monitoring and economic factors affecting the economic viability of afforestation for carbon...

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Environmental Science & Policy 7 (2004) 465–475

Monitoring and economic factors affecting the economic viability

of afforestation for carbon sequestration projects

Kimberly Robertsona,*, Isabel Loza-Balbuenab, Justin Ford-Robertsonc

aForce Consulting, 444 Pukehangi Rd, Rotorua, New ZealandbSchool of Forestry, University of Canterbury, P.O. Box 4800, Christchurch, New Zealand

cFord-Robertson Initiatives, 7 Lynmore Avenue, Rotorua, New Zealand

Abstract

The Kyoto Protocol is the first step towards achieving the objectives of the United Nations Framework Convention on Climate Change and

aims among others to promote ‘the protection and enhancement of carbon sinks and reservoirs’. To encourage afforestation for carbon

sequestration a project must be economically viable. This study uses a model to analyse the impact on project viability of a range of carbon

monitoring options, international carbon credit value and discount rate, applied to a Pinus radiata afforestation project in New Zealand.

Monitoring carbon in conjunction with conventional forest inventory shows the highest return. Long-term average carbon accounting has

lower accounting costs, compared to annual and 5 yearly accounting, as monitoring is only required every 5–10 years until the long-term

average is attained. In this study we conclude that monitoring soil carbon stocks is not economically feasible using any of the accounting

methods, when carbon is valued at US$ 10/t. This conclusion may be relevant to forest carbon sequestration projects elsewhere in the world

and suggests care is needed in selecting the appropriate carbon monitoring options to avoid the risk that costs could be higher than any

monetary benefits from terrestrial carbon sequestration. This would remove any commercial incentive to afforest for carbon sequestration

reasons and severely limit the use of forest sinks as part of any package of measures addressing the ultimate objective of the UNFCCC.

# 2004 Elsevier Ltd. All rights reserved.

Keywords: Carbon sequestration; Monitoring; Accounting; Economics

1. Introduction

The ultimate objective of the United Nations Frame-

work Convention on Climate Change (UNFCCC, United

Nations, 1993) is ‘stabilisation of greenhouse gas

concentrations in the atmosphere at a level that would

prevent dangerous anthropogenic interference with the

climate system’. The Kyoto Protocol (UNFCCC, 1997) is

the first step towards achieving this and aims to promote

sustainable development, energy efficiency, renewable

energy and the protection and enhancement of carbon sinks

and reservoirs.

The Kyoto Protocol sets quantified emission limitation

and reduction commitments for 38 Annex 1 Parties (mostly

Organization for Economic Cooperation and Development

countries), to reduce 1990 emissions by 5% overall in the

* Corresponding author. Tel.: +64 25220 4417.

E-mail address: [email protected] (K. Robertson).

1462-9011/$ – see front matter # 2004 Elsevier Ltd. All rights reserved.

doi:10.1016/j.envsci.2004.07.003

first commitment period (CP1) from 2008 to 2012. The

Protocol states that countries shall use the gross carbon

emissions, from energy and industrial processes,

that occurred in 1990 as their base year emissions.1 The

average annual net emissions from CP1 will be compared

with the base year emissions, and should not exceed the

specified percentage of the baseline in each year. The net

emissions include ‘removals by sinks resulting from direct

human-induced land-use change and forestry activities,

limited to afforestation, deforestation and reforestation since

1990, measured as verifiable changes in carbon stocks’

(UNFCCC, 1997). The greenhouse gas (GHG) removals by

sinks should be reported in a transparent and verifiable

manner.

1 Article 7 of the Kyoto Protocol allows some parties to include emis-

sions from Land Use, Land Use Change and Forestry (LULUCF) in base

year emission calculations.

K. Robertson et al. / Environmental Science & Policy 7 (2004) 465–475466

Carbon sinks shall be used by parties to meet their

commitments under Article 3. This can include domestic

action, to offset domestic emissions or they can be traded

between parties under one of the flexibility mechanisms.

Kyoto Protocol mechanisms (Articles 6, 12 and 17) allow

Annex 1 parties to engage in the trading of emission

reduction units for the purpose of meeting their emission

reduction obligations under Kyoto Protocol Article 3.

Before trading can begin numerous technical difficulties

have to be resolved, including acceptance of the method of

monitoring and accounting for carbon stock changes

associated with land-use change and forestry.

For a country to economically include terrestrial carbon

sinks as an option for reducing net greenhouse gas emissions

monitoring and transaction costs must be at least equal to the

international price of carbon. If the aim is to encourage

afforestation for carbon sequestration the project must be

able to provide an acceptable return on investment. The aim

of this paper is to assess under which carbon monitoring

conditions and international carbon credit price is afforesta-

tion for carbon sequestration economically viable in New

Zealand. The impact of changes in discount rate are also

analysed.

