Ariel L.

Brunner

Environmental Management for Business

Economic Valuation and Appraisal

2019

Word Count: 6007

1. Executive Summary

Within a context of a rapidly-growing population, a fierce competition to access different

markets and resources and the increasing social pressure on both private and public sector
to act upon climate-change associated urgencies, it is key to landowners, farmers and other
agricultural producers and organizations to know how to find a right balance between
economic, social and environmental outcomes of their activities.

The main objective of this report is to provide valuable and understandable information to your
Organization for making decisions concerning how to make use of an arable farm in the UK.
This information will include several analyses seeing different social, economic and
environmental needs. It will also consider the fact that reality is not a static system and that
context can change drastically over time.

2. Introduction

In order to achieve this objective, a model has been developed in which a series of inputs (e.g.
prices, equivalencies, physical and biological properties) will result in a series of convenient
outputs to analyse and compare the results of setting an arable rotation system or a poplar
forestry system for 30 years. Two major scenarios will be studied: with and without grants.
This model will also scrutinize the sensitivity of both systems to changes in grants, discount
rates, costs, crops prices, timber prices and carbon prices. Values will be given in a per hectare
basis in order to make the results extrapolatable to different farm sizes.

For this case of study, an Arable Rotation System (ARS) consists in a farm growing and
harvesting different types of crop each year. This means that the farming cycle will last 4 entire
years and follow this pattern:
Winter
feed
wheat

Winter
4 Winter
oilseed
rape
year feed
wheat
s
Winter
feed
barley
Figure 1: Arable System Rotation Cycle (Burgess et al., 2003)

On the other hand, a Poplar Forestry System (PFS) consists in a plantation of Poplar trees
which could or could not be harvested 30 years later.

The first step will be a basic financial analysis considering costs and revenues. After that,
discount rates will be applied to obtain a result in terms of net present value for each system
and scenario. Subsequently a sensitivity analysis will be performed to evaluate how changes
in different model inputs can affect each alternative. Next step will be to perform an
environmental analysis based on how carbon sequestration or emissions of each system can
benefit or detriment society. Then both financial and environmental aspects will be combined
into an overall analysis which will include a sensitivity analysis as well. With this information a
third system can be analysed: a carbon neutral combined forestry and arable system. Last
section of this report will include final findings, implications and recommendations for further
analysis. Please note that other conclusions can be pointed out alongside the rest of the report
apart from those included at this last section.

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3. Initial financial comparison: arable rotation system vs. poplar forestry system.

First steps of this analysis will consider only financial aspects of each system. This is the
traditional way of realizing a cost-benefit analysis but leaves apart environmental externalities.

Among the model’s inputs, revenues, costs and grants are taken into consideration. For an
ARS, revenues are the result of selling grains at market prices at the end of each year, also a
financial income will result from grants provided by the European Commission. Variable and
fixed costs derive from seeds, fertilizer and sprays prices, machinery operation and labourers’
wages. Data will be used assuming no variation within 30 years on these prices, this is unlikely
to happen, but the possible variation of prices can be considered covered by the subsequently
sensitivity analysis.

Grain Area Labour Machinery

Crop Yield Seed Fertiliser (N) Sprays
price payment
Rate Cost Rate Cost No. Cost
-1 -1 -1 -1 -1 -1
£t £ ha kg ha £ kg kg ha £ kg £ hr ha-1 £ ha-1
Wheat 1 9.6 150 220 175 0.4 190 0.75 5 51 9.2 219
Wheat 2 8.2 150 220 175 0.4 220 0.75 5 51 9.2 219
Barley 7.8 140 220 175 0.39 140 0.75 3 65 8.7 223
Oilseed 3.2 320 220 5.5 9.45 190 0.75 4 59 9 221

Cost of labour £/hr 9

Table 1: ARS financial inputs (Redman, 2019b)

On the other hand, for a PFS, incomes are the result of firstly, grants provided by the UK’s
Forestry Commission (Redman, 2019a) and then, selling harvested timber. Costs are the
result of the establishment, maintenance, administration and pruning of the forest.

