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Opportunity Costs

May 27, 2009
The Washington Post this week reported on a carbon-credit proposal being put forward by Ecuador for consideration in UNFCCC Climate Change Talks. Ecuador is asking for carbon credits in exchange for leaving undisturbed one-fifth of its petroleum reserves, which are located beneath a protected national park that is part of the Amazon rainforest.

The proposal is similar to one put forward by Brazil last August, called the Amazon Fund, which asks foreign countries to donate money for investment in Brazilian businesses that would conserve the Amazon rather than cut it down – rubber production, for instance, rather than timber, cattle, and agriculture.

The Intergovernmental Panel on Climate Change recognizes natural and managed forests as potential carbon sinks, but not untapped petroleum reserves.

Ecuador’s proposal highlights one of the more obscure calculations in the life cycle emissions of biofuels included in the EPA’s proposed rule -- namely “foregone sequestration.” Because natural forests store more carbon than managed agricultural land, biofuels are assessed an opportunity cost stemming from conversion of forest or grassland to agriculture. This is not actual carbon released from the forest or grassland, but a penalty for not preserving a carbon sink (or, in the case of grassland, not converting it to a forest).

The EPA has assumed and applied to biofuels a constant rate of foregone sequestration over a period of 80 years. In fact, the cumulative calculated emissions of corn ethanol include only this opportunity cost after the 20 year mark. The rate is equal to nearly half the calculated emissions of the gasoline baseline. The inclusion of this factor more than doubles the calculated emissions per acre of converted Brazilian forest land assumed to be caused by U.S. biofuel production.

A similar opportunity cost should arguably be applied to petroleum, particularly if Ecuador’s proposal moves forward and the international community recognizes untapped petroleum reserves as potential carbon sinks. In the case of Ecuador, this opportunity cost might include both the emissions that could have been avoided by leaving fossil carbon in the ground and the deforestation caused as roads, pipelines, and drilling sites are cleared from the Amazonian forest.