Effect of Carbon Taxes and Subsidies on Optimal Forest Rotation Age and Supply of Carbon Services

Carbon taxes and subsidies will affect the optimal forest rotation and, consequently, the carbon stored in forests. Unlike the Hartman rotation, where externality benefits are a function of the volume of timber growing on a site at any time, carbon benefits are a function of the change in biomass. This chapter examines implications of carbon subsidies and taxes on economically optimal harvest decisions and the supply of carbon removal services in the forest sector. Subsidies are used to encourage planting of trees and investments in silviculture that promote tree growth, while taxes are used to discourage harvest and the subsequent release of CO₂ (stored carbon) into the atmosphere. The chapter deals with an examination of optimal harvest strategies when carbon uptake is a benefit of growing trees. It discusses how the optimal financial rotation age, or Faustmann harvest age, is affected by the inclusion of carbon sequestration benefits.