Density Tree/ha 156

Operation Unit Poplar
Establishment
(García de Jalón, Graves, Joao
Cost of plant (£ tree-1) 1.55 H. N. Palma, et al., 2018)

Cost of individual tree protection (£ tree-1) 0.43 (Redman, 2019a)

Cost of individual tree mulch (£ tree-1) 0.45 (Dobies, no date)

Ground preparation (£ ha-1) 360.00 (Redman, 2019a)

Labour for planting trees (min tree-1) 3.00 (Burgess et al., 2003)

Labour for tree protection (min tree-1) 0.40 (Burgess et al., 2003)

Labour for mulch mats (min tree-1) 1.70 (Burgess et al., 2003)

Maintenance
Grass cut between tree rows (£ ha-1) 75 (Redman, 2019a)

Tree maintenance (min tree-1) 1.15 (Burgess et al., 2000)

Administration
Insurance management (£ ha-1) 9 (Burgess et al., 2000)

Pruning
Year 2 (min tree-1) 3
Year 4 (min tree-1) 4
Year 6 (min tree-1) 7
Year 7 (min tree-1) 10
Year 9 (min tree-1) 12

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 Start year End year Poplar (8 m x 8 m)
Grant (£ ha-1)
Woodland Creation Grant (@1.28 per
1 200
tree)
Woodland Maintenance Grant 1 10 200
Table 2: PFS financial inputs

As harvesting takes place only once, 30 year after trees are planted, virtual values of poplar
trees growing in the farm will also be analysed but it is important to remark that those values
are not the actual result of a money transaction, they will only become real once the wood is
harvested and sold.

Value of wood depends on the size of the tree from which wood originates. Its curve follows a
polynomial growth which can be describe by the following formula being “y” the value of a
cubic meter of timber and “x” the average volume per tree:

𝑦 = 29.496𝑥 0.5453

With this information it is possible to predict the revenue per hectare of each system and how
this income will cumulate over time:

£/ha
20000

15000
ARS

10000
PFS

5000
PFS
(Standing)
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Year
-5000

-10000
Figure 2: Cumulative net margins (without grants)

On a first approach, a basic analysis shows that, 30 years later, The ARS will provide to a
farm more revenues than a PFS per hectare, although this difference is not big, about 4%
higher:

Total Income (£ ha-1)

Arable system without grants 14291
Forestry system without grants 13748
Table 3: Total income (without grants)

Also, on a year to year basis, the cumulative net margin of the ARS is higher than the PFS,
even if it is compared with value of standing trees. It is also appreciable that, from year 0, the
ARS gives a positive income balance. This is not the case of the PFS where a farmer needs
to bear with different costs without receiving any income from his activity. If we analyse this
considering only tangible money incomes, this negative balance will continue for 30 years until
harvesting.

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What happen if grants are included into the analysis? The final difference between the ARS
and the PFS is even greater, about 25% higher. ARS continues to be the most profitable
system. First year profits are a positive impact on the PFS after including grants into
consideration. Nonetheless, this income is not enough to achieve a positive balance over the
first years:

£/ha
25000

20000
ARS
15000

PFS
10000

5000 PFS
(Standing)
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
-5000
Figure 3: Cumulative net margins (with grants)

Total Income (£ ha-1)

Arable system with grants 21111
Forestry system with grants 15948
Table 4: Total income (with grants)

Discount Rates

Thus far, this analysis has not been taking into consideration discount rates. Discount rates
are applied on a cost-benefit analysis to perceive what is the Net Present Value (NPV) of any
income or outcome that will occur in the future. This report will use a discount rate of 4%, this
means that for the porpoises of this analysis if a farmer earns £100 next year, it will be equal
as if he earns £96 this year. Discount rates are not a fixed number. Different economists will
differ in their opinions regarding what is the most appropriate discount rate to be applied.
Discount rates can also variate over time. Because of this variations and discrepancies, the
sensitivity analysis will also take into consideration the fluctuations of discount rates and its
impact on each system. After applying a 4% discount rate, the NPV of each system is showed
on table 5:

Net present value at NPV30 NPVinfinite Equivalent Annual

0% discount rate years (£ ha-1) Value
(£ ha-1) -1
(£ ha ) (£ ha-1 yr-1)

Arable system with grants 21111 12514 18093 724

Arable system without grants 14291 8490 12275 491
Forestry system with grants 15948 4101 5929 237
Forestry system without grants 13748 2287 3306 132
Table 5: Net Present Value of ARS vs PFS

Discount rates do not impose a significant change on the ARS and PFS curves shapes.
However, it is relevant to analyse the total cumulative NPV. As Table 5 shows, without
discount rates there is a difference between both systems of 4% without grants and 25% with
grants. The effect of the discount rate raises these differences to 73% for a scenario without

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grants and 67% with grants. This shows how powerful discount rates are. Both differences are
higher with discount rates but for the case of a scenario without grants, the difference between
the NPV of an ARS and a PFS goes from only 4% to 73%. This enormous change is
consequence of how the income is distributed over time. While in an ARS a farmer has a profit
every year, in a PFS he must wait 30 years, and as discount rates grows exponentially, the
NPV of that late income greatly decreases.

