An economic analysis of the establishment of forest plantations in the United Kingdom to mitigate climatic change

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An economic analysis of the establishment of forest plantations in the United Kingdom to mitigate climatic change

Maria Nijnik

^a,

⁎ , Guillaume Pajot

^b

, Andy J. Moffat

^c

, Bill Slee

^a

aThe James Hutton Institute, Craigiebuckler, Aberdeen, AB15 8QH, United Kingdom

bUniversité Montesquieu-Bordeaux, 35 Avenue Abadie, 33100 Bordeaux, France

cCentre for Forestry and Climate Change, Forest Research, Alice Holt Lodge, Farnham, Surrey GU10 4LH, United Kingdom

a b s t r a c t a r t i c l e i n f o

Article history:

Received 6 May 2011

Received in revised form 7 October 2012 Accepted 9 October 2012

Available online 15 November 2012 Keywords:

Forestry Afforestation Carbon sequestration Cost effectiveness Policy

Sustainable development

This paper addresses the economic dimensions of climate change mitigation by afforestation in the UK and the necessity of reconciling sustainable development with carbon sequestration forest policy initiatives.

Present value costs per tonne of carbon sequestration through the creation of new forests are estimated, and results of a static comparative analysis, aiming to show the inﬂuence of key variables on the costs, are presented and discussed. The paper provides empirical evidence of the cost effectiveness of the establishment of forest plantations for climate change mitigation in different locations in the UK, identifying also the importance of placing forestry for carbon sequestration in the general context of rural land use, where signiﬁcant policy reforms can be anticipated. The evidence from this research suggests that the choice of location for forestry development, and of appropriate species and management regimes to be applied, are important factors in determining economic costs. Afforestation with relatively fast growing tree species (e.g. Sitka spruce) on low grade agricultural land (e.g. currently used for sheep grazing) may be a cost effective option. The general conclusion is that there is a case for forestry in the UK to contribute to climate mitigation, that woodlands expansion is likely competitive with other means of removing carbon from the atmosphere, and that in certain cases and locations, afforestation projects may provide relatively low cost options for carbon sequestration.

1. Introduction

In the light of the Kyoto Protocol to the United Framework Convention on Climate Change (UNFCCC), the Parties committed themselves to stabilising atmospheric greenhouse gas (GHG) concentrations, including those of CO2.¹The commitment of the UK under the EU burden-sharing target is 12.5% GHG emissions reduction for 2008–2012, relative to the base year.²The target is to be achieved by both reducing emissions (sources) and removing GHG from the atmosphere (enhancement of sinks). Since the COP-7 in 2001,

afforestation, reforestation, forest management and soil carbon have become eligible strategies (Read et al., 2009).

The UK has one of the lowest percentages of wooded land (12%) in Europe, but it has signiﬁcantly expanded its wooded cover in the last hundred years (FC, 2010). The maximum rate at which the forests expanded during the 20th century was about 40 000 ha yr⁻¹in the early 1970s (Cannell, 2003). However, the rate of forest expansion has fallen to an average of about 10 000 ha yr⁻¹(FC, 2011). Currently, about 4 million tonnes of carbon is sequestered annually in forests in the UK, with 0.5 million tonnes of carbon from trees planted since 1990. Terrestrial carbon sequestration is considered important in the postponement or reduction of climate change, as it allows time for ad- aptation, learning and technological innovation. Read et al. (2009) suggested a UK planting target of 23 000 ha yr⁻¹ and this, over 40 years, would involve changing the use of only 4% of the UK's land, producing substantial carbon reductions.

Forestry development in the UK is supported byﬁnancial instru- ments which vary across the territory. For example, in England, the For- estry Commission (FCE) administers the English Woodland Grant Scheme (FCE, 2011). Grants and annual Farm Woodland Payments also encourage farmers to convert productive land into forest (FCE, 2011).

In Scotland, as part of the Scottish Rural Development Programme (SRDP), new grants have been introduced bringing together a range of

⁎ Corresponding author.

E-mail address:maria.nijnik@hutton.ac.uk(M. Nijnik).

1The COP-17 (UNFCCC, 2011) held in Durban agreed on a decision by Parties to adopt a universal legal agreement on climate change as soon as possible, and no later than 2015.

2A series of targets for reducing CO2emissions have been set out—including making the UK's targets for a 34% cut in emissions on the 1990 levels by 2020 (HMG, 2009a). The Climate Change Act (DEFRA, 2008)–theﬁrst of its kind in any country– set out a framework for moving the UK to a low-carbon economy, with a target of 80% emissions reduction by 2050.

http://dx.doi.org/10.1016/j.forpol.2012.10.002

Contents lists available atSciVerse ScienceDirect

Forest Policy and Economics

j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / f o r p o l

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formerly separate support schemes which aim to deliver targeted environmental, social and economic benefits. Grant support is delivered through a number of forestry-specific (e.g. short rotation coppice crops of willow or poplar) and non-specific (e.g. support for renewable energy) options, including those of tackling climate change (Scottish Government, SG, 2011).

