Efficiency of forest carbon policies at intensive and extensive margins

Abstract The economic potential of forest carbon sequestration is widely acknowledged. However, no consensus has been reached regarding the appropriate policy instrument for promoting carbon sequestration. In this study, we develop a dynamic framework to measure the effects and efficiencies of alternative carbon policies. A stylized optimal control model of the timber market is first employed to illustrate the mechanisms through which different policies affect the decision making of the forest sector at the extensive margin (i.e., changing forest areas) and the intensive margin (i.e., changing harvest ages). We then introduce carbon price projections and species‐specific production information into a multi‐age dynamic timber market model. Different carbon policies are simulated numerically. Our results reveal that a carbon tax on forest emissions without compensating for sequestration leads to net carbon emissions and, thus, is the least efficient policy choice. Further, policies that do not increases carbon uptake at the intensive margin result in very high efficiency losses. A per‐hectare land subsidy may be more than 10 times more expensive than a per‐ton carbon tax and subsidy policy or a carbon subsidy policy.