Very little work has been published on the cost of

monitoring carbon stock changes in terrestrial carbon

sequestration projects. Previous work has focussed on

estimating costs associated with setting up carbon seques-

tration projects and does not take into account any ongoing

monitoring costs. The paper uses a model to explore the

economic impact of: (i) carbon monitoring requirements

including how often monitoring is required, (ii) monitoring

of various forest components, (iii) international carbon value

and (iv) discount rate, on the economic performance of a

Pinus radiata afforestation project in New Zealand

(including wood production, harvesting and carbon seques-

tration). The economic impact of carbon sequestration alone

is also assessed. The economic analysis is associated with

two accounting methods (real time and long- term average),

using four monitoring systems: (i) annual inventory, (ii) 5

yearly inventory, (iii) carbon monitoring in conjunction with

conventional inventory and (iv) the long-term average stock

of carbon.

Currently, there is no widely used methodology for

evaluating the economic viability of different projects

including establishing the project and ongoing monitoring,

validation and transaction costs. Development of such a

methodology would greatly facilitate the comparison of cost

effectiveness for a range of projects.

2. Methodology

There are many variables that affect the economic

viability of accounting for carbon sequestration at a project

level. Variables include the choice of monitoring system

(both the timing and absolute dollar cost of monitoring

varies depending on the system), the forest components to be

accounted for and the value of carbon. This paper looks at

the effect of these variables on the economic performance of

an afforestation project when carbon sequestered has a

value. The economic analysis (i.e. net present value (NPV),

benefit/cost ratio (B/C), cost of monitoring per tonne of

carbon) is conducted for four monitoring systems:

(i) a
nnual inventory;
(ii) 5
yearly inventory;
(iii) c
arbon inventory in conjunction with conventional
inventories;

(iv) th
e long-term average (LTA) carbon stock (estimated to
occur at 15 years for Pinus radiata harvested at 28

years).

The analysis is conducted over three 28-year rotations

with deforestation occurring at the end of the third rotation.

This length of time fully captures the impact of LTA acc-

ounting and decay of various forest components after har-

vest. The most common ‘typical’ tending regime in New

Zealand—planting of radiata pine at 1200 stems/ha, pruned

to 6.0 m, waste thinned to 250 stems/ha (Ministry of Agr-

iculture and Forestry, 2000), located on volcanic soil in the

Central North Island of New Zealand, is investigated.

The effect of inclusion of carbon contained in different stand

components, i.e. stem, crown, roots, forest floor, under-

growth, and soil carbon on the economic viability of a pr-

oject is analysed, as well as the effect of carbon credit

value.

2.1. Carbon estimates

For simplicity, it is assumed that land-use change from

pasture (in 1990) to forest occurs in the year 2008, and

therefore, all carbon stock change will be available to meet

countries emission reduction commitments and subject to

penalty if deforestation occurs.

For the purposes of this exercise carbon sequestration in

the stand is estimated using the C_change model (Beets et

al., 1999) in STANDPAK. STANDPAK predicts stem

volume, size and quality of logs from P. radiata stands

grown on a range of sites in New Zealand, Australia and

Chile, and managed under a wide range of silvicultural

regimes (Whiteside, 1990; West, 1993). C_change predicts

the carbon content of various components of managed P.

radiata stands (stem, crown, roots, forest floor, and

undergrowth) from predetermined stem growth rates

estimated by conventional stand growth models in STAND-

PAK (Whiteside, 1990). A key concept underlying the

C_change model is that, given current knowledge of growth

partitioning, mortality and decay of tree components, stem

volume production and mortality can be used, in conjunction

with the silvicultural regime, to calculate dry matter (and

therefore carbon) gains and losses of other forest biomass

components (Beets et al., 1999). Stem dry matter content can

K. Robertson et al. / Environmental Science & Policy 7 (2004) 465–475 467

Fig. 1. Carbon stock changes in a stand over three rotations (5% precision

for all components).

be obtained from stem volume and wood density data, which

are required as model inputs. Stem carbon is then converted

to total tree carbon using allometric equations.

It is assumed that in practice the C_change model will not

be used and carbon sequestration estimates will be derived

from field measurements. As yet the use of such models has

not been agreed to internationally. Fig. 1 presents the

predicted carbon stock change in various components over

the project lifetime. The carbon eligible to offset emissions

is conservatively based on the lower precision limit, which is

influenced by the number of samples taken from each of the

stand components (see Appendix A for more detail on

sampling requirements).

Mineral soil carbon is currently not included in the

C_change model therefore soil C prior to afforestation is

based on published information. Carbon contained in soil

prior to afforestation is assumed to be the same as for pasture

on volcanic soils (59.9 t/ha to 0.1 m depth, Scott et al.,

1999). Soil carbon in the top 0.1 m has been assumed to

decrease by 6 t/ha over the first rotation only (Beets et al.,

2002). Although soil carbon has been shown to decrease

slightly in New Zealand circumstances, largely due to

historical land use practices, this may not be the case in all

countries. In this analysis, it is assumed that changes in soil

carbon will be derived from field measurement

2.2. Carbon accounting methods

Two accounting methods (real time and long-term

average) are used to estimate the carbon stocks and stock

changes.

