environmental science & policy 37 (2014) 1–10

Available online at www.sciencedirect.com

ScienceDirect

journal homepage: www.elsevier.com/locate/envsci

Modeling the impact of carbon farming on land use

in a New Zealand landscape

Jason M. Funk a,*, Christopher B. Field b,1, Suzi Kerr c,2, Adam Daigneault d,3
a
Environmental Defense Fund, 1875 Connecticut Ave. NW, Washington, DC 20009, USA
b
Department of Global Ecology, Carnegie Institution of Washington, 260 Panama St. Stanford, CA 94305, USA
c
Motu Economic and Public Policy Research, Level 1, 97 Cuba Street, PO Box 24390, Wellington 6142, New Zealand
d
Manaaki Whenua/Landcare Research, 231 Morrin Road St Johns Auckland 1072, Private Bag 92170 Auckland Mail
Centre, Auckland 1142, New Zealand

article info abstract

Article history: The opportunity for private landowners to receive carbon credits from reforestation, or
Received 23 January 2013 ‘‘carbon farming,’’ will change the relative value of land uses for landowners, potentially
Received in revised form having an impact on land-use decisions. We constructed a spatial model to evaluate the
13 August 2013 potential scale and location of carbon farming in a New Zealand landscape, the size of resulting
Accepted 13 August 2013 carbon stocks, and the economic trade-offs for landowners considering carbon farming. We
Available online 7 September 2013 modeled the carbon accumulation, economic value, and potential uptake of a carbon farming
management system that utilized native forest regeneration on set-aside land.
Keywords: For the study area, the Gisborne District of New Zealand, we found that regrowth of
Carbon sequestration native forest species on estimated Kyoto-eligible marginal pasture has the technical poten-
Carbon farming tial to store 104.2 Mt CO2-e over 70 years over 379,000 eligible hectares. We found 102,951 ha
Forest carbon where the potential economic revenues from carbon in our most conservative scenario
Land-use modeling could generate NZ$912 million in excess of expected grazing revenues over 70 years of forest
Emissions trading regeneration. Our results suggest that reforestation could out-compete grazing on at least
Land-use change 27% of eligible land in the Gisborne District. Sensitivity analysis shows that uncertainty
about the scale of carbon sequestration can have a sizeable effect on the estimated
profitability of carbon farming, but estimated land conversion is strongly affected by the
choice of discount rates among landowners and the utilization of compatible incentives for
other environmental services. Potential profits from carbon farming are strongly affected by
the uncertainty of the future value of carbon credits.
# 2013 Elsevier Ltd. All rights reserved.

available to landowners. Here, we develop an approach to

1. Introduction estimate the impact of these rewards on land use for a New
Zealand landscape by (1) developing a modeling methodology
Policy incentives for land management activities that seques- for quantifying the spatial and temporal dynamics of potential
ter carbon create a shift in the rewards for different land uses carbon sequestration, (2) examining the revenue potential

* Corresponding author. Tel.: +1 202 572 3388.

