Transaction costs for carbon sequestration projects in the tropical forest sector

There is general consensus that carbon (C) sequestration projects in forests are a relatively low cost option for mitigating climate change, but most studies on the subject have assumed that transaction costs are negligible. The objectives of the study were to examine transaction costs for forest C sequestration projects and to determine the significance of the costs based on economic analyses. Here we examine four case studies of active C sequestration projects being implemented in tropical countries and developed for the C market. The results from the case studies were then used with a dynamic forest and land use economic model to investigate how transaction costs affect the efficiency and cost of forest C projects globally. In the case studies transaction costs ranged from 0.38 to 27 million US dollars ($0.09 to $7.71/t CO2) or 0.3 to 270 % of anticipated income depending principally on the price of C and project size. The three largest cost categories were insurance (under the voluntary market; 41-89 % of total costs), monitoring (3-42 %) and regulatory approval (8-50 %). The global analysis indicated that most existing estimates of marginal costs of C sequestration are underestimated by up to 30 % because transaction costs were not included.