and using a formula for an infinitely regulated forest based on results by von Mantel.

13. Forest Inventory and Forest Carbon Accounting • Merchantable yield volumes, forest inventory, and forest land base • Carbon multipliers and components of carbon inventory

14. Forest sector model (TAMM based) Agricultural sector model • Public timberland • FI timberland • NIPF timberland • FORONLY land • Agricultural land • Ag-only land • Convertible • cropland CROPFOR • Convertible land • Region • Soft & Hard • Prod. Class • Mgt. Class FORCROP PASTFOR • Convertible • pastureland FORPAST Urban, developed and special uses FASOM Model Schematic

15. Merchantable Timber Volume Yields and the Forest Inventory (1) • Data for private timberlands drawn from more than 70,000 forest survey plots monitored by the USDA Forest Service • FASOM models forest inventory using the same age-based structure as ATLAS • Basic forest inventory data are drawn from the 1993 RPA Timber Assessment Update data base

16. Merchantable Timber Volume Yields and the Forest Inventory (2) • Timber inventory strata by: • region (9) • ownership (2) • forest type (4 classes describing species composition, either softwoods or hardwoods, in the current and preceding rotation) • site productivity (three levels for potential wood volume growth) • timber management intensity (four discrete types of timber management regime applied to the area) • 10-year age classes (10) • Each stratum is represented by the number of timberland acres and the growing stock volume per unit area

17. Merchantable Timber Volume Yields and the Forest Inventory (3) • Timber volume yields for plantations on agricultural lands are based on estimates by Moulton and Richards and Birdsey • Reforestation yields are drawn from timber yield tables used in the 1993 RPA Assessment, which give the net wood volume per acre in unharvested stands • Timber harvests from public ownerships are taken as exogenous, with no current modeling of their timber inventory by FASOM

18. HARVEST STORED DISPLACED FOSSIL FUEL MERCHANTABLE BURNED EMISSIONS TO ATMOSPHERE DECAYED NONMERCHANTABLE RESIDUE ECOSYSTEM CARBON DECAY AND EMISSIONS TO ATMOSPHERE SOIL, FOREST FLOOR, UNDERSTORY VEGETATION Forest Carbon Accounting

19. A B Stand Level Example of Forest Carbon Accounting in FASOM

20. Agricultural GHG Accounting ScopeFollows ASMGHG Greenhouse Gas Effected Strategy Basic Nature CO2 CH4 N2O Afforestation / Timberland Sequestration X Biofuel Production Offset X X X Crop Mix Alteration Emiss, Seq X X Crop Fertilization Alteration Emiss, Seq X X Crop Input Alteration Emission X X Crop Tillage Alteration Emission X X Grassland Conversion Sequestration X Irrigated /Dry land Mix Emission X X Livestock Management Emission X Livestock Herd Size Emission X X Livestock System Change Emission X X Manure Management Emission X Rice Acreage Emission X

21. Agricultural GHG Accounting ScopeDifferences — Saturation • We are now assuming that soils stop having an effect after 30 years. We are assuming a linear approach to saturation. • To implement this we are using a modeling structure that separates tillage from production and then keep vintage information on how long the tillage practice has been used. In turn we assume carbon increments occur in the first three decades and then there are no more. We also separate carbon by crop under a tillage system from the average carbon under that tillage system. • Discounting is not needed in the face of saturation since we formally use a NPV framework.

22. II. Policy Applications of FASOM

23. General Policy Observations Based on Studies Using FASOM • Forests can provide cost-effective means for obtaining sizable near-term increments in stored carbon • Regardless of flux target, cost effective policies may involve both the expansion of forest area and modifications in the management of forests • Leakage via unintended (and unregulated) adjustments in land use between forest and ag sectors in response to a sequestration policy can be substantial • Sequestering substantial additional amounts of carbon via afforestation of agricultural lands may have only modest economic welfare impacts on the agriculture sector • Efforts to increase forest C could have a different geographic and species focus than previous studies suggest

24. Specific Policy Applications of FASOM: 2000–2001 • Analysis of Kyoto Protocol “sinks” provisions (Articles 3.3 and 3.4) • Directed studies of leakage • Synergies between sequestration and climate change

25. Kyoto Protocol Analysis (1) Q: What levels of forest carbon can be sequestered (above BAU) under different… • Carbon prices • Time periods: 2008–2012, beyond • Activities • Art. 3.3: Afforesation, Reforestation,Deforestation (ARD) • Art 3.4: Other forest management

26. Kyoto Protocol Analysis (2) Method • Run FASOM at prices of $10, $25, and $50 per tC • Account for incremental (above BAU) changes in forest carbon on ... • (a) Lands targeted by the policy • (b) All forest lands • Leakage = (b) – (a) • Account for changes in market welfare

27. Kyoto Protocol Analysis (3)

28. Kyoto Protocol Analysis (4)

29. Kyoto Protocol Analysis (5) Other results • C prices Þ 1 - 40 MM acres to the private forest area base • Incremental C peaks about 2020 then declines • $ for intensive forest management + increased forest area reduce social costs of sequestration • Commodity price effects are relatively modest, except at the highest C prices • Timber prices are most affected; crop prices are least affected • Higher discount rates Þ reduce C sequestration

30. Directed Studies of Leakage (1) Q: What empirical evidence on rate of leakage across LULUCF mitigation options? Evaluation Methods • Analytical work/comparative statics • Review evidence from econometric studies • FASOM runs under different policy designs

31. Directed Studies of Leakage (2)

32. Synergies: Climate Change, Carbon Prices, and Sequestration (1) Q: How do projected climate change indicators (temperature precipitation, and CO2 fertilization) affect aggregate levels of sequestration? Re: “Indirect human-induced effects” • Method • Take climate scenarios used for national climate change assessment (Hadley and Canadian models) • Run climate scenarios through biophysical models (TEM, VEMAP) • Feed climate/biophysical scenarios into FASOM at baseline ($0) and (+) C prices

33. Synergies: Climate Change, Carbon Prices, and Sequestration (2)

34. Synergies: Climate Change, Carbon Prices, and Sequestration (3)

35. Synergies: Climate Change, Carbon Prices, and Sequestration (4)

36. Summary (1) • FASOM models economic responses and GHG consequences of activity on the private land base in forestry and agriculture in the US • Geographic and cross-sectoral coverage enables simulation of complex policy feedbacks • Intertemporal structure enables more refined analysis of policies and climate change impacts • Estimation of welfare impacts, not just program costs, enables social benefit-cost analysis • Optimization/perfect foresight structure of the model raises some issues of empirical validation

37. Summary (2) • Policy simulations show • Forest sector mitigation options can be an economically effective short-intermediate term strategy • Permanence issues: Current sequestration followed by future releases • Policy design can greatly affect the amount of leakage • Synergies between climate change productivity, C prices, and sequestration rates are substantial

38. Future Directions (1) • Model Revisions • Update US forestry and agriculture data • Expand geographical scope to Canada • Refine detail in forest sector market models • Review and revise carbon accounting framework and data • Extend linkages • Non CO2 GHGs • CGE/macro models • Intra-regional detail

39. Future Directions (2) • Policy Applications • Revised aggregate estimates based on evolving US policy • Transaction cost effects • Co-benefits of sequestration