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Modelling forests for timber and carbon

Carbon forestry provides the opportunity for new, and faster, revenue streams from growing forests. For many existing owners of post-1989 forest, however, the carbon price risk is a significant deterrent to entering the NZ Emissions Trading Scheme (ETS). This is of particular concern to those forest owners who have one or few age-classes and where the age-class is such that they will have to surrender all of the acquired carbon credits (NZUs) at harvest time.

There are several ways to manage carbon price risk. One way is to enter into an agreement whereby a third-party takes on the carbon price risk and pays the forest owner for the use of the NZUs, [if you have more than 100 hectares of post-1989 forest and are interested in this opportunity, please e-mail Theo Vos on theo.vos@pfolsen.com.]

The other ways to manage carbon price risk are:

  • Plant new forest on post-1989 forest land to grow new NZUs to offset harvesting liabilities.
  • Using timber harvesting revenues to offset the carbon liabilities.
  • Harvesting your way into a multi-age class forest – staggered harvesting.
  • Withholding (not selling) some NZUs.
  • Don't harvest your forest.

The trouble is it's easy to list these strategies, but how do they apply to an individual forest owner's situation and how will they actually work?

Recently, Jeff Schnell, a senior consultant with PF Olsen, has combined the power of world-class harvest scheduling software (Woodstock™) with Forecaster™ growth and yield models, including carbon stock changes and a purpose-built spreadsheet model. Woodstock uses optimisation routines to develop a harvesting schedule that optimises the net present value of the forest. Jeff then introduces the impact of carbon and models the resultant carbon, timber and cash flows to achieve the maximum net present value under a number of pre-set constraints. An example of a constraint that may apply is – never allow my NZU (harvesting) liabilities to exceed my NZU (growth) assets in any one year.

"In the past we had to advise clients that they could adjust harvesting rates to achieve such an objective, but is was very clumsy to try to model exactly how this would be achieved", explains Jeff. "Now with this new modelling capability, we can easily simulate differential harvesting rates. So far this has shown increases in the profitability of projects, but more importantly, it suggests that some forest owners may be able to avoid carbon price risk by simply manipulating their harvest schedule".

This chart shows NZU credits and liabilities over two rotations for a 600 ha forest with only two age-classes based on optimising harvesting revenues. Note the very high periodic carbon liabilities which will be expensive to purchase if the NZU price is very high at the time.

This chart shows NZU credits and liabilities over two rotations for a 600 ha forest with only two age-classes based on optimising harvesting revenues, but adding the constraint that NZU liabilities must not exceed credits in any one year. This solution reduced the net present value of the project by less than 1% compared to the unconstrained scenario above. That's cheap carbon price risk "insurance"!

As a consequence of this advancement of capability, PF Olsen can now offer cost-effective carbon modelling services which will not only assist forest owners deciding whether or not to join the ETS, but also allow them to design strategies to maximise profitability and minimise carbon price risk. Some of the outputs from the modelling will include:

  • Cash flow projections from carbon and timber.
  • An estimate of how much net harvest revenues will cover the carbon liability at harvest.
  • Commentary on the potential to progressively harvest over several years.
  • A customised harvest schedule that minimises carbon price risk.
  • Options to defer harvesting, or not harvest some areas at all.
  • Profitability of new planting and its impact on risk and profitability of the whole project.

If you would like to know more about how PF Olsen can assist you with making decisions about whether or not to join the ETS and how you can make the most out of the scheme, please call Jeff on 07 921 7211, or email jeff.schnell@pfolsen.com. [As a guide, this type of analysis is only likely to be cost-effective on post-1989 forest areas of greater than 100 hectares, or if you plan to plant up additional area to exceed 100 hectares in total].