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Managing New Zealand planted forests for carbon: A review of selected

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Managing New Zealand planted forests
for carbon
a review of selected management scenarios and identification of
knowledge gaps
by James A. Turner, Graham West, Heidi Dungey, Steve Wakelin,

Piers Maclaren, Tom Adams, Paul Silcock
Commercial in Confidence
Managing New Zealand planted forests for carbon – a review of
selected management scenarios and identification of knowledge gaps
Authors: James A. Turner1, Graham West1, Heidi Dungey1, Steve Wakelin1,

Piers Maclaren2, Tom Adams1, Paul Silcock1
1.
Scion, 49 Sala Street, Private Bag 3020, Rotorua
2.
Piers Maclaren & Associates Ltd, 115 East Belt, Rangiora, Christchurch
Date: 22 September 2008

Client: Ministry of Agriculture and Forestry
Contract No: CC MAF POL_2008-09 (108-1)
Disclaimer:
This report has been produced by Scion for the Ministry of Agriculture and Forestry. All copyright is the
property of the Crown and any unauthorised publication, reproduction, or adaptation of this report is
strictly prohibited without prior permission
The information and opinions provided in the Report have been prepared for the Client and its specified
purposes. Accordingly, any person other than the Client uses the information and opinions in this report
entirely at its own risk. The Report has been provided in good faith and on the basis that reasonable
endeavours have been made to be accurate and not misleading and to exercise reasonable care, skill
and judgment in providing such information and opinions.
Neither Scion, nor any of its employees, officers, contractors, agents or other persons acting on its behalf
or under its control accepts any responsibility or liability in respect of any information or opinions provided
in this Report.
2
Table of Contents
EXECUTIVE SUMMARY ................................................................................................ 4
KEY RESULTS............................................................................................................... 4
Review of Planted Forest Management Decisions for Carbon and Carbon-Price Risk............................ 4
Modelling the Management of Planted Forests for Carbon ...................................................................... 5
Management of Planted Forests for Carbon-Price Risk ........................................................................... 5
FURTHER WORK .................................................................................................................................. 6
1. INTRODUCTION ................................................................................................... 7
1.1. Report Purpose and Organisation .............................................................................................. 7
1.2. Carbon Sequestration by Planted Forests: Key Concepts ......................................................... 7
1.3. Framework for Representing Planted Forest Management........................................................ 9
2. REVIEW OF MANAGEMENT DECISIONS FOR INCREASING CARBON
STOCKS .............................................................................................................. 14
Summary.......................................................................................................................................... 14
2.1. Literature Review Approach...................................................................................................... 15
2.2. Short- to Medium-Term Sequestration at the Stand-Level ....................................................... 15
2.3. Long-Term Sequestration at the Stand-Level........................................................................... 24
2.4. Management at the Estate-Level .............................................................................................. 31
3. REVIEW OF MANAGEMENT DECISIONS FOR ADDRESSING CARBON-PRICE
RISK .................................................................................................................... 34
Summary.......................................................................................................................................... 34
3.1. Carbon-Price Risk ..................................................................................................................... 34
3.2. Approaches to Managing Carbon-Price Risk............................................................................ 35
4. MODELLING MANAGEMENT DECISIONS FOR INCREASING CARBON
STOCKS .............................................................................................................. 38
Summary.......................................................................................................................................... 38
4.1. Introduction ............................................................................................................................... 39
4.2. Stand-Level Management Decisions ........................................................................................ 44
4.3. Estate-Level Management Decisions ....................................................................................... 55
5. MODELLING MANAGEMENT DECISIONS FOR ADDRESSING CARBON-
PRICE RISK ........................................................................................................ 60
Summary.......................................................................................................................................... 60
5.1. Introduction ............................................................................................................................... 61
5.2. Effect of Carbon-Price Risk on Stand- and Estate-Level Management Decisions................... 65
5.3. Optimal Rotation with Carbon-Price Risk ................................................................................. 85
5.4. Carbon Pooling under Carbon-Price Risk................................................................................. 89
6. PRIORITY GAPS AND WORKPLAN .................................................................. 93
Summary.......................................................................................................................................... 93
6.1. Priority Gaps ............................................................................................................................. 93
6.2. Workplan ................................................................................................................................... 98
ACKNOWLEDGEMENTS .......................................................................................... 101
REFERENCES ........................................................................................................... 102
APPENDIX A: STAND-LEVEL MODELS .................................................................. 109
Appendix A.1: Stand-Level Assumptions .................................................................................... 109
Appendix A.2: Scenario Details ................................................................................................... 115
Appendix A.3: Silvicultural Costs ................................................................................................. 116
Appendix A.4: Projected Log Prices and Specifications.............................................................. 117
Appendix A.5: Merchantable Log Grade Split ............................................................................. 118
Appendix A.6: Modelling system and flow of data ....................................................................... 119
APPENDIX B: ESTATE-LEVEL MODELS................................................................. 120
Appendix B.1: Croptypes ............................................................................................................. 120
Appendix B.2: Estate-level Model Structure ................................................................................ 123
Appendix B.3: Modelling Issues................................................................................................... 124
APPENDIX C: MODELS FOR CARBON PRICE RISK.............................................. 126
Appendix C.1: Estimating Price Risk ........................................................................................... 126
Appendix C.2: Markov Decision Process Model.......................................................................... 127
3
EXECUTIVE SUMMARY
The majority of New Zealand’s planted forests are radiata pine, with management
focused on maximising profits from timber and fibre sales through manipulating
rotation length, species, site choice, etc. With the introduction of an official carbon
market forest managers are faced with new opportunities and challenges when
including carbon in the products they produce from their forests.
The objective of this report is to identify how New Zealand planted forest
management could change to effectively manage for carbon sequestration and
carbon-price risk. This study involved evaluating existing knowledge in a literature
review, and carrying out a comprehensive stand and estate-level modelling exercise.
Results were used to identify core knowledge gaps and provide a research plan for
addressing these gaps. Study results are not, however, intended for use in an
investment analysis for a single property.
Key Results
Review of Planted Forest Management Decisions for Carbon and
Carbon-Price Risk
Management at the Stand-Level
Planted forest management decisions, such as species-site choice, stocking,
rotation, and silvicultural regime, potentially influence carbon sequestration under two
contrasting management objectives:
(i) maximising carbon sequestration over the short- to medium-term (5 to 20
years), and;
(ii) maximising carbon stocks over the longer term (60 to 100 years).
For short- to medium-term sequestration radiata pine is likely to remain the pre-
eminent species for the near future. It has excellent growth potential and low site
sensitivity. If management for carbon sequestration extends the length of rotations
there would also be utilisation advantages.
Stand stockings are likely to be maintained at a level higher than traditional practice,
but not so high as to encounter disease and climatic risk. The economics of
extending rotations to sequester more carbon is influenced by the discount rate.
Management at the Estate-level

While stand-level analyses identify a variety of management decisions that could be
used to increase carbon sequestration in a cost-effective manner, estate-level
constraints and objectives such as sustainable harvest levels and/ or cash flows,
supply commitments to mills, spatial constraints, etc., will limit opportunities to
manage a stand for carbon.
Carbon-Price Risk
Carbon-price risk is one of many risks associated with management of planted
forests for carbon. While carbon markets mature it is expected that carbon-price risk
4
will have a strong influence on carbon project decisions. There are two approaches
to managing financial (including price) risk:
(i) transferring risk to a third party, e.g., insurance or hedging, and;
(ii) pooling risky investments in a portfolio, e.g., pooling carbon credits with
other forest owners. Both are likely to involve significant costs.
Modelling the Management of Planted Forests for Carbon

The influence of carbon (within the Emissions Trading Scheme) on forest
management at the stand and estate-level was examined by modelling, as planted
forests, five forest tree species under a range of management regimes. The
modelling exercise was completed for a hypothetical corporate forest estate and farm
forestry estate in the Rotorua area.
Stand-Level Management Decisions
The major impacts of managing planted forests for carbon are potentially:
• tree species that grow rapidly with medium to high density wood favoured;
• management practices to improve growth rates, e.g., weed control, fertiliser,
better genotypes are more likely to be adopted;
• longer rotation lengths;
• stand tending for improved wood quality less favoured;
• high site occupancy/high initial growth rate (per hectare) regimes favoured
with their focus on standing volume.
Estate-Level Management Decisions
The implications of revenue from carbon in hypothetical corporate and small forest
estates were considered. In the corporate forest we also considered the impact of an
estate-level constraint; a non-declining yield. When a forest estate is managed to
maximise carbon and forestry revenues:
• rotations are extended in Kyoto forests and replanting is into the species and
regime with the highest land expectation value (LEV) when carbon is
included;
• Kyoto stands are used to smooth harvests over time under a non-declining
yield constraint as the cost of delaying harvest in Kyoto forests is less than for
non-Kyoto forests due to returns from carbon;
• the age-class distribution and proportion of the estate that are Kyoto stands
are potentially important influences on how estate-level management
decisions are affected by management for carbon.
Management of Planted Forests for Carbon-Price Risk

What process carbon-prices follow, independent or a random walk, critically
influences the conclusions drawn regarding the effect of carbon-price risk on rotation
and regime choice. When prices follow an independent process, the price today does
not depend on the price a year ago so prices are more variable in the short-term.
When prices follow a random walk, the price today is influenced by the price a year
ago, so prices are more variable in the long-term.
Stand and Estate-Level Management Decisions
The impact of carbon-price risk on stand-level management was analysed using
Monte Carlo simulation. Were carbon-prices to follow an independent price process
planted forests may be managed for:
• longer rotations, which reduce the variability in expected LEVs by reducing
exposure to short-term volatility in the carbon market;
5
• relatively lower carbon sequestration regimes which tend to have less
variable LEVs due to less exposure to short-term carbon-price volatility;
Were carbon-prices to follow a random walk these conclusions would be reversed.
Estate-level implications of carbon-price risk were analysed using portfolio
optimisation. General trends in estate-level management are:
• due to higher LEVs for carbon forestry, compared with forestry alone, an
increasing proportion of the forest estate would go into carbon forestry for
higher average LEVs, but also greater variability in LEVs;
• a forest estate with a mixture of species and regimes in forestry alone and
carbon forestry appears to be the most effective means of reducing carbon-
price risk for a desired LEV.
The impact of carbon-price risk on stand-level optimal rotation and LEV was
assessed using a Markov decision process model. Carbon-price risk increases the
length of the average optimal rotation, due to forest owners’ best decision being to
delay harvest when the carbon-price is high.
A simple example of carbon pooling suggests that deal-making among prospective
pool partners could be relatively difficult involving matching not only the physical
growth and production from individual owners' stands (and hence the credit/liability
schedules), but also the owners' risk profiles.
Further Work
A specific objective of this study was to identify priority areas for further work that
would provide knowledge, functions and models to support decision-making for the
stand- and estate-level management of planted forests for carbon. These gaps
include:
• growth models for alternative species, on a wider variety of sites, on shorter
and longer rotations;
• carbon models for alternative species;
• an integrated stand- and estate-level economic modelling system,
incorporating timber and carbon for multiple species.
6
1. Introduction
This section outlines the purpose of the study, and describes the key concepts of
carbon sequestration in planted forests. This includes necessary principals of carbon
sequestration, a framework of forest owner types and objectives, management
decisions, and the state of relevant regulations at the time of writing.
1.1. Report Purpose and Organisation

The purpose of this report is to identify how planted forests can be managed to
increase sequestration of carbon for economic benefit while recognising the risks
associated with the expected volatility in the price of carbon. A further objective is to
identify gaps in knowledge and indicate priorities for a plan of work to address these
gaps.
This section of the report introduces key concepts for the role of planted forests in
carbon sequestration and an overarching framework for describing planted forest
management, which guided our study.
The next two sections review existing New Zealand and overseas literature on how
planted forests, and forests in general, could be managed for carbon sequestration
and to address carbon price risk. Findings from these reviews were used to identify
key stand- and estate-level management decisions for detailed analysis in a
comprehensive modelling exercise.
The results of this exercise are reported in Section 4 and Section 5 (for the case of
carbon-price risk).
Section 6 identifies priority gaps in knowledge and tools and presents a plan of work
for addressing these gaps.
The final section summarises the study findings.
1.2. Carbon Sequestration by Planted Forests: Key

Concepts
In this study of the role of carbon sequestration in planted forests, several
fundamental concepts need to be recognised:
• It is the balance of the carbon entering and leaving the forest system that
determines the net effect on the atmosphere;
• The conversion of non-forested land (e.g., pasture) to forest is to move from
short vegetation to tall vegetation, with an assured gain in carbon stocks;
• It is more useful to talk of “the change in carbon stocks over an identified
period” rather than the “rate of sequestration”;
• The time interval of management is an important influence on the change in
carbon stocks, with all vegetation systems carbon neutral over the very long-
term.
The net effect of planted forests on the atmosphere is the balance of the carbon
entering and leaving the system (Maclaren 2000). All vegetation absorbs
atmospheric carbon through leaves and needles by photosynthesis. Plants also
release carbon dioxide by respiration. This is particularly the case at night, in winter,
and following a “catastrophic” event such as wind, fire or harvest activity. When
averaged over a long time period all vegetation types are “carbon neutral” in that the
outflow of carbon dioxide exactly balances the inflow. For example, the carbon stocks
in a natural alpine meadow would be much the same if measured on a given date in
successive years –vegetation has grown in the interim but it has also decayed (with
7
mainly decay fungi returning carbon to the atmosphere), with the net effect being no
sequestration.
The conversion of a non-forest (e.g., pasture) to a forest is to move from short
vegetation to tall vegetation, with an inevitable gain in the carbon stocks. Trees are
considered to be significantly better carbon sinks because they are tall, and
accumulate wood and bark, while grass is short and non-woody. There is more
carbon present in a forest, at least above ground. The below-ground component
continues to be controversial with the impacts of forest management on soil carbon
stocks being very site specific (Oliver et al. 2004).
It is more useful to talk of “the change in carbon stocks over an identified period”
rather than the “rate of sequestration”. In other words, “tonnes sequestered between
years x and years y” may be more appropriate as a unit of sequestration than “tonnes
per hectare per year” without any indication of the period to which the answer is
supposed to apply. The carbon growth of a harvested stand over many rotations can
be represented by a sawtooth graph (Figure 1.1). Any answer can apply only to a
small section of that sawtooth, because “tonnes per hectare per year” is not a useful
concept when applied over the longer term. To summarise it is therefore important to
specify the time-frame of interest.
1000
800
600
400
200
0
0 20 40 60 80 100 120
Age
1st rotation 2nd rotation 3rd rotation Multiple rotations Kauri
Figure 1.1. A time profile of carbon sequestration over 120 years. The period represents a
single 120 year rotation of kauri and four thirty year rotations of radiata pine. Decay rates of
harvested radiata pine are also illustrated (Horgan 2000).
As with a regularly harvested forest, growth of regenerating indigenous forest will not
continue linearly forever. The forest will form a mosaic of forest patches in various
scales (from an individual tree (Smale et al. 1997) to hectares) and stages of growth
or decline. New Zealand indigenous forest, particularly beech (Nothofagus spp.), is
well-known for its patchwork composition provided by periodic catastrophic events
from various factors, e.g. wind in mountain beech (N. cliffortioides var. cliffortioides)
forest (Wardle, 1984). The growth and collapse scenario therefore resembles the
sawtooth graph of a repeatedly harvested stand.
Over the very long term all vegetation systems are carbon neutral. However, we are
interested either in very short time intervals corresponding to international
8
commitment periods or in longer-term “planning horizons” such as conservation
forests. The Kyoto Protocol has a five-year commitment period while many of the
Intergovernmental Panel on Climate Change (IPCC) scenarios focus on the year
2100. In the short term (less than 20 years), we would want to choose a species that
accumulates a high level of biomass during this period. For example, species such
as Acacia spp. or Eucalyptus spp. have high volume production for the initial few
decades of growth combined with medium wood density (Miller et al. 1992,1994;
Miller and Knowles 1994).
Looking at a longer time horizon (greater than 60 years), a species that is capable of
reaching – and maintaining – very high levels of biomass per hectare is preferable.
Douglas-fir and redwood are obvious choices in New Zealand, even though their
initial growth is lower compared with many Eucalyptus spp. and radiata pine (Low
and Shelbourne 1999, Maclaren 2000).
1.3. Framework for Representing Planted Forest

Management
In preparing this report we have considered the following framework for interpreting
the influence of forest management decisions on carbon stocks (Figure 1.2).
Kyoto Agreement Qualifying stand age

Commitment period
ETS
Accounting method
RMA Compliance costs
Regional plans
FSC
Regulations
Strategic plan Species

Cash flow Supply contracts
Financial requirements
Current forest estate Multiple use
Length of ownership
Ownership structure
Owner Objectives
species
density
t C/ha
site rotation
age loss
regime stocking
volume t
protection
Management for Carbon
Figure 1.2: Framework for considering the influence of carbon trading on planted forest
management at the stand and estate-level
The lower layer of Figure 1.2 represents the influence of stand-management

decisions on carbon sequestered in the stand over time. The extent to which stand-
management can change to increase carbon sequestration is influenced by the two
layers above; forest owner objectives and regulations. Owner objectives depend on
who the forest owner is, but may include increasing forest asset value, meeting
9
supply contracts or land stewardship. Regulations place specific limits on stand and
estate-level management options and include requirements under the Resource
Management Act and the Emissions Trading Scheme.
It would be prohibitively laborious to examine each and every stand-management
decision of site, species, regime, etc. Instead we identify selected plausible
management scenarios, and analyse these. While the focus is on exotic planted
forest, the report also considers the role of managed indigenous forest in carbon
sequestration. The framework in Figure 1.1 was used to guide the identification of
plausible scenarios. In all scenarios a series of continuous commitment periods are
postulated, using the existing rules as proposed under the New Zealand Emissions
Trading Scheme (ETS) (MAF 2007).
1.3.1. Management Decisions

