Review Reports - Estate-Level Economics of Carbon Storage and Sequestration

Round 1

Reviewer 1 Report

This paper estimates the annual rent needed to compensate the owner of a normal forest boreal estate dominated by spruce. I think the analysis of this from a policy perspective highly relevant and important subject is solid, and the presentation is clear. I did not find any errors or flaws.

As a minor comment, I suggest that the final discussion comparing to the current (before covid19) ETS carbon-dioxide price should be more forward looking. Before the corona, some market analysts forecasted that this price would approach 40 Euro/tonne within three years, and given the gradual phasing out of emission permits , it would probably come as no surprise if the price reaches three-digit numbers within ten years. In this perspective it seems that the compensation required according to your results may very well be reached in a not very distant future and therefore relevant to policy proposals on compensation schemes.

Author Response

Thank you very much for the comments.

A forwar

Thank you very much for the comments.

A forward-looking statement has now been added to the Discussion.

Reviewer 2 Report

Review of Carbon Forestry Compensation on Estate Level

The impact of carbon sequestration on forest capital return deficiency is investigated at the land owner level. Data for a boreal spruce forest is used for simulation the effects. The simulations compares the effect when forest thinning from below and above is applied, respectively. Results suggest that the costs of increasing the timber stock exceeds the value of sequestration when the value is estimated based on current carbon price.

Overall comments

The topic of forest sequestration and its potential role in climate policy is interesting, and also well researched. The question of return to capital is relevant in this context, and the paper outlines an interesting model to deal with this topic, and shows that empirical results with potential policy relevance can be derived from that model. Also I like very much the idea of comparing thinning from above and below. However, the paper has shortcomings which make it possible to grasp the authors’ idea and the implications of the results. For example, the purpose of the paper, as stated in the introduction, is unclear. Also, it is not clear how the study contributes to the field, and essential references are missing (nearly all references are Finnish, which is a major reason for this). Moreover, the policy relevance is unclear, and limitations in this respect are not outlined.

Detailed comments:

Intro:

Terminology is not consistent with that of forestry economics (e.g., microeconomics and national economics are mentioned but the terms are not the ones usually applied here).

Materials and methods:

The materials and methods section mixes the model description with the description of data, making it difficult to follow.

I cannot see how the two different thinning measures enter the theoretical model.

What assumptions are made about the carbon subsidy in the case of harvesting, does it become negative? Could a carbon policy involve the forest products, what is the assumption made here?

References for the data used are partly missing and data are partly unexplained.

It would have been advantageous to have the model data displayed in a table, e.g., in an Appendix.

Results:

The results section would have benefitted from an introduction outlining the authors’ idea about the type of results that are of interest to the reader. Now a multitude of results is entered without much explanation of why these outcomes are chosen.

Many results are provided in figures, but the figures are poorly edited, e.g. having a caption both below and in the figure itself, and lacking legends.

Discussion:

The results are in contrast with much of the literature, and the reasons therefore need to be explained.

Limitations should be outlined, and their consequences discussed.

The policy implications need to be explained.

Author Response

Thank you very much for the Reviewer comments.

The complexity of carbon sequestration as an interdisciplinary topic covering several industries is now discussed in the Introduction, along with references.

The purpose of the paper has been rewritten, and the title of the paper has been changed. The paper discusses estate-level economics of carbon storage within forestry.

It is now stated in the Introduction that instead of trying to propose some kind of a holistic, interdisciplinary optimum, only forestry microeconomics is discussed, with focus to capital return rate according to Eqs. (2) and (7). No statement is made regarding forest products, neither regarding eventual displacement of non-forest products by forest products.

The author is aware that micro-and macroeconomics are not traditionally separately discussed within the field of Forestry. Most investigations within the field of carbon sequestration have macroeconomic focus: the intention is to find procedures for “saving the world”. Significant problems often are encountered due to the complexity of the problem. One of the issues is fielding of macroscopic views to the level of individual agents. Microeconomic treatments often can be integrated into larger scales – not necessarily the vice versa.

There is a particular reason to focus in microeconomics in the present context. Maximization of capital return rate often results in rather low capitalization. Increasing capitalization would provide many benefits along with carbon sequestration: greater growth, greater timber supply, etc. However, the return rate of capital would suffer.

Materials and methods are now separated into four subsections.

Figs 1 to 8 have now been added legends.

Results are presented in separate chapters for thinnings from above and thinnings from below.

