Forestry-derived carbon credit prices would have to increase from their recent average of $7 per tonne to as high as $75 per tonne for US timberland owners to accept a long-term delay in harvesting in favor of accumulating carbon stocks, according to Manulife Investment Management.

“If the price of forest carbon credits were to reach an average of $30 per tonne, potential carbon returns would approach parity with current expected returns for traditional timber production management on a US southern pine plantation,” Manulife analysts wrote. “Similarly, the carbon price required to put the financial returns of carbon management at parity with a US Pacific Northwest timberland property managed on a timber production regime is nearly $75 per tonne.”

Eric Cooperstrom, Manulife managing director for impact investing and natural capital solutions, told Agri Investor that macroeconomic concerns, geopolitics and an increasingly stringent focus on project quality have all shaped recent transaction activity within a voluntary carbon market about which information remains largely anecdotal.

“We’ve seen, generally, companies that had been very ambitious in terms of setting net zero commitment and pursuing high-quality carbon credits – because of the economic uncertainty – take a pause or reassess their strategies,” said Cooperstrom, who joined Manulife after four years at The Nature Conservancy, according to his LinkedIn profile.  “There has been some softening in carbon prices from the broader aggregator indices. For the higher quality end of the market and natural capital-based solutions, those types of credits have seen greater resiliency.”

In its late-October overview, Manulife explored how investors’ assumptions about carbon policy and the future trajectory of carbon and timber values have been incorporated into timber valuations and investments.

The report highlighted carbon potential among factors contributing to a recent Lake States timberland sale at $1,017 per acre compared with 5-year average of $636 per acre. It also included projected breakeven prices for carbon projects to displace production-focused management in US, Australian, New Zealand and Brazilian timber markets.

“As the relative price of carbon credits converges with values generated by a particular region’s timber production, stumpage prices in that region could be pushed higher to motivate landowners to continue to produce timber in place for forest product facilities,” they wrote.

Cooperstrom said that, although it has since levelled off, the increase in timber prices that started with pandemic-fed demand from homeowner renovations has been among the factors driving US mill operators to be more active in timberland acquisition markets.

“That increase in pricing led to greater cash reserves for mill operators selling their products into market,” Cooperstrom said. “That put them into a position to be more acquisitive, especially as they saw carbon projects gaining in popularity. When you take a portion of that timber from a given forest offline in conjunction with a carbon project, those mill operators are often looking at wood supply agreements with landowners to lock in that supply. In other circumstances, they are – and we expect will in the future – look to actually purchase the property and manage the forests themselves so they have that more certain supply of raw materials.”

Cooperstrom said a number of factors can influence the focus of buyer demand for carbon timber projects. “If there is a company that is looking to buy carbon credits and they have a supply chain in a specific area or state, they might want to invest in carbon credits or even a carbon project itself in that state, so they are locating the emissions reductions or removals near where their supply chain is and their emissions are.

“Other companies have applied much higher premiums for carbon credits from projects that have high charisma. They can take a picture, share that with investors and incorporate it into their ESG reporting and the like.”

Carbon potential currently makes its way into timberland values indirectly through timber appraisers, who Cooperstrom explained are collecting information about projects directly from landowners and monitoring comparable transactions. “What we’ve seen in discussions with appraisers is that they are slowly starting to incorporate carbon considerations. They are building the tools internally. Different appraisers are at different points in the development spectrum, of course.

“There’s going to be more intentional analysis of the implications and potential value creation from carbon projects, but I just don’t think all appraisers are there yet.”