Real time accounting follows the actual growth and

harvesting of a stand over three rotations (growth and

harvest cycles), giving credits for any increase and debits for

any decrease in carbon stocks over the time in question.

Three monitoring options are investigated:

(i) a
nnual inventory;
(ii) 5
yearly inventory;
(iii) m
onitoring in conjunction with conventional forest
inventories. In New Zealand forest inventories are

normally carried out after the pruning/thinning opera-

tions (age 5), at mid rotation (age 14) and before

harvest (age 28).

The second accounting method analysed is the long-

term average (LTA) method (Maclaren, 2000), which is

based on the assumption that changing the land cover from

pasture to forest can be looked at as the opposite of def-

orestation or a one off increase in carbon stock. The benefit

to the atmosphere of afforestation/reforestation lies in the

conversion from a low carbon stock land use to a land use

with a higher long-term average carbon stock. Even if the

forest is harvested periodically, the LTA carbon stock still

remains higher than the carbon stock in pasture. The LTA

value is approximately the carbon stock attained at half

rotation age plus 1 or 15 years for a 28-year rotation (-

Maclaren, 2000). It is assumed that a pre harvest inventory

will be carried out as part of normal forest operations and

hence provide data for validation of the LTA at no addi-

tional cost. Credits are given following the actual carbon

stock up to age 15 assuming five-yearly inventory. If at

some time in the future the forest is harvested and not

replanted then responsibility has to be taken for the loss of

carbon due to deforestation. For more information about

accounting methods see Maclaren (2000).

2.3. Costs and benefits of wood production and harvest

Cost estimates are made for wood production including

land purchase; land preparation; planting; weed spraying;

thinning; pruning; harvest and log transport (Appendix B).

The economic benefit accrued to the project from the

commercial harvest of logs depends on log grade. Log

grades are predicted using STANDPAK (see Appendix C for

log grade production and revenue details).

2.4. Costs and benefits of carbon monitoring

Cost estimates are made for measuring stem volume, and

sampling undergrowth, forest floor and soil. Roots and

crown are estimated based on the stem carbon (using

expansion factors, models or other pre-determined relation-

ships) and are not sampled directly and therefore there are no

costs associated with their inclusion. The costs of

monitoring other components are based on the number of

plots required to measure and sample carbon with a given

precision, the time it takes to measure the carbon in these

plots and the personnel costs (Appendix A). The cost of

sampling soil carbon also includes the cost of soil analysis.

Carbon monitoring carried out in conjunction with current

forest inventory practices does not include the cost of

estimating stem carbon as this is carried out as part of the

conventional forest inventory procedure.


The number of samples taken for each forest component

affects the precision of carbon measurements. This in turn

affects monitoring costs and carbon credits that can be

claimed. For example, if soil carbon is measured with 20%

precision (within �10% of the mean carbon on site),

then the lower precision level (or 90% of the mean) is what

has been used to estimate carbon available for trading.

There is a trade-off between increasing the precision of

estimates, which requires an increased number of samples,

but may increase carbon available for trading, and the

additional monitoring costs obtaining these better esti-

mates imply.

In this analysis saleable carbon credits as calculated by

the different carbon monitoring systems, are based on the

lower precision level of the estimated carbon stock for each

of the forest components given by that system. Units used

are tonnes of carbon/hectare (tC/ha) while the international

carbon values applied in the analysis are: US$ 10, 20 and 50/

tC. Costs and benefits associated with each accounting

method and monitoring system are assumed to occur at the

time when the measurements are taken and are, therefore,

discounted at this time. The exchange rate used to convert

costs and benefits from New Zealand dollars to United States

dollars is 0.60 (as of May 2004).

2.5. Economic criteria

In order to compare the economic performance of

alternative carbon monitoring systems, two criteria are used,

the net present value per hectare (NPV/ha) of the entire

forestry project (including the costs and benefits associated

with wood production, harvest, and carbon sequestration)

and benefit/cost ratio (B/C) of the carbon sequestration alone

(includes costs directly attributable to measuring the amount

of carbon sequestered. Also presented is the discounted

carbon monitoring cost (which is equal to the value of

carbon credits above which the project meets the required

rate of return) for each of the monitoring systems and how

this varies with the inclusion/exclusion of different forest

components.

For operational purposes investors usually determine

their discount rate using either the interest rate at which they

can borrow money or the interest rate they can earn in other

investments (Pearse, 1990). Because of the long-term nature

of forestry investments, some indicators of economic

performance such as NPV are highly sensitive to the

discount rate chosen. The base discount rate used for all

systems analysed in this paper has been set at ten percent, the

average reported by Manley (2002) as used by New Zealand

forestry organisations in valuation exercises and the rate

recommended by the NZ Treasury for use in national cost

benefit analysis.

The NPV is calculated by summing the present value of

expected wood revenues (Appendix C) and carbon revenues

of the project and subtracting the sum of the present value of

project costs (wood production and harvesting) and carbon

monitoring costs, which is expressed by Eq. (1).