There is no carbon subsidy contributing to any analysis reported within the section Results. Carbon prices and rents are discussed in order to enable comparison of the capital return deficiency per excess volume with any hypothetical carbon rent. This is now explained in Materials and Methods.

Field measurement data constituting the “normal stand” analyzed in the paper is now included as an Appendix.

There are text amendments in the Results-section.

Within the Results – section, an essential outcome is the capital return rate in Figs. 1 (thinnings from above) and 9 (thinnings from below). Any of the two Figures shows a present value as a function of stand age, and an expected value as a function of rotation age (accumulated stand age). In the case of Fig. 1, there are three different management procedures, corresponding to three different cutting diameter limits.

The capitalization appearing in the denominator in Eqs. (2) and (7) is shown in Figs. 3 and 11. The capitalization depends on the standing volume, shown in Figs. 2 and 10. The change rate of capitalization depends on net growth rate, shown in Figs. 4 and 12. The change rate of capitalization naturally can be produced by multiplying the capital return rate in Figs. 1 and 9 by the capitalization in Figs. 3 and 11. Text has been amended. The initial point of any curve, at the age of 35 years, corresponds to initial conditions determined in November 2018. Text has been amended also here.

Regarding presentation of the data, Figs. 7 and 15 report the expected value of stand volume in Figs. 2 and 10 deducted by that expected value of stand volume that corresponds to the greatest capital return rate (Figs. 1, 9, 2 and 10). This is the excess volume. Figs. 5 and 13 show the capital return rate in Figs. 1 and 9 deducted from the maximum expected value. This is the capital return rate deficiency. Figs. 6 and 14 report the data in Figs. 5 and 13 multiplied by that in Figs. 3 and 11. This is a monetary deficiency per hectare and year.

Finally, Figs. 8 and 16 show the capital return rate deficiency in Euros per excess volume. It is the data in Figs. 6 and 14 divided by the data in Figs. 7 and 15, setting the requirement of necessary subsidy level from the perspective of the estate owner. Any subsidy payment however does not enter in any of the results in any way.

Field observations from November 2018 are now given as an Appendix.

An important amendment has been made in the Discussion. It is related to limitations of the applied growth model. The growth model being rather coarse-grained, it may misjudge the transition diameter between pulpwood and sawlogs. A refinement of most non-dimensionless quantities might occur if there would be a more precise growth model. This would probably retain capital return rate deficiencies, but possibly increase financially optimal timber stock, and correspondingly reduce excess volumes. Consequently, the capital return rate deficiency per excess volume (Figs. 8 and 16) might be increased.

Finally, at the very end of the paper, the present results are related to previous investigations focusing to large-scale systems. The present study appears to be in concert with the previous ones even if their results scatter.

Reviewer 3 Report

the paper is somewhat of an extension of a published paper by the author in Forests in 2019. the uniqueness is to add some analysis of the timely discussion of how managed boreal forests can provide even more climate benefits. However the introduction needs to provide more background information on the different ways in which forest carbon is being defined in various policy arenas. Forest carbon offset markets are one way to set a price on carbon in the forest, but there are many different accounting and governance issues. in addition to the theoretical paper mentioned in the text,

the initial comment about carbon losses and soil carbon could be expanded to references that consider all forest carbon pools and how management affects carbon flux. A good reference is

Campioli, M., Vicca, S., Luyssaert, S., Bilcke, J., Ceschia, E., Chapin Iii, F. S., . . . Janssens, I. A. (2015). Biomass production efficiency controlled by management in temperate and boreal ecosystems. Nature Geoscience, 8, 843. doi:10.1038/ngeo2553

https://www.nature.com/articles/ngeo2553#supplementary-information

Some other references that can help frame the payment strategies for paying for inventory that tie to a reference in the paper are.

van Kooten, G. C., Binkley, C. S., & Delcourt, G. (1995). Effect of Carbon Taxes and Subsidies on Optimal Forest Rotation Age and Supply of Carbon Services. American Journal of Agricultural Economics, 77(2), 365-374. doi:10.2307/1243546

there are other papers with more detail on the links betwen forest mgt and carbon policies that could be of use in framing

van Kooten, G. C., Bogle, T. N., & de Vries, F. P. (2015). Forest Carbon Offsets Revisited: Shedding Light on Darkwoods. Forest Science, 61(2), 370-380.

