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 October 04 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 30year 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?
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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