Temporary carbon storage and discount rates

Several approaches have been proposed for accounting for temporary carbon sequestration in land-use change and forestry projects that are implemented to offset permanent emissions of carbon dioxide from the energy sector. In a previous paper, we evaluated the incentives provided by some of these approaches. In this paper, we investigate further what we call the “ideal” accounting system, where the forest owner would be paid for carbon sequestration as the service is provided and redeem payments when the forest is harvested and carbon is released back into the atmosphere. We demonstrate how discounting affects the net present value of the forest when carbon sequestration is taken into account under this ideal system. Not all carbon is released back into the atmosphere at harvest, however, since a large proportion may remain fixed in forest products for many years. Here, we compare the profitability of the forest under full redemption of credits at harvest, with partial redemption of credits at harvest followed by annual redemption post-harvest as the carbon decays in a durable forest product. The analysis is based on simulation of farm-forestry systems in south-eastern Australia