The lower layer of Figure 1.2 shows that in a planted forest stand carbon
sequestration approximately follows a sigmoidal curve over time. The exact shape of
this curve is directly influenced by how stand volume, wood density, and tree
mortality change with stand age. In turn, these relationships are influenced by forest
management decisions, such as species-genotype choice, site choice, rotation, initial
and final stocking, silvicultural regime, etc. For example, increasing rotation length
increases the level of growing stock and wood density, and hence total carbon
accumulated (Huang and Kronrad 2001, Boyland 2006). Increasing the final stocking
will also increase the level of growing stock and wood density, and hence total
carbon sequestered (Zhou 2001). The exact nature of the relationship between
stand-management decisions and carbon sequestration is complex. For example, the
potential to increase carbon sequestered by extending rotation lengths or increasing
final stockings is often offset by an increased likelihood of stand loss due to forest
pests, windthrow and species biology (Sommerville et al. 1989).
1.3.2. Forest Owner Objectives

There are three distinct forestry ownership groups that are likely to differ in their
carbon management objectives:
• corporate forestry;
• new investor;
• small grower/ land owner.
Corporate forestry
Corporate forestry owners already own, or manage on behalf of owners, relatively
large forest estates of predominantly radiata pine and Douglas-fir. Examples include
Carter Holt Harvey, Timberlands Ltd, Matariki Forests, Hancock Natural Resource
Group, and Earnslaw One. The management objectives of these companies are
focused on forest asset value, timber revenue and meeting supply contracts from
year-to-year. They may, therefore, seek carbon benefits within existing management
to boost overall forest growing income. However, most of the corporate forests are
likely to be non-Kyoto forests due to them being planted pre-1990 or re-planted on
existing forest land (Section 4.4 Estate-Level Management Decisions). Opportunities
for corporate forestry owners to earn carbon credits are also complicated by them not
always owning the land under the forests they manage.
New Investors
New investors are interested in purchasing marginal agricultural land to plant for
carbon, though timber may be considered to reduce the risk associated with
uncertainty in the emerging carbon market (see Review of Management Decisions
10
for Addressing Carbon-Price Risk). Examples include, Solid Energy, Fonterra, and
Roger Dickie NZ. Their management objectives are focused on providing carbon
revenue for investors or to offset emissions with a low level of risk over the near term
(five years). New investors will also want the option to sell on the investment as an
exit strategy.
Small growers/ land owners

Small forest growers and land owners are interested in planting a small portion of
their productive farmland in a variety of species (e.g., Douglas-fir, eucalypts, cypress,
redwood, natives) for carbon, and possibly timber, over the long-term (greater than
20 years). Small owners currently account for nearly 40% of New Zealand’s total
planted forest area (NZFOA 2008). They have a wide variety of management
objectives, with revenue from carbon and timber a lower priority than sound land use,
sustainable land management practices, and boosting farm income (Morey 1986).
There are obviously other important ownership groups, including local and central
government, and Maori land trusts. These groups potentially have similar objectives
to one or more of the above. For example, Maori land trusts are likely to focus on
forest asset value, timber revenue and meeting supply contracts, along with long-
term economic, cultural and environmental benefits.
1.3.3. Regulations: Emissions Trading Scheme

Under Kyoto (and the Emissions Trading Scheme, ETS) a forest is a block of land of
at least one hectare where the average tree-covered width of the block is 30 m, and
with a tree crown cover of 30% or more with species capable of reaching at least five
metres (Maclaren 2008). As carbon sinks, planted forests are covered by both
articles 3.3 and 3.4 of the Kyoto Protocol1. Currently, New Zealand has opted only for
article 3.3, which covers forest planted onto non-forested land post-1989.
The ETS2 is best described in terms of how forests were established during three
critical periods:
• pre-1990;
• post-1989 (Kyoto forest);
• post 2008.
The definitions of these three forest types are given below.
Pre-1990 Forests
Currently the management of pre-1990 forests is an issue of land-use change. For
this study, we do not consider these forests, as changes in their management (other
than conversion to non-forest use) are not covered by the ETS. If New Zealand
adopts Article 3.4 of the Kyoto Agreement, the management of these forests would
need to be considered.
Currently the ETS affects the management of these forests in the following ways
(Maclaren 2008):
1
Article 3.4 provides a basis for claiming emission credit units on the basis of 'additional' sink
activities, as a result of the management of pre-1990 (non-Kyoto) forests, since 1990. Management is
defined as "a system of practices for stewardship and use of forest land aimed at fulfilling relevant
ecological (including biodiversity), economic and social functions of the forest in a sustainable
manner." It is not mandatory for countries to account for Article 3.4 activities in the first commitment
period 2008-2012 (NZCCP 2001).
2
Here we focus on the Emissions Trading Scheme, ignoring the Permanent Forest Sink Initiative
(PFSI) regulations.
11
• There are no liabilities at harvest as long as land is replanted into forest within
four-years of harvest or 30% crown cover is reached within 10 or 20 years for
exotic and native forest, respectively;
• Liability at harvest if converting from forest to another land use. Liability is
equal to the value of the carbon in the material removed from the site at the
time of harvest (Cairns 2008). In 28-year old radiata pine this could be 800 t
per ha, which is $16,000 per ha for $20/t CO2-e;
• Currently eligible for free allocation of 39 credits per ha (Cairns 2008), worth
approximately $780 per ha for $20/t CO2-e;
• If total forest area is less than 50 ha, owners can apply for exemption from
liability and free allocation (Cairns 2008).
Post-1989 Forests
Owners of land with planted forests up to 18 years-old have the option of entering the
ETS and earning carbon units equal to the carbon sequestered from 1 January 2008
(Cairns 2008). At harvest the land owner will repay the number of carbon units equal
to carbon sequestered from 1 January 2008. This is the Fast-growing Forest Fix,
which ensures no one pays more debits for harvesting than credits they earned
during the first five-year commitment period (CP1; Maclaren 2008).
There are a number of stand- and estate-level management issues associated with
the ETS regulations, including (Maclaren 2008):
• Costs are unknown, but include registration (probably low), measurement and
certification fees (possibly thousands), and insurance costs3;
• The option to sell some credits and bank others for future commitment
periods post-31 December 2012;
• “Risk-free credits” could be sold. These range from
o approximately 240 t per ha (for radiata pine), which is equal to the
proportion of carbon that remains on site after logging (Fig. 1.3) to,
o to potentially 370 t per ha (for radiata pine), which is half of the carbon
stocks in a stand that is part of a pool of stands in a normal forest4;
• Because no credits can be earned for sequestration prior to 2008, stands that
had 240 t per ha at 1 January 2008 have no “risk-free credits”;
• Managing for carbon-price risk in these forests is likely to be important,
particularly because of the possibility that the future carbon price has risen to
an extent that the carbon liability at harvest exceeds stumpage revenue
(Cairns 2008).
3
The issue of carbon insurance for forests is discussed in Review of Management Decisions for
Addressing Carbon-Price Risk. Currently carbon insurance is not available (Maclaren 2008).
4
A normal forest has an even balance of age-classes so that the harvest in one stand is exactly balanced
by growth in all the other stands (Buongiorno and Gilliess 2003)
12
1.4
1.2
Carbon Sequestered (000t CO2-e/ ha)
1.0
.8
.6
.4
.2
.0
0 20 40 60 80 100 120
Years since planting
Figure 1.3: Carbon sequestered in a typical stand of radiata pine. Arrow shows the “risk free
carbon”.
Post-2008 Forests
New forest established post-2008 is eligible for a subsidy under the Afforestation
Grant Scheme (AGS). The scheme could provide $1,500 per ha. After 10-years there
is no liability for land-use change (Cairns 2008). Establishing a post-2008 forest is
thought to be a suitable option if (Cairns 2008, Maclaren 2008):
• Area of forest is large, e.g., greater than 100 ha;
• More than one age-class in the forest;
• Strategies exist to manage carbon-price risk.
In this study we consider the following strategies for carbon sequestration with post-
1990 forests:
• Stand-level and estate-level strategies by corporate, investor and small forest
owners for increasing carbon sequestered in CP1 and subsequent
commitment periods;
• Stand-level management options for increasing carbon sequestered in
planted forests established post-2008.
13
2. Review of Management Decisions for Increasing
Carbon Stocks
Summary
Based on a review of New Zealand and international literature this section outlines
the forest management decisions that potentially influence carbon sequestration in
planted forests. Findings are grouped under two categories, based on contrasting
management objectives:
• Maximising carbon sequestration over the short- to medium-term (5 to 20
years);
• Maximising carbon stocks over the longer term (60 to 100 years).
For these two management objectives, the implications of forest management
decisions, at both the stand- and estate-level, were considered.
Species-Site Choice
Of the example species considered here for short- to medium-term sequestration
radiata pine is likely to remain pre-eminent, because:
• it has excellent growth potential and low site sensitivity;
• if management for carbon sequestration extends rotation lengths there would
be utilisation advantages.
There are, however, some biotic risk-management issues for radiata that need to be
addressed, particularly as radiata pine is grown over large areas with differing
climates.
Of the other example species considered, eucalypts are potentially favourable,
particularly E. fastigata which:
• has some of the highest mean annual increments of the eucalypts even
though its initial growth may be slow;
• has relatively low site sensitivity growing on a good range of New Zealand
sites;
• is remarkably unaffected by pests and diseases;
• has good suitability for solid-wood products.
However, there remains a shortage of solid published data on this species.
Of the examples of species for long-term carbon sequestration considered here

Douglas-fir is potentially favourable because:
• it is capable of reaching growing-stocks of over 2 000 m3;
• is more wind and snow-stable than radiata pine, so it is better suited to
southern latitudes and high-altitude sites;
• timber market opportunities are also good.
Other important stand-level management decisions influencing carbon sequestration

are higher stockings and longer rotations. With the choice of stocking a compromise
needs to be sought where stand stockings are maintained at a level higher than
traditional commercial practice but not so high as to encounter disease and climatic
risk problems. With longer rotations, the discount rate is an important influence on
the economics of extending rotations to sequester more carbon.
Management at the Estate-level

Stand-level analyses identify a variety of management decisions that could be used
to increase carbon sequestration in a cost-effective manner. However, estate-level
constraints and objectives such as sustainable harvest levels and/ or cash flows,
14
supply commitments to mills, spatial constraints, etc., will limit opportunities to
manage a stand for carbon.
2.1. Literature Review Approach

The forest owner management objectives for carbon are of critical importance (Figure
1.2). If the objectives are to meet international or domestic reporting requirements, or
to make money from the sale of credits, short-term species and associated forestry
regimes (5 to 20 years) might be favoured. Alternatively, if the forest owner is
conscious of the limited availability of land for afforestation, management of planted
forests for “high levels of standing carbon” might be adopted (60 to 100 years).
In this review, management of planted forests for carbon stocks is addressed under
two categories, based on contrasting objectives:
• Maximising carbon sequestration over the short- to medium-term (5 to 20
years);
• Maximising carbon stocks over the longer term (60 to 100 years).
For these two scenarios, the implications of forest management decisions, at both
the stand- and estate-level, are considered in the following key areas:
• Species and site choice;
• Management regime
o Rotation
o Stocking
o Silvicultural treatments;
• Practices for increasing forest productivity;
• Timber production – ability to offset carbon liabilities at harvest with stumpage
revenue and a mix of timber and non-timber stands;
• Age-class distribution – wood and carbon flows.
2.2. Short- to Medium-Term Sequestration at the Stand-

Level
2.2.1. Species-Site Choice
If the objective is to deliver the maximum quantity of carbon sequestered in the
shorter term, the choice of species and site (at the landscape and microsite levels) is
paramount. For example, the attractiveness of afforestation for carbon sequestration
in Canada was found to be highly sensitive to stand growth and yield, along with the
opportunity cost of agricultural land (McKenney et al. 2004).
With radiata pine, the best growth is in the northern half of the North Island at lower
altitudes, on sloping and well-drained ex-farm sites with a history of intensive
agriculture (Figure 2.1a). Lower altitudes and warmer temperatures will also yield
wood of higher density (Maclaren 1993).
15
(a) (b)
Figure 2.1: Productivity maps for radiata pine (a) and Cupressus lusitanica (b) grown in New
Zealand
For Cupressus lusitanica productivity is influenced by potential root depth, soil

fertility, frost, and date of planting (Watt and Palmer, unpub.) (Figure 2.1b). In the
case of Douglas-fir, productivity increases with rainfall, but not necessarily with
temperature. Also, unlike radiata pine, wood density of Douglas-fir is not closely
correlated with temperature, and the altitudinal growth limit is much higher (Maclaren
2008).
Radiata pine, known for growing well on a wide range of sites, performs well,
compared to other tree species, in large-scale afforestation of highly-variable
landscapes. Species other than radiata pine tend to have more specific microsite
requirements (Legard et al. 2005, Watt and Palmer unpub.). While the productivity of,
for example Acacia dealbata or several eucalypt species will clearly outperform
radiata pine on some sites (Miller et al. 1992, McKenzie and Hay 1996) these sites
tend to be limited in extent in the traditional forestry areas.
While specific site requirements for many of the alternative major exotic species is
reasonably known, it is difficult to apply specific species-site matching to large-scale
afforestation programmes on a landscape scale. In addition, many site requirements
16
for species other than radiata pine are circumstantial and require further research.
While the productivity in permanent sample plots (PSPs) may be well described, the
soil and climatic features are often not. The recent development of a provisional site
and productivity map for C. lusitanica determined important features for siting (Watt
and Palmer unpub.).
As well as the complex choice of species, within each species there are many
provenances, varieties or genotypes. Some may be quite unsuitable. In the case of
radiata pine, the breeding programme has produced some high-volume breeds and
also some high-density breeds, with these two traits being negatively correlated.
Examples of candidate species for short- to medium-term sequestration of carbon
are:
• Radiata pine;
• Eucalyptus spp.;
• Poplars.
Radiata pine5
Growth
Radiata pine grows faster over the first 20-30 years than any other conifer in New
Zealand. It rapidly forms a closed stand and maintains a high rate of stem production.
For highly stocked stands, the single greatest mean annual increment (MAI) for
radiata pine has been reported to be 52 m3 per ha per year at age 25 and the
greatest standing volume of 1743 m3 per ha at the age 47.5 (Frew 1999). Another top
site trial showed that at age 27 the high stocking plots (400 stems per ha) had a
standing volume of 1038 m3 per ha with an MAI of 38.4 m3/ha/yr. This, converted to
Productivity 300 Index, equals 814 m3/ha and an MAI of 25.6 m3/ha/yr.
On typical sites, the average recoverable volume for radiata pine is 486 m3 per ha at
age 27 with an MAI of 18.0 m3 per ha per year (Figure 2.2). The longevity of radiata
pine varies widely. Some trees have been found to be healthy at 130 years, whereas
in warmer parts of the country and in wet or seasonally wet soils, a high proportion of
trees may be decadent by 60 years of age (Burdon and Miller 1994).
5
This and subsequent sections on individual planted forest species are based on Maclaren (2004)
“Realistic alternatives to radiata pine in New Zealand – A critical review”.
17
Figure 2.2: Volume yield curves of pruned radiata pine for nine growth model regions (Paul et
al. 2008)
Site Requirements
Radiata pine performs well over a wider range of New Zealand sites than almost any
other exotic tree species, and almost wherever it succeeds it greatly outperforms all
other conifers. Productivity of radiata pine tends to fall markedly as annual rainfall
drops below 1000 mm. An annual rainfall of 500 mm is often too low for commercial
planted forests. High rainfall, however, increases the risk of foliage diseases (Burdon
and Miller 1994).
Radiata pine is unsuitable for plantations at high altitudes above 900 m in central
North Island trailing off to 300 m in the far south, due to snow damage. Frost and
drought can both cause high mortality in the first year or two after planting, but can
be minimised by good establishment practice.
Radiata pine does not tolerate very wet soils, and even temporarily high water tables
can be harmful. Nutrient requirements for radiata pine are modest but still rather
higher than those of most other pines. Growth can be poor on soils low in available
phosphorus and nitrogen (Burdon and Miller 1994). Radiata pine may be blown over
by strong winds on very wet or exposed or gravely sites, especially after heavy
thinning.
Climate Risk
Radiata pine is very resistant to drought and moderately resistant to frost, but can be
easily damaged by strong winds or wet snow (Burdon and Miller 1994). Snow
damage (and to a lesser extent frosting) can be avoided by careful siting, whereas
wind damage can be a problem in most parts of New Zealand. The fact that the
species has been grown for several rotations throughout New Zealand, with minimum
overall impact from climatic events, is testimony to the fact that – at least at a
national scale – this risk can be categorised as low.
18
Pests and Diseases
Pests and pathogens currently in New Zealand are either not of major economic
importance or can be controlled easily (for example, by spraying with copper
oxychloride for Dothistroma needle-blight). Overall radiata pine suffers less from
pests and diseases than most of the leading alternative candidate species for planted
forests in New Zealand. There are a number of threats present in other countries, but
it is not known how these will react under New Zealand conditions. For example,
pitch canker and Western gall rust could be devastating to the radiata pine resource,
but may need a foreign vector to spread the disease.
Market Risk
Radiata pine has a wide range of market uses. It is satisfactory or excellent in
products as diverse as plywood, framing timber, barn-poles, reconstituted boards,
newsprint, mouldings and furniture. It is a major commercial species in four
continents and now has considerable market recognition throughout the world. For
some purposes, particularly external uses, it is not durable and requires chemical
preservative, but is easy to treat if it is socially acceptable to do so. Its light-coloured
wood is currently an advantage – light woods can be stained darker, but not vice
versa.
The versatility of the species implies that market risk is low. As long as there
continues to be a worldwide demand for wood, relative to substitutes, we can be
fairly confident that radiata pine can claim a share of that market.
Eucalyptus spp.
Growth
The potential radiata pine-like growth rates of the faster-growing eucalypts and their
wood and utilisation properties have made them attractive to growers on a wide
range of sites. Eucalypts have been widely planted in New Zealand, and have
frequently grown well, although species performance and growth have very often
been patchy and unpredictable. The typical rotation age for eucalypts grown for solid-
wood products is 35 to 40 years. E. nitens is being grown mainly on a 15-yr
pulpwood rotation. The best growth is obtained when species are matched well to
site. Examples of stand growth data are presented in Tables 2.1and Table 2.2.
Table 2.1: Examples of stand growth data from sample plots in various locations (Miller et al.
1994)
Age Stocking Volume MAI
Species Location 3 3
(yr) (stems/ha) (m /ha) (m /ha/yr)
E. fastigata Kaingaroa 63 133 1230 21.3
Hunterville 61 730 1614 26.5
Marlborough 55 350 1072 19.7
E. regnans Waitati 60 486 726 12.1
Rotoehu 32 250 1226 38.3
Esk 22 105 445 20.3
E. obligua Waipoua 38 500 1188 31.3
E.
Esk 22 120 418 19
delegatensis
Whirinaki 28 524 713 25
Longwood 43 600 946 22
19
Table 2.2: Growth of E. regnans at different ages in Kinleith Forest (Miller et al. 1994)
3 3
(yr) (s/ha) (m /ha) (m /ha/yr)
4 2050 103 25.7
7 1850 371 53
10 1075 537 53.7
13 1300 542 41.7
17 1250 854 50.2
20 900 544 32.3
20 610 920 51.8
The growth rates of ash eucalypts are comparable to those of radiata pine. Growth
data from two sites (Kaingaroa and Esk) in Table 2.3 compare the volume growth of
ash eucalypts and radiata pine. Although growth of the pine was ahead of, or similar,
to that of eucalypts at age 13, by the age 22 the volume growth of the eucalypts was
greater.
20
Table 2.3. Comparison of ash eucalypt and radiata pine growth on two sites (under sawlog
regime) (Miller et al. 1994)
Location Species 3 3
(yr) (s/ha) (m /ha) (m /ha/yr)
Kaingaroa 39 E. fastigata 183 724 18.5
radiata pine 193 514 13.2
Esk 13 E. regnans 120 182 14
E. delegatensis 130 196 15
Esk 22 E. regnans 105 509 23.1