Another useful value is the infinite NPV. This is a theoretical analysis where it is assumed that
both systems are repeated infinite times. Of course, this is not possible, but is a useful tool to
analyse what will happen if the organization decides to continue with each system for more
than 30 years and what would be the maximum NPV that can be obtained. On the other hand,
the Equivalent Annual Value represents the amount of money that a farmer should earn every
year over 30 years in order to reach the same economic result.

Until this point of the report, the cost-benefit analysis is favourable to the ARS over the
PFS in scenarios with or without grants, with or without 4% discount rate. Infinite NPV
and Equivalent Annual Values are also favourable to the ARS.

Sensitivity analysis

On this section of the report, analysis will be focused on the sensitivity of each system to
changes on different inputs of our model. To do this, inputs of the model are increased or
reduced by a 100% or a 50%. This variation will affect, one by one, prices, grants, costs and
the discount rate. A numerical way of analysing the sensitivity of a system is to calculate the
range of the variation for each relative change in inputs parameters, the higher the range, the
higher the sensitivity. After that it is possible to rank sensitivities from 1 to 8, being 1 the most
sensitive and 8 the less.

Relative changes (%) in input parameters Range Rank

Prices
-100% -50% 0% 50% 100%
Arable (prices) -9550 1482 12514 23547 34579 44129 1
Forestry (prices) -1722 1189 4101 7013 9924 11647 5
Grants
-100% -50% 0% 50% 100%
Arable (grants) 8490 10502 12514 14526 16539 8048 6
Forestry (grants) 2287 3194 4101 5008 5916 3629 8
Costs
-100% -50% 0% 50% 100%
Arable (costs) 26089 19301 12514 5727 -1060 27148 2
Forestry (costs) 7638 5869 4101 2333 564 7073 7
Discount rate
-100% -50% 0% 50% 100%
Arable (discount rate) 21111 15967 12514 10130 8436 12676 4
Forestry (discount rate) 15948 8228 4101 1879 677 15271 3
Table 6: Sensitivity analysis

Prices: Table 6 shows that variation in prices of wheat, barley and oilseed have a much
greater impact in the ARS than the variation on timber prices can have on a PFS. In fact, the
sensitivity of the ARS to relative changes in prices is the highest of all. This difference between
systems’ sensitivities permit that, if both prices drop below a 52%, the PFS could become
more profitable than the AFS.

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 40000£/ha
Relative Change: -52% 30000
NPV: 1084 £/ha 20000
10000
0
-100% -50% -10000 0% 50% 100%

-20000
Arable (prices) Forestry (prices)

Figure 4: Price Sensitivity

Grants: At Table 6 it is also appreciable that the ARS is more sensitive to changes in grants
prices than the PFS. Yet, sensitivity of both systems is not big, in fact PFS sensitivity to
changes in grants is the lowest. Another conclusion that emerges from this comparison is that
there is no grants relative change that could make the PFS more profitable than the ARS, as
it is shown on figure 5:
£/ha
40000
35000
30000
25000
20000
15000
10000
5000
0
-100% -80% -60% -40% -20% -5000 0% 20% 40% 60% 80% 100%
-10000
-15000
Arable (grants) Forestry (grants)
Figure 5: Grants Sensitivity

Costs: Once again, Table 6 shows that the ARS is more sensitive to variations in total costs
than the PFS. While ARS sensitivity is ranked no. 2, PFS is ranked no. 7. This is a big
difference and we can assure that this is an advantage for the forestry system over the arable
one. If costs arise more than 84%, the PFS becomes more profitable than the ARS, as figure
6 shows:
£/ha
40000
35000 Relative Change: 84%
30000
25000 NPV: 1137 £/ha
20000
15000
10000
5000
0
-100% -50% -5000 0% 50% 100%
-10000
-15000
Arable (costs) Forestry (costs)
Figure 6: Costs Sensitivity