van Kooten, G. C., & Johnston, C. M. T. (2016). The Economics of Forest Carbon Offsets. Annual Review of Resource Economics, 8(6.1-6.20). doi:10.1146/annurev-resource-100815-095548

van Kooten, G. C. (2017). Forest carbon offsets and carbon emissions trading: Problems of contracting. Forest Policy and Economics, 75, 83-88. doi:https://doi.org/10.1016/j.forpol.2016.12.006

A useful Scandinavian reference on accounting for forests and forest products is

Gustavsson, L., Haus, S., Lundblad, M., Lundström, A., Ortiz, C. A., Sathre, R., . . . Wikberg, P.-E. (2017). Climate change effects of forestry and substitution of carbon-intensive materials and fossil fuels. Renewable and Sustainable Energy Reviews, 67, 612-624. doi:http://dx.doi.org/10.1016/j.rser.2016.09.056

the author correctly points out that the discussed carbon rent prices are far too small to change boreal forest management. (line 379) . It is not clear that the statement in 375 is necessarily true for a rational forest policy that promotes increased climate benefits.

It is currently hard to understand the problem formulation.

46 In this paper, our primary interest in the microeconomics of actions indisputably favorable from

47 the carbon sequestration viewpoint. These are an increment of biomass density on the one hand, and

48 extension of semiclosed canopy cover on the other hand. In terms of rotation forestry, the latter

49 corresponds to extension of rotation age.

I think the data is there and has been analyzed, but could be presented better.

It is clear that diameter limit cutting (DLC) at 200mm maximizes financial value if there is no carbon storage rental payment. Also it is clear that thin from below to maximize carbon in bigger trees has a revenue stream (mainly pulplogs) and a low growth rate. However, the paper does not explore the data they have – which level of DLC or thin from below would be best if there were payments for both products and for inventory. It would be valuable if the author summarized the substantial data as a avg carbon inventories v capital returns from products in a xy graph to look for frontiers. I tried this and see roughly a straight line tradeoff with the possibility of a max with a DLC at 250 rather than 200 (the best if only products generate value). The author has the data and could provide a useful integration.

The author correctly points out the carbon rent price from current offset markets is far lower than harvest values of same trees or stands. The point of a climate benefits promoting policy is not simple equivalence but incentives to achieve social goals. A higher carbon rental price could help, but there are huge governance problems (van Kooten references )

The introduction and conclusion should do a better job of framing how the two value streams could be integrated. The data is there, but it is not that well presented.

Figure7 and 13 title . excess commercial volume is precisely what a carbon rental would promote. So it isn’t ‘excess’ if carbon stores in the forest are going to be valued as climate benefits.

“It has been recently shown that policies based on carbon rent are equivalent to policies based on carbon sequestration subsidies and taxies [27]. 167-168. Not that simple. The van Kooten articles mentioned above provide some overview. The paper can essential test a payment for carbon stores in combination/competition with payments for harvested products.

Empirical data suggests that some potential flaws to one of the simplest mitigation measures for climate change is to simply expand the boreal forest carbon sinks, because they have so much carbon in the soils as well as the vegetation. While harvesting and replanting will involve immediate releases, some harvesting strategies can significantly increase the financial growth rate as well as the carbon sink growth rate

Questionable whether the ‘carbon rent’ formulation correctly includes the ‘global carbon rent’ benefits of harvested products that can continue to store carbon with efficient product/waste management and displace emission-intensive products that currently do not pay any penalty.

Figure captions need to inform the reader which symbol goes with which trend. Something like ‘DLC 200 (triangle, DLC 250 circle, DLC 300 square’ would help.

Figure 8 is very hard to interpret, and maybe not necessary.

Figure 7 in K (2019) has interesting implications for total system climate benefits. Lower storage but high carbon capture AND significant climate benefits from products made from sawlogs.

Gustavsson et al. (2017) framing of forest related climate benefits require including the long term direct and indirect sequestration benefits of live trees, dead trees, and harvested products. In particular, it is well documented that the direct and indirect climate benefits of carbon harvested in sawlogs are higher, ton for ton, than carbon in smaller diameter trees used for pulp or trees that die and enter a decomposition trajectory in the forest.

Questions raised

Will high value production with lower stocking deliver more total climate benefits than low value production with high stocking? Net sequestration rates from soil, roots, above ground dead, above ground live, and products used in society.

Comments for author File: Comments.pdf

Author Response

Thank you very much for the Reviewer comments.

Reference to the paper of Campioli et al. has been added.

The contents of the papers by Van Kooten et al. is now discussed in the Introduction.