E. delegatensis 120 215 23.3
Site Requirements
There are two primary groups of eucalypts planted in New Zealand, the Ash Group
(Miller et al. 1994) and the Stringybark Group. The ash eucalypts have generally
been planted in the cooler parts of New Zealand, but where winter ground
temperatures do not fall below -8ºC.
There are hundreds of species of eucalypts (Brooker and Kleinig 1994, 1999) and
each has its own particular site requirements. Matching site to the climatic and soil
factors of the natural range of eucalypt species are likely to bring the best results. In
general, however, eucalypts do best in free draining soils and frost free areas due to
sensitivity of seedlings to frosts, particularly out of season frosts. Siting maps for
eucalypts are based on ground frost days (Nicholas 2008). However, frost tolerant
species do exist. E. nitens is one of the most cold-tolerant eucalypts, and is widely
planted in Southland.
Climate Risk
Wind is not as big a problem as it is with radiata pine, with the ash group the most
wind-resistant. Shoots can be very brittle and may break in strong winds, so shelter
can be very important (Miller et al. 1992, Miller et al. 1994). As many eucalypts are
also susceptible to drought and fire, climate risk for eucalypts can be considered
medium, although this is species dependent (Miller et al. 1994). Increasing humidity
is likely to increase susceptibility of eucalypts to fungal disease, particularly leaf
pathogens.
Pests and Diseases

Eucalypts in general are at great risk from pests and diseases. The physical
proximity of New Zealand to Australia means that more pests and diseases will arrive
naturally, usually through extreme wind-flow events. Biological control is likely to be
needed on unpredictable pest- and disease introductions in the future. A number of
fungi, such as Mycosphaerella, affect eucalypts by causing leaf spotting, but most
are not significant. In New Zealand, the most significant leaf pathogen is septoria leaf
spot on E. nitens, which can cause significant damage in warmer, moist areas.
Insects that attack eucalypts in New Zealand include pinhole borer, larvae of various
wood-borer, gum-leaf skeletoniser, and tortoise beetle. Eucalypts are also
susceptible to browsing by rabbits, hares, kangaroos, possums, deer and stock. On
21
older trees bark rubbing and stripping by deer can be a problem, as well as branch
breakage and leaf stripping in the tree crowns by possums. Generally, risk from pests
and diseases can be considered high (Miller et al. 1994).
Market Risk
Market risk is considered to be medium as eucalypt sawlogs pose many conversion
problems; eucalypts generally must be quarter-sawn. There is also a limited planted
forest resource of good timber eucalypts. Pulp prices are low and both sawn timber
and pulp are facing fierce global competition. Good sawing technology and know-
how will overcome the former.
Poplar
Growth
Poplars include the fastest-growing group of commercial species in North America
and have reached yields of 140 m3 per ha without irrigation at age four (2 700 stems
per ha) (Wilkinson 1994). In Washington, plantations have produced more than 500
m3 per ha in 24 years. In New Zealand, yields of 400 m3 per ha at 20 years can be
expected on good sites. Table 2.4 shows approximate volume growth data for New
Zealand grown poplar.
Table 2.4. Approximate total volume growth for wide-spaced (200 stems/ha) poplars in New
Zealand (Wilkinson 1994).
Volume (m3/ha)
Age Good site Medium site Poor site
(years) (river berm) (erosion control plantings) (hill country)
10 173 104 55
15 302 181 96
20 401 240 128
25 467 281 149
30 507 305 161
Site Requirements
Poplars can survive a wide range of environments, but they grow best on moist valley
bottoms and lower hill slopes. Poplars are not very drought resistant, and require at
least moderate soil moisture, maintained by regular rainfall or irrigation of at least
20 mm per week throughout the growing season (Wilkinson 1994). They also grow in
lower rainfall areas provided that the water content of the soil is high and the water
table is ‘live’. Poplars do not, however, grow well in poorly drained swampland.
Poplars respond well to weed control, irrigation and nitrogenous fertilisers. They can
tolerate more than -30 ºC ground frost in their deciduous state but may suffer
growing shoot/tip damage caused by late spring and summer frosts.
Climate Risk
Poplars are not very drought resistant and they may suffer shoot damage if frosts
occur in late spring and summer. Poplar can not tolerate high winds and may lose
branches easily, making the tree susceptible to blackheart infection, which is bad
22
news for the solid-wood products that should result from extending rotations. With
correct clone and site selection, however, these risks can be reduced.
Pests and Diseases

Possum damage and leaf rusts are major threats for poplars, which underlines the
need for selecting cultivars that are resistant to both. Even then, there is substantial
risk that existing rusts could mutate within the lifetime of a tree and new diseases
could be introduced. Also any fungal disease that infests Australia is very likely to be
blown over to New Zealand. For these reasons the risk of pests and diseases can be
considered high (Wilkinson 1994). There are a limited number of species and clones
of poplars in New Zealand. With this limited genetic resource there is the additional
risk of population failure due to pest and disease susceptibility. If wide-scale planting
of poplars is required, a more robust population should be introduced and selected
for New Zealand conditions.
Market Risk
Poplar market risk can be considered high as current markets are small and better
options are available. Poplar is competing mainly with radiata pine and is lacking
intrinsic wood properties that would give it an edge over radiata pine. It has been
speculated that China, which is familiar with poplar, has a huge export potential, but
as radiata pine has recently been accepted in its building code, it might be possible
that these traditional attitudes will change to favour radiata pine over poplar.
2.2.2. Regime Choice

One of the main influences on short- and medium-term carbon sequestration is
stocking (Zhou 2001, Mead 2005), meaning the area occupied by trees, in terms of
trees per hectare or basal area per hectare. Stands with a high stocking rate ensure
more rapid and complete site occupancy, reaching maximum MAI and higher
volumes sooner (Mead 2005).
The effect of stocking is obviously more important on shorter rotations. Stocking
levels have been found to have a 10% to 75% impact on productivity gains for short
rotations, but only 10% to 25% for long rotations (Mead 2005).
Traditional commercial forest management practices, however, decrease the MAI
(Mead 2005). Lower stockings and silvicultural treatments, such as pruning or heavy
thinning, are used to achieve large individual tree diameters, which reduce harvesting
costs and increase log price. Conversely, the economic advantages of higher stand
stockings, decreased frequency and intensity of thinnings, and later thinnings, are
greater with higher carbon returns relative to timber returns (Zhou 2001, Gutiérrez et
al. 2006).
There are, however, several practical difficulties with high stocking regimes:
• high initial stockings are expensive to establish, and so land tends not to be
fully occupied for the first few years (Shepherd 1986), though this difficulty
could be addressed with afforestation grants;
• total peak volume decreases with stocking density (Shepherd 1986);
• high stockings can lead to unhealthy competition and, at worst, windthrow
(Ledgard and Maclaren 1999; Thürig et al. 2005);
• very tight stockings will increase certain risks of diseases and pests, with a
practical upper limit of 3 000 stems per ha for pine suggested by some.
(Shepherd 1986);
• suppression and death of subdominant trees will waste forest productivity; the
carbon is returned to the atmosphere or increases the amount of carbon
23
sequestered in the soil (Selig et al. 2008), although this is not accounted for
under current legislation;
• successive thinning regimes to maintain stand health are expensive and open
the stand to the possibility of wind damage immediately following thinning
(Gardiner et al. 1997).
Other practical limitations to consider include individual-tree habit and growth rate,
tree mortality patterns, planting stock type and planting methods, weeding practices,
rotation length, harvesting systems, nutrient removal, and cost structures (Mead
2005).
In summary, a compromise needs to be sought where stand stockings are
maintained at a level higher than traditional commercial practice, but not so high as
to encounter the above problems.
2.3. Long-Term Sequestration at the Stand-Level

2.3.1. Species-Site Choice
If the objective is not to maximise the carbon removed from the atmosphere within a
few decades, but to achieve the greatest benefits possible for a given estate of land,
a different range of solutions should be considered. Forests with high standing
volumes (biomass) are best for maximising carbon storage over the long-term.
Even if the peak biomass is unsustainable (because stands are harvested, are
windthrown, or collapse from senescence), maximum carrying capacities from
existing mature stands should give some indications of the most promising
combination of site, species and regime. The maximum biomass achieved by radiata
pine was identified by Shula (1989) at 2188m3 per ha (stand age 39, 1368 stems per
ha in Karioi Forest), and for Douglas-fir was 2059 m3 per ha (stand age 52, 860
stems per ha, at Glen Lyon near Lake Ohau in Canterbury) (N. Ledgard, pers comm.)
Redwood (Sequioa sempervirens) may be capable of standing stocks of more than
1804 m3 per ha (age 86, at the Long Mile, Whakarewarewa Forest) (Knowles and
Miller 1993).
Because they are relatively slow starters, indigenous species do not initially compare
well to radiata pine and alternative exotics in the short term, i.e. they do not have
early high biomass growth (Bergin and Gea 2007). However, in the longer-term, it is
possible that indigenous species such as totara and kauri could sequester higher
amounts of carbon for longer because of they are longer-lived species and have the
potential to grow large. There has been very little research effort in this area and
essentially this assumption is circumstantial (Bergin and Kimberley 2003).
It is important to recognise that fast growth is typically not associated with high
standing volumes. Eucalypts, for example, are fast growing, but being “crown shy”
(McKenzie and Hay 1996) do not reach the high basal area levels of the conifers.
Other species (Black Walnut, Blackwood) are also well known for their high value per
tree, but their standing volumes are meagre (Nicholas and Brown 2002).
In addition to choosing tree species with high biomass potential, breeding for
biomass is also possible. Most species have heritable variation for both high growth
and density, which would indicate that breeding for biomass is possible and would
make gains. Silvicultural regimes would need to be developed to allow maximum
carrying capacity for a given site for the breeds developed. Silvicultural regimes could
not be assumed, as different breeds have a different ability to cope with high
stockings.
24
Examples of species possibly suitable for longer term sequestration that were
considered in this study are:
• Douglas-fir;
• Redwoods;
• Cypresses.
Douglas-fir6
Growth
Douglas-fir can produce large volumes of timber but is considered to be a late
developer compared with radiata pine. A typical rotation age for Douglas-fir is around
45 years compared with 27 years for radiata pine. Volume-growth in Douglas-fir is
relatively slow for the first part of the rotation until about age 30 years. Average
(thinned and unthinned) recoverable volumes by age are presented in Table 2.5.
Table 2.5: Average yield and mean annual increment (MAI) of Douglas-fir in New Zealand
(Miller and Knowles 1994).
Recoverable
Age MAI
volume
(Years) (m3/ha) (m3/ha/yr)
10 103 10.3
20 229 11.5
30 410 13.7
40 609 15.2
50 843 16.9
60 959 16.0
Fully stocked areas of Douglas-fir in Otago have been reported as having a volume
of over 2000 m3 per ha on 880 stems per ha with an MAI of close to 40 m3 per ha.
Other recorded top sites include (Miller and Knowles 1994):
• a 61-year old stand in Nelson that had 1500 m3 per ha on a stocking of 560
stems per ha;
• a 52-year old stand in central North Island had 1950 m3 per ha at an altitude
of 880 m;
• a 105-year old stand in Canterbury had 1 700 m3 per ha at a stocking of only
104 stems per ha.
Site requirements
Douglas-fir grows well over most areas that receive moderately high rainfall (1000 to
1500 mm annually) and the growth is generally best on moist, free-draining,
uncompacted soils (Miller and Knowles 1994). Altitudinal limits for good growth in
Douglas-fir have been given as 900 m in the North Island and 750 m in the South
Island. However, there are sites where Douglas-fir is growing commercially
productive well above 800 m and up to 920 m. In general, Douglas-fir is often the
best species for more moist areas of high country due to its tolerance to snow and
lower winter temperatures (Miller and Knowles 1994).
6
This and subsequent sections on individual planted forest species are based on Maclaren (2004)
“Realistic alternatives to radiata pine in New Zealand – A critical review”.
25
Climate risk
Douglas-fir is substantially more wind and snow-stable than radiata pine. In areas
where air drainage is poor and cold air-ponding occurs, or where severe frost occurs
at the same time as when seedlings are flushing, soft foliage may be killed and buds
and bark may be damaged. With selection of good sites, however, this can be
avoided. It is recommended not to plant Douglas-fir on flat areas where there is no air
drainage. Drought is probably the most serious climatic threat for Douglas-fir before
canopy closure; thereafter it is remarkably drought-tolerant.
Pests and diseases

For Douglas-fir, the main disease of concern is Swiss needle-cast fungus. This
disease parasitises the needles of Douglas-fir and may cause chlorosis and
premature defoliation of older needles. Where Douglas-fir has been planted as an
exotic, as in New Zealand, a significant reduction in growth has been associated with
Swiss needle-cast fungus. Its effect has been greatest in older, unthinned stands in
warmer, humid areas.
The loss of productivity due to Swiss needle-cast has been reported to be at least
25% and in extreme cases even 40% (Miller and Knowles 1994). These results
reflect a complex of influences, including insect defoliators, and are not solely
attributable to the needle-cast fungus. Good management, including the use of
appropriate genetic material, careful siting and lower-stocking silvicultural regimes
(conflicting with higher stockings for carbon) should partly offset the productivity loss
due to Douglas-fir defoliators.
Market risk
Although Douglas-fir is occasionally used for visual appearances, its main market is
for structural uses. As global (mainly Pacific) markets for Douglas-fir are enormous
and Douglas-fir supply from North America is quite likely to drop due to
environmental issues, market risk for Douglas-fir can be considered low (Ilmonen and
Turner 2008).
Redwoods
Growth
There are two redwood species that are of interest to New Zealand: coast redwood
(Sequoia sempervirens) and giant sequoia (Sequoiadendron giganteum). Coast
redwood is long-lived and grows taller than any other conifer in the world. The oldest
redwood found so far, determined by growth ring counts, is nearly 2,200 years old. In
their natural stands, coast redwood and giant sequoia both reach extremely large
sizes. The largest stands occur in North America where coast redwoods regularly
attain heights of 60 m to 100 m and have reached 112 m, with volumes of up to
14 000 m3 per ha. In France, MAIs of 30 to 40 m3 per ha per year are common with a
reported maximum of 54 m3 per ha per year. In New Zealand MAIs of 20 to 30 m3 per
ha per year are common and a maximum of 55 m3 per ha per year has been
reported. Coastal redwoods can readily attain heights of 35 m and diameters
exceeding 65 cm at 50 years. Recorded yields of coast redwood are shown in Table
2.6.
26
Table 2.6: Yield and mean annual increment of coast redwood in Rotorua and Southland
(Knowles and Miller 1994)
Location
(year) (stems/ha) (m3/ha) (m3/ha/yr)
Rotorua 47 203 - 17.3
57 987 19.1
68 1300 19.1
78 1539 20
86 1804 21
West Otago 57 321 351 6.2
66 612 9.3
74 969 13.1
Others 80 - 2945 36.8
95 - 2049 21.5
Site requirements
Coast redwood seems to thrive best in sheltered inland localities such as valley
floors, gully bottoms and river flats with deep, fertile, moist but well-drained soils,
relatively high humidity, and reasonably high, well-distributed rainfall. It has done
particularly well on such sites in the northern half of the North Island (Knowles and
Miller 1993). It is especially sensitive to climate and site factors when young
(vulnerable to out-of-season frost, drought and wind). Successful growth has been
observed in altitudes up to 500 m in the North Island and up to 300 m to 400 m in the
South Island.
For giant sequoia, there is little information regarding establishment or response to
sites in New Zealand. In general it has established well in some trials in the South
Island where there has been good shelter and adequate soil moisture. There has
also been successful establishment of specimens or shelterbelts in very dry areas
without shelter (Knowles and Miller 1993). In Europe, in its natural habitat, the giant
sequoia tends to grow best on slopes with good air and soil drainage. It is more
tolerant of climatic extremes than coast redwoods and also tolerates greater
exposure and drier soils.
Climate risk
Coast redwood seedlings can be damaged by severe out-of-season frost and wind is
a major limiting factor on growth. Coast redwood is also badly affected by drought,
especially in the summer, as it has no root hairs or tap roots. For these reasons,
climate related risks can be considered medium.
Pests and diseases