In the light of the policy implications described above, the last decade has seen an upsurge in the number of publications which address the role of UK forestry in tackling climate change (e.g.Bateman and Lovett, 2000; Brainard et al., 2009; Broadmeadow and Matthews, 2003; Cannell, 2003; Matthews and Robertson, 2003; Milne, 2002;

Moran et al., 2008; Morison et al., 2012; Price, 2008; Read et al., 2009;

Rollinson, 2007; Tipper et al., 2004; Valatin, 2011; Valatin, 2012a;

Valatin, 2012b).Stern (2006)explored the economic impacts of climate change and the cost of stabilising GHG in the global atmosphere.

Numerous studies carried out worldwide have addressed the cost effectiveness of afforestation/reforestation for carbon sequestration (Brainard et al., 2009; Newell and Stavins, 2000; Nijnik, 2005; Nijnik and Bizikova, 2008; Slangen et al., 1997; Stavins and Richards, 2005).

van Kooten et al. (2004)carried out a meta-analysis of 68 such studies, with a total of 1047 observations, and identiﬁed substantial variability in marginal costs in different countries and in different settings.³The analysis showed that carbon sequestration through the establishment of new forests could be costly, particularly in EU countries, but that it often compares well with the cost of technologies for carbon capture and storage (which is in the order of US$150 per tonne C). Also, it was shown that in some regions, marginal cost estimates from carbon mitigation by forests can be compared well with market prices of carbon (e.g. prices in the EU's Emissions Trading Scheme (ETS) stand at around€55.5 per tonne C,⁴PointCarbon, 2011a).⁵

A pilot evaluation of the cost effectiveness of forest establishment in the UK for carbon sequestration was published in the Final Report to the Committee on Climate Change (Moran et al., 2008). A national assessment of the potential of the UK forestry to mitigate climate change coordinated by the Forestry Commission (FC) was published inRead et al. (2009). In their contribution to these reports, the authors of the current paper showed that the mitigative role of new forests is mediated by externalities and uncertainties, and shaped by environmental, economic and policy drivers, market signals, institutions and governance, and public attitudes and behavioural patterns, at various scales (Nijnik et al., 2009a). It was stressed that there is a need for further research on the cost effectiveness of climate change mitigation forestry opportunities for the UK, with identiﬁcation of projects which will be coherent, effective, efﬁcient, widely accepted by the public, and consistent with other aspects of policy for sustainable development (Nijnik et al., 2009b).

The current paper extends work done previously on the economics of afforestation for carbon sequestration in the UK and inter- nationally (e.g.Adger et al., 1997; Huang and Kronrad, 2001; Nijnik et al., 2009b; Pajot, 2008). It modiﬁes some of the earlier assumptions made by the authors and expands the scope of the analysis.

The aim is to explore the economic justiﬁcation for afforestation in the UK to mitigate climate change and to provide benchmarks for

possible cross comparison analysis of different carbon sequestration options. The paperﬁrst presents the research methodology. Next, carbon sequestration rates and the potential of climate change mitigation through afforestation in the UK are analysed. Present value costs per tonne of carbon sequestration in new forests are estimated to provide empirical evidence of cost effectiveness. The paper takes into account various initial land uses and discount rates, spatial dimensions, various yield classes and regional timber prices of 2010.

Results of a static comparative analysis showing the inﬂuence of key variables on cost are also shown and discussed. The paper con- cludes by offering some insights into the feasibility of climate change mitigation through afforestation and by providing ideas for future research.

2. Methodology

2.1. Key approaches available

TheIPCC (2007)identiﬁed the following measures to increase the forestry contribution to carbon sequestration:

1. afforestation of abandoned and marginal agricultural land;

2. forest management to increase carbon density at the stand and landscape levels (e.g. maintaining forest cover, minimising forest carbon soil losses, increasing rotation lengths, increasing growth and managing drainage);

3. increasing off site carbon stocks in wood products⁶; 4. enhancing product and fuel substitution.⁷

The current paper analyses the cost effectiveness of theﬁrst policy measure identiﬁed.⁸Stavins and Richards (2005)distinguish three methodologies to analyse the economics of carbon sequestration through afforestation: econometric studies; sectoral optimisation models and a ‘bottom up’ approach. The ‘bottom up’ approach (Valatin, 2012a) is considered as the most straightforward way to carry out cost effectiveness analysis relevant to our research objectives⁹and is used in this paper.

2.2. Baselines and carbon sequestration potential

Consideration of the UK carbon sequestration potential of afforestation was based on targets for planting set by the devolved forestry administrations. Thomson and van Oijen (2008) have developed three scenarios for forestry in the UK until the year 2020, in which the Tier 3 carbon accounting modelCFLOW was used and annual planting statistics and management practices, including thinning regimes and rotation lengths, were considered (CEH, 2009). A high emissions scenario did not take into account any new planting. A second scenario projected the 2005 planting rate to occur every year until 2020. This is the mid emissions scenario which is considered as the baseline for afforestation. The third scenario projects a high planting rate of 30 000 ha yr⁻¹. It is described as the low emissions scenario

3Baseline estimates of the costs of sequestering carbon through forest conservation (based on analysis of 981 estimates from 55 studies of the costs of creating carbon offsets using forestry) range from US$46.62 to US$260.29 per tonne C. Tree planting and agroforestry activities increase costs by more than 200% (van Kooten et al., 2004). Al- though such variation is partly due to the diversity of methods and assumptions used, it indicates that terrestrial carbon sequestration is case speciﬁc and involves a great deal of uncertainty.

4The conversion factor from CO2eto C is 3.67 (i.e. 44/12).

