Forest and forest land valuation: How to value forests and forest land to include carbon costs and benefits
Authors: Richard Meade, Gabriel Fiuza, Andrea Lu, Glenn Boyle and Lewis Evans
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Executive summary
New Zealand has introduced legislation to implement the world's first "all sectors, all gases" emissions trading scheme (ETS) as a way to reduce the country's greenhouse gas emissions. The Scheme is to retrospectively introduce a price for carbon emissions in forestry from 1 January 2008, and will phase in other sectors over time (notably, agriculture from 2013). It is therefore timely to consider what impact the price of carbon might have on forest and forest land value. The New Zealand Ministry of Agriculture and Forestry (MAF) has commissioned the New Zealand Institute for the Study of Competition and Regulation (ISCR) to develop a methodology for assessing this impact.
For illustration purposes ISCR has developed such as valuation methodology, for the following:
- The main commercial exotic forest species in New Zealand - pinus radiata;
- A representative one hectare forest of a single age class;
- Dairy land conversion as a potential alternative to retaining forest land in forestry;
- A valuation data of 2 January 2008 (being one day after the anticipated retrospective introduction of forestry into the ETS).1
The methodology that has been developed is a "partial equilibrium" approach, in that it does not account for changes in the general economy arising from changes in forest and forest land management predicted by our approach. Nor does it seek to account for all changes in the general economy arising under carbon pricing which may indirectly affect forest or forest land management.
Finally, this report is intended for audiences familiar with existing forest and forest land valuation practices. For example, we assume readers are familiar with existing valuation techniques such as comparable sales analysis, and discounted cash flow (DCF) analysis. We also assume that readers are familiar with the key features of the ETS, and so leave a summary of its key features in respect of forestry to Appendix A.
1The choice of 2 January instead of 1 January is to avoid issues of whether or not a one-off free allocation of emission rights to forest landowners under the ETS affect forest or forest land value. Purchasers of certain ("pre-1990") forest land who bought their land after ETS policies were announced but before 1 January 2008 may have factored into their purchase price some allowance for such an allocation (analogous to an investor buying a share "cum dividend"). However, since any such entitlement is attributable to the owner of the relevant land as at 1 January 2008, that entitlement is no longer attributable to purchasers from 2 January.
Contact for Enquiries
Sustainable Land Management and Climate Change
MAF
Pastoral House
25 The Terrace
PO Box 2526, Wellington
Tel: 0800 CLIMATE (254 628)
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