Redwoods are generally healthy species and have a high degree of immunity to fatal
attacks by fungi or insects. However, New Zealand native termite and huhu beetle
can be considered as possible pests of significance as they can enter the dead heart
wood through dead knots. These knots can be minimised through the careful strategy
of thinning and pruning. Overall, the pests and diseases risk can be considered low.
27
Market risk
Markets for redwood are currently very limited and demand is mainly concentrated to
California. Even though the demand has been relatively large in California, it might
be risky to base an industry on a single market. Considering the area, the possibility
of redwood becoming unfashionable due to environmental awareness is possible. In
the case of a shrinking Californian market however, selling redwood to other regions
might not be a problem due to its intrinsic properties, especially the stability of its
heartwood in service, which would possibly maintain world demand. Another factor
that might pose a problem in the market is poor durability of New Zealand-grown
redwood. However, this could be solved by characterising the current resource and
selecting and planting clones for durability and density, to avoid developing a
reputation that New Zealand redwood decays rapidly.
Cypresses
Growth
Out of all cypress species, C. macrocarpa (‘macrocarpa’) and C. lusitanica
(‘lusitanica’) currently hold the greatest commercial potential. On fertile, sheltered
sites in New Zealand C. macrocarpa readily attains a top height of 30 m, and
diameters exceeding 50 cm, within 40 to 45 years. At the same age and on good
sites, C. lusitanica may reach heights of 30 m and diameters of 50 to 70 cm (Knowles
and Miller 1994). Current growth models have shown that volume productivity of C.
macrocarpa and C. lusitanica can, depending on the regime and site, reach volumes
of up to 1200 and 1000 m3 per ha at 35 years, respectively. However, site sensitivity
of volume increment must be an important concern. C. macrocarpa and C. lusitanica
mean annual volume increments by geographic region are presented in Table 2.7.
28
Table 2.7. C. lusitanica and C. macrocarpa sample plot count, maximum age and mean
annual increment by geographic region of New Zealand.
C. lusitanica C. macrocarpa
Max.
Region No. Max. No. Max. Max. MAI
MAI
Plots age (m3/ha/) Plots age (m3/ha/yr)
Northland 34 41 19.3 4 42 17.2
Auckland 6 8 11 - - -
Bay of Plenty 47 41 24.6 20 39 15.6
Waikato 33 67 19.8 23 61 22.6
Gisborne 20 31 20.3 3 4 6.3
Hawkes Bay 10 28 26 - - -
Taranaki 1 32 19.6 1 33 29.3
Wanganui 3 31 17.5 10 34 20.0
Wellington 3 13 18.5 6 51 22.9
Nelson 1 13 11.4 8 36 4.7

West Coast 8 14 9.2 4 16 18.9
Canterbury - - - 21 55 16.9
Otago - - - 53 72 36.1
Southland - - - 7 18 16.4
Site requirements
Cypresses need moderately fertile, moist soils and prefer mild climates and
reasonably sheltered sites up to altitudes exceeding 600 m. C. macrocarpa survives
in a wide range of New Zealand climates and tolerates annual rainfall ranging from
500 mm to 2000 mm and thrives in cooler parts of both islands (Knowles and Miller
1994). It generally does best on fertile lowlands but is intolerant of poorly drained
soils and is apt to be short-lived on very dry soils. An ideal site for C. macrocarpa lies
below an altitude of 400 m in cooler parts of the country on moist, fertile, well-drained
soils receiving 700 to 1300 mm of rainfall (Knowles and Miller 1994).
C. lusitanica is best suited to mild areas in New Zealand away from the immediate
coast. It is relatively demanding in respect of shelter, fertility, and moisture supply,
especially during summer. C. lusitanica generally requires 1000-3000 mm rainfall and
best sites are suggested to be those where humidity is constant (Knowles and Miller
1994). A very recent study has indicated that key factors in the productivity of C.
lusitanica include potential root depth, a measure of fertility, average minimum
temperature, number of ground frost days in summer, and years planted since 1900
(Watt and Palmer unpub. data, Watt et al. 2008). However, more work is required to
finalise, test and validate this result.
29
Climate risk
Assuming that C. lusitanica is planted only in warmer areas, C. macrocarpa in cool,
well-ventilated areas, and Leyland cypresss in drier, cooler and infertile areas, much
of the climatic risk is removed. For C. lusitanica, the risk is slightly higher due to wind
damages.
Pests and diseases

The most significant disease of cypresses in New Zealand is cypress canker. Canker
may spread and girdle the stem or branches causing weakening, dieback, or
breakage; and secondary fungal and insect attacks may follow at the canker site.
C. macrocarpa is the most susceptible species and should not be planted on warm,
humid sites as tree death may occur with the presence of inoculum. Other cypress
species are less susceptible and improved germplasm of these and hybrids with
C macrocarpa are under development to circumvent the canker issue.
Stock and animals may also cause damage as the soft bark of cypress is eagerly
sought by sheep and cattle, hares, rabbits and possums. Overall, the risks from pests
and diseases are considered to be medium, although proper siting with appropriate
species should lower the risk further.
Market risk
Market risk can be considered to be lower than for radiata pine, owing to high,
unsatisfied demand. There is also a large export potential as a naturally durable
timber species.
2.3.2. Regime Choice

Numerous studies have shown the importance of rotation age to increasing the level
of growing stock (and hence carbon) for a given site and stocking (Maclaren 1995,
1996). In commercial forests this is determined mainly by economic considerations
(Chang 1983); the prices of timber and carbon and the discount rate; but also by the
desire to maximise the yield of high-value timber. As such stands are routinely felled
before their peak productivity. Obviously, at this age they are accumulating biomass
at very high levels and will continue to do so for many decades if not harvested.
Radiata pine is a relatively short-lived species and whilst healthy 60-year old stands
have been observed on favourable sites, there is considerable risk of windthrow after
about 50 years (or less) on many other sites. Nevertheless, given that the national
average rotation age is about 27 years this does provide an opportunity for
postponing harvest. A ‘normal’ radiata pine forest managed on a 25-year rotation age
might contain only 334 t CO2-e per ha, but if this were extended to 50 years the
average carbon could be doubled to 686 t CO2-e per ha (Maclaren 2000).
The opportunities for very long rotations in species such as Douglas-fir or redwood
are far greater than for radiata pine. Douglas-fir, for example, has a typical
commercial rotation age of 45 to 60 years but individual trees in natural stands have
been known to be nearly 700 years old. Redwoods are known to reach an age of
2200 years. Extremely long rotations, however, would be totally uneconomic from the
purely timber-growing standpoint.
The economically optimal rotation age for producing timber and carbon is greater
than for timber alone and less than or equal to carbon alone (Boyland 2006). If the
price of carbon credits is high relative to the price of timber, the optimal rotation
length becomes greater (van Kooten et al. 1995). Conversely, as the value of timber
increases relative to the value of carbon, the economic rotation length becomes
30
shorter (van Kooten et al. 1995). Because of discounting, extending rotation age has
been found to be a cost-effective method of increasing carbon sequestered only in
limited circumstances, such as for fast-growing tree species.(Huang and Kronrad
2001).
2.4. Management at the Estate-Level

The discussion so far has centred on stand-level management decisions, species-
site choice, initial and final stocking, thinning, and rotation age. It is important to
recognise that while stand-level analyses identify a variety of management decisions
that could be used to increase carbon sequestration in a cost-effective manner, they
tend to overestimate the estate-level potential. This is because stand-level analyses
ignore estate-level constraints and objectives such as sustainable harvest levels and/
or cash flows, supply commitments to mills, etc. (Boyland 2006). We discuss these
estate-level management constraints here.
There are also additional management decisions made at the estate-level. Here we
consider one such decision specific to carbon trading, namely risk-free credits
(Maclaren 2008).
2.4.1. Estate-Level Management Constraints

There have been a limited number of studies incorporating carbon management
objectives in estate-level analyses (Diaz-Balteiro and Romero 2002, Meng et al.
2003, Bourque et al. 2007). These studies have generated management plans with
goals of maximising carbon, or carbon and revenue simultaneously (using goal
programming). An interesting extension of this work is the inclusion, in the carbon
maximisation objective, of the carbon in wood products from the timber harvested
(Bourque et al. 2007).
Unfortunately it is not possible to draw useful conclusions from most estate-level
analyses as many have serious methodological issues (van Kooten et al. 2004) and
often regulatory and market assumptions are not directly applicable due to the
evolving carbon policy environment (Boyland 2006).
However, estate-level analyses of forest management for carbon have highlighted a
number of key estate-level considerations in addition to those at the stand-level
(Boyland 2006):
• spatial constraints, such as adjacency requirements, riparian buffers and
minimum or maximum harvest block size (Meng et al. 2003);
• temporal constraints such as annual allowable cuts and cashflow
requirements;
• environmental objectives that could limit stand management options;
• social objectives that could prohibit profitable carbon projects that reduce
employment in resource dependent communities;
• an increasing marginal opportunity cost as lands with higher potential timber
profits are included.
An additional management decision at the forest estate-level, in a forest with multiple
age classes, is the possibility that the carbon liabilities incurred by harvesting may be
at least partially offset by credits earned through sequestration in the non-harvested
stands. The ultimate example of this is a ‘normal forest’, in which there is an equal
area in all age classes from establishment to the final rotation age. In this case,
annual liabilities from harvesting will be exactly matched by credits from
sequestration. The ongoing annual net cashflow from carbon would be zero, or
negative if compliance costs were still incurred.
31
2.4.2. Risk Free Credits
It has been pointed out that some of the credits arising from afforestation are ‘risk-
free’, in that they do not have to be paid back (Maclaren 2008). This is the case if it is
assumed that:
• stand carbon at the time of afforestation is zero, and;
• following harvest, stand stocks do not return to zero because of the presence
of harvesting residues, which then decay over a period of time.
More generally, risk-free credits will arise if the lowest level of stand carbon occurring
in the second and subsequent rotations is higher than the initial level of carbon at the
time of afforestation.
This is illustrated in Figure 2.2, using the national average yield table and a 30-year
rotation as an example. In this example, the lowest level reached after the initial
harvest is 240 t CO2-e per ha, so this amount of risk free credits would be available,
assuming that credits are earned for all growth to the time of harvest. However, this
condition only applies to stands in which all growth is captured within commitment
periods; afforestation from 2007.
1000
900
800
Carbon Sequestered (t CO2-e/ ha)
700
600
500
400
300
200
100
1990 2010 2030 2050 2070

Years since planting
Figure 2.2: Carbon stocks for a single hectare stand, planted in 1990. With the yield table
assumed in the example, this applies to afforestation from 1990 to 1996. For afforestation
from 1997 to 2006, an increasing amount of growth is captured within commitment periods, so
increasing quantities of risk free credits are available (Figure 2.3). For second and
subsequent rotations, no additional risk-free credits arise.
Growth prior to commitment period 1 (between 1990 and 2008) does not earn
credits. This means that stands which have already sequestered more than
240 t CO2-e per ha by the start of commitment period 1 will incur greater liabilities
from harvesting than they have earned from growth. Fortunately, the A/R Debit Rule
or “fast-growing forest fix” will reset the liabilities to the sum of credits earned to date,
32
but this still means that there are no risk free credits associated with these stands.
However, subsequent credits can be maximised by removing as much of the post-
harvest residues as possible.
250
200
Carbon Sequestration (t CO2-e/ha)
150
100
50
0
1990 1995 2000 2005 2010
Age Class
Figure 2.3. Risk free credits by age-class (planting year). Credits for the 1997 planting year
are earned in commitment period 1; credits for the 2012 planting year are earned in
commitment periods 2 to 4.
33
3. Review of Management Decisions for Addressing
Carbon-Price Risk
Summary
Carbon-price risk is just one of many risks associated with management of planted
forests for carbon. However, as carbon markets mature it is expected that carbon-
price risk will have a strong influence on carbon project decisions. This is due to the
lack of certainty surrounding future carbon-price trends in an immature market.
There are two approaches to managing financial risk:

• transferring risk to a third party, e.g., insurance or hedging;
• pooling risky investments in a portfolio, e.g., pooling carbon credits with other
forest owners.
Both are all likely to involve significant costs or result in a reduced carbon value.
The only study on how carbon-price risk influences stand-level harvest age found
that carbon price signals must be strong in order to significantly increase the optimal
rotation.
Methods of analysis for assessing the effect of carbon-price risk on stand- and
estate-level forest management include:
• Monte Carlo simulation;
• Markowitz portfolio optimisation;
• Markov decision process models;
• Decision making criteria under uncertainty.
3.1. Carbon-Price Risk

3.1.1. Types of Risk
There are numerous sources of risk associated with managing forest stands and
estates for carbon (Table 3.1).
Table 3.1: Risks associated with projects that generate carbon credits. Source: Laurikka and
Springer (2003)
Term Description
Project risk Cause(s) of project failure
Quantity Project does not generate anticipated credits
(including biological risks)
Delivery Project developer does not transfer credits
Political Problems with implementation
Cost Abatement costs higher than expected
Price risk Carbon price fluctuates beyond expectations
Policy risk Rules for credits change
Other “traditional” risks Currency, country, etc.
Aspects of project quantity risk (Table 3.1) have previously been considered by
Maclaren and Wakelin (1992); including the risk of catastrophic forest loss due to fire,
wind, volcano or disease. While windthrow, along with other causes of catastrophic
loss, would decrease land expectation values and optimal rotation ages on forest
stands producing timber and carbon sequestration benefits (Stainback and
34
Alavalapati 2004) windthrow is potentially of negligible impact to global carbon
sequestration (Maclaren and Wakelin 1992).
The focus of this section is on how carbon price risk might effect stand- and estate-
level forest management. Carbon-price risk is considered likely to dominate carbon
markets as they mature (Hultman 2006).
3.1.2. Information on Carbon-Price Risk

A significant difficulty in understanding carbon price risk, and hence developing risk
management strategies, is the limited carbon-price data due to the immaturity of the
market (Subak 2003).
The latest price for carbon used by the New Zealand Treasury to calculate New
Zealand’s liability under the Kyoto Protocol is 11.13€/ t CO2-e7 (approximately
NZ$22/ t CO2-e). This was the base carbon-price used in the modelling analysis
presented in this report. However, a range of future of carbon-prices is possible. At
one extreme the value of carbon credits could decline to almost zero as a result of:
• the failure of governments to devise a successor to the Kyoto Protocol;
• inferior credits, including Russian “hot air” and carbon-neutral (as opposed to
carbon-negative) forms of power generation, swamping the market.
At the other extreme, the value of carbon credits increase with prices predicted to
potentially reach NZ$240/ t CO2-e (Riahi and Roehrl 2001). In an IIASA MESSAGE
model analysis of future carbon markets with constrained emissions (Riahi and
Roehrl 2001) the carbon-price was predicted to increase from:
• 5€/ t CO2-e (NZ$8.77) in 2010;
• to 7-17€/ t CO2 ($12.28-$29.82) in 2050;
• to 33-70 €/ t CO2 ($57.89-$122.81) in 2070;
• to 110-136 €/ t CO2 ($192.98-$238.60) in 2100.
These are based on the IPCC A2-550 t and B2-550 t scenarios. Along with these two
extreme trends in carbon-prices, the price of carbon would be expected to fluctuate
year-to-year or day-to-day.
For our analyses, rather than attempting to predict future carbon-prices we sought to
answer the question; “Within the plausible range of carbon-price trends and volatility
in price within these trends, how will the economics of different stand- and estate-
level planted forest management decisions be affected?” To answer this question we
needed to first estimate price processes for carbon credits and radiata pine logs (see
Appendix C) in order to describe the carbon-price risk.
3.2. Approaches to Managing Carbon-Price Risk

