The Economics of Forest Carbon Offsets

Abstract

Annually, nearly 500 gigatonnes of CO2 are exchanged between terrestrial ecosystems and the atmosphere, and this exchange is clearly affected by human activities related to the Earth's forests. Governments are therefore willing to draft legislation incentivizing forest activities that sequester carbon to combat climate change. In this review, we examine issues related to the creation of carbon offset credits through forest conservation, burning of wood biomass in lieu of fossil fuels, and intensive commercial management that accounts for all carbon fluxes, including postharvest. In doing so, we study the costs of monitoring, measuring, and contracting; the principal-agent problem; and questions related to life cycle analyses of CO2. We can only conclude that greater care is likely needed in the future to identify carbon offsets from forestry activities if these are to be traded in emissions markets.