Economic value of land use for carbon sequestration

This paper applies the replacement cost method for calculating the value of stochastic carbon sink in the EU climate policy for mitigating carbon dioxide emissions. Minimum costs with and without carbon sinks are then derived with a safety-first approach in a chance constrained framework for current system with an emission trading system and national allocation plans and a hypothetical system where all sectors trade. The theoretical results show that i) the value of carbon sink approaches zero for high enough risk discount, ii) relatively low abatement cost in the trading sector curbs supply of permits on the ETS market, and iii) large abatement costs in the trading sector create values from carbon sink for meeting national targets. The empirical application to the EU commitment of 20% reduction in carbon dioxides shows large variation in carbon sink value depending on risk discount and on institutional set up. Under no uncertainty, the value can correspond to approximately 0.45% of total GDP in EU under current policy system, but it is reduced to one third if all sectors are allowed to trade. The values are unevenly allocated among countries, but in different ways depending on EU policy; under current system countries make gains from reduced costs of meeting national targets, under a sector wide trading scheme buyers of permits gain from reductions in permit price and sellers make associated losses