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					                                       Research Proposal:

       Evaluating Effects of Private Insurance on Forest Landowners’ Incentives to
                  Sequester and Trade Carbon: Impact of Hurricanes

                                         Mansi Grover1
                        Department of Agricultural and Applied Economics
                                         Virginia Tech
                                          February 11

Background
    The creation of marketable carbon credits in forestry has received a great deal of
attention in recent years, and is one of the low cost options for meeting emissions
reduction goals. A number of technical and economic studies are available to assess the
feasibility of sequestering carbon through practices such as land conversion, tree
planting, and various management activities (e.g. Mooney et al; Brown et al).
    There is a considerable gap, however, between sequestering an actual ton of carbon in
forests, and having that ton available to be used as an offset by a carbon emitter operating
under a regulated program, given the risk of that carbon being lost or emitted as a result
of natural disasters like hurricanes. Included in the gap between “growing” a ton and
“selling” a ton is the risk that the sequestered carbon may be emitted back into the
atmosphere as a result of natural disasters and the consequent costs incurred by the
carbon credit seller in terms of financial losses and penalties. If the costs and penalties
are too high, landowners, especially small landowners, will simply avoid the carbon
market. At first glance, it appears that these costs may become a serious deterrent to
small projects, or those that produce a small amount of sequestered carbon.
    Buying private insurance is gaining popularity as a tool (de Figueiredo et al., Wong
and Dutschke) to mitigate the financial consequences for participating landowners from
carbon loss. An investment company or a large forest company may be able to tolerate
the losses from a forest fire or hurricane but for a small forest owner with a valuable 30-
year old plantation, the financial losses are enormous. Without some form of risk
management or risk protection, landowners are not likely to be motivated to participate in
carbon sequestration trading even though they recognize the potential of financial gains.
There is a need, therefore, to document and analyze the impact of private insurance on a
forest landowners’ portfolio of strategies, given the risk of carbon loss due to hurricanes.

Proposal
    Insuring their economic stability will help persuade landowners to change their land
management practices to sequester carbon. I will utilize a stochastic stimulation model to
analyze the potential implications of buying private insurance on landowners’ incentives
to participate in terrestrial carbon trading given the risk of carbon loss from natural
disasters like hurricanes. The analysis will focus on answering questions such as:
      Does purchasing private insurance impact the optimal portfolio strategies of the
     landowner, if yes is there an improvement in incentives?

1
    Graduate Research Assistant
     Does purchasing private insurance encourage greater landowner participation,
    especially for small landowners?
     The resulting suggestions in terms of the necessary incentive structures and how
    they can be put in place by buying insurance should prove invaluable to potential
    project owners, insurance companies, planners, and offset buyers, as well as state and
    federal policymakers.

     If the risk of carbon loss due to natural disasters creates significant disincentives, that
overwhelm the market price for offsets for landowners (especially small), these projects
will never be offered on the market. It will thus be important to analyze how private
insurance might impact the market incentives and in turn the landowners’ decision to
participate. A clear understanding of the cost/risk implications associated with hurricanes
and insurance will facilitate the debates over the role of private insurance in terrestrial
carbon trading markets.


References

Antle, J., S. Capalbo, S. Mooney, E. Elliot and K. Paustian. 2002. A Comparative
Examination of the Efficiency of Sequestering Carbon in US Agricultural Soils.
American Journal of Alternative Agriculture 17(3):109-115.

Brown, S., M. H. P. Hall, F. Ruiz, a. Flamenco, B. DeJong, L. Auckland, O. Masera, and
D. Shoch. 2002. Land Use and Forestry Projects that Abate Greenhouse Gas Emissions:
Baselines and Additionality. Winrock International, US AID-supported Research.

Holecy, J., Skvarenina, J. Tucek & J. Mindas, Fire risk insurance model for forest stands
growing in the area of Slovak Paradise.
(http://www.fria.gr/chapters/warmCh19Holecy.pdf)

Kovacs, P. 2001. Wildfires and Insurance. Toronto: Institute for Catastrophic Loss
Reduction.

de Figueiredo, M.A., D.M. Reiner and H.J. Herzog, "Towards a Long-Term Liability
Framework for Geologic Carbon Sequestration," presented at the Second National
Conference on Carbon Sequestration, Washington, DC, May 5-8 (2003).

Wong, J.enny and, M. Dutschke. Can Permanence be Insured? Consideration of some
Technical and Practical Issues of Insuring Carbon Credits from Afforestation and
Reforestation . Hamburg Institute of International Economics-Discussion Paper No.
235. 2003

				
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