E-mail addresses: jfunk74@gmail.com, jfunk@edf.org (J.M. Funk), cfield@ciw.edu (C.B. Field), suzi.kerr@motu.org.nz (S. Kerr),
daigneaulta@landcareresearch.co.nz (A. Daigneault).
1
Tel.: +1 650 462 1047.
2
Tel.: +64 4 939 4250.
3
Tel.: +64 9 574 4100.
1462-9011/$ – see front matter # 2013 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.envsci.2013.08.008
2 environmental science & policy 37 (2014) 1–10
under a variety of carbon price scenarios, (3) exploring the
impact of concurrent incentives for reforestation, and (4)
comparing the expected revenue from reforestation with
expected returns from grazing.
New Zealand adopted a policy in 2007 called the Perma-
nent Forest Sink Initiative (PFSI), which creates a mechanism
for landowners to receive carbon credits for eligible forests on
their lands (MAF, 2007b). Under New Zealand’s domestic
rules, any net conversion of land use to new forests after the
baseline date of January 1, 1990 is considered eligible to
receive carbon credits.
The availability of carbon credits to private landowners
will increase the economic value of reforestation on
eligible lands. Other incentives, such as non-timber forest
products and subsidies for erosion control or biodiversity
protection can provide additional revenues for permanent
forests. Therefore, landowners who manage their land to
comply with one or more of these programs can earn multiple
revenues from a single block of land. For some lands, the
additional revenue earned from carbon credits may make
forest regrowth economically competitive with other land
uses. To encompass all of these possibilities, we use the broad
term ‘‘carbon farming’’ to refer to any land use in which
landowners capture economic benefit linked to the amount of
carbon sequestration.
Although this definition could also include timber
plantations, in the analysis presented here, we examine a
land management system that utilizes native forest
restoration to earn carbon credits through the PFSI. We
analyze native forest regeneration for several reasons: (1)
because the potential for carbon policy to trigger
expansion of the extent of native forests is important
ecologically and culturally, (2) because native forests deliver
a greater variety of ecological co-benefits than timber
plantations, and (3) because the conditions necessary for
earning credits would require substantial changes to the
current management regimes of timber forests, which is
not the focus of this work. Nevertheless, we recognize
that under some conditions, a modified system of timber
forestry to include carbon credits may be optimal in many
places.
Our purpose is to identify areas and conditions where a
carbon management system could compete economically
with grazing. By mapping these areas spatially, we estimate
the areas of potential conversion and the total resulting
carbon sequestration in the region, as well as identify areas
of higher or lower revenue potential from carbon farming.
For this study, we examined the Gisborne District of New
Zealand – a district with large areas of marginal grazing
land, where native tree species quickly invade pastures with
low grazing pressure, and where indigenous Ma-ori land-
owners often struggle to profitably manage large areas of
communally owned land. To evaluate whether carbon
farming could be a beneficial enterprise, we compare the
net present value of carbon farming and grazing over a long
time horizon (70 years) in order to capture the long-term
implications of a commitment to ‘‘permanent’’ reforesta-
tion. We also evaluate a variety of discount rates to reflect
the different time preferences that landowners may apply to
their land-use decisions.
1.1. Research objectives
This analysis had several objectives:
1. Model the amount of Kyoto credits that could be generated
by the conversion of eligible land in the Gisborne District to
native forest;
2. Model the economic revenue potential of these credits
under several price scenarios;
3. Model how complementary incentives add to the value of
native reforestation as a ‘‘carbon farming’’ land manage-
ment system;
4. Compare carbon farming as a land use with the opportunity
cost of grazing.
2. Study area: land-use and policy
interactions
The Gisborne District in the North Island of New Zealand has a
number of factors that could make it favorable for carbon
farming. It is a large area (about 835,500 ha) dominated by
rugged hills, and it has relatively small population of 44,460, of
whom 19,758 (44.4%) self-identify as Ma-ori, the indigenous
people of New Zealand (Statistics New Zealand, 2013).
Residents are relatively isolated and remote from access to
markets. Geologically, much of the area has a high risk of
landslides on steep slopes, especially slopes that have been
cleared of trees (Phillips and Gomez, 2007; Glade, 2003). After a
major cyclone caused extensive landslides in 1989, the NZ
government sponsored a program called the East Coast
Forestry Project (ECFP) to subsidize landowners planting trees
on erodible areas.
In the Gisborne District, native forests can regenerate on
abandoned pastures in a forest successional process that
predominantly begins with the invasion of manuka tree
species (Leptospermum scoparium), or sometimes kanuka
(Kunzea ericoides). These pioneer species establish easily in
pastures where grazing pressure is low (i.e. less than 2 stock
units per hectare per year), which is frequently the case with
hill country pastures in the Gisborne District, where carrying
capacity is low (Landcare Research, 2000). Without periodic
clearing, manuka typically sprouts from wind-dispersed seeds
in pastures, grows through a shrub phase, and eventually
matures as a closed canopy ‘‘scrub’’ phase of small Trees 6–10
m in height (Wardle, 1991; Stephens et al., 2005). Its rapid
establishment and growth mean that some areas that were
still pasture in 1990 were closed-canopy scrub by the
beginning of the first Kyoto commitment period in 2008, even
when managed for low-intensity grazing.
Native forests in various stages of maturity offer econom-
ically valuable goods and services. For instance, residents use
native forests and scrub as a source of fuelwood, medicine,
and food (Stephens et al., 2005). The manuka tree (L.
scoparium) is used for medicinal tea and oil, and it supplies
honey with unique antibacterial properties (Stephens et al.,
2005; Allen et al., 1991; Molan and Russell, 1988). Manuka oil
and honey from the Gisborne District are produced commer-
cially and marketed internationally (Kerr, M., personal
communication, 2006).
 environmental science & policy 37 (2014) 1–10
Native forest cover also provides other co-benefits, such as
reduction in soil erosion and improvement to water quality, and
some of these are incentivized through government programs
for new forest establishment. Because these programs could
deliver supplementary revenues on some areas eligible for the
PFSI, we analyzed the financial implications of these revenues
for landowners, in combination with the PFSI.
In 1992 the government initiated the ECFP for the Gisborne
District, administered at that time by the Ministry of
Agriculture and Forestry (MAF) (MAF, 2006). This program
offers grants to private landowners to stabilize erodible land,
including through an option for native forest regeneration. In
2011, the ECFP had enrolled and facilitated forest establish-
ment on over 35,552 ha of land (MAF, 2011b).
In 2008, the government introduced the Afforestation Grant
Scheme (AGS), delivering grants to plant exotic or indigenous
tree species (MAF, 2008), but this program is not consistent
with our definition of carbon farming because revenues to
landowners are not linked to the amount of carbon seques-
tration the land delivers.4 Therefore, we do not include the
AGS in this analysis.
Other programs are targeted at biodiversity protection.
Through the Department of Conservation (DoC), landowners
may enroll in one of two programs for retiring land for
biodiversity conservation: the Queen Elizabeth II Trust (QE2)
and Nga Whenua Rahui (NWR).5 These programs provide
landowners with financial assistance for fencing and pest
management for lands with high biodiversity value.
3. Methods
3.1. Data
To model the carbon sequestration potential for the regener-
ation of native forests in the Gisborne District, we used the
following datasets:
1. LUCAS Land Use Map 1990–2008 (LUM v003), a national
land-use classification database created for greenhouse gas
reporting (Thompson et al., 2003).
2. Land Use Capability (LUC) classification, a ranking system
of land quality for different productive uses, including
forest productivity (Jessen et al., 1999).
3. NZ Land Resources Inventory (NZLRI), a database that
includes factors that influence the productivity of land for
4
In this case, the AGS is not compatible with carbon farming as
defined here, because (1) the government owns the rights to
carbon credits generated in the program, (2) landowners bid
through a tender process, which may not directly link to the
amount of carbon they sequester during the grant period, (3) lands
enrolled in the PFSI, ECFP, or other government programs are not
eligible, and (4) lands already partially or wholly reforested are not
eligible. These factors eliminate much of the land considered in
our analysis and make comparisons with grazing management
less interesting, since economic theory would suggest that land-
owners should offer a tender just higher than their opportunity
cost, which is represented by our grazing scenarios in this analy-
sis.
5
The NWR program applies only to Māori land.
3
different uses, including average stock carrying capacity
(CCAV), average annual rainfall, and soil fertility (Landcare
Research, 2000).
4. Political boundaries, roads, rivers, and lakes.
3.2. Carbon model
We constructed a spatial and temporal model of carbon
accumulation for indigenous forests, using data from the LUC
and NZLRI databases. Our model uses soil fertility and average
annual rainfall as spatial parameters in a forest growth model.
The model is based on empirical work by Trotter et al. (2005).
3.2.1. Carbon growth model
Following Trotter et al. (2005), we constructed a model of tree
growth and carbon sequestration, using empirically derived
relationships to such factors as soil quality and annual
precipitation. We assumed that the accumulation of carbon
over the first 70 years would be due primarily to the growth of
manuka (L. scoparium), which establishes dense stands in
abandoned pastures and remains the dominant species for
several decades. Our model is consistent with empirical
estimates of carbon accumulation over time in abandoned
pastures in the Gisborne District, in which manuka and
kanuka were dominant for at least 55 years (Ford-Robertson
et al., 1999; Scott et al., 2000). In the model, the accumulation of
carbon within each age class was estimated using a Gompertz
equation for a sigmoidal growth curve, of the form:


1eðxtÞ
YðtÞ ¼ a  eb 0:1 (1)
where t is time since establishment, in years; Y(t) is accumu-
lated CO2-equivalents for the area, in tons.
We fit the following parameters for the model using
Trotter’s empirical data: a = 2.93; b = 0.46; x = 0.07.
In addition to the estimation of carbon accumulation for
each age class, we also modeled the area of coverage that each
new age class would occupy in each year. We assumed the
cumulative distribution of the area occupied by each succes-
sive age class would also follow a sigmoidal curve. Starting
with bare ground in year 0, we constructed a function to model
the fraction of the area, f(t), covered by trees, resulting in total
coverage by age 10. This equation was of the form:
1
f ðtÞ ¼ 1  (2)
1 þ 1=etþ5
where t is the number of years since establishment. Thus,
for each year t up to year 10, a new age class is established for
some fraction of the area and the accumulation of carbon
within the age class is modeled for that age class according to
Eq. (1).
This model was used to calculate carbon accumulation for
soil of average productivity (class 3) and high rainfall
(1500 mm). For other soil and rainfall classes, we assumed
each soil class difference resulted in a 6% change in carbon
sequestration and each 100 mm decrease in rainfall from the
highest class (1500 mm) resulted in a 5% decrease in carbon
sequestration (see Trotter et al., 2005). In total, we modeled 40
unique combinations of soil and rainfall classes, of which 27
were found on eligible land in the study area, to generate a
4 environmental science & policy 37 (2014) 1–10
carbon sequestration potential ranging from 204 and 348 t
CO2/ha. More details on the data used to develop the soil
fertility and rainfall classifications are discussed in the
Supplementary Material.
The model was calculated using Microsoft Excel and output
tables were imported into the spatial attribute files for the
productivity layer in the spatial database.
3.3. Management scenarios
In addition to the impact of the value of carbon, the uptake of
carbon farming will also depend upon the value of overlapping
revenue streams from other management activities – such as
biodiversity and erosion control incentives, and private
markets for manuka honey – in the areas set aside for forest
regeneration. We used spatial data to analyze the potential for
different areas to yield revenue from two scenarios for carbon
farming, incorporating the timing of the revenues into the NPV
calculation. We present the analysis of the following scenari-
os:
A: Carbon alone. We estimate the area eligible for the PFSI
and calculate the net present value of the stream of revenue
from carbon, under a range of price scenarios detailed below.
B: Carbon + ECFP + Conservation Program + manuka hon-
ey. We estimate the area eligible for each of these sources of
revenue, then we estimate the net present value of the
revenue that landowners would receive by taking advantage of
as many of these sources as they can. This scenario provides
an upper bound estimate of the potential economic benefits to
landowners from afforestation.
We attempted to explicitly incorporate the value of non-
carbon benefits in our model using the following information:
- ECFP: We model a total payment of $1512 per ha, with a
payment of $756 in year 1 and a payment of $756 in year 5, as
accepted in the revised ECFP guidelines released in 2007
(Ministry of Agriculture and Forestry, 2007a).
- Manuka honey: We model payments of $50 per ha per year,
starting in year 1 and continuing through year 70. Actual
revenues from honey production are difficult to estimate for
both biological and economic reasons, so we have used a
conservative estimate of the additional marginal revenue to
landowners from honey from native forests.
- Conservation Program: Nga Whenua Rahui/QE2 Trust: We
model a payment of $150 in year 1. Actual payments per
hectare from these programs depend on the quality of the
habitat being protected and the costs of project establish-
ment (Mohi, M., Nga Whenua Rahui, personal communica-
tion, 2006). We adopted a simple case of enrolling land in one
of these programs in the year of establishment and receiving
a payment of $150 per ha.
3.4. Carbon price scenarios: creation and application
The value of carbon sequestration for farmers will depend
upon the future price of carbon credits or other incentives.
There are many plausible scenarios for the future price of
carbon, including a set of studies that use general equilibrium
modeling to calculate an expected shadow price for carbon
under various policy constraints (van Vuuren et al., 2007; Tol,
2005; Nordhaus and Boyer, 2000).6 We incorporated recent
projections of the price of carbon rising at a real rate of 3.8%
per year, and used three scenarios for different starting prices:
NZ$15, NZ$25 and NZ$35 per ton CO2-e, respectively. These
price scenarios are higher than recent carbon prices in NZ, but
they are consistent with scenarios used in NZ government
policy assessments (Denne and Bond-Smith, 2010).
3.5. Comparison scenarios for grazing
We calculated the comparative income from grazing using a
combination of data on grazing productivity and average gross
margins. Grazing productivity was calculated on a per hectare
basis using the average stock carrying capacity spatial data
layer (CCAV) for the Gisborne District, as mapped in the NZLRI
database. This data layer is based on empirical quantification
of the average carrying capacity that can be maintained by a
grazing operation with average levels of inputs for that land
type, expressed in normalized ‘‘stock units.’’ The estimated
carrying capacity of a particular grazing species (or combina-
