An Economic Analysis of Incentives for Carbon Sequestration on Non-Industrial Private Forests (NIPFs)

Executive Summary There is widespread recognition of the potential role forests can play in contributing to Green House Gas (GHG) reductions through carbon sequestration. Non-industrial private forests (NIPF) comprise a significant portion of forests in the U.S. (approximately 40%). Thus, it is crucial to assess the role that NIPF landowners can play in broader carbon sequestration efforts. Management actions that could increase carbon sequestration on NIPF lands include afforestation of agricultural land, longer rotations, intensive management, changing stocking density, or choosing alternative tree species. Because the resulting carbon sequestration benefits are to a large extent external to individual landowners, incentives such as carbon sequestration subsidies and carbon release taxes, carbon rental fees, or cost-sharing agreements, may be necessary to induce them to adopt these management options. A key question is how effective these different policies can be in eliciting the desired management choices by NIPF owners. In this report we assess the current state of knowledge about carbon sequestration in forests, including afforestation of agricultural land, sequestration in existing forests, and sequestration in NIPFs. We review the broader literature on the response of NIPF owners to incentives intended to promote specific forest management activities and to conserve habitat for endangered species, and discuss the literature on incentives for carbon sequestration in agriculture as well. We also discuss the issue of additionality in terrestrial carbon sequestration and briefly evaluate the suitability of the data available to study NIPF behavior in the context of sequestration. The literature on carbon sequestration and incentives suggest that various types of incentives can effectively be used to promote afforestation and forest management practices to increase carbon sequestration. However, the literature on NIPFs suggests that the effectiveness of incentives programs depends on a variety of factors, including the objective of the policy and 3 landowner and property characteristics. Therefore, results from existing studies cannot necessarily be extrapolated to draw conclusions on the potential effectiveness of incentives for carbon sequestration on NIPFs. A separate study that focuses specifically on this topic would provide more reliable insights. Finally, our review suggests that the issue of additionality is relevant in this context, and that the design of any incentive scheme to elicit increased carbon sequestration needs to carefully consider how to minimize the costs caused by asymmetric information about landowner's baseline behavior.