NPV ¼Xn

y¼0

Rwy

ð1 þ iÞy þXn

y¼0

Rcy

ð1 þ iÞy

!

�Xn

y¼0

Cwy

ð1 þ iÞy þXn

y¼0

Ccy

ð1 þ iÞy

!(1)

where Rw is the wood revenue, Rc the carbon revenue, Cw

the wood production and harvesting costs, Cc the Carbon

monitoring costs, y the year and i is the discount rate.

A positive NPV indicates that the expected rate of return

of the project is higher than the discount rate, meeting the

required rate of return and therefore economically viable.

The B/C ratio is used in this study to indicate the viability

of investing in carbon trading when a forestry project is

already being carried out. This indicator is calculated by

dividing the present value of the carbon credits by the

present value of the carbon monitoring costs only (Eq. (2)).

The costs and benefits associated with wood production and

harvesting are not included. If the present value of costs

exceeds the present value of benefits associated with parti-

cipating in carbon trading, the B/C ratio is lower than 1

indicating that the return on a dollar invested is less than 1.

Accordingtothiscriterionat theselecteddiscountrateaproject

is not viable at B/C ratios lower than 1 (Klemperer, 1996).

B

Cratio ¼

Pny¼0 Rcy=ð1 þ iÞyPny¼0 Ccy=ð1 þ iÞy (2)

For each monitoring system, discounted costs of

monitoring per tonne of carbon are analysed, to enable

comparison with other GHG mitigation options. This is

calculated by dividing the present cost of monitoring the

stand carbon stock at each time, by the lower precision level

carbon stock change, which is the amount of carbon that

merit credits.

2.6. Systems analysed

Table 1 gives an overview of the variables for the systems

analysed.

All scenarios are based on the aforementioned common

regime in New Zealand on volcanic soils, and personnel

costs of NZ$ 20/h (US$ 12). The NPV and B/C ratio are

analysed based on 5 yearly monitoring, a carbon value of

NZ$ 16.7/tC (US$ 10) and a discount rate of 10% unless

otherwise stated. Stem and crown are estimated at 5%

precision, and forest floor, understorey and soil at 20%

precision unless otherwise indicated.

2.6.1. Monitoring systems

The economic impact of real time (annual inventory, 5

yearly monitoring and monitoring in conjunction with

conventional forest inventory) and LTA are analysed.

Carbon stocks are estimated based on monitoring of stem

and crown only.


Table 1

Overview of systems analysed

Systems analysed Accounting

method

Monitoring system Components monitored Economic criteria Credit value

(US$/tC)

Discount

rate (%)

Monitoring systems Real time Annual Stem/crown Monitoring cost/NPV/B/C ratio 10 10

Real time Every 5 years Stem/crown Monitoring cost/NPV/B/C ratio 10 10

Real time With forest inventory Stem/crown Monitoring cost/NPV/B/C ratio 10 10

LTA LTA Stem/crown Monitoring cost/NPV/B/C ratio 10 10

Forest components Real time Annual Stem/crown Monitoring cost/NPV/B/C ratio 10 10

Every 5 years Stem/crown/roots

With forest inventory Stem/crown/roots/forest floor

Stem/crown/roots/forest

floor/undergrowth


floor/undergrowth/soil

LTA LTA Stem/crown Monitoring cost/NPV/B/C ratio 10 10

Stem/crown/roots

Stem/crown/roots/forest floor


floor/undergrowth


floor/undergrowth/soil

Carbon value Real time/ Every 5 years Stem/crown NPV/B/C ratio 10 10

Real time/ Every 5 years Stem/crown NPV/B/C ratio 20 10

Real time/ Every 5 years Stem/crown NPV/B/C ratio 50 10

Discount rate Real time/ Every 5 years Stem/crown NPV/B/C ratio 10 10

Real time/ Every 5 years Stem/crown NPV 10 8

Real time/ Every 5 years Stem/crown NPV 10 12

2.6.2. Forest components

The NPV, B/C ratio and present cost of monitoring per

tonne of carbon monitored is analysed for different forest

components, namely: (i) stem and crown, (ii) stem, crown

and roots, (iii) stem, crown, roots and forest floor (iv) stem,

crown, roots, forest floor and undergrowth and (v) stem,

crown, roots, forest floor, understorey and soil.

2.6.3. Carbon value

The impact of increasing the carbon credit value, from

US$ 10/tC to a value of US$ 20/tC and US$ 50/tC, on the

viability of afforestation for carbon sequestration is

explored.

2.6.4. Discount rate

The effect of a change in the discount rate on project NPV

is performed. The sensitivity analysis looks at discount rates

of 8% and 12%.

Fig. 2. Effect of different carbon monitoring methods on NPV.

3. Results

3.1. Monitoring systems

These scenarios analyse the NPV and B/C ratio variation

when comparing carbon accounting monitoring systems.