tion of species) can be readily converted to ‘‘stock units’’ using
standard conversion rates included in the database.
We used a range of expected gross margins – defined as
‘‘the gross income from an enterprise less the variable costs
incurred in achieving that income’’ (Rae, 2003) – to test the
sensitivity of land conversion to farmers’ expectations about
their ability to earn profits. Gross margins do not include fixed
or overhead costs, which can vary from farm to farm. The
average gross margin for each stock unit was multiplied by the
stock unit carrying capacity for each hectare, yielding the
expected stream of grazing gross margins for all areas of
eligible land, under each price scenario. To compare these
grazing scenarios to carbon revenue scenarios, we discounted
each revenue stream to obtain the net present value.
For grazing, we used three scenarios, with constant real
gross margins of NZ$10, NZ$20, and NZ$30 per stock unit,
respectively. These scenarios were based on weighted pre-tax
farm profit per stock unit reported in the Beef and Lamb/
Economic Service Farm Survey, conducted in participating
farms, which ranged from $2.49 to $29.79 per stock unit in the
years 2003–2011 on hill country in the Eastern North Island,
including the Gisborne District (Beef and Lamb, 2011). A more
recent report confirmed that prices have continued within a
similar range in recent years (MAF, 2011a). Historically, farm
profit per stock unit in real dollars has been relatively stable in
this range (Beef and Lamb, 2011), following a period of
adjustment after economic reforms in the mid-1980s. We
include a high profit scenario of NZ$30 per stock unit to reflect
the possibility that landowners may expect grazing to be more
profitable in the future than it has been historically.
We expect costs to be lower for carbon farming than
grazing, on average, because of reductions in (1) labor units, (2)
costs of capital, and (3) depreciation of capital inputs.
Therefore, we expect that a comparison of gross margins to
6
This price need not be delivered through a market for carbon
credits; the comparisons presented here are valid for any incen-
tive if the value of the incentive is proportional to the annual
amount of carbon sequestered.
 environmental science & policy 37 (2014) 1–10
gross margins will yield a conservative estimate of conversion
to carbon farming. However, on some farms the relative
savings from converting grazing to carbon farming may be
partially or completely offset by the added costs of (1)
additional fencing, (2) specialized labor from certifiers, and
(3) application and audit processing in the PFSI. These costs
can vary from farm to farm and are not captured in this
analysis.
3.6. Discount rates
The selection of discount rates reflects the potential variation
in landowners’ real rate of time preference and allows us to
compare today’s land-use allocation decisions on an equiva-
lent basis, even though revenues from each system will differ
across management scenarios from year to year. We model
carbon revenue each year as the sequestration that year
multiplied by the carbon price. Since the flow of income from
carbon farming varies over time, discounting the stream of
income from carbon farming and the comparable stream from
the current land use allows us to normalize the net present
value (NPV) of the different options.
We used three discount rates commonly used by the NZ
Government to evaluate the impacts of policies: 0, 5, and 10%
(New Zealand Treasury, 2005). The combination of discount
rates and gross margins serve to represent landowner profiles
that we have observed in the Gisborne District. For instance,
some landowners take into account the impacts of land-use
decisions far into the future – a view that can be represented
by applying a low discount rate of 0%. Other landowners may
be ‘‘capital starved’’ and have opportunities to invest in farm
improvements with a high rate of return once they get access
to capital. These landowners are represented by applying a
high discount rate of 10%. Discount rates in the intermediate
range represent landowners who have access to capital and
may have other low- to moderate-risk opportunities for
investment (not necessarily on their own farms).
3.7. Spatial integration
For each area of analysis, NPV of revenue per hectare from
each scenario was calculated and mapped. We compared the
NPV of each grazing scenario to each carbon farming scenario,
under all management options, using the same landowner
discount rate to compare each pair of land-use options (carbon
farming vs. grazing). These are not the exhaustive set of all
price possibilities, but they are useful for showing how a range
price scenarios affects the revenue from carbon farming. We
then projected the expected difference in revenue for each
year on each unique area of land.
3.8. Estimating eligible land and modeling carbon
sequestration potential
We estimated the extent of PFSI eligible land using the
database of eligible land available from the Ministry for the
Environment (MfE, 2010).
In addition, areas eligible for ECFP were considered. The
target land for ECFP is based on Land Use Capability
classification of highly erodible lands: LUC classes 7e18 and
5
higher, and all of class 8. We mapped these areas and created
attribute fields with values corresponding to the NPV of grant
payments (on a per hectare basis) announced in July 2007
(MAF, 2007a). We applied discount rates of 0%, 5%, and 10% to
these payments, to match the rates applied to carbon and
grazing revenues.
We performed similar procedures for manuka honey
production and conservation. We considered all Kyoto-eligible
land to also be eligible for conservation incentives and honey
