Investment managers are facing a crucial dilemma in the heart of our forests. They stand reevaluating each tree, not just for its timber potential, but also for its ability to generate valuable carbon credits. This shift, driven by the surging demand for carbon offsetting, has transformed forest management into a strategic game with significant environmental and financial implications.
Determining the ideal role for each tree within a forest portfolio is no easy feat. It requires meticulous analysis, as Brian Kernohan, Chief Sustainability Officer at Manulife Investment Management, explains: "Investing in a forest now necessitates a critical question: how do we balance wood products with carbon capture? Ultimately, the answer hinges on our clients' priorities."
Manulife, managing a vast 5.4 million acres of forest, employs sophisticated calculations to assess the individual value of each tree, factoring in species growth rates and market value of the lumber. This data guides their harvest strategy. If a tree's carbon credit potential surpasses a certain threshold, it receives a reprieve, even if for just a few additional years. However, if its timber value outweighs its carbon capture potential, it faces the saw.
Broad-leaf trees, champions of carbon sequestration, boast superior credit potential, accumulating up to 500-600 credits per hectare. However, their maturity takes well over a century, significantly slowing down the process of generating credits. In contrast, conifer trees, though offering half the credit potential, mature within 35-40 years, making them a more attractive option for companies seeking to achieve net-zero emissions faster.
The viability of solely carbon-focused forest investments has recently shifted dramatically, as Kernohan emphasizes: "Previously, the value of forest land for carbon sequestration wasn't substantial enough to warrant investment. However, the tide has turned, and we can now capitalize on this environmental benefit."
The voluntary carbon credit market is poised for exponential growth, with projections estimating its value to reach a staggering $40 billion by 2030, a twentyfold increase from 2021 levels (Boston Consulting Group and Shell report). This surge creates an opportunity for companies to offset their carbon footprint, particularly those in hard-to-abate sectors like energy and heavy industry.
Carbon credits come in various forms. Removal credits, generated by actively removing carbon dioxide from the atmosphere, hold greater value due to the ease of quantifying the carbon tonnage stored. Conversely, avoidance credits, originating from activities that prevent emissions (e.g., not cutting down a tree), pose a greater challenge in calculation as they rely on the absence of an action. Tree-planting initiatives fall under the removal category as they directly remove carbon through photosynthesis.
Companies like Finite Carbon are emerging as key players in this evolving landscape. Based in Pennsylvania, they act as a bridge between institutional investors seeking to understand carbon credit value and landowners contemplating a shift away from traditional timber income sources towards carbon-focused revenue streams.
"Landowners face a critical decision," explains Daniel Crawford, Vice President of Commercial Operations at Finite Carbon. "They must assess the value of each tree and explore the potential sources of that value." Crawford adds a crucial caveat: "The carbon value of existing trees only becomes financially viable if there's a demand for timber in the surrounding area. If the tree wasn't intended for cutting anyway, then carbon savings become irrelevant, and avoidance credits shouldn't be issued."