A forestry project alone has a NPV lower than when carbon

has a value. Results indicate that under the assumptions used

in this analysis monitoring in conjunction with conventional

forest inventory is the only economically viable monitoring

system. Monitoring in conjunction with conventional forest

inventory produces the highest NPV followed by 5 yearly

monitoring, LTA and annual monitoring. (Fig. 2). Monitor-

ing carbon in conjunction with conventional forest inventory

has the highest B/C ratio and lowest carbon monitoring cost

(Tables 2 and 3) followed by LTA, 5 yearly and annual

monitoring. This is due to the conventional forest inventory

costs associated with monitoring of stem and crown being

attributed to wood production and harvesting requirements.

The ranking of monitoring system based on B/C ratio is

different to the NPV ranking because it includes only

benefits and costs associated with carbon and not the whole


Table 2

B/C ratio of carbon monitoring systems and stand components

Component Monitoring system

Annual 5 Yearly LTA Conventional forest inventory

Stem and crown 1.0 5.1 5.8 335.5

Stem, crown and roots 1.4 7.1 8.0 459.2

Stem, crown, roots and forest floor 0.9 4.3 4.8 10.9

Stem, crown, roots, forest floor and undergrowth 0.2 0.8 0.9 1.1

Stem, crown, roots, forest floor, undergrowth and soil 0.1 0.5 0.5 0.6

Fig. 3. Effect of monitoring various components on NPV.

project (costs and benefits of wood production and carbon

sequestration).

3.2. Forest components

When including stem, crown, roots and forest floor

components in the monitoring system the NPV is highest

(Fig. 3). This is because roots are estimated from stem

biomass, which implies there is no extra cost of measuring

roots and more total stand carbon is estimated. If forest floor

is included the NPV is slightly higher than including roots,

due to the monitoring cost for forest floor being lower than

credits received for this component. Results indicate that

including undergrowth and soil in the monitoring system is

not economically viable and significantly lowers the NPV

(Fig. 3). This is due to their highly variable nature and the

high cost of monitoring these components for little increase,

or even a decrease, in carbon.

The B/C ratio for different accounting methods and

components monitored at US$ 10/tC is shown in Table 2.

When all components in the monitoring system are included,

Table 3

Carbon monitoring cost (US$/tC)

Component Monitoring Sy

Annual

Stem and crown 10

Stem, crown and roots 7

Stem, crown, roots and forest floor 11

Stem, crown, roots, forest floor and undergrowth 61

Stem, crown, roots, forest floor, undergrowth and soil 111

the B/C ratio is lower than 1 for all accounting methods

considered. This indicates that at the selected discount rate

(10%) and with the assumptions made in this study, the

option of participating in afforestation for carbon seques-

tration is unacceptable if all components are required to be

measured.

If undergrowth and soil carbon are not included in the

monitoring system, all monitoring systems (except annual

monitoring) showed a B/C ratio higher than 1. Carbon

monitoring in conjunction with conventional forest inven-

tory has the higher B/C ratio regardless of which forest

components are monitored (Table 2).

Table 3 gives the cost of including various forest

components in a monitoring system. Inclusion of all

components in an annual monitoring system requires a

carbon value above US$ 111/t to encourage afforestation for

carbon sequestration. If carbon monitoring is required every

5 years then measuring all forest components becomes

economically attractive at a value of US$ 22/tC, decreasing

further for the LTA and conventional forest inventory

monitoring systems.

The precision of monitoring the various forest compo-

nents influences the cost of carbon monitoring (Tables 4 and

5). When the monitoring precision of all components is set at

5%, monitoring costs per tonne of carbon available for

trading, increase significantly to such a level that it is

unlikely to encourage participation in afforestation projects

for carbon sequestration (Table 4). Conversely reducing the

precision of carbon estimates for forest floor, undergrowth

and soil reduce monitoring costs (Table 5). When the

precision is lowered annual monitoring remains the most

costly, followed by 5 yearly monitoring, long-term average

and monitoring in conjunction with conventional forest

inventory. The highest cost increment is when undergrowth

and soil carbon monitoring costs are included.

stem

5 Yearly LTA Conventional forest inventory

2 2 0

1 1 0

2 2 1

12 11 9

22 20 17


Table 4

Carbon monitoring cost (monitoring at 5% precision for all components (US$/tC)



Stem and crown 10 2 2 0

Stem, crown and roots 7 1 1 0

Stem, crown, roots and forest floor 72 14 13 11

Stem, crown, roots, forest floor and undergrowth 818 164 147 133

Stem, crown, roots, forest floor, undergrowth and soil 1556 312 280 255

Table 5

Carbon monitoring cost (monitoring at 5% precision for stem, crown and roots and at 50% for forest floor, undergrowth and soil (US$/tC)



Stem and crown 10 2 2 0

Stem, crown and roots 7 1 1 0

Stem, crown, roots and forest floor 8 2 1 0a

Stem, crown, roots, forest floor and undergrowth 19 4 3 2

Stem, crown, roots, forest floor, undergrowth and soil 30 6 5 4

a This analysis returned a value of 0.4 but due to rounding is given as 0.

