Increasing use of biofuels increases the demand for agricultural land. Credible empirical evidence supports the common-sense judgment that this will lead to the conversion of forests and other habitats to generate more cropland, particularly in the tropics, where land conversion is cheapest. However, when analyzing the effects of biofuels on land use, governments frequently use a particular class of economic models, including the popular “GTAP” model, to justify a finding that biofuels will cause little additional land conversion. We argue that the GTAP model does not provide a credible scientific basis for this conclusion because it lacks an econometric basis for its economic parameters, and generates physically impossible results by a wide margin. It also incorporates several unsupported assumptions that guarantee little land use change, such as constraints on international trade and a failure to account for unmanaged forests.
To reduce global carbon emissions, should people harvest and use more wood or less? This question underlies the merits of policies that encourage power plants and heating facilities to burn more wood pellets and builders to construct more tall wood buildings. As one illustration of the question’s importance, the U.S. government has recently requested input on whether a lucrative tax credit for carbon-neutral electricity should apply to burning wood.
In the Carbon Costs of Global Wood Harvests, published in Nature in 2023, WRI researchers using a biophysical model estimated that annual wood harvests over the next few decades will emit 3.5-4.2 billion tons of carbon dioxide (CO2) per year. That is more than 3 times the world’s current annual average aviation emissions. These wood-harvest emissions occur because the great majority of carbon stored in trees is released to the atmosphere after harvest when roots and slash decompose; as most wood is burned directly for heat or electricity or for energy at sawmills or paper mills; and when discarded paper products, furniture and other wood products decompose or burn. Another recent paper in Nature found that the word’s remaining forests have lost even more carbon, primarily due to harvesting wood, than was lost historically by converting forests to agriculture (other studies have found similar results1). Based on these analyses, a natural climate solution would involve harvesting less wood and letting more forests regrow. This would store more carbon as well as enhance forest biodiversity.
Carbon Costs focused on the pure physical emissions from wood harvest and timber management relative to leaving forests alone. This is consistent with the approach used for decades by the IPCC and numerous other papers to estimate the emissions from new wood harvests.2 However, it differs from some papers that claim the carbon emitted to the atmosphere by harvesting and using wood should generally be ignored. These papers assume that wood is carbon neutral, just like solar or wind energy, so long as other forest tracts in a large area (often a whole country) are growing enough to keep the total amount of carbon stored in forests stable — which is true of forests in most countries. By itself, this argument makes little sense: If some parts of a country’s forests are not harvested, forests in that country overall will grow more and absorb more carbon, which reduces global warming. This rationale for carbon neutrality is roughly equivalent to claiming that a money-losing company does not lose money if a country’s companies are profitable overall.
Yet, some researchers, such as the developers of the Global Timber Model (GTM), also have a more refined argument for why harvesting wood causes low, no, or even negative emissions. In a blog and a critique submitted to Nature, their core claim is that the effect of forestry on carbon is an economic question that requires analysis using an economic model rather than a biophysical one. According to the GTM, increased wood demand for any one product leads to a range of results that can lower carbon costs; these include causing people to plant more forests, to reduce their consumption of other wood products, and to intensify forest management. The first idea, that increased wood demand leads to more forests, is related to a broader idea: that forests exist because of the demand for wood. This underlies the views of many others who see wood as carbon neutral.
The GTM is by far the most cited economic model for analyzing the carbon consequences of global wood use, so its findings could have serious policy implications. Importantly, the model has been used to claim the climate advantages of harvesting more wood for bioenergy, particularly to burn in power plants. One GTM paper estimates that substantially increasing demand for wood for bioenergy could lead to roughly 1.1 billion hectares of agricultural land being converted to forests around the world. That is an area almost four times the size of India and equal to more than 70% of current global croplands — which raises the question of where the world’s food would come from.
