| comments (4) in Forest Carbon, Forest Finance & Economics, Timber Market Analysis, Timberlands

Forest Carbon is a Forest Product

A timberland investment, in and of itself, comprises a bundle of diversified cash flows. The sources of these flows include softwood and hardwood logs and fiber, hunting leases, cell phone towers and, increasingly, ecosystem services such as carbon sequestration. These products feed different, and often uncorrelated, markets.

Investors place a premium on identifying attractive “cash flow bundles” when screening forest assets. Acquiring timberland in a strong, competitive wood basket is like opening a bakery in a busy shopping district. Better infrastructure and roads support more foot traffic and potential customers. Stores in this district pay for these benefits with higher rents, just as timberland investors pay for access to robust timber markets with higher timberland prices.

The interest of institutional capital in forest carbon assets forces us to revisit the fundamental timberland investment model and, in turn, capture this during due diligence of local timber markets. Since anything that increases present value faster than the investor’s opportunity cost enhances value, forest carbon has the potential to augment timberland values to the extent that markets for carbon support reliable cash flows relative to those for timber.

Forest carbon, a product with a market, generates questions with respect to its role and relative performance within a timberland asset or broader portfolio. “What are the valuation implications on my timberland from participating in forest carbon markets? What are the liquidity implications? How does this contract affect my ability to manage my forest?”

Spot prices for timber, timberland and forest carbon provide a simple snapshot. Deeper understanding of a timber market emerges with tracking performance over time and through the business cycle. Simple forecasts, scenarios and rankings help identify key drivers and screen for better markets. A systematic process, like a checklist, reduces risk and maximizes understanding for timberland investment decisions.

This post also includes themes addressed in the (virtual) Timber Market Analysis course on December 8th and 9th, 2021. Discounted registration for the course ends November 24th.

Comments (4)

  1. Jim Rinehart / Reply

    Thank you for your article, Brooks. While I agree with you that anything produced by a forest that can generate cash flow through sale in a market would seem, by definition, to be a forest product. But let’s be precise. In this case, the product is the absence of carbon in the atmosphere attributable to carbon sequestered in the forest, not forest carbon itself. To be more precise, the product is a tradable certification that X amount of carbon is absent from the atmosphere due to the efforts of forest management that meet certain requirements of additionality, permanence, and others. To my knowledge, there is no solid proof yet that carbon offsets have actually lowered the amount of carbon in the atmosphere, and I wonder if such proof will ever be available. So, while carbon offsets may be a forest product as defined, they may not be a product that yields a measurable beneficial use.

    I remain a carbon offset skeptic. Here’s a radical thought: Let’s tax carbon emitters and use the tax proceeds, in part, to compensate forest owners for specific management practices that are likely to increase stored carbon. Don’t we have such programs already?

    • Brooks Mendell / Reply

      Jim: thank you for taking the time to read and share your thoughts. I appreciate this point, especially from a “forest carbon on its own” perspective. My thinking in the post is that investors make choices with their forests: focus on grade or pulpwood rotations? Plant this specie or that? For financially oriented owners, these reflect choices on which market to serve from their forest, and forest carbon is an option. It offers another investment decision for the landowner to make. With respect to the role of forest carbon within the broader carbon marketplace, I totally hear where you’re coming from. Hope you are well! – Brooks


    I, like Mr. Rinehart, am skeptical of the impact magnitude of the carbon offset markets. That said, the article is correct in that carbon can play a significant role in forest product marketing decisions. Mr. Rinehart suggested a ‘radical’ thought about taxing carbon; but, as he suggested, we do already have such programs — the California compliance market is essentially that – carbon emitters have to pay a ‘tax’ to carbon sequestering entities for specific management practices that increase stored carbon. The beauty of the CARB program, if there is any, is that the ‘currency’ goes directly to the forest owners, and doesn’t pass through the hands of the government, where it very often ends up being directed towards other uses. Now if we could only get some of our other taxes to end up directly in the hands of the service providers they’re intended for! — Thanks for a good article. Dave

  3. Will Sonnenfeld / Reply

    That makes three of us who are skeptics. I think the distinction that Jim is making is whether the carbon projects are, in fact, “Additional.” As many of us in the industry have been told by firms that have sold Improved Forest Management (or “IFM) projects, that they aren’t doing anything different from what they have done in the past and/or were planning to do in the future, these IFM projects are failing the Additionality test, even those in CARB’s compliance market. What Jim may be suggesting is a hard line prescription (stipulated actions and stipulated outcomes, verified by a third party) for being able to sell a credit, as opposed to leaving it up to the project owner and his/her project developer to develop customized but manipulated and speculative baseline Business-as-Usual or Common Practice baselines which are the foundation of IFMs. CARB protocols require that the actions taken must not have otherwise happened in the absence of the payment for the carbon credits, so doing what you have always done, even if above Common Practice, should not be permitted (or credited). In addition to the points that Jim has made, I would add concerns that the growing voluntary marketplace are even worse, with 30 or 40-year commitments, and even 1-year deferrals, thus failing the “Permanence” test. And all of the IFM based protocols have grossly inadequate adjustments for leakage (both activity-shifting and market-shifting), thus failing the quantification criteria.

    Finally, as an group and as individuals, those of us that are skeptical have a responsibility to share our skepticism with anyone and everyone, especially those who do not have our education, training and experiences, to work towards finding genuine solutions that truly mitigate carbon emissions, and to call out those who misdirect carbon mitigation funds purely for personal gain. If a landowner wants to cash in on maintaining the status quo (high inventories and modest cash flows), then they should sell a conservation easement, not dilute and misdirect carbon mitigation funding.

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