There are two broad approaches to managing financial (including price) risk
(Laurikka and Springer 2003):
• transferring risk to a third party, e.g., an insurance company or through
financial markets. Examples of this approach in forestry are:
o traditional forestry insurance (Cairns and Lasserre 2004);
o hedging (Weinstein 2001), which is the practice of offsetting carbon-
price risk by taking an equal but opposite position in the futures
market. Hedging is commonly used in commodity markets and to
protect against exchange rate fluctuations;
• pooling risky investments in a portfolio. Examples of portfolio approaches
applied to forest management include:
7
NZ Treasury http://www.treasury.govt.nz/government/liabilities/kyoto/carbonprice and The Treasury.
2007. Price Estimation of Kyoto Compliant Emission Units. New Zealand Treasury, Wellington.
35
o land reserves, by converting more land to forest than needed to
sequester the agreed amount of carbon (van Kooten and Sohngen
2007);
o substituting credits from another carbon sink at the time of harvest
(van Kooten and Sohngen 2007);
o species and rotation mixes.
Whichever approaches to managing carbon-price risk are used they are all likely to
involve significant costs or result in a reduced carbon value (Subak 2003).
3.2.1. Transferring Risk to a Third Party

Insurance transfers the risk of underperformance from a carbon sequestration project
to a third party, and could be an extension of traditional forestry insurance to cover
the loss of carbon values (Subak 2003). Insurance has previously been recognised
as important for the efficient functioning of carbon trading (Cairns and Lasserre
2004).
However, it is unlikely that insurers will insure against carbon-price risk, as well as
other risks associated with carbon projects (Table 3.1), because of the following
factors (Wong and Dutschke 2003):
• lack of specialised forestry insurers. Where insurance is offered it is on an
annual, rather than long-term continuous basis (Subak 2003);
• small size of the carbon sequestration market. Current insurance policies
cover the expected loss from a given event, and in particular the value of the
trees. They do not cover the value of the carbon liabilities associated with the
loss of the trees, as this is unknown and unknowable;
• lack of information upon which insurance companies can base insurance.
Forest losses due to disease are a notable example. The effect of climate
change on forest growing conditions could be another.
Hedging is a more likely method of transferring carbon-price risk to a third party.
Carbon hedges currently operate in the European carbon market (Hultman 2006).
Hedging involves contracts to hedge future increases (a long hedge) or decreases (a
short hedge) in the spot price of carbon buy purchasing a guarantee of a future
carbon-price (Brealey et al. 2003).
3.2.2. Pooling Risky Investments in a Portfolio

Pooling involves bundling projects from different regions or sectors (including timber)
so that losses from projects can be absorbed within a larger investment portfolio
(Subak 2003, Hultman 2006). Pooling has been used in the Protected Areas project
in Costa Rica, with 40% of the project’s carbon initially placed in reserves (Subak
2003). Issues with pooling include (Subak 2003):
• requires participation of large investors or groups of investors willing to bundle
smaller projects from a myriad of investors;
• may not provide adequate coverage for smaller, more homogenous
sequestration projects;
• may not be affordable for afforestation projects with high establishment and
monitoring costs and/ or opportunity cost of land;
• may be costly due to the need for risk assessment across the entire portfolio.
In this study we do not assess the use of financial instruments that transfer risk to a
third party, e.g., hedging, insurance. Instead we assess how carbon-price risk may
influence the decision to pool species, rotation lengths and regimes at the estate-
level using Monte Carlo simulation and Markowitz portfolio optimisation (Markowitz
36
1959). These approaches can be used to determine how variability in carbon-prices
affects the risk, returns and the optimal composition of the forest-estate in terms of
species mix, rotations and silvicultural regimes that achieve a desired return with
minimum risk. The approach has previously been applied to forest estate investment
and harvest scheduling (Reeves and Haight 2000).
Carbon Pooling for Carbon-Price Risk

Under the Emissions Trading Scheme, an owner of a single age-class forest stand
must decide whether to keep the credits earned from sequestration to cover the
future loss of carbon from harvesting, or sell the units and take on the risk of an
uncertain future liability given that the price of carbon units may change. The ETS
documentation, however, suggests that “there may be an opportunity for owners to
pool their forests with those of other owners in order to jointly manage their carbon
credits and liabilities, but this would be a private arrangement and not part of the ETS
rules.”8
There are theoretical advantages in pooling carbon credits and liabilities with other
forest owners (Maclaren 2008). In this study we present a simple case study
involving three forest owners pooling their carbon forest stands to mitigate against
the risk of the carbon price being high at the time a particular owner's stand is due to
be harvested. The decision on whether or not to pool is evaluated using decision
making criteria such as maximax (maximising the maximum return), maximin
(maximising the minimum return) and minimax regret (minimising the maximum
regret or opportunity cost) (Tapiero 2004, Wisniewski 2006).
3.2.3. Stand-level Management Decisions for Carbon-Price Risk

There has been one formal study of how carbon-price risk may affect stand-level
forest management for carbon, in particular the optimal rotation and decision to
replant (Chladná 2007). Carried out at the stand-level using real-options analysis,
several carbon and timber price scenarios and different portions of liability for
emissions at harvest were assessed for their effect on the optimal rotation. Key
conclusions were:
• only strong carbon price signals make a significant difference to the optimal
rotation, with rotations extended when timber prices are constant, the carbon
price is increasing and interest rates are low;
• the optimal rotation decreases as forest owner’s responsibility for released
CO2 at harvest increases;
• The real options method can be extended to address other forest
management decisions as well as land use decisions.
In this study, we use a Markov decision process model (Buongiorno and Gilliess
2003, Buongiorno 2001) to carry out a similar analysis for the specific cases of the
tree species and regimes assessed in the stand-level analysis in Modelling
Management Decisions for Increasing Carbon Stocks. We assess the influence of
carbon-price risk on the optimal rotation and decision to replant using the model.
Markov decision process models have previously been used to assess the effect of
timber-price risk and risk of catastrophic forest loss on uneven-aged (Rollin et al.
2005, Zhou and Buongiorno 2006) and even-aged (Buongiorno 2001) forest
management.
8
Emissions Trading Scheme questions and answers:
http://www.maf.govt.nz/climatechange/forestry/ets/q-and-a.htm
37
4. Modelling Management Decisions for Increasing
Carbon Stocks
Summary
The influence of carbon (within the Emissions Trading Scheme) on forest
management practices at the stand and estate-level was examined by modelling
planted forest scenarios. Five forest tree species were modelled under a range of
management regimes for a hypothetical corporate forest estate and farm forestry
estate.
Stand-Level Management Decisions
Results from this study, at the stand level, suggest inclusion of carbon in forest
management could have a significant influence on forest management practices in
New Zealand. However, because numerous variables such as site quality, species
choice, carbon-price, and discount rate interact, universal rules can not be easily
applied. This is also a reflection of the doubtful accuracy of the current suite of
models for alternative species, particularly at older ages.
The study results are generic to the Rotorua area and not specific to a single
property or paddock, as would be required for an investment analysis.
For the range of management decisions considered in this study the major impacts of
managing planted forests for carbon are potentially:
• Tree species that grow rapidly with medium to high density wood may be
favoured. Examples of these are radiata pine and E. fastigata;
• Management practices that improve growth rates such as weed control,
fertiliser, better genotypes, or improve wood density, are more likely to be
adopted. The same percentage improvement in density and growth appear to
result in similar increases in carbon sequestered, though economics favours
growth improvements;
• Longer rotation lengths may be adopted, possibly extending current harvest
intentions for radiata pine Kyoto forests from 28 to 30 year rotations to 40
years;
• Intensive stand tending for improved wood quality, particularly branch control
such as the clearwood regime, are likely to be less favoured because carbon
trading adds value to a stand through an undifferentiated product;
• High site occupancy/high initial growth rate (per hectare) regimes with higher
stockings, such as the plant and leave regimes, may be favoured with their
focus on standing volume;
• The last three results appear to particularly be the case for species which
have high carbon revenue, due to rapid carbon sequestration and/ or have
comparatively low timber values, e.g., E. fastigata and radiata pine.
Estate-Level Management Decisions
Estate-level management objectives and constraints, and distribution of age-classes
potentially reduce the extent to which stands will be managed for carbon as
suggested by the stand-level analysis. In a hypothetical corporate forest estate we
considered the impact of one such constraint; a non-declining yield.
38
When a forest estate is managed to maximise carbon and forestry revenues:
• rotations are extended in Kyoto forests in both the corporate and small forest
estates, and replanting is into the species and regime with the highest land
expectation value when carbon is included;
• In the corporate estate, Kyoto stands are used to smooth harvests over time
under a non-declining yield constraint. This is because the cost of delaying
harvest in Kyoto forests is less than for non-Kyoto forests due to returns from
carbon;
• The age-class distribution and proportion of the estate that are Kyoto stands
are potentially important influences on how estate-level management
decisions are affected by management for carbon.
Extensive modelling exercises, such as this study, rely heavily on the underlying
assumptions built within the models and in the application of the models. Overall
accuracy is very difficult to estimate as errors can compound or compensate as
function links to function in a sequence.
The models and systems used in this study are the best currently available for
modelling stand- and estate-level planted forest management and when used by
experienced forest modellers, are the best that can be offered to address the issues
surrounding management of planted forests for carbon.
Improvements and additions identified in the later Gap Analysis (see Part 3) will
undoubtedly modify and enhance the findings made in this study.
4.1. Introduction
Due to the complex interactions among many of the decision making variables,
questions surrounding the impact of carbon trading on forest management can only
be answered through quantitative economic analysis. This is because the
interactions among decision making variables lead to trade-offs between carbon and
timber management. Quantitative analysis also enables the sensitivity of findings to
factors such as carbon and log prices to be explored.
This section uses the framework of factors developed in the above Review of
Management Decisions to evaluate the impact of carbon trading on planted forest
management decisions and profitability. Sensitivity analysis was used to identify
which decisions may change at different carbon and log prices.
The analysis of stand and estate-level management decisions takes the form of a
sensitivity analysis applying currently available models to important forest
management variables. The key challenge is to achieve useful answers without
building a matrix of factors that becomes too large, time consuming and difficult to
comprehend. Another key consideration is whether the study seeks to understand
interactions between variables or simply assume additive effects and hence not test
all combinations.
4.1.1. Stand-Level Management Decisions

The stand modelling exercise drew on the team’s experience in developing models,
and used Scion’s extensive range of modelling systems (Figure 4.1); the FFR
Radiata Calculator, FFR Douglas-fir Calculator, 300 Index growth model (Kimberley
et al. 2005, 2008) Douglas fir growth model (Knowles 2005, 2008) Cypress growth
39
model (Berrill 2004), Redwood growth model9, (Kimberley and Dean 2005),
Eucalyptus growth model (van der Colff and Kimberley 2005), the C_Change carbon
model (Beets et al. 1999). These models have been used to quantitatively assess the
impact of different management decisions on both timber output and carbon
sequestration.
Radiata Douglas-fir Redwood C. lusitanica E. fastigata
Calculator Calculator Growth Model Growth Model Growth Model
C-Change C-Change
C-Change Density
Volume
Grade yields Volume
Grade Yields
PLI & density 1st & 2nd rotation carbon
Density
1st & 2nd rotation carbon Stocking
Stocking
Log grade prices Carbon price
Carbon Silviculture costs Overhead
Financial Spreadsheet Harvest cost function Cartage cost
LEV
Stand-level
Carbon compliance cost
Estate-level
Expected LEV Age-class Carbon
Monte Carlo FOLPI
Variance of LEV distribution LEV
Optimal estate
Price risk
Optimal harvest Markov Decision Minimum risk

decision Process Model Portfolio Optimisation
mix of regimes
Figure 4.1: The flow of data and outputs among models used to analyse the effect of carbon
on stand-level forest management decisions.
The key management decisions for this study relate to site, species, management
regime, rotation, and growth and density improvement. A total of 480 combinations of
management decisions were tested, with 96 simulations per species. These
management decisions were then overlaid with economic drivers such as discount
rate, carbon-price, timber price, silvicultural costs, and harvesting costs (Figure 4.1).
Management decisions were compared in terms of their impact on carbon
sequestered at rotation end and forest value. The latter is measured by the land
expectation value, which is the value of successive stand rotations to perpetuity. This
is a traditional measure of forest stand profitability (Buongiorno and Gillies 2003) and
importantly enables a meaningful comparison of management options that differ in
rotation length.
Site
Variability in forest productivity due to site can be very large. To provide the most
robust situation to run models for at least five species and have reasonable data from
permanent sample plots (PSPs) for starting projections or testing outputs, the study
was limited to one site.
The site selected was equivalent to Whakarewarewa Forest, Rotorua, (330 m

altitude, latitude 38.1°S), but as a Kyoto forest on run-out farmland, with reverting
weeds requiring a single broadcast herbicide for tree crop establishment.
9
This model has been provided by NZ Forestry Ltd and NZ Redwood Co. Ltd. Their contribution is
gratefully acknowledged.
40
This study is therefore generic to the Rotorua area and not specific to a single
property or paddock, as would be required for an investment analysis.
Species
Five species were modelled in the study:
• Eucalyptus fastigata – considered a likely candidate for new forestry investors
who may seek short rotations and fast early growth;
• Radiata pine and Douglas-fir – considered likely candidates for existing
forestry corporates who generally seek medium term rotations that include an
assured timber yield;
• Cupressus lusitanica and Coastal Redwood (Sequoia sempervirens) –
considered likely candidates for existing small forest growers who generally
seek long rotations that include a timber yield, and provide a variety of non-
timber benefits.
Management Regime
For each species four regimes were applied – (the details vary for each species and
are given in Appendix A.1)
• Clearwood – prune in 2 to 3 lifts to 5 m to 6 m and thin early to 350 to 400
stems per ha;
• Sawlog – no pruning, thin to 450 to 500 stems per ha at age 9 to 11 years;
• Plant and leave 600 to 800 stems per ha and not thin or prune;
• Plant and leave 800 to 1200 stems per ha and not thin or prune.
Douglas-fir was modelled on only 3 regimes, as the clearwood regime is not
practiced for this species.
Rotation
Each species was modelled for at least four rotation lengths which ranged from a
minimum set at the current practice for short rotations (e.g. 15 yrs for E. fastigata
pulpwood) and a maximum set at perpetuity (70 years because of model limitations)
to model permanent forests without timber harvested.
Genetic Gain or Productivity Improvement

To model the sensitivity to improving wood density from genetic gain, a scenario was
run in all species with a 10% increase in wood density. To model the sensitivity to
improving growth rate from weed control, fertiliser, or genetic gain, scenarios were
run in all species with 10% and 20% increases in growth rate. This was calibrated by
varying productivity indices (e.g., 300 Index MAI in radiata pine) to achieve the level
of gain in standing volume.
Economic Factors
A discount rate of 8% (pre tax) was used for all runs. This was considered close to
the industry average as found by Manley (2005). Costs were generally calculated
using a labour rate of $38/hour plus 12% supervision, or the best available unit costs
were sourced from industry experts or publications. The Radiata and Douglas-fir
Calculators use labour rates to calculate tending costs. Costs by species and regime
are given in Appendix A.
Log prices (delivered to mill) were from the average of the last 12 quarters from MAF
(2008) or industry experts for each species. The assumed prices are given in
Appendix A.4, along with the log grade distributions for Redwood, C. lusitanica, and
E fastigata – otherwise the log grade distributions were as predicted by the
Calculators. Carbon-prices assumed were: $0, $12, $22, and $38/ t CO2-e. Annual
41
fixed costs for forestry were set at $50 /ha/yr and annual compliance costs for
entering the Emissions Trading Scheme were set at $60/ha/yr.
Carbon Trading Regulations

Reflecting the long-term outlook of this study, carbon trading was represented here
as a simplification of the Emissions Trading Scheme:
• Continuous commitment periods, occurring throughout the period of analysis
in this study; up to 95 years;
• Annual carbon revenues, based on the annual carbon increment predicted by
C_Change;
• Full carbon liabilities, associated with carbon removed from the site, paid at
the time of harvest. It was assumed carbon credits were purchased at the
time of harvest at the same price as they had been earlier sold at.
4.1.2. Estate-Level Management Decisions

The results from the stand-level analysis were used as the basis for an estate
modelling exercise carried out using the FOLPI forest estate modelling system
(Garcia 1981, Manley et al 1991) (Figure 4.2). Estate-level analysis is essential as
stand-level management decisions are influenced by estate-level objectives,
constraints, and the mix of stand ages in the estate (Boyland 2006).