This dialogue, to which WRI has responded in an exchange under review at Nature, provides a useful basis for exploring the effects of wood consumption on climate change and what they mean for policy. The U.S. government has specifically asked for comments about the role of economic models in treating wood as carbon neutral or negative. Here, we take a closer look at both economic and biophysical models and what each does or doesn’t tell us about the climate consequences of using wood.
Enthusiasm for “greening the financial system” is welcome, but a fundamental challenge remains: financial decision makers lack the necessary information. It is not enough to know that climate change is bad. Markets need credible, digestible information on how climate change translates into material risks. To bridge the gap between climate science and real-world financial indicators, we simulate the effect of climate change on sovereign credit ratings for 109 countries, creating the world’s first climate-adjusted sovereign credit rating. Under various warming scenarios, we find evidence of climate-induced sovereign downgrades as early as 2030, increasing in intensity and across more countries over the century. We find strong evidence that stringent climate policy consistent with limiting warming to below 2 °C, honoring the Paris Climate Agreement and following representative concentration pathway (RCP) 2.6, could nearly eliminate the effect of climate change on ratings. In contrast, under higher emissions scenarios (i.e., RCP 8.5), 59 sovereigns experience climate-induced downgrades by 2030, with an average reduction of 0.68 notches, rising to 81 sovereigns facing an average downgrade of 2.18 notches by 2100. We calculate the effect of climate-induced sovereign downgrades on the cost of corporate and sovereign debt. Across the sample, climate change could increase the annual interest payments on sovereign debt by US$45–$67 billion under RCP 2.6, rising to US$135–$203 billion under RCP 8.5. The additional cost to corporations is US$10–$17 billion under RCP 2.6 and US$35–$61 billion under RCP 8.5.
Climate policies vary widely across countries, with some countries imposing stringent emissions policies and others doing very little. When climate policies vary across countries, energy-intensive industries have an incentive to relocate to places with few or no emissions restrictions, an effect known as leakage. Relocated industries would continue to pollute but would be operating in a less desirable location. We consider solutions to the leakage problem in a simple setting where one region of the world imposes a climate policy and the rest of the world is passive. We solve the model analytically and also calibrate and simulate the model. Our model and analysis imply: (1) optimal climate policies tax both the supply of fossil fuels and the demand for fossil fuels; (2) on the demand side, absent administrative costs, optimal policies would tax both the use of fossil fuels in domestic production and the domestic consumption of goods created with fossil fuels, but with the tax rate on production lower due to leakage; (3) taxing only production (on the demand side), however, would be substantially simpler, and almost as effective as taxing both production and consumption, because it would avoid the need for border adjustments on imports of goods; (4) the effectiveness of the latter strategy depends on a low foreign elasticity of energy supply, which means that forming a taxing coalition to ensure a low foreign elasticity of energy supply can act as a substitute for border adjustments on goods.
Climate policies vary widely across countries, with some countries imposing stringent emissions policies and others doing very little. When climate policies vary across countries, energy- intensive industries have an incentive to relocate to places with few or no emissions restrictions, an effect known as leakage. Relocated industries would continue to pollute but would be operating in a less desirable location. We consider solutions to the leakage problem in a simple setting where one region of the world imposes a climate policy and the rest of the world is passive. We solve the model analytically and also calibrate and simulate the model. Our model and analysis imply: (1) optimal climate policies tax both the supply of fossil fuels and the demand for fossil fuels; (2) on the demand side, absent administrative costs, optimal policies would tax both the use of fossil fuels in domestic production and the domestic consumption of goods created with fossil fuels, but with the tax rate on production lower due to leakage; (3) taxing only production (on the demand side), however, would be substantially simpler, and almost as effective as taxing both production and consumption, because it would avoid the need for border adjustments on imports of goods; (4) the effectiveness of the latter strategy depends on a low foreign elasticity of energy supply, which means that forming a taxing coalition to ensure a low foreign elasticity of energy supply can act as a substitute for border adjustments on goods