Brent Sohngen, Department of Agricultural, Environmental and Development Economics, Ohio State University (email@example.com)
For too many years, scientists and environmentalists have owned the discussion of short-term carbon storage, sowing confusion on an otherwise ordinary economic principle. The economic principle at play is renting versus owning. Just about any asset, carbon included, can be rented or owned.
Consider this, when you fly to a vacation destination, you don’t have to buy a house because it is quite easy these days to rent one for the week. If you are an aspiring farmer who can’t afford the high price of buying farmland in the United States, you can join other farmers who annually rent about 40% of US farmland to produce crops. Chances are good that the last time you flew commercially, you did so on a leased aircraft just like the rich and famous do on small private jets. Short-term leases are ubiquitous, helping markets allocate goods and services throughout the economy.
Renting stuff works really well for other assets, why shouldn’t it work for the carbon asset stored in forests and agricultural soils?
The concept of renting carbon has been used to evaluate forest and agricultural carbon sequestration since the early 2000s. The economics of renting is straightforward. The price of any asset is determined as the present value of the stream of revenues associated with owning that asset, where the stream of revenues is the rent. In the case of carbon, the market price of carbon is the asset price. The rental value can be determined directly by using the discount rate.
If the price of carbon at time t is PC(t), and the annual rent is R(t), the economic relationship between the two is
R(t) = PC(t) – PC(t)*exp(-r)
Where r is the discount rate. When the carbon price is $50 and the discount rate is 5%, then the rent on that carbon is $2.44 per year.
Renting carbon is like buying it this year and selling it next year. If you buy a ton of carbon today on a market for $50, and sell it in one year (assuming no depreciation) for the same $50, and your discount rate is 5%, your economic costs of buying and selling that ton are exactly the same as the rental rate:
Costs of buying carbon and selling it a year later = $50 – $50*exp(-r) = $50 – $47.56 = $2.44
A recent paper a few colleagues and I wrote shows how storing carbon for one year like this has value, and how carbon stored for only a year can be used by companies to help them become carbon neutral (see Parisa et al., 2022: https://doi.org/10.1016/j.forpol.2022.102840).
In some cases, if a company wants to become carbon neutral, they may be able to purchase an offset credit from another company, based perhaps on renewable energy, nuclear energy, landfill methane capture, or some other method. However, a big source of relatively low-cost offset credits lies in forests and agricultural soils, both of which provide mainly temporary storage. Forests are temporary because they are susceptible to natural disturbance and future harvest, while agricultural soils are temporary because farmers frequently change their land use or management practices.
But now, with the study by Parisa et al. (2022), there is a clear pathway to treat short-term carbon storage on an equal basis with carbon emissions. To make sure that short-term storage and carbon emissions have equal value, Parisa et al. show that the straightforward answer is to hold multiple tons of short-term storage to equal 1 ton of carbon emission.
Parisa et al.’s paper works out the exact number of tons that need to be held for 1 year at a given discount rate to equal the value of 1 ton of C emissions from energy combustion. If the interest rate is 5%, then someone has to hold 20.5 tons for one year to have equivalent value as one ton emitted.
This means that a farmer who does conservation tillage this year and stores 41 tons for the year offsets the damages caused by 2 tons of CO2 emitted (20.5 tons for 1 year = 1 ton emitted and 41 tons for 1 year = 2 tons emitted). If the price of carbon is $50 per ton, then the farmer could be paid $100, or $2.44 per ton ($100/41 tons =$2.44 per ton), for their year of storage.
The math would work the same for trees, wetlands, or any other ecosystem warehouse of carbon storage. Under different discount rates, the annual rent for carbon would change, as would the number of tons that have to be held to equal a ton of emissions (see table below)
Table: Number of tons that need to be stored for 1 year to equal the value of 1 ton of CO2 emitted under alternative discount rates.
|Tons stored 1 year|
By these calculations, if you have a farm or forest and you defer a timber harvest, reduce your tillage, or plant a cover crop, you now know exactly how much benefit your action provides society. Specifically, if your discount rate is 5%, and you hold 20.5 tons out of the atmosphere for just one year, you have offset the damages caused by 1 ton of your own or someone else’s emissions. With ecosystem storage (in forests, soils, grasslands, or wetlands) you only have to store the carbon for one year to have that benefit.
With short-term carbon storage, you can choose to adopt the new practice as long as you want, providing benefits the whole time. If you choose to store carbon tons for more than one year, you increase the carbon benefit you provide. Storing the carbon for 2 years provides the same benefit the second year as the first, meaning storing 20.5 tons for a second-year offsets the damages caused by 1 additional ton of your or someone else’s emissions. As a result, you can be paid the second year for the same tons. Similarly, storing it for 5 years means you can be paid the carbon price in each of the 5 years.
Moving towards efficient mechanisms to mitigate climate change with short-term storage like this is critical for solving the climate problem. Studies like Austin et al. (2020: https://www.nature.com/articles/s41467-020-19578-z) have estimated the costs of forest carbon storage assuming that markets properly price short-term storage in forests and agricultural soils. This and other similar studies show that there is quite a bit of potential to ramp up carbon sequestration on the landscape at low prices.
Unfortunately, the main crediting agencies, like Verra, American Carbon Registry (ACR), and the California Air Resources Board, have ignored the rental and short-term carbon storage approach in Austin et al. (2020) and Parisa et al. (2022). Instead, they have implemented approaches that rely on models of carbon rather than actual measured carbon, and approaches that rely on long-term contracts.
Environmental groups often bolster their arguments about the importance of fighting climate change using new estimates of the costs of forest carbon abatement in studies like Austin et al. (2020), and recent compilations of the earlier literature on costs such as in Griscom et al (2017) and Fargione et al. (2018). These studies make climate mitigation look cheap after all, suggesting that society should just get to it. However, many environmental groups then argue for crediting rules in the land-based sector that make land-based options hundreds of times more costly than estimated.
The results in Parisa et al. (2022) provide landowners and carbon markets with the assurance that their efforts to provide atmospheric benefits through short-term storage both work, and have atmospheric value. By providing a clear trade-off between short-term tons stored and carbon emissions, and basing the tradeoff on tons that are readily observed in ecosystems, offset markets can flourish. Ultimately, they can grow in scale to create the level of atmospheric benefits estimated in the many studies that have shown them to be low-cost options for climate mitigation.