C-Change C-Change
C-Change Density
Volume
Grade yields Volume
Grade Yields
Density
Stocking
Silviculture costs Overhead
Carbon
Financial Spreadsheet Harvest cost function Cartage cost
LEV
Stand-level

Estate-level
Monte Carlo FOLPI
Optimal estate
Price risk

mix of regimes
Figure 4.2: The flow of data and outputs among models used to analyse the effect of carbon
on estate-level forest management decisions.
Two hypothetical forest estates, for a corporate owner and a smaller forest owner,
were developed (Table 4.1). In addition to the stand-level information, the estate-
level analysis required information on the age-class distribution of stand areas for
each owner. These distributions describe the area of the estate in each species and
regime that is a particular age (Figure 4.3 and Figure 4.4).
42
Table 4.1: Characteristics of corporate and small forest owner forest estates
Corporate Owner Small Owner
Estate Area 170 671 ha 33.6 ha (10% of typical farm)
Proportion Kyoto 0.6% 100%
compliant
Basis for age class Rotorua District Post-1989 afforestation
distribution
Basis for “Kyoto One-third of new land planting Entire area
forest” proportion in 1990s
Initial regimes Radiata clearwood Radiata clearwood
Radiata sawlog Redwood clearwood
Douglas-fir sawlog E. fastigata clearwood
Potential replanting Radiata (Clearwood, Sawlog, Radiata (Clearwood, Sawlog,
regimes Plant and leave 600 stems per Plant and leave 600 stems per
ha, plant and leave 800 stems ha, plant and leave 800 stems
per ha) per ha)
Douglas fir (Sawlog, Plant and Redwood (Clearwood, Sawlog,
leave 600 stems per ha, Plant Plant and leave 600 stems per
and leave 1200 stems per ha) ha, plant and leave 800 stems
per ha)
E. fastigata (Clearwood, Sawlog,
Plant and leave 600 stems per
ha, Plant and leave 1100 stems
per ha)
8.0
Kyoto Radiata Clearwood
Non-Kyoto Radiata Clearwood
7.0
Kyoto Radiata Sawlog
6.0 Non-Kyoto Radiata Sawlog

Kyoto Douglas-fir Sawlog
5.0 Non-Kyoto Douglas-fir Sawlog

Area (000 ha)
4.0
3.0
2.0
1.0
.0
0 5 10 15 20 25 30 35 40
Age (Years)
Figure 4.3: Area age-class distribution for the hypothetical corporate forestry estate used in
the estate-level analysis
43
3.5
Kyoto Radiata Clearwood
3.0 Kyoto Redwood Clearwood
Kyoto E. fastigata Clearwood
2.5
2.0
Area (ha)
1.5
1.0
0.5
0.0
0 5 10 15 20 25 30
Age (Years)
Figure 4.4: Area age-class distribution for the hypothetical small forest owner estate used in
the estate-level analysis
The estate-level analysis considered the management of the estate over a 95 year
period from 2008, with no further afforestation or deforestation. The objectives of
estate management that were analysed were to maximise either:
• discounted forestry net revenues excluding carbon; or
• discounted forestry and carbon net revenues, using an 8% discount rate.
Further details of the FOLPI models can be found in Appendix B.
For both objectives it was assumed that the corporate forest owner would seek to
maintain a minimum harvest volume over time; a non-declining yield. The impact of
the above objectives on forest estate age-class distribution by species and regime,
average harvest age, and harvest volume were explored.
4.2. Stand-Level Management Decisions

4.2.1. Carbon Sequestered
The relationship between carbon sequestered and stand age, by species, for the
plant-and-leave 800 stems per ha regime10 (P&L 800) is shown in Figure 4.5. Dashed
lines in the figure show projections outside the data bounds of the growth model.
However the redwood model does have one plot with time series data out to 102
years.
For the site productivity indices and starting values used in this study, there are
significant differences between species, both in terms of their relative early growth
and later total standing volumes.
10
For radiata pine plant-and-leave 800 stems per ha is currently rarely practiced.
44
5,000
Redwood
Radiata pine
Douglas - fir
C. lusitanica
4,000 E. fastigata
Redwood Projected
Carbon Sequestered (t CO -e / ha)
radiata projected
Douglas - fir projected
2
3,000 C. lusitanica Projected

E. fastigata Projected
2,000
1,000
0
0 10 20 30 40 50 60 70 80 90 100
Stand age (years)
Figure 4.5: Relationship between carbon sequestered and stand age, by species, for a plant-
and-leave 800 stems per ha regime
For harvested crops, with intensive tending, the trends are quite different. Figure 4.6
gives the relationship between carbon sequestered and stand age, by species, for
the clearwood regime that is harvested at age 40 years.
1.6
Radiata pine
E. fastigata
1.4 C. lusitanica
Redwood
1.2 Douglas-fir
1.0
.8
.6
.4
.2
.0
0 10 20 30 40 50 60 70
Stand Age (years)
Figure 4.6: Relationship between carbon sequestered and stand age by species for a
clearwood regime on a 40 year rotation. The Douglas-fir is on a sawlog regime.
Stand management regime also has a significant effect on the relationship between
carbon sequestered and stand age. Figure 4.7 shows the relationship between
carbon sequestered and stand age for radiata pine managed on four different
regimes.
45
2.0
Plant and Leave 800sph
1.8
Plant and Leave 600sph
1.6 Sawlog
Clearwood
1.4
1.2
1.0
.8
.6
.4
.2
.0
0 10 20 30 40 50 60 70 80
Stand Age (years)
Figure 4.7: Relationship between carbon sequestered and stand age for radiata pine on
different management regimes, harvested at 40 years
The combined influence of regime and rotation length for each of the species is given
in Figure 4.8 to Figure 4.12. Each shows the increase in carbon sequestered relative
to a base regime (identified in the title) that gave the lowest value. The figures
therefore emphasise the change in carbon sequestered due to rotation and regime.
3500
3000
Carbon (t CO2-e/ha)
2500
2000
1500
80
1000
40
500 30
15 Rotation (years)
0
Clearwood Sawlog Plant and Plant and
Leave 800 Leave 1100
Regime
Figure 4.8: Change in carbon sequestered by E. fastigata for different rotation ages and
regimes. The base case is plant and leave 800 stems per ha on a 15 year rotation, which
sequesters 552 t CO2-e/ha at rotation end.
46
3500
3000
Carbon (t CO2-e/ha)
2500
2000
1500 70
40
1000
35
500 30 Rotation (years)
25
0
Leave 600 Leave 800
Regime
Figure 4.9: Change in carbon sequestered by radiata pine for different rotation ages and
regimes. The base case is clearwood on a 25 year rotation, which sequesters 938 t CO2-e/ha
at rotation end.
3500
3000
Carbon (t CO2-e/ha)
2500
2000
1500 90
1000 60
Rotation (years)
50
500
40
0
Sawlog Plant and Leave Plant and Leave
800 1200
Regime
Figure 4.10: Change in carbon sequestered by Douglas-fir for different rotation ages and
regimes. The base case is the sawlog regime on a 40 year rotation, which sequesters
879 t CO2-e/ha at rotation end.
47
3500
3000
Carbon (t CO2-e/ha)
2500
2000
1500
90
1000
60
500 40
Rotation (years)
25
0
Leave 600 Leave 800
Regime
Figure 4.11: Change in carbon sequestered by C. lusitanica for different rotation ages and
regimes. The base case is the clearwood regime on a 25 year rotation, which sequesters
3500
3000
Carbon (t CO2-e/ha)
2500
2000
1500
90
1000
60
Rotation (years)
500 50
40
0
Leave 600 Leave 800
Regime
Figure 4.12: Change in carbon sequestered by redwood for different rotation ages and
regimes. The base case is the clearwood regime on a 40 year rotation, which sequesters
48
For all species studied carbon sequestered increases with increasing rotation age, as
expected given the relationships shown in Figure 4.5 to Figure 4.7. Carbon
sequestered also generally increases as the intensity of stand management (pruning
and thinning) decreases and stockings increase. The former reflects the influence of
pruning and thinning on reducing total stand volume in favour of improved log quality;
namely few malformed stems and increased clearwood.
4.2.2. Stand-Level Economics: Land Expectation Value

Using the estimates of log yield by grade and carbon sequestered, land expectation
value (LEV) was calculated for each combination of species, regime, and rotation
length using a carbon-price of $22 /t CO2-e. Figure 4.13 to Figure 4.17 show the
results.
4000
3500
Land Expectation Value ($/ha)
3000
2500
2000
1500
80
1000 40
500 30
Rotation (years)
15
0
Leave 800 Leave 1100
Regime
Figure 4.13: Change in LEV for E. fastigata with a range of rotation ages and regimes. The
base case is the plant-and-leave 800 stems/ ha regime on a 30 year rotation, which has an
LEV of $2,763/ha.
49
$4,000
$3,500
$3,000
$2,500
$2,000
70
$1,500
40
$1,000 35
Rotation (years)
$500 30
25
$0
Leave 600 Leave 800
Regime
Figure 4.14: Change in LEV for radiata pine with a range of rotation ages and regimes. The
base case is the clearwood regime on a 25 year rotation, which has an LEV of $4,095/ha.
$4,000
$3,500
$3,000
$2,500
$2,000
90
$1,500
60
$1,000
50 Rotation (years)
$500
40
$0
Sawlog Plant and Leave Plant and Leave
800 1200
Regime
Figure 4.15: Change in LEV for Douglas-fir with a range of rotation ages and regimes. The
base case is the sawlog regime on a 60 year rotation, which has an LEV of $180/ha.
50
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
90
$1,000 60
$500 40 Rotation (years)
25
$0
Leave 600 Leave 800
Regime
Figure 4.16: Change in LEV for C. lusitanica with a range of rotation ages and regimes. The
base case is the clearwood regime on a 60 year rotation, which has an LEV of -$210/ha.
$5,000
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500 90
60
$1,000
50 Rotation (years)
$500
40
$0
Leave 600 Leave 800
Regime
Figure 4.17: Change in LEV for redwood with a range of rotation ages and regimes. The base
case is the plant and leave 600 stems per ha regime on a 90 year rotation, which has an LEV
of $2,090/ha.
51
Figure 4.13 to Figure 4.17 show that a carbon-price of $22/ t CO2-e is not enough to
move the economics of planted forest management entirely to the rotation and
regime choices with the highest carbon sequestered at rotation end.
For some species, but not all, LEVs suggest a shift to longer rotations and less
intensive silvicultural management. This appears to particularly be the case for
species which have high carbon revenue, due to rapid carbon sequestration and/ or
have comparatively low timber values, e.g., E. fastigata and radiata pine.
For species which have low carbon revenue, due to slower carbon sequestration
and/ or have comparatively high timber values, e.g., redwood, Douglas-fir and
C. lusitanica, there appears to be less effect of carbon trading on rotation age and
regime.
These findings support results from previous studies which emphasise the important
influence of the relativity of timber and carbon returns on rotation and regime choices
when managing for carbon and timber (van Kooten et al. 1995, Gutiérrez et al. 2006).
Density and Growth Improvements

To test the impact of improving growth rate and wood density on carbon sequestered
and stand-level economics in carbon forestry, these growth rates and densities were
varied separately and together. Figure 4.18 shows the impact on carbon
sequestered. Figure 4.19 shows the impact on LEV.
3.5
3.0
Carbon (000t CO 2-e/ ha)
2.5
2.0
1.5
d0% i0%
d0% i10%
1.0
d0% i20%
d10% i0%
.5
d10% i10%
d10% i20%
.0
20 30 40 50 60 70 80
Rotation (years)
Figure 4.18: Effect of percentage improvements in wood density (d) and tree growth (i) on
carbon sequestered for radiata pine on a clearwood regime.
52
8.0
7.0
Land Expectation Value ($000/ha)
6.0
5.0
4.0
3.0 d0% i0%

d0% i10%
2.0 d0% i20%
d10% i0%
1.0 d10% i10%
d10% i20%
.0
20 30 40 50 60 70 80
Rotation (years)
Figure 4.19: Effect of percentage improvements in wood density (d) and tree growth (i) on
land expectation value for radiata pine on a clearwood regime.
Improvements in tree growth and density of the magnitude studied lead to significant
increases in carbon sequestered. Interestingly, for the approach used in this study to
represent growth and density improvements, a 10% increase in growth has the same
impact on carbon sequestered as a 10% increase in density.
Reflecting the effect of discounting on returns from up-front investments in forestry,

increased growth rates and density have a greater impact on LEVs for shorter
rotations (Figure 4.19). The economic benefit from improved growth is slightly greater
than for improved density, suggesting current log grade pricing and the carbon-price
used here would support improvements in growth over density. This result may
change as log grade specifications are changed to recognise differences in wood
density or carbon-prices are higher.
Effect of Carbon Trading on Stand-Level Economics

Figures 4.20 and Figure 4.21 show the impact that carbon may have on forest
economics. Using radiata pine and Douglas-fir as examples the impact can be seen
to be considerable, though the level of impact will be species, site, and regime
specific.
53
7.0
Land Expectation Value ($000/ha) 6.0
5.0
4.0
3.0
2.0
1.0
.0
25 30 35 40 70
-1.0
Carbon (no forestry costs)
-2.0 Forestry + Carbon Revenue

Forestry Revenue
-3.0
Rotation (years)
Figure 4.20: Contribution of carbon ($22/t CO2-e) to stand-level land expectation value for
radiata pine managed on a clearwood regime.
4.0
3.0
2.0
1.0
.0
40 50 60 90
-1.0
-2.0
Carbon (no forestry costs)
-3.0 Forestry + Carbon Revenue
Forestry Revenue
-4.0
Rotation (years)
Figure 4.21: Contribution of carbon ($22/t CO2-e) to stand-level land expectation value for
Douglas-fir on a sawlog regime.
Effect of Carbon-price and Discount Rate on Stand-Level Economics

The future price of carbon is uncertain but could be between $0.00/ t CO2-e and
$60.00/ t CO2-e. The discount rate applied to investment projects also varies,
depending on individual’s circumstances, expectations of risk, and government
54
policy. Figure 4.22 shows the influence of carbon-price and discount rate on LEV for
radiata pine on a 40 year rotation plant and leave 800 stems per ha regime.
35.0
6% Discount Rate
30.0 8% Discount Rate

10% Discount Rate

25.0
20.0
15.0
10.0
5.0
.0
0 10 20 30 40 50 60
Carbon Price ($/t CO2-e)
Figure 4.22: Influence of carbon-price and discount rate on land expectation value for radiata
pine on a 40 year rotation plant-and-leave 800 stems per ha regime.
The influence of both carbon-price and discount rate are significant. For every dollar
increase in the price of carbon, the calculated LEV at 10% discount rate increases
approximately $330/ ha. At an 8% discount rate LEV increases by $430/ha and at a
6% discount rate LEV increases by $590/ha.
4.3. Estate-Level Management Decisions

4.3.1. Corporate Forest Owner
Under a non-declining yield constraint with the opportunity to gain revenues from
carbon in addition to forestry-only revenues, non-Kyoto forests remain in the
preferred regime of plant-and-leave 600 stems per ha, due to there being no revenue
from carbon for these forests. Kyoto forests are replanted to the plant-and-leave 800
stems per ha regime (Figure 4.23) which yields the highest LEV when carbon
revenue is included (Figure 4.14).
55
1.0
Douglas-fir Sawlog
.9
Radiata Plant + Leave 800 sph
.8 Radiata Sawlog
Radiata Clearwood
.7
Area (000 ha)
.6
.5
.4
.3
.2
.1
.0
2007 2012 2017 2022 2027 2032 2037 2042 2047 2052
Year
Figure 4.23: Kyoto forest area in the corporate forest estate over time, by management
regime.
Again reflecting stand-level results harvest ages in the Kyoto forest are extended by
about 7 years in the first rotation and 14 in the second rotation (Figure 4.24).
56
Figure 4.24: Average harvest age in Kyoto and non-Kyoto forest for forestry only and
forestry with carbon
50
Non-Kyoto Forest
45 Kyoto Forest - No Carbon
Kyoto Forest - Carbon

Harvest Age (years)
40
35
30
25
20
2000 2020 2040 2060 2080 2100 2120
Year
With a non-declining yield constraint the Kyoto forest stands in the estate are used to
smooth overall yields (Figure 4.25). This results in peaks in harvests from the Kyoto
forests. This occurs because the cost of delaying harvest in Kyoto forests to smooth
harvest volumes is less than for non-Kyoto forests due to returns from carbon
sequestered.
5000
4500
4000
Harvest Volume (000 m3)
3500
3000
2500
2000
1500
1000
KF harvest
500
Non-KF harvest
2008 2018 2028 2038 2048 2058 2068 2078 2088 2098
Year
Figure 4.25: Harvest volume from Kyoto and non-Kyoto forest in the corporate forest estate,
under a non-declining yield.
57
There are three important influences on the results of the estate modelling for the
corporate forest estate: the small proportion of the total estate that is Kyoto forest;
the comparatively even age-class distribution of the forest (Figure 4.3); and the lack
of additional constraints on management.
The small proportion of the corporate estate that is Kyoto forest means that revenues
from carbon forestry are a small proportion of total estate revenues, i.e., an additional
discounted value of $1.5 million over 95 years. There is little scope for large changes
in the non-Kyoto forest harvest schedule because there is insufficient Kyoto forest to
make up for any shortfalls in the annual cut. Managing the Kyoto forest for its carbon
value resulted in a decrease in the discounted value of forestry net revenues of $1.4
million, but this was offset by additional net revenues of carbon with a discounted
value of $2.9 million. There was little change in the discounted value of non-Kyoto
forest revenues. Reflecting the small changes in revenues from carbon, there was
proportionately little increase in the carbon sequestered across the corporate forest
estate.
The comparatively even age-class distribution of the hypothetical corporate forest
estate modelled means that there is less need to change harvest ages in the non-
Kyoto forest to achieve a non-declining yield. As such there is little change in the
average harvest age for non-Kyoto with and without the non-declining yield
constraint.
For the analysis here the only constraint on management was the requirement to
meet a non-declining yield. Other management constraints such as requirements to
supply a specific log mix to markets, e.g., clearwood to an appearance sawmill, and
restrictions on site suitability for species and regimes, would restrict the extent to
estate management could be modified to incorporate carbon forestry.
4.3.2. Small Forest Owner

