Potential Gains From Participating in a Global Carbon-Trade Market: An Illustration for Peru

Carbon emissions from fossil fuels in Peru amount to 30 million tons per annum. Those due to deforestation are estimated at about the same level (WRI, 1998). It is estimated that about 200,000 ha of primary forest are lost every year. Most of the forest is quite dense, and the carbon content per ha is estimated at about 200 metric tons. If we assume that deforestation causes the release of 75% of the total CO₂ stored in the forest it means that total annual emissions due to deforestation come to about 30 million tons (150 tons 200,000 ha).

Peru has also embarked on an ambitious reforestation project in the Sierra. About 100,000 ha per annum are being planted with trees there. Using a very conservative estimate, about 22.5 tons of CO₂ sequestered per ha from the approximately 1,000 trees per ha planted, the reforestation program causes CO₂ retention equivalent to 2.25 million tons.

If annual CO₂ emission quotas were set according to this historical benchmark, Peru’s total carbon quota allowance would be 62.25 million tons per annum (30 million tons for its current industrial emission plus another 30 million tons for its forest-burning emissions and 2.25 million tons for its contribution to CO₂ retention through its reforestation program). According to recent studies, once trade in carbon permits is started within the developed countries, its value is expected to be about US$125 per ton of CO₂. According to the same study, the quota price per ton of CO₂ declines to about US$25 once most LDCs are incorporated into the trading system.

If Peru could cut its forest losses by 50%, it would have about 17.25 million tons of CO₂ emission rights that could be sold in the first year. Thus, if it decided to participate in this market and the rest of the Southern countries did not, it would receive US$3.9 billion in quota revenues the first year (Table 5). In the following years, as economic growth continued, Peru would gradually reduce the amount of salable CO₂ quota revenues. Assuming an elasticity of demand for CO₂ with respect to GDP of 0.50, Peru could continue growing at 5% per annum for more than 25 years without facing any binding CO₂ restriction for its industry (Figure 3). In the meantime, the country would earn billions of dollars by selling the unused part of its CO₂ quotas.

Even if most LDCs entered into the carbon-trade scheme and quota prices fell to US$25 per ton of CO₂, Peru would still earn a large volume of rents during this period. In this case the quota revenues would reach US$439 million in the first year and progressively decline over time in a similar way.

What about the costs to Peru of reducing deforestation by 50%? This means refraining from incorporating 100,000 ha of land into agriculture or other alternative uses each year. Using agricultural land values estimated for the Amazon reported by Schneider (1993a), a plausible range for this value is US$100 to US$500 per ha. This means that the cost to Peru each year of forgoing the conversion of 100,000 ha ranges between US$10 and US$50 million. It would take 23 years for the annual quota revenues to fall to US$50 million. Thus, trading in CO₂ could benefit Peru by more than US$17 billion in net present value if other LDCs did not participate and about US$3 billion if most of them did.