5However, prices in markets do not necessarily reﬂect the social value of carbon reductions, but rather current demand and supply, and the institutional aspects of such markets (Nijnik et al., 2009b). Recent reforms of the CAP are likely to have signiﬁcant effects on land prices which will change the net cost of afforestation. The rule change in late 2009 to allow continued receipt of the Single Farm Payment after afforestation is of importance, and world food prices can have additional effects (Slee et al., in press).

6Carbonﬁxation alone has a one time effect, and eventually, through the decay of wood all the above ground carbon is released to the atmosphere. However, when trees are usually cut after they reach mean annual increment the carbon stored in wood products is an addition to the terrestrial carbon sink.

7Wood received can be used as a substitute for fossil fuels, or timber used in wood products can later get burned. If energy required for harvesting and processing of wood is not taken into account, the use of timber as a substitute for fossil fuel is carbon neu- tral. The net gain here is the amount of CO2that would have been released by burning fossil fuel if not replacing it with wood.

8As shown byvan Kooten (2004)on examples, particularly of forests in British Co- lumbia, the social beneﬁts of carbon capture and storage, and substitution effects, under wood product and bio energy scenarios are repeatable over rotations, and therefore expected to be considerably higher than under the strategy of carbonﬁxation alone.

9It compares forestry and farming incomes and climate beneﬁts (carbon sequestration in trees).

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and is taken as our abatement option for afforestation.^10,11Abatement potential was therefore determined relative to a business as usual baseline.Table 1shows the additional carbon sequestration potential resulting from the greater rate of afforestation under the abatement option.

The emissions caused by soil disturbance occur in theﬁrst years after planting.¹²Because of emissions from soil, the additional carbon sequestration potential becomes positive several years after planting and then progressively rises as carbon stocks increase in the biomass offset carbon emissions from soils.

2.3. Assessing the beneﬁts of carbon sequestration

Three major groups of approaches brieﬂy presented below have been suggested byRichards and Stokes (2004)to evaluate the carbon sequestration beneﬁts of afforestation.

1. The Flow Summation approach consists of summing annual carbon ﬂows over a given number of years (where the choice of end dates can be arbitrary and has a substantial impact on the results). The projected beneﬁts are estimated, as follows:

B¼∫

T₁

0

S^′ð Þtdt−∫

T₂

0

S^′ð Þtdt ð1Þ

where:

Bdescribes the beneﬁts of the project over time (t);

S′describes annual carbonﬂow (change in carbon);

T₁is the rotation length implemented in theﬁrst project; and T2is the rotation length implemented in the second project.

2. The Average Storage (stock) approach averages the carbon stocks over a given number of years. The project's beneﬁts are estimated, as follows:

B¼Sm₁−Sm₂ ð2Þ

where:

Bdescribes the beneﬁts of the project;

Sm1is the average stock produced by theﬁrst project;

Sm2is the average stock produced by the second project.

The average stocks are calculated according to the following equation:

Sm_i¼ X^T

t¼1

S_ið Þt

T ð3Þ

where:

Smiis the average stock produced by each of the two projects compared;

iis either 1 or 2 of the projects;

Projects‘one’and‘two’are general cases considered byRichards and Stokes (2004). Our case presumes conversion of marginal agricultural land to forestry. Therefore, our case takes project 1 as afforestation, and project 2 as maintaining agriculture. The use ofTis the rotation length; andSi(t) is the carbon stock at timetby projecti.

However, early sequestration could be considered as having a greater value than late sequestration (for example, when biological sequestration is seen as a means to buy time, while waiting for climate-friendly technologies). Discounting techniques for carbon beneﬁts can be used (van Kooten, 2004) to take this into account.

In addition, they allow us to compare projects that exhibit different sequestration patterns (i.e. fast growing versus slow growing plantations or projects aiming at sequestering carbon in the biomass versus projects aiming at sequestering carbon in soils). They are also suitable for considering the use of wood in wood products or as a substitute for fossil fuel. The discounting of both beneﬁts and costs explained below (using the method applied e.g. in Nijnik, 2005;

Nijnik and Bizikova, 2008) makes economic analysis, with a comparison of different mitigation options, more practical.

3. The beneﬁts can then be calculated using the Discounting Approach, as:

B¼∫

T₁

0

S^′ð Þte^−rtdt−∫

T₂

0

S⁰ð Þte^−rtdt ð4Þ

where:

Bdescribes the beneﬁts of the project over time (t);

S′describes annual carbonﬂow (change in carbon);

T1is the rotation length implemented in theﬁrst project;

T2is the rotation length implemented in the second project;

e^−rtaccounts for discounting.

The current paper is largely designed to provide benchmarks for possible comparison of the costs of climate change mitigation, and under the speciﬁc requirements of the UK Government (Moran

10We note that in the absence of new planting, the current carbon sink function of the land use sector (strongly inﬂuenced by carbon sequestration in forests) will be al- tered. Land could even become a net carbon emitter.

11For further consideration of the model and its projections seeThomson and van Oijen (2008)and for the way the projections were adopted by Pajot to analyse climate mitigation options for forestry, seeMoran et al. (2008).