Discount Rate: Finally, for the sensitivity to the variations on discount rates, the ARS is
slightly less sensitive to relative changes than the PFS. This also means that, no matter what
discount charges are applied, the economic result will always be more profitable for the arable
system. Sensitivity curves are shown in figure 7:

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 £/ha
40000
35000
30000
25000
20000
15000
10000
5000
0
-100% -80% -60% -40% -20% -5000 0% 20% 40% 60% 80% 100%
-10000
-15000
Arable (discount rate) Forestry (discount rate)
Figure 7: Discount Rate Sensitivity

Even if in most scenarios the ARS is still more profitable than a PFS, it is important to say that
the PFS is a more robust system. This means that, in comparison, changes in variables
over time will have a minor effect on its final economic result. If the ranked numbers of each
scenario are summed up, the ARS gives a total of 13 and the PFS an overall of 23. Numerically
speaking we can asseverate that the PFS is 77% less sensitive to relative changes in
inputs parameters than the ARS.

4. Ecosystem services provided.

Whether it is about obtaining food, water, disposing wastes and many other benefits or
services, mankind has always been dependant to different ecosystems to thrive and survive.
This services are known as Ecosystem Services (Reid et al., 2005). Both the ARS and the
PFS can be considered themselves as individual ecosystems, and as such, they can provide
or deprive different services. As an example, table 7 shows how each system can be beneficial
or prejudicial to society (The cost of lost opportunity is considered as prejudicial). Each “+”
sign means that the system is able to provide a particular service and each “-“ sign means that
it is detrimental to an ecosystem service.

Ecosystem Service ARS PFS Ecosystem Service ARS PFS

Food Provisioning +++ Erosion Prevention ++ ++
Timber Provisioning --- +++ Biodiversity +++ +++
Aesthetic -- ++ Genetic Resources - +
Bio-Control --- +++ Pollination + ++
Climate regulation -- ++ Soil fertility ++ +
Cognitive - + Water purification ++ ++
Cultural - + Water provision -- ++
Table 7: Ecosystem services (Van der Ploeg and de Groot, 2010)

There are different ways of give a monetary value to each ecosystem service. The final value
will Depend on how important the service is to society, how big is the ecosystem contribution,
how expensive it is to replace the service (if it possible) by anthropogenic mediums, how
important a service is to public opinion, and other variables such as the cultural importance of
a certain ecosystem (Sukhdev et al., 2010).

Continuing with the comparison between both systems, the next section of this report will
analyse and compare the environmental monetary value of Carbon Sequestration.

5. Carbon sequestration comparison.

As it is shown on Table 7, by a qualitative assessment we can initially conclude that a PFS

provides more ecosystem services to society than an ARS. But how important is each service?
How big is the contribution to any of them? On this section this report will give a monetary

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value to the carbon sequestration contribution of both services, compare them and then
combine the financial analysis with the environmental analysis. By doing this, this report will
enable the organization to decide based on a more complete set of data considering both
potential economic but also societal contributions of both projects.

This environmental modelling will consider carbon emissions as costs and carbon
sequestration as revenues. Then the model will assign a monetary value to carbon in order to
be able to compare environmental incomes with financial incomes. For the ARS, carbon
emissions occur because of machinery, pesticides and fertilizers manufacturing which are
used every year. Everyday field operations are a carbon emission source as well. On the other
hand, carbon emissions for the PFS are a result of, once again, machine manufacturing but
also field operations. However not all these emissions will take place every year. Machinery
manufacturing emissions and ground preparation occurs only the first year, when trees are
planted. Harvesting emissions will have an impact only the last year and recurring costs such
as grass maintenance befalls every year.