Table 6

B/C ratio associated with monitoring system and carbon value

Carbon value

(US$)

Annual 5 Yearly LTA Conventional

forest inventory

10 1.0 5.1 5.8 335.5

20 2.0 10.1 11.6 670.9

50 5.0 25.3 29.1 1677.2

For each accounting method stem and crown only are included.

3.3. Carbon value

The international price of carbon affects the B/C ratio as

expected, increasing the B/C ratio, and therefore viability of

a project, as it increases. The higher the carbon price the

more profitable it is to participate in afforestation for carbon

sequestration (Table 6).

3.4. Discount rate

Results are highly sensitive to changes in discount rate.

The impact of decreasing the discount rate is to significantly

Fig. 4. Effect of changes in discount rate on NPV.

increase the NPV and project viability. The converse is true

of increasing the discount rate (Fig. 4).

4. Discussion

4.1. Discount rate

The discount rate of 10% used for most of the analysis

may not be appropriate for other countries circumstances

and as results are highly sensitive to the chosen discount rate

it is important to analyse the relative impact of the

monitoring system differences on project viability and not

only focus on the numbers produced.

4.2. Monitoring systems

Under most circumstances monitoring carbon in conjunc-

tion with conventional forest inventory has the lowest cost and

highest return on the dollar invested in monitoring and the

lowest carbon monitoring cost, followed by long-term

average, 5 yearly monitoring system, and annual monitoring.

Monitoring carbon with conventional forest inventories higher

return is due to costs associated with estimating carbon

contained in stem and crown being attributed to the forest

inventory not the carbon inventory, i.e. there are no marginal

costs of monitoring stem and crown carbon. One difficulty

with carbon monitoring in conjunction with conventional

forest inventory is that it is not common for small forest owners

to conduct inventories over the rotation and they may only

conduct a forest inventory at the end of the rotation or not at all.

As much of the post 1990 afforestation in New Zealand

consists of small forest area holdings by farmers, carbon

monitoring in conjunction with conventional forest inventory


may not be the most suitable monitoring system for New

Zealand. Therefore one of the other monitoring systems may

have to be considered. Results indicate that long-term average

monitoring is the second most cost effective option (i.e.

highest B/C ratio). Transaction costs are not included in the

analysis, and could have an impact on the results. Transaction

costs are likely to be lowest for LTA given that there are only

one or two transactions, and not every 5 years. Therefore, if

these costs are included, long-term average may be the most

cost-effective option.

Before the LTA method can be widely used it needs to

gain international acceptance. Five yearly monitoring will

probably meet international criteria of transparency and

verifiability, however, as the data in Tables 3–6 reveal this

option, depending on the components to be monitored, may

not always be economic. Annual monitoring will also meet

international transparent and verifiability criteria but does

not provide an acceptable return on investment or encourage

afforestation. If monitoring in conjunction with standard

inventory is to be used care is required to design a system

that meets international criteria.

4.3. Components monitored

Ideally, all forest stand components should be included in

the carbon monitoring system but in practice some of the

components (undergrowth, forest floor and soil) are difficult

to measure accurately, can increase the monitoring costs

dramatically and therefore impact on project viability. While

it has been suggested internationally that reporting may be

required in annual inventories of all components (Inter-

governmental Panel on Climate Change, IPCC, 2000), if this

means conducting annual field based inventories, cost can be

expected to increase dramatically. The results of this study

suggest that including soil monitoring in a carbon

monitoring system is in many cases likely to lead to lower

project NPV, and a B/C ratio lower than 1 – particularly if the

credit value of carbon is low – US$ 10/tC. Soil carbon may

decline slightly under P. radiata plantations in New Zealand

(Fig. 1), and if soil is not monitored then carbon

sequestration may be over predicted. One option to

overcome this is ‘conservative accounting’ or to only claim

credits for above ground carbon, excluding soil, roots and

forest floor. Root carbon stock increases, more than soil

carbon stock decreases, more than compensating for any

decrease in soil carbon (Fig. 1). Another option is to model

changes in soil carbon but at this stage there is not enough

data to do this with any degree of certainty. Developing and

testing a soil carbon modelling system will take some time

and require the collection of many samples over time.

4.4. Alternatives to field measurement

One alternative to field measurements for each stand of

trees is to use models to estimate carbon sequestration and

measure a small percentage of stands to validate the models.

It has also been said that modelling may be used to estimate

soil carbon changes (IPCC, 2000), since field measurements

may be unable to detect small changes in large stocks. The

use of models could decrease the monitoring costs, and

increase the profit from participating in an afforestation

project and carbon trading. However, before models can be

used to estimate carbon available for trading internationally

the definitions of ‘transparent and verifiable’ under Article

3.3 of the Kyoto protocol are needed.

The end of rotation and commitment period will not

always coincide with the timing of the monitoring except for

annual monitoring. This may require an extra forest

inventory after harvest to capture the stock change in the

commitment period. Alternatively, models are available to

extrapolate or interpolate results. Possibly the use of a model

that estimates carbon stock changes and has already been

validated, with ground based measurements, will be an

acceptable alternative to field measurements but this needs

to be agreed internationally.