12Thuille and Schulze (2006)showed that despite the comparatively larger amount of carbon stored in the growing trees, afforestation should also aim at the preserva- tion/increase of carbon in the mineral soil regarding its greater stability compared with stocks in biomass and humus layers. If grassland afforestation is planned, suitable management options and a sufﬁcient rotation length should be chosen to achieve these objectives. Maintenance of grass cover reduces the initial loss. Estimates of carbon losses from the afforested soils byHargreaves et al. (2003)suggest that long term losses from afforested peatlands are about 0.3 tonne C per ha yr⁻¹thirty years after afforestation.

The Forestry Commission has therefore implemented a policy prohibiting tree planting on peat lands.

Table 1

UK carbon sequestration potential of afforestation, thousand tonnes C yr⁻¹. Source: authors' computations based onThomson and van Oijen (2008).

Year Carbon sequestration from forest land

Additional carbon sequestration potential

Baseline Abatement

2007 3909 3867 −42

2008 3761 3711 −50

2009 3528 3495 −32

2010 2939 2949 −10

2011 2921 2991 70

2012 2715 2853 137

2013 2444 2648 204

2014 2331 2598 268

2015 2137 2464 327

2016 2107 2489 382

2017 2113 2548 435

2018 2114 2599 486

2019 1851 2386 535

2020 1376 1960 584

Sign‘−’indicates carbon removals.

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et al., 2008) and in consideration of intergenerational equity,¹³all carbon beneﬁts in this paper are valued equally whenever captured.

Therefore, carbon uptake beneﬁts are not discounted, and the average storage (stock) approach (method 2 above) is primarily used. The ex- ception is brief theoretical considerations about discounting and someﬁnal calculations showing the effect of using different discount settings on the results provided inSection 3.5.

2.4. Carbon sequestration rates

Carbon sequestration rates by forests vary depending on the tree species' ability to grow and lock up carbon. A widely held assumption is that a tree approaches carbon saturation at maturity, and when it reaches saturation, carbon sequestration equals carbon loss through respiration and leaching (van Kooten, 2004). This current paper builds upon the work done by Bateman and Lovett (2000) that combines data from the FC Yield tables (Edwards and Christie, 1981) describing timber volumes and data on carbon storage in trees.

Sitka spruce (Picea sitchensis) is the most common species in UK forests (FC, 2010), and the study covers a range of Yield Classes (YC) between 12 and 24. The following function (uTWCS) of total carbon storage in unthinned wood, byBateman and Lovett (2000), for example, describes carbon storage of an unthinned Sitka spruce stand (SS) of YC12¹⁴:

uTWCS_SS;12¼0:43727t

4:40

ð Þ þ0:10747t²

28:09

ð Þ −0:0010267t³

−29:21

ð Þ ð5Þ

where:

t= years from planting (t= 0, 1, 2,….).

A generalised functionuTWCSiYCbyBateman and Lovett (2000)as considered in this paper fori= SS (Sitka spruce stands) of any YC is:

uTWCS_SS;YC¼A_SS;YC:uTWCS_ss;12 ð6Þ

By Bateman and Lovett (2000), carbon storage varies linearly across YC, andAis the factor allowing for an approximate¹⁵switching from the YC12 to any other Sitka spruce stand.

ASS;YC¼0:08333YC ð7Þ

Further, a thinning factor allowed consideration of the impact of thinning on carbon stocks.¹⁶A similar approach (functions) by the same authors is available and was applied in the current research paper for broadleaves. The results for thinned and unthinned stands for Sitka spruce and beech (Fagus sylvatica) based upon the Bateman and Lovett (2000)functions are summarised inTable 2.

The carbon sequestration rate for the new plantations was averaged over the length of the rotation and is, for example, 2.8 tonne C per ha (Sitka spruce, YC12, thinned). This is in the range of other estimates for UK (c.f.Broadmeadow and Matthews, 2003) and comparable or even slightly better than those in some other countries in Europe (Nijnik and Bizikova, 2008).¹⁷

Carbon sequestration rates between the tree species are shown in Table 2for purposes of comparison. Although the demand for multiple ecosystem services from UK forestry will likely mandate a mix of coniferous and broadleaved species to be planted, this research addresses the establishment of tree plantations for climate change mitigation alone. Therefore, the planting of Sitka spruce was considered, for which the upper limit for carbon sequestration is comparatively high (c.f.Thomson and van Oijen, 2008). For the reason that sequestration rates for beech are lower, the option of afforesting land with beech for the purpose of carbon sequestration alone has not been considered further. It was assumed that all newly established forests will have the same growth characteristics as Sitka spruce under an in- termediate thinning management regime. Further, because in this paper the tree-planting for carbon sequestration is considered, and carbon sequestration rates positively correlate with the growth rates of trees, we do not think about lower yield classes than 12.¹⁸ 2.5. An economic analysis of afforestation for carbon sequestration

The costs per tonne of carbon sequestration are computed by di- viding the opportunity costs of land conversion to forests (Newell and Stavins, 2000) by the tonnes of carbon sequestered, Eq. (8).

According toStavins and Richards (2005), an important element affecting the costs of carbon sequestration through afforestation in the UK is the revenue that is foregone by diverting land from other (current) uses in order to establish a carbon sink.

