| The study investigates farmers' decision to afforest marginal agricultural land to create carbon sinks in western Canada. A real option model, which incorporates price risks related to carbon and timber revenues as well as opportunity cost uncertainty, is used to assess the impact of a carbon market on farmers' afforestation decision. Irreversibility of the decision is also modeled by including sunk cost of forest establishment and the cost of reversing the afforestation process. In addition, the non-permanence impact on the profitability of afforestation was analyzed by assessing the effect of two non-permanence carbon accounting schemes.; Results indicate that both, actual non-permanence policies and the presence of real options, have a significant negative impact on afforestation incentives. However, the carbon market has a positive effect as it increases the expected revenues to afforestation and also represents a diversification opportunity. Yet, even in the presence of a carbon market the investment barrier remains considerable. Despite the positive effect of the carbon market, results show that unless carbon prices reach levels well above {dollar}100/tC a subsidization of afforestation cost is needed in order to generate substantial GHG abatement from marginal agricultural land afforestation in western Canada. |
