The Effect of Transaction Costs on Greenhouse Gas Emission Mitigation for Agriculture and Forestry

Abstract

Climate change and its mitigation is rapidly becoming an item of social concern. Climate change mitigation involves reduction of atmospheric greenhouse gas concentrations through emissions reduction and or sequestration enhancement (collectively called offsets). Many have asked how agriculture and forestry can participate in mitigation efforts. Given that over 80 percent of greenhouse gas emissions arise from the energy sector, the role of agriculture and forestry depends critically on the costs of the offsets they can achieve in comparison with offset costs elsewhere in the economy. A number of researchers have examined the relative offset costs but have generally looked only at producer level costs. However there are also costs incurred when implementing, selling and conveying offset credits to a buyer. Also when commodities are involved like bioenergy feedstocks, the costs of readying these for use in implementing an offset strategy need to be reflected. This generally involves the broadly defined category of transaction costs. This dissertation examines the possible effects of transactions costs and storage costs for bioenergy commodities and how they affect the agriculture and forestry portfolio of mitigation strategies across a range of carbon dioxide equivalent prices. The model is used to simulate the effects with and without transactions and storage costs. Using an agriculture and forestry sector model called FASOMGHG, the dissertation finds that consideration of transactions and storage costs reduces the agricultural contribution total mitigation and changes the desirable portfolio of alternatives. In terms of the portfolio, transactions costs inclusion diminishes the desirability of soil sequestration and forest management while increasing the bioenergy and afforestation role. Storage costs diminish the bioenergy role and favor forest and sequestration items. The results of this study illustrate that transactions and storage costs are important considerations in policy and market design when addressing the reduction of greenhouse gas concentrations in climate change related decision making.