CE¼NPV_Forestry−NPV_Farming

ΔC ð8Þ

where:

CE is the cost effectiveness of carbon sequestration;

NPVForestryis the NPV of forestry;

13Discounting at a positive rate assigns insigniﬁcant present values even to considerable far away future damages/losses, consequently, advocating little immediate action as to climate change alleviation. Therefore, for decision making to favour the resilience to climatic changes: the more rapidly CO2concentrations in the atmosphere are projected to be increasing in time (and could lead to considerable future damages/

losses), the less future carbon beneﬁts should be discounted. Overall, largely because of uncertainties an important question that arises while employing economic analysis of planting trees to mitigate climate change is that of carbon discounting (Nijnik, 2002).

14The model reportedfits the data extremely well (R²= 99.9). All parameter estimates are statistically significant (a significance level ofP= 0.05) and coefficients have expected signs and magnitudes. Figures in brackets are oft-statistics.

15Yield class affects not just the rate of carbon accumulation, but the proﬁle through time. However, in this paper, it was not analysed.

16The main idea behind is that after thinning operations total tree carbon storage falls progressively below what is predicted byuTWCS. Using data byMatthews (1991 and 1993), this proportion can be measured as the thinning factor and is provided in Bateman and Lovett (2000).

Table 2

Carbon sequestration rates for Sitka spruce and beech plantations, unthinned and thinned stands, across the analysed yield classes.

Source: based onBateman and Lovett (2000).

Yield class

Carbon sequestration rates unthinned stands (tC/ha)

Carbon sequestration rates thinned stands (tC/ha) Sitka spruce

8 2.2 1.9

12 3.2 2.8

16 4.3 3.6

20 5.4 4.5

24 6.5 5.3

Beech

4 1.9 1.5

6 2.9 2.3

8 3.8 3.0

10 4.8 3.9

17See, for example,Thuille and Schulze (2006)who explored carbon dynamics in Norway spruce (Picea abies) stands in Thuringia and the Alps.

18An assumption was made of the tree species suitability to grow in 2050 and 2080, and e.g. climate and other drivers of changes were omitted from this pilot analysis.

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NPVFarmingis the NPV of farming; and

ΔCis the carbon stock gain over one rotation (i.e.‘beneﬁts’of the project).¹⁹

Forestry generates timber sales income through thinning and clear fell harvesting. We assess the beneﬁts of forestry over one rotation, i.e. the‘Fisher (single) rotation’(van Kooten, 2004), seeing forestry as a temporary solution that enables society to buy time while waiting for low carbon technologies. A simpliﬁed form of the net present value (NPVForestry)²⁰is²¹:

NPV_Forestry¼−cþpve⁻^rT ð9Þ

where:

pis the timber price;

cis the plantation cost;

vis the timber volume;

Tis a temporal variable;

ris the discount rate.

Since there is no accurate measure of mean net farming incomes per unit area of farmland (NPVFarming), the revenues that are foregone by diverting land from other uses can be approximated by gross margins from current farming activities. Previous studies carried out in the UK used this approach (Moran et al., 2008; Nijnik et al., 2009b).

However, considering that the use of gross margins likely overestimates the costs of carbon sequestration, since it only deducts variable costs (i.e. labour, fuel and fertiliser application) from the farm gross earnings, an approach based on land market values has been applied in this paper.

3. Results

The marginal costs vary with initial land use and also spatially for a given option (for example, because of variations in growing condi- tions and in the price of land). The discounting protocol also impacts on the costs of carbon sequestration. A static comparative analysis aiming to show the inﬂuence of these key variables on the costs has been carried out. It focused on the land use on which afforestation takes place, yield classes, locations and discount rates.²²

3.1. Opportunity costs of land

The costs of carbon sequestration through afforestation are analysed for various initial land uses and discount rates.²³Spatial dimensions of UK forestry, multiple yield classes and timber regional prices are also taken into consideration. Forestry generates income through thinning and clearfell harvesting. The amount of income depends on timber prices, available from the Forestry Commission

for England, Scotland and Wales. Tree planting costs (for example, of £1250 per ha for conifers) are based on data fromRadov et al.

(2007). As recommended by the HM Treasury (2003), a discount rate of 3.5% is used as a basic one to represent the attitude of a public investor. The private discount rate is higher, so we also considered a rate of 7%.

To account for the opportunity cost of land, we used the land market values (Table 3) which were investigated in the Agricultural Land Market Survey.²⁴We analysed the costs of carbon sequestration when low quality, medium quality and good quality land is considered for conversion to forest. The assumption was made that it wouldﬁrst displace uncultivated land with a low agricultural potential, i.e. used for low density sheep grazing.

3.2. Costs of carbon sequestration and initial land uses

The carbon sequestration costs for various initial land uses are presented inFig. 1ranking the cheapest places to afforest as low cost options and the most expensive places as high cost options.

The example considers plantation of Sitka spruce forest in Scotland, YC 16 under a 3.5% discount rate assumption (onlyﬁnancial variables are discounted at this stage).

As expected, the conversion of the highest graded land to forests generates the highest carbon sequestration costs. The costs range from £15.4 per tonne C for low grade land (poor livestock) in Scotland to £75.7 per tonne C (prime arable), when high quality land is considered, and costs are discounted at 3.5%. The costs of carbon sequestration are lower than in our previous study (Nijnik et al., 2009b) and conﬁrm that the use of gross margins overestimates the costs of carbon sequestration, whereas the use of land values, as in this paper, probably leads to more accurate estimations. However, public sector calculations relating to the implicit opportunity cost of land might still be overestimated.²⁵

The results provide empirical evidence in support of prospective afforestation of marginal land currently used for livestock (for in- stance, low density sheep grazing). The costs of carbon sequestration on poor livestock land and some Grade 3 livestock land may fall below the social value of carbon (approximately £18 per tonne C) proposed by DEFRA (2008).²⁶ If those measures are undertaken, Table 3

Land value (price per hectare) for various grades of agricultural land, £.

