Forest Management with Carbon as an Output in Bangladesh

Forest management traditionally has involved managing the forest for the production of a single output—timber. However, the single output, industrial wood, may come in various forms, e.g., pulpwood and saw timber, which have different production costs, harvest cycles, and market prices. For example, pulpwood can be produced more quickly than saw timber, but pulpwood’s value per unit volume is lower than that of saw timber. The prudent forest manager must consider questions of timber volume and timber quality (type) when managing to maximize the profitability of the timber operation. Additionally, the existence of an opportunity cost of capital (a discount rate) dictates that harvests will usually take place before biological growth is maximized. Thus, a traditional forest manager must consider, at least, the costs and prices of various outputs obtainable from the forest, the yield function, and the discount rate when determining management regimes and harvesting rotations. The manager then determines the appropriate lengths of the harvesting rotation, thinning, and other silvicultural operations to achieve the output mix and time profile required maximizing the present value of the timber. In the simplest case, the question is simply one of choosing the harvest rotation that will maximize the net discounted present value of the forest, given the product and anticipated product price. This will maximize the profitability of the forest. Forests have always sequestered carbon, but this ecosystem service went unnoticed and uncompensated. In the past, the forest manager would have been expected to ignore any carbon considerations in his management actions. Suppose now, however, that payments were made for both carbon sequestration and timber. Under this arrangement, timber and carbon sequestration would be viewed as joint products, and the owner would have two market outputs to consider. As the forest matures, its timber stands become more valuable, as does the value of its carbon sequestration services. Suppose an owner receives an annual payment for carbon services on the basis of the volume sequestered but that this payment is forthcoming only as long as the timber remains “on-the- stump.” This approach recognizes the fact that forests need not last forever, and trees do eventually die. Because the amount of carbon sequestered will depend on the forest biomass, the payment for carbon services would be expected to rise as the forest matures. Additionally, suppose payment is received for the timber, but only when it is harvested. Thus, the manager must make a choice between receiving an annual payment for the carbon sequestration value and receiving a one-time payment for the value for the timber. If the payment for carbon were zero, then the timber values would predominate, as has been the case historically. However, once annual payments are being received for carbon, the harvest and payment for timber would mean the loss of payments received for the carbon sequestration services. In fact, if a regulated forest were established on previously unforested lands where the annual harvest of mature timber would simply equal the net annual growth of the forest system, carbon sequestration could last longer than one rotation. A steady-state amount of carbon would be sequestered in such a steady-state forest. In such a situation, annual payments for the sequestered carbon could continue indefinitely.Given the relevant prices of timber and carbon, the yield function, and the discount rate, an optimal financial rotation can be calculated. As the price of carbon rises relative to timber, the advantages of keeping the timber on the stump will grow (Sedjo 1999). Moreover, it has been shown that; as carbon takes on value, the optimum financial timber rotation age will be extended (Van Kooten et al.1995) Furthermore, at a price of carbon sufficiently greater than that of timber, the harvest rotation will cease, as the manager will find that his best financial returns would be associated with extending the rotation indefinitely. Additionally, since payments would now be made for carbon sequestration as well as timber, the financial returns to the entire joint production of timber and carbon will be higher than that for timber alone. Finally, there is the issue of liability in the case that the sequestered carbon is released, inadvertently or otherwise. In the case of the unplanned loss of sequestered carbon, does the forest owner compensate the purchaser of the carbon offset for unplanned carbon losses, or does the certificate purchaser bear the liability risk and thus go uncompensated even though the certificate is now worthless? It can be argued that the liability should be borne by the tree owner (seller of sequestration services) to maintain incentives to continue the existence of the planted forest and discourage fraud. With a long-term certificate, however, buyers of certificates that became invalid would need to try to recover losses from the tree owners. Compensation could be difficult and costly, especially if it involved inter-country litigation. An alternative would be for certificates to be good for relatively short time periods, e.g., one year. Each year the certificate would need to be renewed. Of course, this type of approach would require periodic monitoring of the forest to ensure its continued existence and its carbon content. However, monitoring would also be required for a long-term certificate. The advantage of short-term renewable credits is there is no need for placing liability or compensation should the forest be destroyed either intentionally or by accident. This result could be assured if payment is made for carbon that has already been sequestered. For example, if payment were made at the end of the sequestration year for carbon that had been sequestrated the previous year.