Optimal forest rotation under carbon pricing and forest damage risk

TL;DR

This paper analyzes how carbon pricing influences optimal forest rotation lengths considering damage risks, showing that higher carbon prices encourage longer rotations and larger carbon stocks, with implications for climate mitigation and landowner economics.

Contribution

It provides the first analytical framework for determining optimal forest rotation under combined carbon pricing and damage risk, supported by numerical illustrations.

Findings

Carbon pricing significantly extends optimal rotation lengths.

Damage probability has a nearly linear relation with rotation length.

Longer rotations lead to larger carbon stocks but lower harvests.

Abstract

Forests will have two notable economic roles in the future: providing renewable raw material and storing carbon to mitigate climate change. The pricing of forest carbon leads to longer rotation times and consequently larger carbon stocks, but also exposes landowners to a greater risk of forest damage. This paper investigates optimal forest rotation under carbon pricing and forest damage risk. I provide the optimality conditions for this problem and illustrate the setting with numerical calculations representing boreal forests under a range of carbon prices and damage probabilities. The relation between damage probability and carbon price towards the optimal rotation length is nearly linear, with carbon pricing having far greater impact. As such, increasing forest carbon stocks by lengthening rotations is an economically attractive method for climate change mitigation, despite the forest damage risk. Carbon pricing also increases land expectation value and reduces the economic risks of the landowner. The production possibility frontier under optimal rotation suggests that significantly larger forests carbon stocks are achievable, but imply lower harvests. However, forests' societally optimal role between these two activities is not yet clear-cut; but rests on the future development of relative prices between timber, carbon and other commodities dependent on land-use.