Another alternative is the use of improved remote sensing

systems that have been validated with on the ground

information and provide relatively accurate forest carbon

estimates (although soil carbon may still need to be

measured/modelled). This would decrease the monitoring

costs, and increase the profit from participating in an

afforestation project and carbon trading. Once again before

this sort of information could be used to estimate carbon it

needs to be established if it will meet the ‘transparent and

verifiable’ definitions of the Kyoto Protocol. Currently,

remote sensing systems do not provide accurate enough

information on carbon stocks for them to be used in this

manner.

4.5. Carbon value

The carbon value determines the viability of using one or

other accounting method or whether to include all forest

components or only some of them. It has been shown that if

the international price of carbon is above US$ 111 it would

be viable to monitor all components annually. The expected

market value of carbon would be the main indicator for

determining the forest components to be included and the

monitoring method preferred.

4.6. Assumptions

In this study we have conservatively assumed that the

carbon available for trading is based on the carbon

sequestration estimate at the lower precision level. However,

there is a trade off between estimating carbon more

accurately to increase the amount tradable and increasing

monitoring costs. To increase the precision of carbon

estimates requires more samples and increased cost, which

can have a large impact on the viability of a project.

An argument could be made that if carbon sequestration

from a large enough area and/or a number of projects were


amalgamated then the amount of carbon available for

trading could be increased to 100% of the carbon

sequestration estimate (based on the central limits theorem).

The area required to be able to do this would be dependant

on the variability in the most variable of components to be

included in the accounting system. This would not change

the relative rankings of the accounting systems but would

increase the NPV and B/C ratio, increasing the economic

return of all accounting systems. It may also mean that the

inclusion of more or all components becomes economically

feasible.

This paper assumes that discounting the carbon stock

change to remove stock changes resulting from indirect

effects such as CO2 fertilisation, N fertilisation, etc is not

required. There is some discussion internationally about this

and the UNFCCC has indicated that ’accounting excludes

removals resulting from: (a) elevated carbon dioxide

concentrations above their pre-industrial level and (b)

indirect nitrogen deposition’ (UNFCCC, 2001a). Currently,

this is not feasible and the UNFCCC has asked the IPCC ’to

develop practicable methodologies to factor out direct

human-induced changes in carbon stocks and greenhouse

gas by sources and removals by sinks due to indirect human-

induced and natural effects (such as those from carbon

dioxide fertilization and nitrogen deposition’ (UNFCCC,

2001a). However, Article 3.3 of the Kyoto Protocol states

‘removals by sinks resulting from direct human-induced

land use change and forestry (LUCF) activities, limited to

afforestation, reforestation and deforestation since 1990. . .’.This suggests that it is the activity that is important and any

stock changes ‘resulting from’ these activities can be used to

meet emission reduction commitments. Requiring forest

owners to establish counter-factual baselines could be an

expensive obligation that may discourage afforestation for

carbon sequestration. Considering there is little evidence to

suggest there is any long-term impact of some of these

indirect effects on growth (Davidson and Hirsch, 2001) due

to limiting factors such as nutrients and moisture, imposing

the need for a baseline could be counter-productive.

It was also assumed that the discount rate of the

afforestation project was the same for carbon credit value

(i.e. market value). The discount rate used has an impact on

the short and long-term benefits of sequestering carbon.

The higher the discount rate the lower the present value.

The present value of benefits of sequestering carbon in the

future would appear to be smaller when the discount rate is

high and vice versa. It is controversial whether environ-

mental benefits such as carbon sequestration should be

discounted at all or discounted at a rate different to that

used by investors.

5. Conclusions

The viability of afforestation for carbon sequestration

depends on many factors. This paper has looked at a number

of them including monitoring system choice, forest

components to be monitored, the international price of

carbon and the discount rate. Monitoring carbon in

conjunction with conventional forest inventory, long-term

average and 5 yearly monitoring are usually economically

viable, when the international price of carbon is US$ 10,

except where soil carbon is included. Annual monitoring is

only viable, at an international price of carbon of US$ 10, if

soil and undergrowth are not required to be included in the

monitoring system. Monitoring in conjunction with con-

ventional forest inventory has the lowest carbon monitoring

cost and the highest return on the dollar invested, followed

by long-term average, 5 yearly monitoring system, and

annual monitoring. It has been shown that at an international

carbon price of US$ 111 it would be viable to monitor all

components annually. The expected market value of carbon

would be a key indicator in determining the forest

components to be included and the monitoring method

preferred. The required rate of return (or discount rate) has a

large impact on project viability but does not change the

ranking of monitoring systems or forest components to be

monitored.