Arable system
GHG Field
GHG Manufacturing
Operations
GHG GHG emissions GHG emissions
machinery Pesticides Fertilizers Total GHG
manufacturing manufacturing manufacturing
(kg CO2e per
(kg CO2e hr-1) (kg CO2e kg-1) (kg CO2e hr-1)
Crop pass)
Wheat 1 14.59 23 8.21 59.69
Wheat 2 14.59 23 8.21 59.69
Barley 14.59 33 8.21 59.69
Oilseed 14.59 83 8.21 59.69
Forestry system
GHG Manufacturing GHG Field Operations
GHG recurring
GHG machinery GHG ground GHG
costs (grass
manufacturing preparation harvesting
maintenance)
(t CO2e ha-1) (t CO2e ha-1) (t CO2e ha-1) (t CO2e ha-1)
0.0768 0.43 0.02 0.9597
Table 8: Carbon Emissions (Graves et al., 2011)

From these values, the cumulative carbon emission for the ARS is 70.9 tonnes of equivalent
CO2 per hectare while for the PFS the final cumulative GHG emission is 2.1 tonnes of
equivalent CO2 per hectare. This means that the PFS emits 97% less carbon than an ARS.

For the carbon sequestration, as the sequestered carbon by crops of the ARS is rapidly lost
to the atmosphere when they are harvested (García de Jalón, Graves, Joao H.N. Palma, et
al., 2018) we can consider this system total sequestration as zero. In contrast, PFS is capable
of sequestering carbon by taking carbon dioxide of the atmosphere and fixing its carbon
molecules into biomass. As wood is used to build houses, furniture and other manufactured
goods it is assumable that carbon will not go back to the atmosphere. Calculate the amount
of carbon that is sequestrated is possible knowing the amount of biomass (in this case timber)
that is created. The ratio of carbon from the atmosphere converted into timber can be known
by dividing the molecular weight of CO2 (42) by the molecular weight of carbon (12) which
gives a ratio of 3.66. Knowing that a poplar tree is about 45% carbon and that poplar specific
density is 0.5 (García de Jalón, Graves, Joao H.N. Palma, et al., 2018), we can know how
much carbon is fixed within the forest’s biomass. With this and carbon-atmosphere/carbon-

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timber ratio we can calculate the final carbon sequestration. Adding this information as inputs
in our model, the cumulative amount of carbon sequestered after 30 years is 344 tonnes of
equivalent CO2 per hectare.

Now it is possible to convert this carbon values to pounds per hectare. Following the strategy
provided by the UK’s Government (Green Book supplementary guidance: valuation of energy
use and greenhouse gas emissions for appraisal - GOV.U>, no date) it is assumable a value
of 69£ per tonne of CO2 equivalent. As said before, considering CO2 emissions as costs and
CO2 sequestration as income, the environmental result of each system is showed in table 9:

Net present value at 0% NPV30 years NPVinfinite Equivalent Annual

discount rate (£ ha-1) (£ ha-1) (£ ha-1) Value (£ ha-1 yr-1)

Arable system -5022 -2968 -4291 -172

Forestry system 23594 11313 16356 654
Table 9: Environmental Net Present Values

As ARS has no carbon sequestration, it is not a surprise that all its values are negative. This
means that society will have to pay externalities emerged from this kind of system. Values
shown on Table 9 are presented in terms of Net Present Value. Oppositely, the PFS’s
emissions are significantly lower and carbon sequestration is much higher than zero, so it was
expected to have a positive outcome on every value presented on this table.

Combining both financial and environmental incomes it is possible to calculate the overall
result of both projects in terms of net present value. The result of doing this is the following:

Net present value at NPV30 years NPVinfinite Equivalent

0% discount rate (£ ha-1) (£ ha-1) Annual Value
(£ ha-1) (£ ha-1 yr-1)
Arable system with grants 16089 9546 13801 552
Arable system without grants 9269 5522 7983 319
Forestry system with grants 39542 15414 22285 891
Forestry system without grants 37342 13599 19661 786
Table 10: Overall Net Present Values

It is clear how including this ecosystem service value provided by the PFS has a great impact
on the overall result. Both scenarios (with and without grants) are now more profitable for the
PFS than the ARS. With a 4% discount rate, the PFS is 38% more profitable than the ARS
for a grants-providing scenario and 60% more beneficial without grants.

