Economics of carbon emission and sequestration in the Malaysian forest sector

In 1990, The International Tropical Timber Organization (ITTO) adopted an objective to bring all tropical timber production to sustainable levels by the year 2000. To achieve the conservation objective, producers need to regulate harvests from their historical levels. The two main objectives of the study are to analyze how the forest sector economies—forest resources and industry—affected by a policy to reduce harvest to a sustainable level and to evaluate subsequent change in CO₂ emissions and sequestration of the policy.; A forest sector model consisting of the forest and industry sub-models is developed to evaluate the level of CO₂ emissions and the economic trade-off of the policy. The forest sub-model generates timber inventory data from the timber account that is incorporated in log supply estimate. The industry sub-model is comprised of a system of 11 demand and supply equations in five market sectors. The model employs firm and national level time series data over the historical period 1970–1996. Simultaneous equation (two stage least square) estimation is used. The model is simulated by reducing the timber inventory between 45% and 55% that result in log harvests within the sustainable harvest level suggested by the ITTO.; The empirical context is a simulation model of the production, consumption and trade of forest products from Peninsular Malaysia (PM), a key player in the international tropical timber trade.; Simulation results suggest that the policy to achieve sustainable harvest level appears detrimental to the peninsula's forest sector economy. The switch from the historical harvest level to a sustainable level could cost Peninsular Malaysia between M{dollar} 2.1 and M{dollar} 2.8 billion from baseline income in 1995. The greatest loss is in social surplus in the five market sectors. Nonetheless, the policy generates a moderate increase in forest biomass and carbon storage but has a significant impact in reducing CO₂ release from forest activity associated with harvests. The results indicate that Peninsular Malaysia's forest is providing a carbon storage service to rest of the world. However Malaysia's loss from reduced timber harvests could not be offset by the compensation value of using Malaysia's forest as carbon sink.