This paper seeks to understand the mechanisms underlying the policies creating incentives for carbon sequestration. The key difficulty in designing carbon policies for forests is to take into account the ephemeral nature of carbon sequestration and to accurately track the carbon flow entering and exiting forests. Among a number of existing payment systems, carbon subsidy-tax system (CST) and carbon rental system are the only two systems which both consider nonpermanence and accurately track the forest carbon flow. In this paper, we derive the optimal conditions for harvests under various carbon policies and simulate the effects in a single region, multi age class timber market model. We find that carbon policy will encourage afforestation if it create additional revenue but the CST and carbon rental system are more effective than the others in extending rotation ages. Another finding is that costs of carbon rental system are much higher than that of CST system although they are efficiently equivalent.


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