Furthermore, with these values, it is possible to make a sensitivity analysis of each system to
variation on carbon prices. Once again, the model will switch carbon values decreasing and
increasing them by 50 and 100%. By knowing the range of each system sensitivity, we will be
able to determine which one is the most sensitive:

Relative changes (%) in carbon price Range

-100% -50% 0% 50% 100%
Arable (carbon value) 12514 11030 9546 8062 6578 5936
Forestry (carbon value) 4101 9757 15414 21070 26727 22626
Table 11: Carbon prices sensitivity analysis

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 £/ha
Relative Change: -41% 40000
35000
NPV: 10766 £/ha
30000
25000
20000
15000
10000
5000
0
-100% -50% 0% 50% 100%
Arable (carbon value) Forestry (carbon value)
Figure 8: Carbon Price Sensitivity

As it is expected, PFS is more sensitive to changes in carbon prices because most of its
benefits arises from carbon sequestration. But an important conclusion of this analysis is that
the convenience of a PFS over an ARS greatly depends on carbon prices. If prices went
down 41% income of both systems became equal, if they drop more than that an ARS would
be the most gainful option in an overall perspective.

The overall benefit of each system combines the financial outcome and the environmental
result, but environmental revenues are not affecting directly the landowner and the costs or
benefits of them are absorbed by the society (landowner included). This could be considered
a reason to why it is common to see this part of a cost-benefit analysis ignored. In order to
include these externalities into the financial outcome of an economic development, studies are
being conducted to realize what the best alternatives are for doing this. One of many
alternatives is to set a carbon tax on CO 2 emissions (Burke et al., 2019). This report will
consider three different scenarios and, through our model, see how a tax or a compensation
based on the value of carbon will impact on the revenues of each system.

The first scenario is a one-way tax where a landlord must pay a tax proportionate to the
carbon emissions of his activity and to the value of carbon defined. The second scenario is a
one-way compensation where, if a productive activity is sequestrating carbon from the
atmosphere, the landowner is compensated with a proportionate reimbursement (it could be
cash or a tax cut) as a reward of this service provided to society. The third scenario is a
combination of both previous arrangements. It consists in a two-way scheme where those
activities that are emitting carbon must pay a tax and those who are sequestrating receive a
monetary compensation. An interest way of compare these scenarios is to determine the fee
or payment required to make both systems equally profitable, how much higher or lower than
the original value of carbon used (69£ per hectare) this value must be, and how the maximum
financial revenue is affected on each scenario if its compared to the original scenario without
carbon tax. For a scenario with grants and a 4% discount rate the results are the following:

Scenario Value of Relative Revenues Maximum revenue

carbon Change decrease
£ (t CO2)-1 £ ha-1 £ ha-1
One-way tax 195.6 183% 4101 67%
One-way compensation 51.3 -26% 12514 0%
Two-way Scheme 40.6 -41% 10766 14%
Table 12: Carbon tax scenarios

These results show that the most aggressive scenario for a farmer’s economic result is the
one-way tax. Relative change on the value of carbon is almost 2 times higher than one used
for previous environmental analysis. It also represents more than half of the revenues lost in
carbon tax. The positive side of this scenario is that the entire cost of environmental

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externalities caused by carbon emissions are paid by the generator. However, including a tax
of these proportions would probably have a negative impact on country’s economy. The
second scenario is much less aggressive to a farmer’s economy, but it requires a big economic
investment from the public treasury to compensate carbon sequestrations, this could have an
impact on quality of public services (e.g. education, health) and the country’s economy in
general as well. Carbon emissions are not directly paid by emitters, but now a cost of lost
opportunity will be reflected in a cost-benefit analysis if a carbon-sequestrating project is
compared to a carbon-emitter one. The third scenario needs to set the lowest value of carbon
of the three alternatives to make both systems equally profitable, is less aggressive to a
farmer’s economy than the one-way tax and less aggressive to the country’s economy than
the one-way compensation scenario. In this case, the overall result will be defined by the
environmental performance of the country. If the summary of economic activities result in a
carbon-emission situation, the state will receive a compensation for the externalities caused
by the producers, otherwise if the result is carbon-sequestrating, the state should reward the
producers for the benefits provided to society.

It is important to say that other variables play an important role on setting a new tax. This
analysis is only considering environmental and economic aspects of a farm but predicting the
results of setting a new tax is much more complex and could have other environmental, social,
political and economic consequences that are out of the reach of this report.

