The Economics of Timber Harvesting vs. Carbon Sequestration

A Wall Street Journal article from March 4 poses the question of how forest landowners and managers decide how to value a tree headed toward harvest versus the value from a carbon credit program based on carbon sequestration over years or decades.

“Investment managers who have bought up forestland are going tree by tree to figure out whether they should be felled for timber or kept up for carbon-credit generation”, the Journal article suggested.

“Tree by tree” may be an exaggeration when hundreds or thousands of acres are involved, but this does identify the landowners' economic question: How to compare the current value of a tree for harvest against the value suggested by a carbon credit proposal.

The article quoted Brian Kernohan, chief sustainability officer, private markets, at Manulife Investment Management, as asking clients who own forest land, “How do you manage wood products versus carbon”.

In establishing value, landowners and managers need to understand the current value of forests as timber for forest product production. Consulting foresters are skilled at estimating timber inventories—the volume of trees of a particular species available on the land. Organizations like Timber Mart South in the Southeast and Forest Data Network in the Lake States provide index prices to landowners, managers, and their foresters of the different species available on their land based on recent transactions in their area.

Sequestration carbon credits often pay landowners to delay or reduce harvests that are available on their land. These contracts often last for 20 to 50 years. So the contract value is typically a discounted value of the total value of the trees. A longer delay in the tree returning to eligibility for harvest should result in a greater proportion of the full value of the tree paid for the carbon contract. The tree's growth rate and the risk of disease during the contract also enters into the calculation.

The Journal article described the work of Finite Carbon of Wayne, Pennsylvania, which connects companies that are looking to sequester carbon with landowners and are interested in considering value from carbon contracts as an alternative revenue source.

“You have a decision to make,” Daniel Crawford, vice president of commercial operations at Finite Carbon, told the Wall Street Journal. “You have acquired this tree, so what is the value and where will the value come from? There’s now this new operation of carbon value for what is sequestered and stored.”

The comparison of value involves a complex calculation involving timber prices, volume, and the time value of money (or discount rates). A capable and experienced independent forester using good price data and tools can help sort through the complexity.