As companies look for ways to shrink their environmental footprint, timberland owners are discovering an intriguing new way of diversifying their revenue streams: Sell carbon offset credits to polluters and get paid not to cut down their trees.
Already, a number of significant players are moving on the opportunity.
Traditionally, managing timberlands meant cutting down trees to make lumber. But JPMorgan is betting on the rising importance of offsets: Since trees store carbon dioxide, removing greenhouse gases that cause climate change, the Wall Street giant can offset its own environmental impact or sell the carbon credits to others.
It’s also betting on timberlands rising in value, as offsets become more established and better satellite technology increases the ability to monitor forest carbon programs.
JPMorgan is by no means alone here, with deals popping up in the United States, where privately held timberlands are far more common than in Canada.
“When institutions start making capital allocation decisions based on a new market, that creates a lot of momentum, and a lot of things happen,” Brooks Mendell, chief executive officer of Forisk Consulting, a forest industry consultancy based in Athens, Ga., said in an interview.
Michigan is also emerging as a player in this space. The state’s Department of Natural Resources is limiting logging in the Pigeon River Country State Forest for 40 years to create carbon offset credits.
The credits can be purchased by companies that want to offset their greenhouse gas emissions, moving them toward carbon neutrality, or net-zero emissions, over the coming decades – a lofty goal established by a number of governments and companies.
Can regular investors take advantage of this emerging trend? Perhaps.
Acadian Timber Corp. owns and manages extensive forests in New Brunswick and Maine, which provide the sawlogs that feed regional lumber mills, generating revenue that finds its way to investors in the form of steady dividends.
But the Edmundston, N.B.-based company, traded on the Toronto Stock Exchange, is now exploring an opportunity to make money as its trees grow. Last month, Acadian announced an agreement to sell carbon offset credits on a portion of its property in Maine, marking its first foray into this market.
For now, the company isn’t making a big deal about this new line of business.
“This is sort of a soft entrance for Acadian,” Adam Sheparski, the company’s CEO, said in an interview. “This is just a small portion of a piece of property that already has a conservation easement on it.”
Acadian doesn’t expect to receive payment from the unnamed buyer until mid-to-late 2022. Even then, it expects that the contribution to cash flow will be modest.
Nonetheless, Mr. Sheparski is enthusiastic about the potential here. Apportioning some of its land for carbon offset credits, rather than harvesting trees aggressively, fits with Acadian’s focus on maintaining its timberlands for the long term.
“So for us, it makes a lot of sense. We think there is some opportunity there, and we will know more over the next six to nine months as to what that opportunity looks like, from a financial perspective,” he said.
Early reaction from some analysts is cautiously upbeat. John Duncanson, timber analyst at Corton Capital’s Global Timber Fund, said that sales from carbon offsets are small right now, but they will likely gain traction.
“Timberland owners can expect some good permanent revenues from selling carbon credits going forward as the offset business grows and matures,” Mr. Duncanson said in an e-mail.
Offset credits can improve a company’s environmental, social and governance (ESG) profile as well. Companies with strong ESG scores can attract greater interest among investors, in many cases lifting stock valuations.
The key to success, though, rests on businesses and governments addressing climate change by embracing credit offsets as part of the solution.
Many observers are hopeful that these credits will limit greenhouse gases because they offer a financial incentive for companies and governments to reduce their emissions while also supporting green initiatives, from expanding wind power to preserving rainforests. The decline in the use of coal in North America and Europe, owing to its economic disadvantages, is one sign of success.
The Taskforce on Scaling Voluntary Carbon Markets, the private sector-led initiative to develop a voluntary carbon credit trading market, is a big proponent of credits. It expects that the market could be worth as much as US$100-billion by 2030.
The extent of the opportunity for timberlands, though, is not yet clear.
Forisk’s Mr. Mendell pointed out that forests represent a small slice of the overall offset market. As well, revenue from carbon offsets is not competitive with revenue from harvesting trees in areas with strong markets for lumber, potentially limiting its expansion.
“When you do the math of what forest carbon brings to the table, the revenue streams are quite modest,” he said.
However, he added, carbon offsets look more compelling in areas where wood markets are weaker. Forests come with other advantages as well: They offer a relatively cheap and accessible offset, since the trees are already growing. And since forests are natural, they look good from a public relations perspective.
Mr. Mendell said that thousands of U.S. timberland owners, many of them small, have been looking at carbon offset credits, suggesting a strong level of interest.
Is this a gold rush in the making? Maybe not. But for investors who had previously viewed trees as little more than building products in the raw, forests may be gaining a whole new profile.
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