The issue is illustrated for the US but could be valid for other locations and, more importantly, to other investments based on stochastic carbon offset payments. In the US, the American Clean Energy and Security (ACES) Act of 2009 and the American Power Act (APA) of 2010 established a cap-and-trade policy, and allowed the agricultural sector to provide offset credits from carbon mitigating and sequestering practices such as afforestation. Forest offset credits are particularly interesting because large-scale afforestation of cropland could increase commodity prices thanks to a reduction in cropland.

These scenarios show that afforestation would begin after 15 years and start in areas with low agricultural yields and revenues. Our simulation indicates that most afforestation occurs in the south and northeast of the country, with almost no conversion in the Corn Belt – something that has minor implications on commodity prices. As carbon price increases, more areas will be converted and commodity prices will rise in line with allowance price. However, when compared with deterministic models, less land gets converted from cropland to forestry over the projection period of 40 years.

The lesson for policy makers is that under carbon price uncertainty, less afforestation and carbon sequestration takes place. To foster afforestation, different mechanisms are necessary to reduce uncertainty at the expense of higher commodity prices.

Related links