production, and we added the combined value of these
additional discounted revenues to each appropriate scenario,
to evaluate the impact of these revenues on potential land
conversion.
3.9. Comparison of carbon farming to grazing
Similarly, we modeled the expected value of grazing under
three price scenarios. We used the average stock carrying
capacity layer to map the sustainable stock density across the
landscape. We then applied an expected gross margin of $10,
$20, and $30 per stock unit, respectively. Grazing gross
margins were discounted at each of the rates applied to the
carbon scenarios (0%, 5%, and 10%). We compared the net
present value of grazing gross margins to the net present value
of carbon farming revenues under all scenarios, matched by
discount rate. Our approach is similar to Kerr et al. (2012), but
the analysis differs because we used finer-grained spatial data
to map the economic potential for conversion, whereas Kerr
and colleagues estimated conversion on the basis of empirical
data about past conversions, mapped in a grid at a coarser
level. This means that our results represent the economic
potential for carbon farming, whereas Kerr and colleagues
estimate actual potential based on past behavior.
4. Results
4.1. Carbon potential on eligible land
Using our carbon model, we estimated that if all eligible land
were reforested, it would store about 104.2 Mt CO2-e by the end
of the 70-year time period. For comparison, New Zealand’s
total greenhouse gas emissions in 2010 were 71.65 Mt CO2-e
(MfE, 2012).
On eligible land, our model predicted a range of total carbon
storage between 204.2 and 347.6 t CO2-e per ha. The maximum
in any one year on the most productive land was 12.8 t CO2-e
per ha. The area-weighted mean sequestration after 70 years
was 275.16 t per ha. The distribution reflects the spatial
distribution of land with different cumulative carbon storage
capacity across the district (Fig. 1).
4.2. Value of carbon farming on eligible land
Under a conservative price scenario starting at NZ$15 per ton
CO2-e, if all estimated eligible land were reforested, the total
expected revenue (0% discount rate) from carbon credits over
70 years for the Gisborne District would exceed NZ$4.42
billion, or an average annual revenue of NZ$63 million (NZ$167
per ha per year). The spatial distribution of the revenue reflects
6 environmental science & policy 37 (2014) 1–10
Fig. 1 – Map of cumulative CO2-e storage after 70 years on
eligible land.
the pattern of carbon accumulation (Fig. 2) because the spatial
factors affecting sequestration (soil quality, rainfall) are static
in the model.
The effect of discounting revenues allows us to evaluate the
relative importance of price scenarios in the future. Compar-
ing scenarios across discount rates, we see that the discount
rate has a strong effect on the value of a decision to enter
carbon farming today. Landowners may express different
discount rates across the Gisborne District (or even apply
different discount rates to different decisions), but the impact
of applying a uniform discount rate to the district creates
important results.
Comparing price scenarios within discount rates, we see
that at rate of 5% leads to areas of conversion that are equal or
less than those expected a rate of 0%, and a rate of 10% leads to
areas equal or less areas than a 5% rate. This suggests that
landowners who value short-term profits will be less likely to
Fig. 2 – Spatial distribution of present value of carbon ($/ha)
on eligible land with a carbon price of $15 per ton, rising
3.8% per year, using a discount rate of 0%.
Fig. 3 – The estimated present value of grazing ($/ha) in the
East Cape, assuming constant margins of $20 per stock
unit and a discount rate of 0%. The boundary of the study
area is shown with a dashed line.
convert their land to carbon farming, even if carbon farming
would deliver greater value to future owners of the land.
4.3. The impact of complementary incentives on the value
of native reforestation
By adding supplemental revenues to the carbon farming
management system, complementary incentives increase the
total revenue on some areas of land, and potentially increase
the area converted to carbon farming. With certain areas of
land eligible for multiple revenues, the attractiveness of
carbon farming increased, shifting revenues upward in those
areas. In some cases, the combined revenues are sufficient to
make carbon farming competitive on more land.
Comparing total potential revenues from carbon credits to
these other revenues, none of them approach the same impact
on the district as carbon revenues, but the additional revenues
add substantially to the NPV per hectare on eligible areas,
resulting in more potential conversion (Table 2).
4.4. Comparisons of carbon farming to grazing
To the extent that economics determine land use, the impact
of carbon farming on the land-use composition of the district
will depend upon its value to landowners, relative to other
land-use options. As a result, we must compare the net
present value of carbon farming to the net present value of
competing land uses. Here, we compare the present value of 70
years of carbon farming to the present value of 70 years of
grazing on estimated Kyoto-eligible land.
We made a spatial comparison of the economic value of
carbon farming to the economic value of grazing, since grazing
productivity varies widely across the Gisborne District (Fig. 3).
We then selected areas where the NPV of carbon farming
exceeded grazing by overlaying and subtracting the NPV of
grazing from the NPV of carbon farming. This estimate of land
that earns higher returns from carbon farming provides a
 environmental science & policy 37 (2014) 1–10 7