In the small forest owner estate when carbon net revenues were excluded, the
preferred strategy was to harvest existing stands of radiata pine at 26 years,
E. fastigata clearwood at 15 years, and redwoods at 39 years. These stands were
replanted into the E. fastigata sawlog regime on a 15 year rotation. This management
strategy is driven by the specific objective used in the estate-level analysis; to
maximise discounted forestry net revenues, excluding carbon. Obviously, small forest
owners manage their forests for additional objectives, such as aesthetics, on farm
wood use, and soil protection (Morey 1986), which would influence harvest age,
species, and regime choice.
With carbon revenues included, rotations for existing stands were extended; radiata
pine to 30 years, E. fastigata to 19 years, and redwoods to 40 years. These results
are in agreement with the stand-level findings, which showed that rotations tend to
increase when carbon revenue is included in management, particularly for faster
growing species. The stands were then replanted into the E. fastigata clearwood
regime (Figure 4.26). There is a 38% gain in discounted revenues from the inclusion
of carbon net revenues and managing the forest to maximise net revenues from both
forestry and carbon.
58
35.0
E. fastigata Clearwood
30.0
Redwood Clearwood
25.0 Radiata Clearwood

Area (ha)
20.0
15.0
10.0
5.0
0.0
2007 2012 2017 2022 2027 2032 2037 2042 2047
Year
Figure 4.26: Kyoto forest area in the small forest owner estate over time, by management
regime.
59
5. Modelling Management Decisions for Addressing
Carbon-Price Risk
Summary
What process carbon-prices follow, independent or a random walk, critically
influences the conclusions drawn regarding the effect of carbon-price risk on rotation
and regime choice. When prices follow an independent process, the price today does
not depend on the price a year ago so prices are more variable in the short-term.
When prices follow a random walk, the price today is influenced by the price a year
ago, so prices are more variable in the long-term. The variability in carbon-price also
critically influences the conclusions drawn regarding the level of risk associated with
carbon forestry compared with forestry alone. Because a carbon market has yet to
fully develop in New Zealand it is not known what type of process carbon-prices will
follow or the variability in the carbon-price.
Stand and Estate-Level Management Decisions
Monte Carlo simulation was used to analyse stand-level implications of carbon-price
risk under the two carbon-price processes. In the absence of a carbon market, the
carbon-price process was estimated using price data for United Sates sulphur
dioxide market, which is also a cap and trade market. The log-price process was
estimated using price data for radiata pine logs.
Were carbon-prices to follow an independent price process, where prices vary from
year-to-year but do not depend on last year’s price, there are a number of
implications for how planted forests may be managed at the stand-level:
• Longer rotations reduce the variability in expected land expectation values by
reducing exposure to short-term volatility in the carbon and timber markets at
the time of harvest;
• Higher carbon sequestration regimes tend to have more variable LEVs due to
increased exposure to short-term carbon-price volatility;
• Despite greater variability in LEVs for radiata pine regimes managed for
carbon, due to the above, LEVs are significantly higher than for Douglas-fir for
the economic and management assumptions used in this study.
Were carbon-prices to follow a random walk, where prices are related to last year’s
price with some variability, there are a number of implications for how planted forests
may be managed at the stand-level:
• Due to the greater variability of carbon-prices following a random walk, land
expectation values are more variable under such a price process;
• Longer rotations increase the variability in expected LEVs by increasing
exposure to long-term volatility in the carbon market at the time of harvest.
For the variability in carbon-prices and log prices estimated in this study, returns, as
measured by land expectation value, are more variable for carbon forestry than
forestry alone due to carbon-prices being more variable than log prices.
Estate-level implications of carbon-price risk were analysed using Markowitz portfolio
optimisation. General trends in estate-level management are:
• Due to higher LEVs for carbon forestry, compared with forestry alone, an
increasing proportion of estates would go into carbon forestry for higher
expected LEVs;
• A forest estate with a mixture of species and regimes in forestry alone and
carbon forestry appears to be the most effective means of reducing the risk
associated with carbon forestry for a desired LEV.
60
Monte Carlo simulation and portfolio optimisation are useful methods for
understanding how carbon-price risk, and potentially other sources of risk, influence
forestry returns from different stand management decisions and for identifying least-
risk mixtures of management regimes, rotations, species and forestry/carbon stands
within a forest estate
The Optimal Rotation with Carbon-Price Risk
A Markov decision process model was used to assess the impact of carbon-price risk
on stand-level optimal rotation and LEV:
• Carbon-price risk increases the length of the average optimal rotation, due to
forest owners’ best decision being to delay harvest when the carbon-price is
high. This effect is greater for carbon-prices following an independent process
compared with a random walk;
• When carbon-prices follow an independent process LEVs are lower
compared with the case when prices are known with certainty. LEVs are
higher when carbon-prices follow a random walk.
Markov decision process models are a useful method for assessing the impact of risk
on stand management decisions. An advantage of these models is that they can be
easily extended to consider the impact on optimal management of different sources
of risk, such as catastrophic stand loss and uncertain growth rates.
Carbon Pooling for Carbon-Price Risk
Beyond individual forest owner decisions, carbon pooling among forest owners could
be used to reduce carbon price risk. The simple example of carbon pooling among
three forest owners presented in this study shows that an individual forest owners’
decision whether or not to pool is influenced by:
• their carbon credit/ liability profile, which is affected by
o the year in which their forest stand was planted
o their harvest rotation;
• their risk profile (maximax, maximin, minimax regret);
• assumed future carbon-price trends.
Because the market for carbon in New Zealand is not mature we can only infer how
carbon-prices will vary over time from overseas carbon markets (EU and the Chicago
Climate Exchange) and cap and trade markets for other pollutants (SO2 as used in
this study). A better understanding of how carbon markets influence carbon-price
behaviour is essential to improving our knowledge of how to manage for carbon-price
risk.
5.1. Introduction
The analysis so far has been for the case when carbon-prices are known with
certainty. This section explores how fundamental stand and estate-level
management decisions (rotation, regime and species choice) may be influenced by
carbon-price risk. This analysis utilises stand-level results (carbon sequestered over
time, timber volumes, silvicultural costs, harvest costs, etc.) in Monte Carlo
simulation (Reed and Haight 1996), Markowitz portfolio optimisation (Reeves and
Haight 2000), and Markov decision process models (Buongiorno 2001) to analyse
the impact of carbon-price risk (Figure 5.1).
61
C-Change C-Change
C-Change Density
Volume
Grade yields Volume
Grade Yields
Density
Stocking
Financial Spreadsheet
LEV Harvest cost function Cartage cost
Stand-level
Estate-level
Monte Carlo FOLPI
Optimal estate
Price risk

mix of regimes
Figure 5.1: The flow of data and outputs among models used to analyse the effect of carbon-
price risk on stand and estate-level forest management decisions.
An essential input to the analysis is a description of carbon-price risk, as well as log

price risk. In this study we used data on New Zealand radiata pine log prices (MAF
2008) to estimate timber price risk and the United States sulphur dioxide cap and
trade market to estimate carbon-price risk. The latter was used due to a lack of long-
run carbon-price data.
Both carbon and timber price risk were described as stochastic price processes,
which relate current prices to previous period prices plus a randomly distributed error
that makes prices uncertain. Two price processes were used to describe stochastic
carbon-prices; independent and a random walk. This is because the exact nature of
the carbon-price process is unknown.
An independent price process (Figure 5.2) suggests that current prices do not
depend on last period’s prices; they simply fluctuate around a known average long-
run price ($22/ t CO2-e in this study). Such a price process leads to large short-term
price variability. A random walk price process (Figure 5.3) suggests that current
prices are equal to last period’s prices plus some random error. Such a price process
leads to large long-term price variability.
Log prices were described using an independent process (Figure 5.4). Critical to
describing these processes is an estimate of the error in the price series. Appendix C
describes how these were estimated.
62
45
40
35
30
25
20
15
10
0
2000 2020 2040 2060 2080 2100 2120 2140
Year
Figure 5.2: Three simulated carbon-price series following an independent price process
250
200
150
100
50
0
2000 2020 2040 2060 2080 2100 2120 2140
Year
Figure 5.3: Six simulated carbon-price series following a random walk price process
63
120
100
80
Log Price ($/m3)
60
40
Pruned
S1
20 S2
L1&L2
S3&L3
Pulp
0
2000 2020 2040 2060 2080 2100 2120 2140
Year
Figure 5.4: A single simulated log price series following an independent price process
Markowitz portfolio optimisation is widely used to identify risk-efficient investment

plans for shares, property and cash investments (Markowitz 1959). These plans
minimise the risk (variance in returns) associated with different levels of expected
returns. The approach has previously been applied to timberland investment and
harvest scheduling under timber price uncertainty (Reeves and Haight 2000). Here
we use portfolio optimisation to determine the portfolio of stands (rotation, species,
regime) that minimises the risk associated with achieving an expected LEV. Portfolio
optimisation proceeds in two steps:
• Monte Carlo simulation of stand-level analyses to provide expected LEV,
variance in LEV, and co-variance in LEV among regimes (Reed and Haight
1996)
• Markowitz portfolio optimisation to identify, for a mixture of rotations, species,
and regimes, what the portfolio of these is that minimises the risk associated
with achieving an expected LEV.
In this study Monte Carlo simulation simply involved repeating the stand-level
financial analysis (Figure 5.1) for a large number of random carbon-price processes
(2100 simulations), such as those in Figure 5.2 to Figure 5.4, and calculating the land
expectation value for each carbon-price sequence. The 2100 LEVs calculated from
the Monte Carlo simulation are a sample of possible futures. These were used to
estimate the average LEV, variance in LEV and co-variance in LEV among regimes.
As well as using this information in the portfolio optimisation the average and
variance in LEVs were used to show the range of possible LEVs from different
carbon and forestry rotations, species and regimes given uncertainty surrounding
future carbon-prices. This provided information on how stand-level expected LEV and
variance in LEV due to carbon-price risk are affected by forest management
decisions.
64
In this study we used a Markov decision process model (Buongiorno 2001,
Buongiorno and Gilless 2003, Chap 17) to identify how the optimum rotation is
affected by carbon-price risk. Markov decision process models represent stand
management decisions, in this case harvest age, under risk by describing the stand
in terms of its current state and the probabilities of moving to different states in the
future. Here we describe a stand state in terms of its timber volume, carbon stock,
and carbon-price. Because the last is uncertain, at any time the stand may be in
different carbon-price states; high, medium or low. Which carbon-price state the
stand is in and the probability of being in different price states in the future influences
the optimal harvest decision at that time. Appendix C describes the Markov decision
process model used in this study in more detail.
5.2. Effect of Carbon-Price Risk on Stand- and Estate-Level

Management Decisions
The effect of carbon-price risk on stand- and estate-level management decisions was
assessed for the common radiata pine and Douglas-fir regimes and rotations:
• Radiata pine clearwood regime on different rotations;
• Radiata pine regimes on 30 year rotations;
• Douglas-fir sawlog regime on different rotations;
• Douglas-fir regimes on 40 year rotations.
5.2.1. Independent Carbon-Price Process
Radiata Pine Rotation

The effect of carbon-price risk, when carbon-prices follow an independent price
process is shown in Figure 5.5. Based on Monte Carlo simulations Figure 5.5 shows
the average land expectation value and the range of LEVs that could occur with 95%
likelihood.
9.0
Average Land Expectation Value ($000/ha)
7.0
5.0
3.0
1.0
-1.0
-3.0
-5.0
25 yr 30 yr 35 yr 40 yr 70 yr 25 yr 30 yr 35 yr 40 yr 70 yr
Carbon Carbon Carbon Carbon Carbon Forestry Forestry Forestry Forestry Forestry
Figure 5.5: Average land expectation value and 95% confidence interval for LEV for a radiata
pine clearwood regime on different rotations, managed with and without carbon, for an
independent carbon-price process.
65
Managing the forest on longer rotations reduces the variability in land expectation
values by reducing the number of times the forest owner is exposed to the timber and
carbon markets at the time of harvest. This is more significant in management for
forestry only, as carbon-price obviously influences annual revenues from carbon.
However, reduced risk from longer rotations is traded off against lower returns from
longer rotations.
There is also greater variability in land expectation values for carbon forestry
compared with forestry only (Figure 5.5). This is due to the estimated carbon-price
process (Figure 5.2) being more variable than the log-price process (Figure 5.4)
(Appendix C).
66
Radiata Pine Regime Choice
9.0
7.0
5.0
3.0
1.0
-1.0
-3.0
-5.0
Clearwood Sawlog P+L 600 P+L 800 Clearwood Sawlog P+L 600 P+L 800
Carbon Carbon Carbon Carbon Forestry Forestry Forestry Forestry
Figure 5.6: Average land expectation value and 95% confidence interval for LEV for radiata
pine regimes (30 year rotation), managed with and without carbon, for an independent
carbon-price process.
There is greater variability in the LEVs from the plant-and-leave 800 stems per ha
regime. This is possibly due to the higher amount of carbon sequestered under this
regime, increasing the exposure to fluctuations in the price of carbon.
Douglas-fir Rotation
4.0
3.0
2.0
1.0
.0
-1.0
-2.0
-3.0
-4.0
-5.0
40 yr 50 yr 60 yr 90 yr 40 yr 50 yr 60 yr 90 yr
Figure 5.7: Average land expectation value and 95% confidence interval for LEV for the
Douglas-fir sawlog regime on different rotations, managed with and without carbon, for an
67
As with radiata pine, managing Douglas-fir on longer rotations reduces the variability
in LEVs by reducing the forest owner’s exposure to short-term fluctuations in the
price of carbon.
Douglas-fir Regime Choice

4.0
3.0
2.0
1.0
.0
-1.0
-2.0
-3.0
-4.0
-5.0
Sawlog P+L 800 P+L 1200 Sawlog P+L 800 P+L 1200
Carbon Carbon Carbon Forestry Forestry Forestry
Figure 5.8: Average land expectation value and 95% confidence interval for LEV for Douglas-
fir regimes (40 year rotation), managed with and without carbon, for an independent carbon-
price process.
As with radiata pine managing Douglas-fir on the highest carbon sequestration
regime, plant-and-leave 1200 stems per ha, increases the variability in the expected
LEV.
Species and Regime Choice

11.0
9.0
7.0
5.0
3.0
1.0
-1.0
-3.0
-5.0
Dfir Sawlog Dfir P+L Radiata Radiata Radiata Dfir Sawlog Dfir P+L Radiata Radiata Radiata
800 Clear Saw P+L 600 800 Clear Saw P+L 600
68
pine (30 year rotation) and Douglas-fir regimes (40 year rotation), managed with and without
carbon, for an independent carbon-price process.
Reflecting the higher carbon sequestration rates and shorter rotation of radiata pine
regimes, compared with the Douglas-fir regimes, the LEVs for radiata pine are both
higher and more variable. However, when managed for carbon, radiata pine regimes
perform significantly better than Douglas-fir regimes in terms of LEVs.
Least Risk Stand- and Estate-Level Management

The results of the Monte Carlo analysis suggest that there is a trade-off between
higher LEVs from managing stands for carbon on particular rotations and regimes
and increased risk; variability in the LEVs achieved. This section describes the
results of portfolio optimisation used to identify the least risk mixture of rotations,
regimes, species and carbon/forestry only stands within a forest estate to achieve a
desired LEV.

Figure 5.10 shows the percentage proportion of the forest-estate area that would go
into stands that are either carbon forestry or forestry only, with different rotation ages.
These proportions depend on the desired average land expectation value, shown on
the x-axis.
Reflecting the higher LEVs, but also greater variability, in carbon forestry an
increasing proportion of the estate would go into carbon forestry for higher average
LEVs. Reflecting the stand-level findings, stands in carbon forestry would be
managed on a longer rotation than the forestry only stands; 35 years compared with
30 years (Figure 5.10).
69
100
90
80
Proportion of Forest Estate (%)
70
60
50
40
30
20
Forestry 40 yr Rotation
10 Forestry 30 yr Rotation
Carbon 35 yr Rotation
0
- 498 996 1,494 1,992 2,490 2,988 3,486 3,984 4,482
Figure 5.10: Least risk percentage proportion of forest estate area in different forestry and
carbon radiata pine clearwood rotations to achieve desired average LEV with an independent

Reflecting the higher LEVs, but also greater variability, in carbon forestry an
increasing proportion of the estate would go into carbon forestry for higher average
LEVs. Again reflecting the stand-level findings, stands in carbon forestry would be
managed on a higher carbon yielding regime, plant-and-leave 600 stems per ha,
compared with the forestry only clearwood regime (Figure 5.11). Counter to the
stand-level results in Section 5, the preferred forestry only regime is clearwood,
possibly due to less variability in returns.
70
100
90
80
70
60
50
40
30
20
10 Forestry Clearwood
Carbon P+L 600
0
0 656 1312 1968 2624 3280 3936 4592 5248 5904
carbon radiata pine regimes (30 year rotation) to achieve a desired average LEV with an
An increasing proportion of the estate would go into Douglas-fir carbon forestry for
higher average LEVs. Reflecting the stand-level findings, stands in carbon forestry
would be managed on a longer rotation than the forestry only stands; 50 years
compared with 40 years (Figure 5.12). However, shorter rotation carbon forestry (40
years) is preferred if higher desired LEVs are sought.
71
100
90
80
70
60
50
40
30
20
10
0
0 128 256 384 512 640 768 896 1024 1152
carbon Douglas-fir sawlog rotations to achieve desired average LEVs with an independent
100
90
80
70
60
50
40
30
20
Forestry P+L 1200
10 Forestry P+L 800
Carbon P+L 800
0
- 268 536 804 1,072 1,340 1,608 1,876 2,144 2,412
carbon Douglas-fir regimes (40 year rotation) to achieve desired average LEVs with an
72
As for radiata pine, an increasing proportion of the Douglas-fir forest estate would go
into carbon forestry as higher LEVs are desired. For both forestry only and carbon
forestry the preferred regime is plant-and-leave 800 stems per ha (Figure 5.13).

