Impact of market conditions on the effectiveness of payments for forest-based carbon sequestration

This research analyzes the effects of market conditions on the performance of incentive payment approaches for forest-based carbon sequestration. We develop supply curves for sequestered carbon using the relationship between deforestation for urbanization and the relative returns from forest products and urban uses under two different market conditions. The empirical results for an 18-county case study show that a hypothetical payment system was effective and the marginal cost of carbon sequestration increased with the target level of carbon sequestration during the 2001-2006 real estate upturn, while the same system was ineffective during the 2006-2011 period that included a real estate downturn. Our study is the first to examine the role of temporal changes in market conditions on the performance of incentive payment approaches. Although a first step, our snapshot, static approach shows the value in thinking of the dynamic role of changing market conditions in evaluating incentive payment systems.