Potential impact of carbon trading on forest management in New Zealand

The New Zealand Government has enacted an emissions trading scheme (ETS) under which owners of Kyoto-compliant forests will receive/surrender units for increases/decreases in the carbon stocks of their plantations. Each unit represents one tonne of carbon dioxide (CO2) and can be traded. In this paper we evaluate the potential impact of the ETS on forest management decisions including whether to establish new forest, choice of species and silviculture, and forest rotation length. Criteria used in the analysis are financial return (LEV or NPV) and carbon price risk (cost or percentage of units to be surrendered after harvest). Results show that carbon trading has the potential to increase forest profitability and influence the choice of silviculture. Forest rotation length increases with expected carbon price. However there is considerable risk arising from carbon prices. We develop strategies that hedge against carbon price risk at both the stand level and the forest estate level. The former include growing a valuable crop and trading only a portion of units received. The latter includes managing forest structure via age-class composition. We evaluate trade-offs between financial return and risk in order to identify the opportunity cost of strategies that are robust against future carbon prices.