Valuing forestlands with stochastic timber and carbon prices

Abstract

We calculate expected bare land values, assuming forestry is the highest and best land use, using a real options methodology with stochastic mean-reverting timber and carbon prices. Land values relect the contribution of both timber as well as carbon stored in three separate pools—the forest, harvested wood products, and emissions avoided by using wood versus carbon-intensive substitute materials. Land values reflect one of three sequestration scenarios that vary the percentages of carbon sequestered in the three pools relative to the carbon sequestered in the forest just prior to the harvest activity. At harvest time, the value of the carbon sequestered in the three pools determines if the forest owner retains income gained from the sale of carbon credits, or must purchase credits to offset emissions associated with the harvest activity. A case study involving a hypothetical western Washington Douglas-fir stand suggests that carbon sequestration may be a significant income contribution for forest owners if the three carbon pools are recognized as credible offsets. However, the income contribution is sensitive to the amount of credit realized for carbon sequestered in each of the pools. The analysis demonstrates the significance of including carbon sequestered in the three separate pools when designing carbon offset policies.

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Notes

  1. 1.

    The forest carbon pool discussed here only includes carbon contained in merchantable timber as given by the yield curve, and it excludes carbon stored in, for example, soils, roots, or foliage.

  2. 2.

    Several facts were used in determining the value of γ. First of these was the composition of CO2: 44.0 g of CO2 contains 12 g of carbon. The value of the conversion factor from merchantable timber yield to carbon yield is equal to 14.38 lbs of carbon per cubic foot of Douglas fir. Finally, the factor converting timber volume from thousands of board feet, MBF, to thousands of cubic feet, MCF, was set to the average of conversion factors for the small and large Scribner rules at 0.115 MCF per MBF.

  3. 3.

    Presently, carbon exchanges do not recognize the substitution pool and place restrictions on the harvested wood product pool when granting off-set credits.

  4. 4.

    Although harvesting a forest stand as young as five years is extremely uncommon, the minimum harvest age was set to this low value for the sake of completeness of simulation results.

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Acknowledgements

The financial support for the analysis presented in this article was provided by the School of Environmental and Forest Sciences at the University of Washington.

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Correspondence to B. Bruce Bare.

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Petrasek, S., Perez-Garcia, J. & Bare, B.B. Valuing forestlands with stochastic timber and carbon prices. Ann Oper Res 232, 217–234 (2015). https://doi.org/10.1007/s10479-013-1389-1

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Keywords

  • Bare land value
  • Real options
  • Product life cycle
  • Carbon offset pools