Sustainability Issue #2 April 2012

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Bioenergy, climate and economy

Forest resources. A research project at Centre for Environmental and Resource Economics at Umeå is studying the economical and ecological aspects of energy and climate policy, specifically the change from fossil fuels to renewable fuels.  Photo: W. Wirth / DPA / SCANPIX

Consider everything at the same time:

Bioenergy, climate and economy

By Tommy Lundgren and Per-Olov Marklund

Forest and economy in balance. Can this be achieved? What changes can be expected in forestry if the forest is to sequestrate more carbon dioxide? Does the change from fossil fuels to biofuels promote our welfare? Equilibrium and a holistic approach are the guiding principles for the SLU (Swedish University of Agricultural Sciences) environmental and natural resource researchers in Umeå.

We are facing drastic measures if we are to be able to achieve the energy and climate objectives we have set for ourselves. And we need models so that we can, in a holistic perspective, analyse the effects of the large scale changes in the energy system that are expected. The general aim of our research project “Bioenergy, climate and economy” is to contribute to the development of the types of model that can be used as a reference in designing energy and climate policies.

In most studies, for example, no consideration is given to the carbon cycle as a whole, and this can give rise to erroneous decisions concerning measures if they are based on the results of the studies. These and other deficiencies, and the haste to do something about global warming, form the basis to our research project.

Development of models

More specifically, we will develop both theoretical and empirical models which, in a correct manner, take account of the interplay of economy and ecology. For example, a general equilibrium model will be developed so that we can simulate the effects on society and sectors in different environmental and energy politics scenarios, the objectives of which are to promote climate and sustainable use of bioenergy.

So far, the project has generated a doctoral thesis and a number of articles. In the thesis, a study is made of the sequestration of carbon dioxide in the forest, which is attracting increasing interest in the policy debate. Technically, there are several ways of increasing this sequestration.  It is possible, for instance, to enlarge the forest area, change the management of existing forests, extend the life of wood products and use more bioenergy . Attention must however be paid to changes in silviculture and the use of biomass in industry.

The doctoral thesis presents a computable general equilibrium model (Computable General Equilibrium, CGE) in which the economy and ecology interact. The ecological model is a growth model that describes the dynamics of a forest where an explicit harvesting strategy exists and is determined in the model. An evaluation is made here of the probable effects of economic policy measures which may potentially be introduced to promote carbon sequestration in the forest.

Three scenarios

We take a closer look at three scenarios:

Scenario No 1. Compensation is given to forest owners because CO2 is sequestrated in new growth, and because they are taxed because CO2 is emitted during harvesting (symmetry).

Scenario No 2. In addition to the measures applied in Scenario No 1, forest owners receive tax rebates  depending on the products for which the harvest is used, and on the length of time these products prevent emission of CO2  into the atmosphere  (product sequestration).

Scenario No 3. In addition to the measures applied in Scenarios Nos 1 and 2, forest owners who save GROT (branches G and crowns T) and stumps in the forest receive tax rebates.

The results indicate that the cost to society of these scenarios would be greater in the beginning of the planning horizon, since there may be a considerable delay before there is a significant increase in the sequestration of carbon in the forest.

The analysis shows that the use of biomass will probably move from the pulp industry to the wood industry, because of differences in age specific types of biomass that are used in different parts of the industry. This seems reasonable, since a policy that stimulates sequestration of CO2 increases the age of the forest.

The results also indicate that such a sequestration policy would result in resources being transferred to forest owners from other economic actors. These transfers will probably be increased further if tax concessions have already been established. The model shows that the introduction of tax rebates increases the social costs of an environmental policy that focuses on the sequestration of CO2.

Why biofuels?

Is it possible to formulate a clear overall conclusion with regard to e.g. the climatic effect?

Biofuels are seen as energy sources with the potential to solve different problems connected with climate changes, environmental destruction, energy supply and energy security. In an article we discuss biofuels, primarily biofuels for transport, such as ethanol and biodiesel, from a welfare perspective and address a fundamental question: Why biofuels?

A survey of the literature shows that the effects of  a policy that promotes transition from fossil fuels to biofuels does not necessarily promote welfare. Our theoretical framework gives indications of possible reasons for this. On the basis of our model, we are proposing a policy that not only taxes the emission of CO2 from all types of sources – including biofuels – but also favours the growth of biomass, which implies that growth is subsidised.

With the help of a theoretical growth model that comprises environment and climate related external effects, we take a closer look at the welfare effects of stimulating biomass growth and increasing the use of bioenergy. As an illustration, we make use of a hypothetical intensive cultivation project, MINT. It is important that we calculate not only the positive effects of promoting growth and using bioenergy, such as the substitution away from fossil fuels and carbon sequestration. It is also important – in order to arrive at a balanced measure of the effects on the climate – that we also incorporate all the carbon dioxide emissions that are associated with bioenergy. Unless this is done, we will overestimate the positive climatic effects of increasing the use of bioenergy and stimulating growth. This is particularly important for slow growing biomass, such as Swedish forest that has a rotation of 50-100 years.

Cost-revenue analysis

A current study presents a systematic method for studying the socio-economic revenues and costs of introducing intensified management measures in forestry. Changes in wood production are evaluated, as well as various types of external effects such as the impact on recreation, acidification and carbon balance. The model is exemplified with the help of data from the Swedish state MINT investigation from 2009 that examined the impact on the Swedish forest sector of intensified silviculture methods.

Our cost-revenue analysis shows that intensified management measures are normally cost effective from the standpoint of private economics. Whether these measures will also be profitable from the standpoint of society depends on the magnitude of the external effects inclusive of carbon balance.

Author :

Tommy Lundgren is researcher at Centre for Environmental and Resource Economics, CERE, Swedish University of Agricultural Sciences SLU, Umeå

Per-Olov Marklund is researcher at Centre for Environmental and Resource Economics, CERE, Umeå University

Literature:

Ö. Furtenback (2011) “Three essays on Swedish energy and climate policy options – dynamic CGE-models with heterogeneous forests and econometric model of fuel substitution in district heating plants” (doktorsavhandling, SLU - Umeå).

T. Lundgren, P-O. Marklund, Brännlund, R., B. Kriström, (2008/2009), ”The Economics of Biofuels”, International Review of Environmental and Resource Economics, Vol 2, 237-280.

Lundgren, T., P-O. Marklund (2011), “Assessing the welfare effects of promoting biomass growth and the use of bioenergy – A simple back-of-an-envelope calculation.” WP 11-2011, Centre for Environmental and Resource Economics, www.cere.se.

Brännlund, R., O. Carlén, Lundgren, T., P-O. Marklund (2011). ”The costs and benefits of intensive forest management”. WP 12-2011, Centre for Environmental and Resource Economics, www.cere.se.

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