A CGE Approach to Modeling the Economic Impacts of Forest Carbon Plantations & Prices

1. A CGE Approach to Modeling the Economic Impacts ofForest Carbon Plantations & Prices Forestry & Agriculture Greenhouse Gas Modeling Forum Oct 1-3, 2001, National Conservation Training Center Shepherdstown, West Virginia Janaki R.R. Alavalapati and Grace Y. Wong School of Forest Resources & Conservation, University of Florida Financial support from the USDA is greatly appreciated

2. Layout of Presentation: • Study objectives • Model specification - the CGE framework and economic assumptions • Model run simulations - base case projections and policy shock projections • Results and discussion • Future research – Integrated forest CGE model

3. Climate change projections: Global mean temp change (oC), relative to 1860 for 3 different emission scenarios. Pattern of annual avg temp changes, 2080 relative to present day for B2 (most conservative) emission scenario. Source: Hadley Research Centre, 2000

4. Objectives: • To explore the potentiality of CGE approach for modeling the forest sector • To examine land use changes and economy-wide impacts in the U.S. from establishing forest carbon plantations (Dynamic model) • To examine the impact of carbon payments on CO2 supply and welfare (Static model) • To find ways to integrate global CGE and timber supply models

5. CGE Structure: Dynamic FARM model(Darwin et al. 1996; Hertel 1997; Ianchovichina and McDougall et al. 2001)

6. Model Specification (1): Assumptions • Data is from the Global Trade Analysis Project (GTAP) database, version 4, 1995. • Dynamics is driven by investment theory. • Perfectly competitive market structure • Producers maximize profits • Consumers maximize utility • Model is solved recursively.

7. Model Specification (2):Production Structure

8. 12 Regions: United States Canada European Union Japan Australia - NZ Southeast Asia Other East Asia Other Asia Latin America Africa Former Soviet Union Other Europe (OEU) 12 sectors: Crops (six types) Livestock (six types) Forestry (six types) Coal, Oil & Gas Other Minerals Fish, Meat & Milk Other Processed Foods Textiles, Clothing & Footwear Other Non-metallic Manufactures Other Manufactures Services & Utilities Capital goods formation Model Specification (3):Regional & Sectoral Aggregation Model has six land classes based on the length of growing season

9. Model specification: Land Crops sub-sector associated with land class i Livestock sub-sector associated with land class i Forestry sub-sector associated with land class i Manufacturing and services sectors QENDF(i,j,r): Supply of land class i to sector j in region r (Allen partial elasticities) QEND(i,r): Land endowment of type i in region r

10. Model Limitationsfor forestry analysis • Model in its current form does not have details on forest growth dynamics. • Model assumes a steady-state timber output, period-by-period. • Unable to discern forest inventory or price impacts on timber harvest behavior. • CO2 effects have to be calculated outside the model.

11. An illustration of steady state (sustained yield) Area: 100 acres; Rotation age: 25

12. Model Simulations (2000-2020): • Base Case Scenario – NO carbon plantations. • Macro forecasts (rates of growth in GDP, population, supply of skilled & unskilled labor). Includes post-Uruguay Round trade liberalization effects. • Policy Shock – Increase of 22.05 mil ha of carbon plantations: • U.S. Pacific NW = 1 mil ha • U.S. South = 15 mil ha • Canada = 5 mil ha • Australia = 0.5 mil ha • New Zealand = 0.55 mil ha

13. Results (1):Base case projections by 2020 (with NO policy) • Forest area shrinks by about 2.9 mil ha (particularly in the U.S. South) • Agricultural land area expands by 0.13% • Aggregate crop output increases by 25% • Timber output increases by 24% • Crop output and timber output prices drop by 9% and 11% • Trade balance grows by over US$ 624 bil.

14. Base case projection ofland use changes by 2020 (with NO policy)

15. Results (2):Policy Impacts on U.S. Land use 18.54% 8.54% * Leakage effect is approximately 0.97 mil ha

16. Results (3):Policy Impacts on Welfare • Overall economy declines: • GNP (-0.01%) • Welfare as measured by EV drops (-US$727 mil) • Average wage drops (-0.07%) • Household income drops (-0.04%) • Trade balance drops (-US$ 3.4 bil) • Primary factor income in farm and forest sectors decreases by 0.92%

17. Results (4):The static CGE model * • To model CO2 price payments, a Static CGE model was used • All economic assumptions hold. Data is from GTAP, v.5, 1997. • Results reflect post-shock steady-state outcome, and are relative changes from the pre-policy steady-state values.

18. Comparison of Results: *Denotes CO2 stored in harvested forest products only EV can be perceived as shadow price of policy

19. On going research • Link current CGE framework with a dynamic timber supply model (Sedjo and Shogen): • to be able to determine future timber supply and prices more accurately. • to model impacts of economic incentives on harvest behavior. • to estimate cumulative gains or losses in forest carbon storage over the long-term. • to be able to compare the efficiency of various forest carbon policies.

20. Wish list... • Expand details in the energy sector to link CO2 emissions to economic activities based on the amounts and types of energy consumed (eg. GTAP-E).

22. Conclusions • Top-down CGE models are good to provide economy-wide impacts by capturing intersectoral and interregional linkages • Have to be careful. Otherwise they quickly become black boxes • Crucial to customize models by linking with sectoral models