Paying for forest carbon: Cost-effectiveness of the Verified Carbon Standard (VCS) remuneration scheme

Forests play an essential role in climate change mitigation by absorbing carbon dioxide from the atmosphere and storing carbon in biomass. Carbon sequestration can be increased by the extension of rotation cycles in existing plantation forests. This study examines the cost-effectiveness of the remuneration scheme employed by Verified Carbon Standard (VCS), a commonly used carbon accounting method based on the average amount of carbon stored in the forest. We compare the net present value of carbon remuneration under VCS with that of a scheme that remunerates actual carbon storage in each year which we call "current carbon accounting." We use data for an Acacia mangium plantation in Indonesia where the forestry sector is expected to contribute more than half of the reductions of carbon emissions according to Indonesia's Nationally Determined Contribution (NDC) under the Paris Agreement. For our baseline scenario, we find, first, that the payments needed to incentivise additional carbon storage under VCS are considerably higher than under current carbon accounting. Second, the inefficiency is more pronounced at lower discount rates. Third, recent prices reported for VCS forest credits are not sufficient to incentivise forest managers to lengthen the forest rotation in Indonesian plantation forests. Older forests store more carbon. Using a multiple rotations model our study determines how carbon payments incentivise forest managers to lengthen the forest rotation and, hence, to sequester and store more carbon.Forest managers should consider carbon remuneration options in their forest management decisions, in particular when choosing the length of the rotation period.Optimal forest management is impacted by the design of the remuneration scheme. It matters in particular whether carbon sequestration or carbon storage is paid for.Fund managers can incentivise larger amounts of carbon storage through careful design of the carbon remuneration scheme.