Source: adapted from the data provided in 2010 by the Savills Research.

UK regions Prime

arable Grade 3 arable

Grade 3 livestock

Prime dairy

Poor arable

Poor l ivestock South East England 14,961 13,903 12,608 14,155 11,413 11,766 South West England 14,892 13,468 11,309 13,045 – 9976

West Midlands 15,423 13,570 12,285 15,257 – 9883

East Midlands 12,516 11,748 9811 10,249 9336 8896

East of England 15,557 14,474 7413 – 11,486 3991

North of England 13,695 11,174 9473 13,079 – 6021

Wales 10,656 10,110 10,001 11,084 – 7823

Scotland 13,501 9722 4684 8323 – 2871

19Followingvan Kooten and Bulte (2000)we presume one-time tree planting, with- out considering future use of wood and land after timber harvesting. This hypothetical assumption can only come along with the assumption that by harvesting the trees, using the revenues to cover future costs and storing carbon by some means, both the gains and losses in physical and monetary values are relatively balanced. Another assumption made in this research is that carbon stock of the initial (i.e. agricultural land use) is relatively small, and that the carbon stock in forestry, over one rotation, is the deemed‘beneﬁt’used to calculate the cost-efﬁciency.

20For example, for the most important in the UK conifer species, Sitka spruce YC14, the NPVForestrymaximised is equivalent to £732.75 per ha in 49 years, the nominal length of a commercial rotation for this species.

21Although thinnings are not included in the simpliﬁed Eq.9, they were considered in our calculations.

22The reservation should be noted here that that yield class and land types are often correlated variables.

23This extends the work of Pajot (co-author of this paper) which provided input to the marginal cost curve model for producing estimates for reducing emissions (increasing sequestration) in the land use sector of the UK (Moran et al., 2008).

24We realise that land price represents a capitalisation of future net beneﬁts and that arrangements for Single Farm Payment affect the private opportunity cost of forestry, representing money accruing other than for the physical product. However, in this pilot study, some assumptions and approximations have been made, including those on our computation of NPVfarming. There is no accurate measure of mean net farming incomes per unit area of farmland in the UK and the using of gross margins from farming activities as the measure (Nijnik et al., 2009a, 2009b) probably overestimates the costs of carbon sequestration, since it only deducts variable costs from the farm gross earnings. Therefore, an approach based on land market values is deemed to be more appropriate. Also, because our research is based at country and regional scales, trade-offs between accuracy and scale of the analysis were unavoidable.

25For example, it is less costly if environmental dis-beneﬁts from initial/former land uses are fully taken into consideration (Valatin, 2012a).

26See for exampleValatin (2011)for more information.

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they will beneﬁt society. However, in order to maximise the beneﬁts of afforestation, the economic and climate policy considerations must be reconciled with a more holistic vision of sustainable forestry development, and an economic analysis should be supported by geograph- ic information systems to balance trade-offs (e.g. between bioenergy production and biodiversity conservation, or carbon sequestration/

energy generation and food production), and to avoid soil carbon losses.

3.3. Costs of carbon sequestration and yield classes

The analysis shows a negative relationship between yield class and the costs of carbon sequestration; an example of this relationship for low grade land in Scotland under a 3.5% discount rate is shown in Fig. 2(only ﬁnancial variables are discounted). This relationship is understandable as high yield classes that sequester more tonnes of carbon equate to higher timber revenues for forest businesses which, in turn, generate a higher NPV, and therefore, a lowering of carbon sequestration costs.

3.4. Costs of carbon sequestration across the location

The cost effectiveness of afforestation varies from region to region across the UK, because of different timber prices and of opportunity costs effects.Fig. 3shows the example of afforestation of land ranked as“Grade 3 livestock”in various regions under a 3.5% discount rate and YC12 (only ﬁnancial variables are discounted at this stage).

Costs vary considerably, ranging from £26.7 per tonne C in Scotland to £65.3 per tonne C in South East England, where land values are high.

There are two opposite effects of location on the costs of carbon sequestration. On one hand, carbon sequestration is more cost effective when the timber price is higher (i.e. in England compared with Scotland), if other variables are kept constant. Higher timber prices generate a higher NPV of forestry, which then compares favourably with agriculture. On the other hand, carbon sequestration is less cost effective where the opportunity costs of land are high. Generally, this effect is stronger than the“timber price effect”inducing higher carbon sequestration costs in places where land values are the highest.

3.5. Costs of carbon sequestration and discounting protocols

Forestry is a long term activity that generates income over several decades. Therefore the economic analysis of forest plantations is considerably inﬂuenced by the discounting protocol used (Nijnik, 2002).

Furthermore, the traditional framework of cost–beneﬁt analysis Fig. 1.Costs of carbon sequestration by afforestation for various initial land uses: plan-

tation of Sitka spruce YC 16, under a 3.5% discount rate, £ per tonne of C.

Fig. 2.Costs of carbon sequestration for various yield classes, example of afforestation of poor livestock land in Scotland, discount rate 3.5%, £ per tonne of C.