Fig. 4 – Estimated areas of conversion from grazing to carbon
farming and net revenue in excess of expected grazing
margins with farmers utilizing carbon revenue only,
starting with a carbon price of $15 per ton and rising 3.8%
per year, assuming gross margins of $20 per stock unit,
applying a discount rate of 10%. Total area = 98,339 ha.
Fig. 5 – Estimated areas of conversion from grazing to
carbon farming with farmers utilizing carbon revenue and
revenues from compatible activities, starting with a
carbon price of $15 per ton and rising 3.8% per year,
assuming gross margins of $20 per stock unit, applying a
discount rate of 10%. Total area = 277,692 ha.

spatially explicit estimate of potential land-use conversion

(Fig. 4).
For a conservative scenario starting with a relatively low
price for carbon ($15 per ton), moderate gross margins for
grazing ($20 per stock unit), and a discount rate of 10%, we
estimate 98,339 ha of conversion if only carbon revenue is
considered. However, when revenues from other sources are
also considered, this figure rises to 277,692 ha (Fig. 5). Of this
area, about 160,000 ha are lands where the NPV of carbon
farming is at least 20% greater than the NPV of grazing
(including about 34,000 ha where the estimated NPV of grazing
is zero). Results of all price and management scenarios are
presented in Tables 1 and 2.
5. Discussion
5.1. Implications for land use and rural development
Carbon farming in the Gisborne District is not a panacea for
New Zealand’s climate obligations, nor will it provide the
majority of emissions reductions to help the country meet its
international commitments. However, the Gisborne District
does have substantial capacity to create forest sinks that can
reduce New Zealand’s net emissions for years to come. If
policies continue to deliver incentives for carbon sequestra-
tion along with existing incentives for other non-carbon

Table 1 – Estimated conversion areas under different price scenarios and discount rates, comparing grazing gross margins
to carbon revenue only.
Starting carbon price Grazing gross margins per stock unit

