Forest carbon can affect timberland values to the extent that robust markets for carbon support reliable cash flows to investors. With wood, the economic value of trees derives from the ability of manufacturers to turn logs into value added products consistently, at a profit, over time. Without demand, whether from mills or carbon markets, trees have no (economic) value.
Meanwhile, back at the lab, alternate forest carbon markets continue to develop. What is required to evaluate the potential impact of these markets on timberland investors? We must think about plausible long-term structural changes to the forest industry; forest carbon markets could evolve in markedly different ways within the broader carbon economy.
Two Futures
Consider two broad and diverging scenarios. On the one side, forest carbon markets provide a temporary stop-gap measure, a bridge, from current carbon sequestration efforts to a future where global emissions are, thanks to wholesale transitions in energy generation and carbon capture technologies, de minimis, making forest carbon efforts irrelevant on the margin. The gap between the current situation and the future irrelevance would be measured in decades.
Alternately, what if we have this backwards? Assume the marketplace decides that trees are more valuable as stores of carbon and sources of other environmental services for the next century or more than they are as a fibrous raw material. In that world, wood users would compete with carbon-centric opportunity costs when procuring logs. Forest owners would require a certain level of payment to offset their carbon storage role, and all wood fiber dependent industries and service providers could face massive disruption.
Analyzing Operable and Viable Futures
Painting a speculative, fact-free story is easier than grinding through data to develop a bottom-up analysis and view of the future. However, to understand what is viable or operable, and assuming the laws of physics apply equally to us all, that is exactly the task at hand. We invest the time required to consider the implications on wood demand and timber prices in the future.
In other words, we want to (1) further our understanding of how carbon markets affect aggregate wood demand and timber supplies in order to (2) provide a view on how the forest industry will be structured and how it may operate. This helps us prioritize investments and connect the dots between investors and their expected cash flows and returns.
To conduct this exercise, we might start with basic assumptions:
- Demand for timber is a function of demand for wood products.
- The economics of timber and wood products depend on the accessibility, availability and sustainability of forest supplies.
- All of these are subject to impacts from technology, non-wood substitutes, legislation and institutional ESG efforts.
From here, we segment the analysis to dissect each sector in the forest industry. This includes the break-even economics for manufacturing costs by mill and product type. The “ability-to-pay” for wood varies across sectors, and understanding this helps us evaluate the wood demand-to-supply balances by local market and the associated clearing (expected) timber prices at a given point in time relative to our assumption of how the forest industry might look in the future.
We could think of this as the ultimate “return-to-stump” analysis (much as mills might conduct “return-to-log” analysis). This provides a view on the optimal use of forests with differing profiles.
Comparing Scenarios
Scenario analysis offers a tool for assessing the relative impact (sensitivity) of wood demand, forest supplies, logistics and technology across potential futures. This type of work helps us stack and rank markets, and depends on a granular understanding of wood-using mills and their relative technological position.
Forest carbon markets build on key economic assumptions, one of which is that it does not matter where (on the planet) a unit of carbon is reduced. Therefore, thinking through future conditions includes a type of “growth-to-drain” or “supply-to-demand” balances by local market and region on continental and global bases. This provides the raw analysis for taking positions on which global regions will lean into their traditional forest industries, which may lean into emerging forest carbon and environmental service opportunities and which may serve as models for integrated approaches.
While the exercise has “academic” aspects, it depends on the nuts-and-bolts applied analysis associated with documenting regional operating costs, capacities and forest supplies over time. At the end of the day, we want to understand the relative competitive position of these regions and their “value proposition” by product in a market sense to start thinking through priorities by sector. For investors and executives, this supports strategic planning and internal discussions on the role of forest carbon as an opportunity and potential disruptor.
Forest Fundamentals Still Apply
Forest researchers have expended significant effort improving the growth-and-yield simulations of the key commercial tree species that drive timberland wood flows and cash flows. From a “physical facts” standpoint, these same models support our understanding of the “sequestration capacity” of forests for carbon markets. However, our relative understanding of forest biology is matched by a destabilizing uncertainty associated with forest carbon prices and markets.
When investors decide to acquire and manage timberlands, they rely on estimates of expected returns, not on paranormal psychology or a horoscope. To the extent forest carbon influences capital investment in the wood products industry or forest management decisions moving forward, it will build, in the end, on the detailed bottom-up work required to “operationalize” strategic plans and scenarios.
This is wrong and dangerous It will destroy the future of the our forests and its allowing the destruction of our Southern usa forests and foreign forests it is not helping conservation or climate change. It ruins our world forests while allowing the pollution to continue instead of investing in available technology to reduce greenhouse emissions. It will only serve the unwillingness to invest in the future of our nation and its citizens
Brooks – We agree with your assessment of the possible impacts on the timberland and forest products industries if we end up in a situation where policy evolves to “pit” competition for raw forest products (standing carbon versus harvested trees) against each other in the market place. I am personally fearful that this is where the policy-makers will end up. As foresters know, young vigorous stands of trees sequester far more carbon than old stands that have reached carrying capacity. As foresters know, lumber, panels, and paper sequester carbon after the tree is harvested allowing for regeneration and more young vigorous trees. And as we know as foresters, concrete and steel are not renewable and require far more energy and green-house gas emissions than wood-based products in the built environment. However, the one thing we don’t know is how to effectively influence policy in this arena. If we want to maintain, and even enhance raw forest products markets and protect the viability of our forest products industry we have to become more involved influencing carbon policy and carbon accounting to insure the inclusion of downstream products. Thanks for addressing such an important and pressing topic. This one is really important.
Brooks, I agree with Mike. Thank you for an insightful view of how we might configure a “scenario analysis” to compare carbon value with more traditional forest values. With the work of NCX (formerly Silvia Terra) and others, we may be reaching a point where tradable carbon stores may become more than nebulous “counter-factuals” and more actual near-tangible forest products that can compete on solid ground. Still, I have some concern that until it can be solidly demonstrated that carbon products have a directly measurable positive affect on the atmosphere, it will remain the realm of traders seeking arbitrage gains, leaving someone with the “hot potato” when the game ends.
It is gonna take a whole new approach to how timber is being harvested it cant continue with current harvest practices. It has to include other tree species that are not being used for their own purposes. The efficient use of all fiber
A total restructuring of public sector workers and other obligations to have access to get people who want a change. Waste of money on the property tax credits and no incentives
If you are getting a property tax break for growing trees for economic growth then it doesn’t seem fair to get a tax credit for not. So if you’re getting a tax break for the growing trees that are going to help provide a stable timber supply when you remove it for the carbon tax credit it would seem fair to lose the break for the other maybe even with a fair rector active. Penalty for the growing time since last harvesting you have recieved credit for. The tax revenue lost to a state county government would be a crushing cost. It will be cheated out of years of investment. It would have to do something or continue with an unfair burden. It also has implications for foreign corporations domiciled in other states that are currently given tax breaks that domestic corporations don’t. This is really bad in the state of Oregon with already serious issues with property taxes. This and reduced income from the ONC timber lands.School funds will be unavailable with out a sales tax or property tax rate increase. Oregon already has one of the highest property tax rates in the United states. Making affordable housing for its citizens not attainable. Oregon has its future in the hands of outsiders and it wont see the forest or the trees. Oregon once the timber jewel of the Nation. A nation built by Oregon’s timber is being kicked to the curb. It is being left to burn and it is.