Fig. 4.Costs of carbon sequestration by afforestation in Scotland with Sitka spruce under different discount rate (DR) settings, £ per tonne of C.

Fig. 3.Costs of carbon sequestration for various regions of the UK; afforestation of Grade 3 livestock land, YC 12 under a 3.5% discount rate, £ per tonne of C.

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(CBA) has been challenged for several reasons (Price, 2005), including that the use of a constant and positive discount rate reduces the weight of future beneﬁts/costs, and intergenerational equity might be overlooked. Therefore, in the example given inFig. 4, we analyse Sitka spruce plantations for various types of land under several discounting protocols applied (Eq.(8)). In line with Moran et al.

(2008), we assume that the private discount rate is 7%, and that the social discount rate is 3.5%.

For the declining discount rate protocol in this research, the HM Treasury guidelines (2003) were followed (Fig. 5) when incomes occur- ring in the years beyond 30 are discounted at a lower rate. The declining discount rates (DDR) applied to forestry and agriculturalflows²⁷work in favour of forestry (by giving more weight to futurefinancialflows compared to current ones). The declining discount rate protocol thus reduces the costs of carbon sequestration in forestry. This is reflected in calculations.

As discussed inSection 2.2, it is also possible to discount carbon (in physical terms) to take into account the fact that sequestration projects may exhibit various sequestration profiles, which means they are not equivalent in terms of their effects on climate. Whereas all major calculations have been made under the assumption thatfi- nancial variables were discounted, results with discounted (average) carbon benefits are now shown inFig. 4(black columns). Thus,finan- cial costs can be compared with carbon storage benefits on an identical basis. When carbonfluxes are discounted at the same rate as the economic variables (3.5%), costs are severely impacted. They are almost doubled, as discounting of carbonfluxes reduces carbon benefits (the denominator of Eq.(8)).

4. Discussion

Carbon price volatility will remain an important factor to consider in economic analysis of afforestation for carbon sequestration (Nijnik et al., 2009a). EU ETS carbon prices may rise over time (as suggested byTurner et al., 2008). However, the development of a carbon market with an increase in the amount of carbon credits available may on the contrary push the price of carbon credits down. This is also driven by availability of“hot air”²⁸particularly in transition countries (Nijnik and Bizikova, 2008).²⁹ A large inﬂow of REDD carbon credits (if it takes place) would mean a lowering of carbon prices across the globe

(unless demand were to increase through tighter cap). This is because GHG mitigation through REDD projects is generally thought to be relatively inexpensive (with a reduction potential of 2.65 Gg tonnes at a cost below $14.7 per tonne C,Point Carbon, 2011b). Thus, the econom- ically optimal level of mitigation through forestry, and the actual uptake of mitigation by private forest owners, including those in the UK, will depend on what is assumed about the global price of carbon (years into the future).

Van Kooten and Sohngen (2007)argue that, if the opportunity cost is fully taken into account and emissions reduction credits can be pur- chased for ca. US$³⁰110 per tonne C, the carbon sequestration through tree planting (and fuel substitution) in tropical and boreal regions will be generally competitive with emissions reductions (Table 4). In Europe, marginal costs of creating carbon offset credits through forestry are much higher.

Results of this research add to the evidence suggesting that an important factor inﬂuencing the costs of carbon sequestration through afforestation is the opportunity cost of land, which in the UK is often high. It suggests that afforestation for carbon sequestration should be focused on the less productive land in the UK rather than considering larger scale afforestation. The decline of hill farming may create space for new economic activity on abandoned farmland, among which could be forestry.³¹

Choice of discounting protocol has a dramatic impact on the economic acceptability of an afforestation project. Higher discount rates reduce the present value of future forest operations. Clear cutting is distant in time, and is more affected by a high discount rate than agricultural annual incomeﬂows. This reduces the relative value of Table 4

Marginal costs of creating carbon offset credits through forestry, $ per tonne C.

Source: adapted fromvan Kooten and Sohngen (2007).

Activity Global Europe Boreal Tropics

Planting 81–121 580–680 18–470 0–26

Planting and fuel substitution 0–180 422–686 3.67–330 0–84

Forest management 220–433 727–1005 169–771 125–231

Forest management and fuel substitution

176–283 745–804 161–396 0–184

Forest conservation 172–716 n.a. n.a. 95–499

Fig. 5.The long term discount rate based on HM Treasury Guidelines of 2003.

27Timber harvesting is distant in time, and is more affected by a high discount rate than annual agriculturalﬂows of income.

28‘Hot air’concerns the amount by which the emissions have been reduced below their target levels.

29In May 2006, when several countries revealed registries indicating that their indus- tries had been allocated more allowances than they could use, trading prices crashed from about€110.1 per tonne C to€36.7 per tonne C, and (after a slight recovery) de- clined to below€0.2 per tonne C in December 2007 (Point Carbon, 2011a).

30In September 2012, 1US$ approximately equals to £0.61, for a more detailed information see:http://www.xe.com/ucc/.

31The issues of institutional changes and future cashﬂow for and responses of farming enterprises merit attention but are beyond the scope of this paper. Also, shifting to forestry would depend on whether agricultural subsidies continue to hold up land prices and whether cultural values would affect the propensity to develop forest- based activities on private land, including those of tree-planting.