$10/SU $20/SU $30/SU

Area of conversion (ha; percentage of eligible area)
0% discount rate
$15/t CO2-e 356,082 (94%) 276,971 (73%) 102,951 (27%)
$25/t CO2-e 358,129 (95%) 353,605 (93%) 102,951 (27%)
$35/t CO2-e 358,129 (95%) 355,663 (94%) 102,951 (27%)
5% discount rate
$15/t CO2-e 353,892 (93%) 245,795 (65%) 98,339 (26%)
$25/t CO2-e 358,106 (95%) 345,240 (91%) 102,951 (27%)
$35/t CO2-e 358,129 (95%) 355,629 (94%) 344,524 (91%)
10% discount rate
$15/t CO2-e 333,590 (88%) 98,339 (26%) 75,570 (20%)
$25/t CO2-e 356,082 (94%) 276,971 (73%) 102,951 (27%)
$35/t CO2-e 357,869 (95%) 344,524 (91%) 266,596 (70%)
Carbon farming with revenue from carbon only.
8 environmental science & policy 37 (2014) 1–10
Table 2 – Estimated conversion areas under different price scenarios and discount rates, comparing grazing gross margins
to combined revenues from carbon and other sources.
Starting carbon price
$10/SU
Area of conversion (ha; percentage of eligible area)
0% discount rate
$15/t CO2-e 360,471 (95%)
$25/t CO2-e 361,182 (95%)
$35/t CO2-e 361,182 (95%)
5% discount rate
$15/t CO2-e 360,605 (95%)
$25/t CO2-e 361,246 (95%)
$35/t CO2-e 361,246 (95%)
10% discount rate
$15/t CO2-e 359,458 (95%)
$25/t CO2-e 361,440 (95%)
$35/t CO2-e 361,669 (95%)
Carbon farming with revenue from ECFP, honey, and conservation programs.
benefits, a conservative scenario (using a 10% discount rate,
starting price of $15 per ton CO2-e, and expected gross margins
of $20 per stock unit) suggests that landowners in the Gisborne
District would be marginally better off if they converted up to
278,000 ha of eligible land to carbon farming. Within this area
are over 75,000 ha of erodible land eligible for the ECFP. The
addition of carbon revenue will make conversion of this
erodible land more attractive to landowners, potentially
leading to better protection of soil, waterways, and down-
stream infrastructure.
Nevertheless, reasonable expectations about farmers’
behavior would suggest that uptake will be well below the
economic potential. A sensitivity analysis that varies farm-
ers’ expectations of future gross margins creates substantial
changes in the predicted area of conversion. Farmers’ time
preference (expressed in the discount rate) also has a
large impact, partly because the rising value of carbon in
the future carries greater weight today when we apply low
discount rates. With higher discount rates, grazing repre-
sents a better option on more land, because it yields
greater value in the near term. Such variations in expressed
time preferences (in both directions) might be found more
commonly among Ma-ori landowners, who often value
benefits to future generations (sometimes leading to low
discount rates) but also face de facto institutional barriers to
capital (sometimes leading to high discount rates).
Changes in the average carbon price have a strong effect on
predictions of conversion, especially at moderate and high
discount rates. For example, at a discount rate of 0%, carbon
only outcompetes grazing on about 103,000 ha regardless of
the carbon price, but at a discount rate of 5% a change in initial
carbon price from $15 to $35 triggers an increase in conversion
by an additional 242,000 ha. The same change in initial carbon
price has a lower impact on conversion when a discount rate
of 10% is applied, triggering an additional 164,000 ha of carbon
farming (Table 1).
The addition of non-carbon revenues greatly increases the
area of land that would be retired, although the increase varies
with the discount rate. For moderate to high carbon prices and
low to moderate grazing margins, the predicted area of
Grazing gross margins per stock unit
$20/SU $30/SU
334,905 (88%) 152,479 (40%)
356,273 (94%) 355,120 (94%)
356,556 (94%) 354,690 (94%)
337,539 (89%) 152,931 (40%)
358,518 (95%) 335,120 (88%)
358,716 (95%) 354,690 (94%)
277,692 (73%) 106,790 (28%)
348,024 (91%) 263,184 (70%)
358,752 (95%) 335,394 (89%)
conversion is often greater than 70% of the eligible area, so
revenue from other sources has its greatest effect on
conversion at low carbon prices and high grazing margins.
For example, at a discount rate of 5%, initial carbon price of $25
per ton, and grazing margins of $30 per SU, revenues from
non-carbon sources would be sufficient to trigger an expan-
sion in the converted area from 102,951 ha to 335,102 ha. The
dynamics of the honey market, in particular, may play an
important role in real conversion of land use, due to the fact
that it requires little input by the landowner, it pays back on an
annual basis, and landowners could easily expand to take
advantage of increases in the market over the next few years.
Whether these short-term dynamics will stimulate the
conversion of land to forest is uncertain, but they could
strongly mitigate the problem of short-term revenue for
carbon farming.
In our model scenarios, revenue from manuka honey
becomes available immediately after setting aside clear
pasture because farmers may incorporate adjacent areas of
existing scrub, smoothing the stream of income over time and
increasing their cash flow during the period of conversion
from forest to pasture. Sophisticated landowners could use
the timing of carbon and other revenues to smooth their
income with strategic timing of land retirement to achieve a
steady stream of income from carbon credits by enrolling land
as it approaches peak sequestration rates, 15–20 years after
manuka establishment. This would reduce the impact of
enrollment costs, while allowing farmers to continue grazing
on some pastures. Enrollment in the ECFP could accelerate this
process on land eligible for that program.
Where landowners are willing to sacrifice economic
returns for the sake of non-economic benefits from forests,
the area of uptake might increase markedly. Many landowners
find value in protecting areas of native forest. The opportunity
to earn carbon credits during the process may be enough of an
incentive to make large-scale conversions worthwhile. This
raises intergenerational equity issues, because today’s owners