6. Economic assessment at a farm-scale: net zero carbon emissions.

By this point of the report we are in position to analyse a third option: A Combined Forestry
and Arable System (CFAS). The main advantage of this system is that it can be highly
profitable in financial terms, but also be neutral on carbon emissions, this means that no
externalities had to be paid by society as a consequence of this project. The purpose of this
section is found out what should be the characteristics of this system in a per hectare basis
and what will be the economic result of it. For this section of the report only a with-grants
scenario will be studied.
Assuming the farm has a total area of 1000 hectares, from our model we can calculate how
much of those 1000 hectares will be covered by an ARS and PFS. Then with our previous
calculations we can estimate the total revenues in terms of NPV of this CFAS:
0 Carbon emission Financial
Area of forest (ha) 175 Arable system with grants 10318 NPV (1000£)
Area of arable (ha) 825 Forestry system with grants 720 NPV (1000£)
Sub-total 11038 NPV (1000£)
Arable carbon emission (t CO2e) -60010 Environmental
Forestry carbon emission (t CO 2e) 60010 Arable system -2447 NPV (1000£)
Net carbon emission (t CO2e) 0 Forestry system 1985 NPV (1000£)
Overall benefit
Arable system with grants 7871 NPV (1000£)
Forestry system with grants 2705 NPV (1000£)
Farm net benefits 10576 NPV (1000£)
Table 13: Net zero carbon emissions

The results obtained from the model shows that a CFAS developed over 1000 hectares where
175 of them are used to establish a PFS and 825 for an ARS will have 0 net carbon emissions
or, in other word, be carbon neutral. The financial result of this system in term of NPV and
applying a discount rate of 4% will be of 11038 £ per hectare. This represents 12% less
revenue than a full ARS and 263% more than a PFS. For the overall benefits, the CFAS will
offer a revenue of 10576 £ per hectare, this is 11% more revenues than the overall result of
an ARS and 31% less than the PFS.

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It is important to clarify that overall benefit is minor than financial benefit because of the effect
of discount rates applied on sequestrated carbon values. If discount rate was 0%,
environmental benefit will be zero as well as net carbon emissions and overall benefits will be
equal to financial benefits.

7. Findings, implications and recommendations for further analysis.

With the information gathered so far, it is possible to reach some conclusions. Firstly, it is
imperative to highlight the importance of the environmental result and how significant it can
be at the time of making decisions. If this is not considered, it is not possible to anticipate that
an important damage can be caused to society. Also, considering or not considering this
aspect could make a real difference at the time of choosing one alternative over another.

Another clear outcome is the significance of performing a strong sensitivity analysis. Doing
this provides a more complete set of information. It is helpful to predict how changes in the
social, economic and even political context could affect each one of the alternatives.

There are some other variables that have not been considered in this report, but they could
have some impact on final results. Among costs, taxation was not included, also administrative
costs, insurance, water, gas and electricity and others. If the Organization believes that adding
these costs into the analysis could have a significant impact in the final comparative result, we
strongly recommend considering them as well.

Another aspect that is out of the scope of this report is a more profound prediction on how
prices, grants, and costs will evolve over the next 30 years. Even though those variations can
be considered covered by the sensitivity analyses, much precise analysis can be done within
this subject. Additionally, sensitivity analysis where performed varying costs, grants and prices
at the same time for both systems, although for example timber values can increase while
crops values can decrease or vice versa. The possible combinations are infinite and most of
them were excluded in benefit of delivering a more brief and concise report.

The possibility of new taxes on carbon that may been included in the future was also analysed
on this report. It is not unlikely that this kind of taxes were to be included in the future as social
pressure grows upon political leaders to take actions towards tackling climate change. It is
important to a farmer to keep up to date and anticipate these possible changes that may have
a big impact on his economic activity.

It is also important to keep track and being aware of the externalities that an economic
development could have, how beneficial or harmful to society those externalities can be and
how this might change over time. For example, the value of carbon is not fixed, it can vary
over time depending on, for example, how the temperature of the earth evolves during the
next decades or how the CO2 concentration in air grows over time, etcetera. For this it is
important to determine how different projects can provide or deprive society of different
ecosystem services, how it can affect the existing ones and how valuable those services are.

As a final statement, this report will highlight the importance of analysing environmental
challenges with a sustainability perspective, which has three main aspects: social, economic,
and environmental. These challenges are as important as difficult to solve, every action has a
reaction which not always is easy to anticipate and failing on making proper studies to find
which are the most probable consequences for an action, could have even worst costs to
society. But if individuals and organizations act with this sustainable perspective and
considering how an action can impact on others, society will have greater chances to succeed
and thrive.

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