If afforestation is to be encouraged as one method of

sequestering carbon the options for monitoring, reporting,

and verification of carbon stock changes need to be

evaluated to assess practicality and cost. One way of

encouraging terrestrial carbon sequestration is to design a

carbon monitoring system that interacts with conventional

forest inventory practices provided this is applicable to all

forest management. This will provide the most benefit if real

time accounting is required. Another option is use of the

long-term average monitoring system. This presents a very

practical solution without ongoing costs for monitoring

carbon stock changes in the long-term, and hence reducing

transaction costs.

Inclusion of soil and undergrowth in a forest carbon

monitoring system substantially reduces the potential

viability of participating in afforestation for carbon

sequestration. One way of avoiding this is conservative

accounting, or excluding soil, undergrowth and roots from

the carbon monitoring system. In order to do that, it should

be proven that the carbon stock in the pool under

consideration is not a source of carbon (UNFCCC,

2001b; IPCC, 2000).

The use of models to estimate carbon sequestration may

decrease the monitoring costs, and increase the viability of

participating in afforestation projects for carbon sequestra-

tion purposes.

Acknowledgments

We would like to acknowledge the support of New

Zealand Forest Research Ltd who funded the early stages of

this work through FRST Contract Number C04X0208,

Mitigation of Climate Change.


Appendix A. Estimate of number of plots required to

attain carbon stock estimates of a certain precision

and plot sampling cost

Number of plots required/ha for a range of precisions

Precision %
Forest
floor

Undergrowth
Soil
50 (�25)
3 7 7
40 (�20)
3 10 10
30 (�15)
5 17 16
20 (�10)
8 35 34
10 (�5)
25 136 131
5 (�2.5)
92 538 519
Plot sampling cost

Forest

floor

Undergrowth
Soil
Time to sample 1 plot (mins)
15 30 20
Cost to sample 1 plot (NZ$)
5 10 7
Cost to sample 1 plot (US$)
3 6 4
Based on samples taken in Kaingaroa forest, Central North

Island, New Zealand.

For stands less than 5 ha it is assumed to take 2 h to

measure stem and crown in 1 ha at 5% precision. This

amounts to NZ$ 40/ha (US$ 24). Roots are not sampled but

are estimated as a % of stem carbon.

Costs of sampling are estimated using the time taken and

personnel costs. Personnel costs have been estimated at NZ$

20/h (US$ 12). This is an average for one experienced field

crew leader and one field crew person.

Soil analysis costs are estimated at NZ$ 28 (US$ 16.8)

per sample based on information from Forest Research’s soil

laboratory.

Appendix B. Costs of wood production operations

NZ$
US$ Units
Thinning
10 6 m3
Pruning to 2.2 m
400 240 hectare
(ha)

Pruning to 4 m
360 216 ha
Pruning to 6 m
350 210 ha
Overheads
63 37.8 year
Land purchase
1500 900 ha
Land preparation and

initial weed spray

300
180 ha
Planting
516 310 ha
Tree release weed spray
240 144 ha
Harvest and transport
37 22 t
Appendix C. Wood production and revenue associated

with different log grades

Log grade
Wood production
at harvest (m3/ha)

Revenue

NZ$
US$ Units
PARA
174.4 206 124 JASa m3
A
76.5 115 69 JAS m3
K
105.6 83 50 JAS m3
S3L3
52.8 62 37 True m3
Pulp
99.7 38 23 True m3
For specifications, see http://www.maf.govt.nz/forestry/sta-

tistics/logprices/specification.htm. a Japanese Agricul-

tural Standard, see above website.

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Kimberly Robertson has a BSc (Zoology) from the University of Otago in

New Zealand. She is a member of the NZ Institute of Forestry and Associate

Task Leader of IEA Bioenergy Task 38: Greenhouse Gas Balances of

Biomass and Bioenergy Systems. She has worked on forestry, bioenergy and

climate change issues in New Zealand for the past 9 years, involved in the

development of forest carbon models and monitoring systems, LULUCF

accounting for New Zealand’s GHG inventories, and reviewing of the 2003

LULUCF GPG and UNFCCC LULUCF inventories. She runs her own

business providing consultancy services both within New Zealand and

internationally.

Isabel Loza-Balbuena has worked on climate change and forest manage-

ment for the last 5 years. She has developed models used for estimating

carbon stocks in plantation species in Uruguay, and is currently, investigat-

ing the ‘Impact of climate change policies on the greenhouse gas balance of

the NZ forest industry’ for her PhD at Canterbury University. She has

also been involved on the proposal and implementation of a national

carbon accounting system for forestry and harvested wood products in

Uruguay.

Justin Ford-Robertson has a BSc (Hons) Forestry and MPhil (Bioenergy)

from the University of Aberdeen, Scotland. He is a member of NZ institute

of Forestry and Farm Forestry Association. Justin has over 15 years

experience in environmental aspects of forestry, particularly climate change

mitigation and bioenergy. He has been active in international research and

policy setting through involvement with organizations such as the Inter-

national Energy Agency and Intergovernmental Panel on Climate Change.

He runs his own business providing consultancy services to local, national

and international organizations, and undertakes sustainability projects such

as native ecosystem restoration and implementing small-scale renewable

energy systems.

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