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forestry compared to agriculture and generates higher carbon sequestration costs. The declining discount rates applied to both forestry and agriculture work in favour of forestry (by giving more weight to futurefinancialflows of income compared to current ones). Never- theless, there are situations when short term benefits could be preferred to long term benefits. For example, climate change is characterised by thresholds beyond which irreversible effects appear.

If the threshold is close, we might prefer a strategy sequestering carbon as quickly as possible or drastically reducing emissions. The discounting of carbon stocks changes is also an issue that merits attention, as its inﬂuence on the results of economic analysis is substantial (Fig. 4).

This pilot economic analysis considers carbon forestry alone. How- ever, carbon sequestration forestry projects are likely to be implemented if they are consistent with the wider programmes of sustainable rural development (focusing on multiple social, economic and environmental objectives). This particularly concerns remote rural areas where carbon sequestration forestry projects could com- bine the socio economic objectives with the enhancement of nature and rural landscape. National programmes supporting carbon sequestration forest-based activities in the UK focus largely in rural areas.

The effective measures aim for“win–win”situations to beneﬁt rural development, people, the economy and the environment (Rollinson, 2007).

An ecosystem services approach (Millennium Ecosystem Assessment 2005)which is currently widely espoused as a suitable lens through which to explore multifunctional rural land use,ﬁts well for the understanding of UK forestry. The multiple purpose land use considerations would help to prevent potential conﬂicts between‘development’and

‘conservation’and to manage possible conflicts relating to trade offs, e.g. between biodiversity and carbon sequestration, or between landscape amenity values and those of climate change mitigation. However, there remains much to do to find acknowledged mechanisms for balancing trade-offs and attaining an‘optimal’(case specific) solution for appropriate stakeholders. For example, although multipurpose afforestation may result in lower rates of carbon sequestration, it is expected to be more attractive to people, as in the majority of cases, it will provide additional benefits and will promote sustainable rural development (Nijnik and Bizikova, 2008). In the UK, the role of forestry is deemed to be particularly relevant to regions that have a potential for tree planting (as in Scotland), and where cost effectiveness of afforestation, social acceptability of carbon forestry options, challenges of forest development on high carbon soils, using wood for energy and in wood products projects, are important future topics.³²

Woody biomass is being recognised as a renewable energy source with low GHG emissions (Galbraith et al., 2006; HMG, 2009a;

Matthews and Robertson, 2003; Read et al., 2009), and grant aid (e.g. the Energy Crop Schemes in England and Scotland) is available in many parts of the UK (HMG, 2009b). Policy support for renewable energy is likely to increase the demand for wood, as should any dif- ferential tax on non-renewable energy (Atanasiu, 2011). The opti- mum policies tend to link carbon sequestration in forestry with the long-term substitution of wood in renewable energy projects and in construction. The wood products pool in the UK is estimated to be 80 million tonnes of carbon stored (excluding landﬁll). It is growing at 0.44 million tonnes C yr⁻¹(Broadmeadow and Matthews, 2003).

The building of more timber-rich houses and increasing the service life of wood products are considered by UK policy makers to be valu- able contributions to reducing carbon impacts, and particularly in the long perspective, when the land now available for the establishment of forest plantations is exhausted and forest carbon gets stabilised (Suttie et al., 2009).

5. Conclusions

Carbon sequestration in forestry could contribute modestly but signiﬁcantly to UK emissions reduction (Read et al., 2009). Carbon sequestration rates per unit area of forest in the UK are comparable with those in other countries in Europe (Nijnik and Bizikova, 2008).

The carbon sequestration potential of afforestation in the UK is deemed to be substantial. Although this potential is restricted by various factors, including socio economic, the results suggest that forest carbon sequestration is likely to be competitive with other means of removing carbon from the atmosphere. The results provide evidence in support of prospective conversion to forest of some marginal land currently used for low density sheep grazing. About 5.5 million ha of this land type is available in the UK (ADAS, 2007).

With an afforestation rate of 30 000 ha yr⁻¹(i.e. the abatement option used in this study), there would be enough land for tree planting until 2020 (and even until 2200).

The sensitivity analysis shows that carbon sequestration costs vary negatively with yield class and timber prices. Yield class is also an important variable determining the viability of forest based business. It changes considerably across UK territory. Higher yield classes generate higher wood volumes, from thinning and clear cutting operations. Therefore, the present value of forestry is much higher for the upper range of yield classes, which then generates relatively low costs of carbon sequestration (as shown inFig. 2).

Moreover, choosing appropriate tree species and locations for tree planting are important considerations. Afforestation with relatively fast growing tree species (e.g. Sitka spruce) on low grade agricultural land may be a cost effective option, ranking the costs in some regions of the UK below the shadow price of carbon estimated byDEFRA (2008).

Although the current paper is limited to afforestation, future research will go beyond a single rotation and take a longer-term, holistic perspective reflecting on time preference (by discounting of both, costs and benefits of carbon uptake) and taking into account future use of land and wood after timber harvesting. This particularly concerns carbon storage in wood products, the quantities of which are anticipated to be significant.

Acknowledgement

The support of the Environment and Rural Affairs Department of the Scottish Government and of the Forestry Commission for this research is gratefully acknowledged. The research falls under the EU FR7/03 COST Action“Expected Climate Change and Options for Euro- pean Silviculture”. We are very grateful for the reviewers of this paper for their very helpful comments.

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