Optimal forest rotation under carbon pricing and forest damage risk

Abstract

Forests 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 first-order optimality conditions for this problem and illustrate the setting with numerical calculations representing boreal forests. Under the considered range of parametrizations, carbon price has far greater impact on the optimal rotation than the damage probability. Increasing forest carbon stocks through longer rotations is thus economically attractive option for mitigating climate change, despite the forest damage risk. Carbon pricing increases land expectation value and reduces the economic risks posed by disturbances. The production possibility frontier between harvests and carbon storage suggests that significantly larger forests carbon stocks are achievable, but implies 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.