Carbon offset as another driver of timberland investment returns in the United States

Abstract

Timberland investment has three return drivers: biological growth, timber price change and land value appreciation. The interaction of the three drivers determines the total timberland investment returns. Recent public attention to climate change resulting from excessive greenhouse gas emissions, nonetheless, has led to more discussion of forests as a natural carbon sink. With carbon sequestration, landowners should be compensated for keeping trees alive. The cash flows associated with forest carbon present an opportunity for timberland investors to potentially generate extra returns. For an afforestation investment and at the current carbon price of about $20 per metric ton in the voluntary market, forest carbon has a moderate contribution of about 21% to the total timberland investment return with a return premium is about 115 basis points. However, for a regeneration investment in which only additional carbon sequestration beyond the baseline is credited, the impact of forest carbon on total timberland investment return is minor yet positive. Overall, the return contribution of forest carbon is positively related to carbon price, interest rate, and investment horizon. As the pressure from global warming tightens, demand for nature-based carbon storage tends to increase, leading to higher carbon prices. Meanwhile, concerns about additionality often result in longer-term carbon contracts. All these would boost the influence of forest carbon on total timberland investment returns in the future.