This post is the second in a series related to the Q1 2021 Forisk Research Quarterly (FRQ), which includes forest industry analysis and timber price forecasts for North America.

Words and their combinations are so interesting.

Ice is frozen water. Cream is the thick fatty liquid that rises to the top when milk is left to stand. Ice and cream, ice cream, is a delicious dessert, available in over 31 flavors, enjoyed in a cup, on a cone or floating on root beer. I scream, you scream, we all scream for ice cream.

Forests are large areas covered with trees. Carbon is a nonmetallic chemical (atomic number 6!) found in its impure form in soot and coal. Forest carbon refers to the carbon dioxide absorbed from the atmosphere by trees as they grow. The capturing of forest carbon can either be considered part of a broader climate change mitigation strategy or rather an idealistic institutional and policy-making shell game with few practical applications.

Markets Take Time to Develop

Most years, our team prioritizes a topic or theme for our internal research budget. In 2008, we were choosing between wood bioenergy and forest carbon. At the time, wood bioenergy ranged from actual, wood-using pellet plants and combined heat-and-power (CHP) projects to speculative cellulosic ethanol, while forest carbon comprised a stack of academic papers, along with nascent trading platforms and carbon offset projects. We chose wood bioenergy.

Since then, carbon markets have grown and matured. For forest carbon in particular, markets evolved for all key approaches to carbon offset projects[1]:

• Afforestation (planting or replanting trees);
• Avoided conversion (preventing the switch of a forest into non-forested land), and
• Improved forest management strategies to increase carbon sequestration.

In sum, forest carbon markets and projects have since become relevant to timberland investors, forest owners and users of forest-grown wood raw materials.

Growing Pains

Forest carbon markets are not without their critics or challenges. For example, in December 2020, Bloomberg published an article addressing the problem of “meaningless” carbon offsets that fail to change behavior or capture an actual environmental benefit.[2] While the article raises legitimate issues, it also affirms the strong interests and motivations pursuing these markets, which translates into growing demand and potential customers for firms able to solve key technical issues.

How do we manage the practical issues of verification in the woods, leakage across markets and access for smaller forest owners? There is movement on this front, as firms such as SilviaTerra and Finite Carbon are addressing the blocking-and-tackling issues of bringing buyers and sellers together at the local level, building on improved technological platforms and data sets.

Next Steps

At Forisk, we added forest carbon to our research program and are looking at the economic incentives and cash flow implications that would or could change behavior in the forest industry. At what point, would forest carbon values and pricing mechanisms influence timber prices and wood markets? How should or could timberland investors think about capturing these attributes in their valuations?

Forest Carbon Economics will also be covered in the upcoming (virtual) Applied Forest Finance course on March 4^th.

[1] NC State Extension published a helpful, clear summary of forest carbon offset markets. To access: https://content.ces.ncsu.edu/an-introduction-to-forest-carbon-offset-markets

[2] “These Trees Are Not What They Seem” by Ben Elgin, 12/9/20, Bloomberg.