Carbon is a nonmetallic chemical (atomic number 6) found in its impure form in soot and coal. Forest carbon refers to the carbon dioxide absorbed from the atmosphere by trees as they grow. The capturing of forest carbon can be considered part of a broader climate change mitigation strategy or a policy-making shell game with few practical applications. Recently, we’ve seen evidence that the markets for forest carbon have progressed.
Markets Take Time to Develop
Most years, Forisk prioritizes a topic for internal research. In 2008, we were choosing between wood bioenergy and forest carbon. At the time, wood bioenergy ranged from actual, wood-using pellet plants and combined heat-and-power (CHP) projects to speculative cellulosic ethanol, while forest carbon comprised a stack of academic papers, nascent trading platforms and carbon offset projects. We chose wood bioenergy.
Since then, carbon markets have grown and matured. For forest carbon in particular, markets evolved for all key approaches to carbon offset projects:
- Afforestation (planting or replanting trees);
- Avoided conversion (preventing the switch of a forest into non-forested land), and
- Improved forest management strategies to increase carbon sequestration.
In sum, forest carbon markets and projects have since become relevant to timberland investors, forest owners and users of forest-grown wood raw materials.
Forest carbon markets are not without their critics or challenges. For example, in December 2020, Bloomberg published an article addressing the problem of “meaningless” carbon offsets that fail to change behavior or capture an actual environmental benefit. While the article raises legitimate issues, it also affirms the growing demand and potential customers for firms able to solve key technical issues.
How do we manage the practical issues of verification in the woods, leakage across markets and access for smaller forest owners? There is movement, as firms such as SilviaTerra and Finite Carbon are addressing the blocking-and-tackling issues of bringing buyers and sellers together at the local level, building on improved technological platforms and data sets.
At Forisk, we added forest carbon to our research program and are looking at the economic incentives and cash flow implications that would or could change behavior in the forest industry. At what point, would forest carbon values and pricing mechanisms influence timber prices and wood markets? How should or could timberland investors think about capturing these attributes in their valuations?
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