Carbon monitoring costs and their effect on incentives to sequester carbon through forestry

Technically, land-use change and forestry (LUCF) projects have the potential of contributing significantly to mitigation of global warming, but many such projects may not be economically attractive at current estimates of carbon prices. Payments for greenhouse-gas emission offsets can make some projects attractive and hence stimulate the development of the forestry sector. However, the costs of participating in the carbon market may be too high to make it worthwhile. Forest carbon is in a sense a new commodity that must be measured to acceptable standards for the commodity to exist. This will require credible carbon-monitoring programs be in place. Carbon monitoring is subject to both fixed and variable costs and these will affect the profitability of projects - particularly small projects, those involving geographically dispersed parcels and those with high levels of heterogeneity. Monitoring schemes need to be designed to maximize efficiency. These issues are discussed at a general level and illustrated numerically based on a model of an 'Acacia mangium' plantation in South Sumatra, Indonesia. Using plausible assumptions we show that a project of this type can be economically attractive under a range of conditions and with variable monitoring costs as high as $1,500 per sampling plot, provided that the project is large enough to absorb fixed costs. Under the assumed fixed-monitoring costs and a discount rate of 15%, a 500-hectare project is shown not to be profitable from a carbon-sequestration standpoint, as a landholder would be better off not entering the carbon market and relying only on timber sales.