will benefit from selling carbon credits, but future owners
could inherit large liabilities if they decide to deforest the land.
However, if carbon prices rise as predicted by some models,
 environmental science & policy 37 (2014) 1–10
the overall benefit of carbon farming may be economically
worthwhile, especially over long time horizons – though
recent carbon prices in New Zealand have not supported this
prediction (Point Carbon, 2013). If the cultural value of forests
is high among owners – as is evident among many Ma-ori
landowners – then native forest reversion might be taken up
broadly. If it occurred over a large fraction of the available
land, the decrease in scale of farming activities in the Gisborne
District could have important implications for the District’s
tax base, as well as infrastructure and services for grazing
operations. Negative impacts of retiring land could be
mitigated, at any scale, by investing carbon farming revenues
into the intensification of production on other land. This raises
questions about leakage from these projects, but under
current rules any additional emissions from reinvestment
would not be counted as leakage.
Landowners may also find management options that are
intermediate between forestry and grazing, such as agrofor-
estry, and these could combine benefits of both management
practices. Such intermediate management scenarios might
have an added benefit of mitigating market risk and policy risk
for the revenue streams evaluated separately in this analysis.
However, the eligibility criteria for the PFSI, ECFP, and
biodiversity programs, by design, would make it difficult to
integrate these with on-going grazing. As a result, the
potential for integrated management systems in NZ is limited.
The greatest value of land-use conversion in the Gisborne
District may be in other areas besides climate mitigation. The
impact of reforestation for providing unpriced benefits from
ecosystem services may add to or even surpass the value of
forests for climate mitigation. These impacts depend largely
on the spatial location of reforestation. In erodible catch-
ments, increasing forest area may reduce sediment loading to
streams, improving water quality and freshwater habitat, as
well as reducing peak flows and sediment transport down-
stream, which affect infrastructure such as bridges and roads.
Increases in forest cover may also provide other important
biological benefits. Where new forests extend existing forests
or provide corridors between them, they may create dispersal
pathways for species to reach new habitats. However, the
biodiversity impacts of dispersal pathways and increased
forest area might not all be positive: these can also facilitate
the higher populations and greater dispersal of introduced
exotic species like the brushtail possum (Trichosurus vulpecula),
which negatively impact the diversity and health of native
forest ecosystems and can be costly to control (Jones et al.,
2012). These interactions between land cover, connectivity,
species diversity, and carbon accumulation are complex and
should provide fruitful opportunities for future research.
6. Conclusions
Identifying the spatial locations favorable for carbon seques-
tration is important for landowners making decisions about
land-use allocation, as well as for policymakers who need to
understand the land-use impacts of policy choices. In this
analysis, we demonstrated that 75,000–361,000 ha of land (20–
96% of eligible land) in the Gisborne District could earn higher
gross margins from carbon farming than from grazing, under
9
reasonable expectations. Much of this area is truly marginal
for grazing, supporting less than two stock units per ha. At the
farm level, some of this land may even be earning negative
returns, implying that land abandonment is already the best
alternative. Carbon farming, using native forest regeneration
combined with other compatible sources of revenue, offers a
financially attractive land-use option for many low-produc-
tivity pastures in the Gisborne District.
Expectations about the adoption of carbon farming under
the PFSI or other initiatives in the Gisborne District must be
framed by a variety of factors relevant to land-use decisions.
Our analysis shows substantial potential for carbon seques-
tration, due to favorable biophysical factors, including (1) rapid
regrowth rates, (2) large area of eligibility, and (3) areas with
low productivity for other uses. Under reasonable expecta-
tions for carbon prices, conversion of Kyoto-eligible land from
grazing to carbon farming could generate competitive income
on much of the eligible land area (378,672 ha), with higher
areas of conversion expected when landowners also utilize
complementary incentives.
Landowners have reasons for caution, due to scientific
uncertainties in measurements and models, market uncer-
tainties about the price of carbon, and policy uncertainties,
which could lead to a collapse of carbon markets or substantial
changes in the price of carbon. Policymakers could encourage
more certainty by standardizing and simplifying enrollment
procedures in multiple sustainability initiatives, and estab-
lishing guidelines for monitoring procedures, establishing
durable rules for trading carbon credits in order to improve
landowners’ ability to make land-use commitments based on
long-term expectations. Flexibility in commitments for land-
owners, such as rewarding temporary storage of carbon, could
also encourage participation.
Acknowledgements
The authors would like to thank Amy Rosenthal and Charles
Huang (World Wildlife Fund) and two anonymous reviewers
for their generous and thoughtful contributions to this work.
The work was supported by the Tindall Foundation (New
Zealand), the National Science Foundation (United States), and
the Sustainable Farming Fund (New Zealand).
Appendix A. Supplementary data
Supplementary data associated with this article can be
found, in the online version, at http://dx.doi.org/10.1016/
j.envsci.2013.08.008.
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