This post is the fourth in a series related to the Q2 2021 Forisk Research Quarterly (FRQ), which includes forest industry analysis, timber price forecasts and featured research on forest carbon.

Markets facilitate trade between buyers and sellers; they assign value and allocate resources. Markets for carbon, which exist within broader efforts to mitigate climate change, help set prices on the “right” to emit carbon dioxide, a greenhouse gas, into the atmosphere. Forest carbon projects and markets rely on certain economic assumptions and, as noted in a previous Forisk post, have their critics and challenges.

Current Forisk research offers context for the opportunities and uncertainties associated with forest carbon markets in the U.S. This includes addressing implications related to forest cash flows and values. This helps answer questions such as, “how should forest owners and investors think about carbon markets?” and “what is the math associated with deferring my harvest one year?” While forest carbon projects come in many forms, the “math” of harvest deferral applies specifically to the newer voluntary short-term “rental” program offered by SilviaTerra through the Natural Capital Exchange (NCAPX).

Forest carbon has value to the extent it expresses a measurable and verifiable change in behavior that results in additional carbon storage for a known period of time. At a high level, current forest carbon cash flows from voluntary programs in the U.S. are not competing with traditional forest harvesting cash flows in deep, high-volume wood markets. However, they are “interesting” and relevant in shallower, lower volume wood markets where, by default, timber prices (and timberland values) are lower. That said, the limited duration and specificity of the one-year deferral option does raise the simple and answerable question: based on the math, should a forest owner consider this?

The economics of local timber markets and forest ownership determine the opportunity costs associated with changing forest management or harvesting plans. When investors acquire timberland assets, they do so with harvest schedules that seek to maximize the present value and returns of the property. Anything that destroys assets, slows growth or defers cash flows tends to diminish returns. Anything that increases present value faster than the investor’s opportunity cost, often expressed in the discount rate, enhances value.

Forisk developed a case study that contemplates a forest managed on an optimally economic rotation to better understand the impacts of a forest carbon one-year deferral contract on cash flow and value. The figure below summarizes our analysis to estimate what type of forest carbon payment might be required for a “break-even” decision.

With harvest deferral contracts, timberland owners receive payments after the deferral occurs and is confirmed. That means forest owners would want to confirm that the payment received in the future also accounts for the opportunity cost of waiting one year to receive the cash. In our case analysis, per acre payments for a mature pine forest in the South, inclusive of opportunity costs, were in the $10 and up range, depending on specific assumptions and landowner investment horizons. Numbers were typically higher under a single-rotation scenario versus perpetual forest management.

A critical and fundamental aspect of understanding implications is establishing the business-as-usual (BAU) baseline of the forest to estimate “additionality” or the amount of incremental forest carbon supported by a given forest management strategy. Then, we want to understand the economics of entering a contract. Which decision, from a purely dollars-and-cents standpoint, makes the forest owner better off? Break-even and scenario analyses can help us evaluate the options, tradeoffs and unknowns.