The paper by Gustafsson et al. is now discussed in Introduction.

The statement on line 375 (original line number) is a direct reference to Lintunen et al. Text has now been modified to improve clarity.

The paper discusses estate-level economics of carbon storage. This is now explained in the Introduction, and the title of the paper has been changed correspondingly.

Problem formulation on lines 46-49 (original line numbers) has been rewritten in terms of shorter sentences.

The paper does not incorporate any carbon rental payments in financial analysis presented in the Results-section. Instead, the paper does clarify capital return rate deficiencies resulting from deviations from management practices providing the greatest capital return rate. The capital return rate deficiency is predominantly due to excess volume – the standing commercial volume exceeding that timber stock that provides the best capital return rate. The deficiency and the excess volume being known, the deficiency can be normalized by the excess volume (Figs. 8 and 16).

Self-evidently, an excess volume can be viably maintained if the capital return rate deficiency induced by it is compensated somehow. This relation sets the required level of subsidies. Comparison of the level of hypothetical subsidies derived from the present carbon market prices with the required subsidy level is the only way hypothetical subsidies enter the contents of the paper. This happens in the Discussion.

The above has now been clarified by additional text in the Introduction on lines 184-189 (present line numbers).

As the paper does not calculate any effects of eventual rental payments, it neither discusses any payments from products. The focus is in capital return rate according to (2) and (7). There are only two quantities in Eq. (2), change rate of capitalization in the numerator, and capitalization in the denominator. Selling trees does not produce wealth: it only converts existing wealth in trees into the form of cash. Wealth is created in the process of growth (including assortment transitions). The rate of wealth increment in relation to the current capitalization is the capital return rate. This has now been further clarified on lines 126-130 (present line numbers).

The Author feels that the Data is revealed to the reader.

Within the Results – section, an essential outcome is the capital return rate in Figs. 1 (thinnings from above) and 9 (thinnings from below). Any of the two Figures shows a current value as a function of stand age, and an expected value as a function of rotation age (accumulated stand age). In the case of Fig. 1, there are three different management procedures, corresponding to three different cutting diameter limits.

Then, what is the data behind the results?

Finally, Figs. 8 and 16 show the capital return rate deficiency in Euros per excess volume. It is the data in Figs. 6 and 14 divided by the data in Figs. 7 and 15, setting the requirement of necessary subsidy level from the perspective of the estate owner. Again, any subsidy payment does not enter in any of the results in any way, and there are no timber sales discussed.

Field observations from November 2018 are now given as an Appendix.

On the basis of the above, it appears that data processing is transparent and made available to the reader.

It is now mentioned in the introduction that instead of trying to propose some kind of a holistic, interdisciplinary optimum, the paper solely concentrates in microeconomics of carbon sequestration in forestry, focusing on estate level. There are no subsidy payments included in the analysis, neither any timber sales. The only quantities appearing in Eq. (2) are change rate of capitalization and capitalization. Correspondingly, no value streams are integrated. There are no global considerations since the focus is on estate level.

The Figure captions have been edited as proposed by the Reviewer.

From the viewpoint of applications, Fig. 8 is the main outcome of the paper. This Figure sets the required subsidy level. The Reviewer proposed deletion of the most important Figure (?).

There is positive causality between stocking and the rate of production, as discussed on lines 466-468 (present line numbers).

Round 2

Reviewer 3 Report

I think a more appropriate title would be 'Estate-level economics of carbon storage and sequestration'

it is the annual sequestration, or growth, that is of central interest - both in absolute terms and in relation to storage levels.

the paper is now much simpler and more logical in its combination of innovative economic analytical terms to managed boreal forests. the plain wording in the discussion do a good job of relating the analysis to the broader issues of forest policy to support increased climate benefits.

line 131 'withdrawal' is more common than 'withdraval'

227 and other places ‘thick lines’ rather than ‘thick drawings’. Line 335 uses ‘thick markings’

I am not sure which English words are best for what will mainly be a Nordic readership, markings or lines seem better to me than drawings (which is the sum of all lines in a portrait or figure)

now that a legend with the squares, circles and triangles is in each figure, it does not need to be duplicated in the legend. The earlier version had neither, one placement is probably enough now.

Author Response

Thank you very much.

The title of the paper has been changed as proposed.

Wording regarding illustrations has been unified as proposed.

The meaning of different symbols has been deleted from the Figure captions as proposed.

The paper has now been subjected to a linguistic revision