As with choosing between a mixture of rotations or regimes, choosing a mixture of
species shows an increasing proportion of the forest estate going into carbon forestry
as a greater LEV is desired (Figure 5.14). For lower LEVs the least risk carbon
forestry regime appears to be Douglas-fir plant-and-leave 800 stems per ha. As
higher LEVs are desired more of the estate would go into radiata pine managed on
plant-and-leave 800 stems per ha and sawlog regimes. This reflects the results from
the stand-level analysis which shows higher LEVs for radiata pine carbon forestry
compared with Douglas-fir.
100
90
80
70
60
50
40
30
20
10
0
0 786 1572 2358 3144 3930 4716 5502 6288 7074
Carbon Douglas-fir P+L 800 Carbon Radiata pine Sawlog
Carbon Radiata pine P+L 600 Forestry Douglas-fir P+L 800
Forestry Radiata pine P+L 600
carbon Douglas-fir (40 year rotation) and radiata pine (30 year rotation) regimes to achieve
desired average LEVs with an independent carbon-price process.
Figure 5.15 shows the efficient risk-return frontier for each estate mixture
(percentage proportion of forest estate area) of rotations, regimes or species. The
efficient risk-return frontier shows the minimum variability in land expectation value
(measured by the standard deviation in LEV) for a desired expected LEV, i.e., it
shows the minimum risk for a desired LEV. Five risk-return frontiers are shown, for
each of the rotation, regime and species choices described in the sections above
(Figure 5.10 to Figure 5.14).
For example, the Radiata Rotation risk-return frontier is for a forest-estate with a
changing proportion of area in radiata clearwood carbon forestry or forestry only, on
different rotations (Figure 5.10). The frontier in this case shows how the variability in
LEV increases as an increasing proportion of the estate area goes into 35 year
rotation carbon forestry (Figure 5.10).
73
12.0
Radiata Rotation (Figure 5.10)
Radiata Regime (Figure 5.11)
10.0
Douglas-fir Rotation (Figure 5.12)
Douglas-fir Regime (Figure 5.13)
Average LEV ($000/ha)
8.0 Species (Figure 5.14)
6.0
4.0
2.0
.0
.0 .2 .4 .6 .8 1.0 1.2 1.4 1.6
Standard Deviation of LEV ($000/ha)
Figure 5.15: Efficient risk-return frontier for radiata pine and Douglas-fir regimes and rotations
under an independent carbon-price process.
An estate composed of a mix of radiata pine and Douglas-fir regimes appears to be

the most effective way to reduce risk (standard deviation of LEV) for an expected
LEV (Figure 5.15). This is shown by the efficient risk-return frontier for a species
mixed estate being farthest to the left.
Figure 5.15 and Figure 5.10 to Figure 5.14 can also provide an indication of the level
of risk and the optimal mixture of forestry and carbon stands needed to achieve a
forest value (LEV) exceeding land prices. For example, if land prices are $4,000/ ha
Figure 5.15 suggests a mixture of radiata pine and Douglas-fir stands in the forest
estate would be the least risk estate; with a 95% likelihood that the estate LEV would
be between $3000/ ha and $5000/ ha. Such an estate would be entirely in carbon
forestry, with 60% of the estate in Douglas-fir plant-and-leave 800 stems per ha and
40% radiata pine plant-and-leave 600 stems per ha (Figure 5.14).
5.2.2. Random Walk Carbon-Price Process

The effect of carbon-price risk, when carbon-prices follow a random walk price
process is shown in Figure 5.16. Figure 5.16 shows the average land expectation
value and the range of LEVs that could occur with 95% likelihood, based on Monte
Carlo simulations.
There is greater variability in land expectation values for carbon forestry compared
with forestry only (Figure 5.16). This is due to the estimated carbon-price process
(Figure 5.3) being considerably more variable than the log-price process (Figure 5.4)
(Appendix C). The greater variability in carbon-prices assumed for a random walk
price process, compared with the independent price process, suggests that LEVs for
carbon forestry would not differ significantly from forestry only returns (Figure 5.16).
74
25.0

20.0
15.0
10.0
5.0
.0
-5.0
25 yr 30 yr 35 yr 40 yr 70 yr 25 yr 30 yr 35 yr 40 yr 70 yr
pine on a clearwood regime on different rotations, managed with and without carbon, for a
random walk carbon-price process.
Were carbon-prices to follow a random walk as simulated in this study, the greater
long-term variability in carbon-prices would lead to the possibility that stands
managed for carbon would have negative LEVs (Figure 5.16). For example, for
radiata clearwood stands managed for carbon the likelihood of a negative LEV was
estimated from the Monte Carlo simulation data to be 7.9% for a 30 year rotation to
9.4% for a 40 year rotation.
Managing a stand on shorter rotations reduces the variability in LEVs when carbon-
prices follow a random walk, due to less short-term price variability. Shorter rotations
reduce forest owner exposure to longer term changes in the carbon market.
However, reduced risk from shorter rotations is traded off against lower levels of
carbon sequestered.
75
25.0
20.0
15.0
10.0
5.0
.0
-5.0
Clearwood Sawlog P+L 600 P+L 800 Clearwood Sawlog P+L 600 P+L 800
pine regimes (30 year rotation), managed with and without carbon, for a random walk carbon-
price process.
As for the different radiata pine rotations, managing stands for carbon when carbon-
prices follow a random walk could lead to negative LEVs and LEVs not significantly
different from those for forestry only.
There is greater variability in the LEVs from the plant-and-leave 800 stems per ha
regime. This is possibly due to the higher amount of carbon sequestered under this
regime increasing the exposure to fluctuations in the price of carbon (Figure 5.17).
76
13.0
11.0
9.0
7.0
5.0
3.0
1.0
-1.0
-3.0
-5.0
40 yr 50 yr 60 yr 90 yr 40 yr 50 yr 60 yr 90 yr
Figure 5.18: Average land expectation value and 95% confidence interval for LEV for
Douglas-fir sawlog on different rotations, managed with and without carbon, for a random
walk carbon-price process.
Were carbon-prices to follow a random walk as simulated in this study, the greater
long-term variability in carbon-prices would lead to the possibility that stands
managed for carbon would have negative LEVs and that LEVs would not differ
significantly from forestry LEVs.
As for radiata pine managing Douglas-fir stands on shorter rotations reduces the
variability in LEVs when carbon-prices follow a random walk, due to less short-term
price variability. Again this would lead to a trade-off between reduced risk but lower
carbon sequestered (Figure 5.18).
77
13.0
11.0
9.0
7.0
5.0
3.0
1.0
-1.0
-3.0
-5.0
Sawlog P+L 800 P+L 1200 Sawlog P+L 800 P+L 1200
Carbon Carbon Carbon Forestry Forestry Forestry
Figure 5.19: Average land expectation value and 95% confidence interval for LEV for
Douglas-fir regimes (40 year rotation), managed with and without carbon, for a random walk
As for the different Douglas-fir rotations, managing stands for carbon when carbon-
prices follow a random walk could lead to negative LEVs and LEVs not significantly
different from those for forestry only. There is greater variability in the LEVs from the
plant-and-leave 1200 stems per ha regime (Figure 5.19). This is possibly due to the
higher amount of carbon sequestered under this regime increasing the exposure to
fluctuations in the price of carbon.

Reflecting the higher carbon sequestration rates and shorter rotation of radiata pine
regimes compared with the Douglas-fir regimes the LEVs for radiata pine are both
higher and more variable. Reflecting the greater variability in carbon-prices when
they follow a random walk there is no significant difference in returns from Douglas-fir
and radiata pine (Figure 5.20).
78
25.0
20.0
15.0
10.0
5.0
.0
-5.0
Dfir Sawlog Dfir P+L Radiata Radiata Radiata Dfir Sawlog Dfir P+L Radiata Radiata Radiata
800 Clear Saw P+L 600 800 Clear Saw P+L 600
pine (30 year rotation) and Douglas-fir regimes (40 year rotation), managed with and without
carbon, for a random walk carbon-price process.
Least Risk Stand- and Estate-Level Management

The results of the Monte Carlo analysis for a random walk carbon-price process
suggest that there is a trade-off between higher LEVs from managing stands for
carbon on particular rotations and regimes and increased risk, variability in the LEVs
achieved. This section uses portfolio optimisation to identify the least risk mixture of
rotations, regimes, species and carbon/forestry only stands within a forest estate for
a desired LEV.

Figure 5.21 shows the percentage proportion of the forest-estate area that would go
into stands that are either carbon forestry or forestry only, with different rotation ages.
These proportions depend on the desired average land expectation value, shown on
the x-axis.
Reflecting the stand-level results for rotation when carbon-prices follow a random
walk, the preferred mixture of radiata clearwood rotations in carbon forestry are
shorter; 30 years. An increasing proportion of the estate goes into carbon for an
increasing desired LEV. To achieve the highest LEVs the estate would be entirely
carbon forests managed for perpetuity (Figure 5.21).
79
100
90
80
70
60
50
40
30
20 Forestry 25 yr Rotation
10 Carbon 70 yr Rotation
0
0 910 1820 2730 3640 4550 5460 6370 7280 8190
carbon radiata pine clearwood rotations to achieve desired average LEVs with a random walk

As a higher LEV is sought a greater proportion of the radiata pine forest estate would
go from a forestry only plant-and-leave 600 stems per ha regime into carbon forestry
on the same regime (Figure 5.22).
80
100
90
80
70
60
50
40
30
20
Forestry P+L 600
10 Carbon P+L 800
Carbon P+L 600
0
0 966 1932 2898 3864 4830 5796 6762 7728 8694
carbon radiata pine regimes on 30 year rotation to achieve a desired average LEV with a
random walk carbon-price process.
Reflecting the stand-level results for rotation when carbon-prices follow a random
walk, the preferred mixture of Douglas-fir sawlog rotations in carbon forestry is 40
years. An increasing proportion of the estate goes into carbon for an increasing
desired LEV. Again reflecting the stand-level results for Douglas-fir the preferred
carbon forestry rotation is the same as for forestry only, 40 years (Figure 5.23).
81
100
90
80
70
60
50
40
30
20
10
0
0 332 664 996 1328 1660 1992 2324 2656 2988
carbon Douglas-fir sawlog rotations to achieve desired average LEVs with a random walk

As when carbon-prices follow an independent process, the preferred Douglas-fir
regime for both forestry and carbon is plant-and-leave 800 stems per ha. Again as
higher LEVs are desired, a greater proportion of the forest estate would be put into
carbon forestry (Figure 5.24).
82
100
90
80
70
60
50
40
30
20
10 Forestry P+L 800

Carbon P+L 800
0
0 522 1044 1566 2088 2610 3132 3654 4176 4698
carbon Douglas-fir regimes (40 yr rotation) to achieve desired average LEVs with a random
walk carbon-price process.

As with choosing between a mixture of rotations or regimes, choosing a mixture of
species shows an increasing proportion of the forest estate going into carbon forestry
as a greater LEV is desired (Figure 5.25). For lower LEVs the least risk carbon
forestry regime appears to be Douglas-fir plant-and-leave 800 stems per ha. As
higher LEVs are desired more of the estate would go into radiata pine managed on
plant and leave 600 stems per ha and sawlog regimes. This reflects the results from
the stand-level analysis which shows higher LEVs for radiata pine carbon forestry
compared with Douglas-fir.
83
100
Forestry Radiata P+L 600
90 Forestry Dougls-fir P+L 800
80 Carbon Radiata P+L 600

Carbon Radiata Sawlog

70
60
50
40
30
20
10
0
0 1094 2188 3282 4376 5470 6564 7658 8752 9846
carbon Douglas-fir (40 year rotation) and radiata pine (30 year rotation) regimes to achieve
desired average LEVs with a random walk carbon-price process.
The effect on the variability in LEVs (measured by the standard deviation in LEV) of
changing the mixture of stands in the estate as an increasing LEV is sought, is
shown in Figure 5.26. Figure 5.26 is the efficient risk-return frontier for each estate
mixture of rotations, regimes or species. It shows the minimum risk for a desired
LEV.
Figure 5.26 shows the efficient risk-return frontier for each estate mixture
(percentage proportion of forest estate area) of rotations, regimes or species when
carbon-prices follow a random walk. The efficient risk-return frontier shows the
minimum variability in land expectation value (measured by the standard deviation in
LEV) for a desired expected LEV, i.e., it shows the minimum risk for a desired LEV.
Five risk-return frontiers are shown, for each of the rotation, regime and species
choices described in the sections above (Figure 5.21 to Figure 5.25).
For example, the Radiata Rotation risk-return frontier is for a forest-estate with a
changing proportion of area in radiata clearwood carbon forestry or forestry only, on
different rotations (Figure 5.21). The frontier in this case shows how the variability in
LEV increases as an increasing proportion of the estate area goes into 30 year and
70 year rotation carbon forestry (Figure 5.21).
Were carbon-prices to follow a random walk there would be less opportunity to use
rotation, regime or species choice to reduce variability in LEV (Figure 5.26). This
reflects the preference for radiata pine regimes over Douglas-fir to achieve a desired
LEV at least risk (Figure 5.25) when carbon-prices follow a random walk. In this case
lower variability in returns could be achieved by having a greater proportion of
forestry only stands in the estate.
84
12.0
Radiata Rotation (Figure 5.21)
Radiata Regime (Figure 5.22)

10.0
Douglas-fir Rotation (Figure 5.23)
Douglas-fir Regime (Figure 5.24)

Expected LEV ($000/ha)
8.0 Species (Figure 5.25)
6.0
4.0
2.0
.0
.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0
Standard Deviation of LEV ($/ha)
Figure 5.26: Efficient risk-return frontier for radiata pine and Douglas-fir regimes and
rotations under a random walk carbon-price process.
Figure 5.26 and Figure 5.21 to Figure 5.25 can also provide an indication of the level
of risk and the optimal mixture of forestry and carbon stands needed to achieve a
forest value (LEV) exceeding land prices. For example, if land prices are $4,000/ ha
Figure 5.26 suggests a mixture of radiata pine managed on a plant-and-leave 600
stems per ha regime in carbon and forestry in the forest estate would be the least risk
estate; with a 95% likelihood that the estate LEV would be between -$500/ ha and
$8200/ ha. Such an estate would be 43% carbon forestry, with 57% forestry only
(Figure 5.25).
5.3. Optimal Rotation with Carbon-Price Risk

The above analysis using Monte Carlo simulation and portfolio optimisation assumed
that forest owners would not change their decision to harvest a stand at a particular
rotation age if the price of carbon, when the decision was made, was too high. The
analysis therefore ignores the possibility that the forest owner may choose to delay
harvest when the carbon-price is high to continue to receive high carbon revenues
and avoid a large carbon liability.
Here we use a Markov decision process model (Buongiorno et al. 2001) to assess
the extent to which forest owners might change their decision to harvest when the
carbon-price is high or low.
5.3.1. Radiata Pine

Figure 5.27 shows the long-term average rotation age for four radiata pine regimes
under forestry only, carbon forestry where the price is known with certainty
($22/t CO2-e), the carbon-price follows an independent process and carbon-prices
follow a random walk. The average rotation is shown, as the optimal rotation
depends on whether the carbon-price is high or low at the time of harvest. For
example, if the carbon-prices follow an independent process then it is best to harvest
85
a stand earlier when the carbon-price is low as the immediate return from timber
minus the carbon liability is greater than when the carbon-price is high.
Consequently, it is best to harvest a stand later when the carbon-price is high.
The first impact of carbon-price risk is that the optimal rotation is on average longer
compared with the situation when carbon-price is known for certain (Figure 5.27).
This is due to forest owners delaying harvest when the carbon-price is high. The
delay in harvest is greater when carbon-prices follow an independent process
compared with a random walk. This is because of the greater long-term variability in
carbon-prices when they follow a random walk. As such it takes longer for prices to
move to the long-term average price. The probability that the market will be in the
same state next period is therefore high so that the difference between immediate
returns and the discounted long-term average return will decrease.
The optimal rotation is slightly longer for regimes with lower timber values; plant-and-
leave compared with clearwood and sawlog (Figure 5.27).
100
90
80
70
Rotation (yr)
60
50
40 P&L 800
30 P&L 600
20 Sawlog
10 Clearwood
0
Forestry Only Carbon Known Independent Random Walk
Price
Price Process
Figure 5.27: Optimal rotation age for a radiata pine stand managed on different regimes, with
forestry only and with carbon, under different carbon-price processes.
Figure 5.28 shows the land expectation value for the four radiata pine regimes under
forestry only, carbon forestry where the price is known with certainty ($22/t CO2-e),
the carbon-price follows an independent process, and carbon-prices follow a random
walk. In each case the land expectation value is calculated for a stand managed on
the optimal rotation age (Figure 5.27). LEVs are slightly lower when carbon-prices
follow an independent process compared with deterministic carbon-prices. When
carbon-prices follow a random walk, LEVs are highest.
86
9.0
8.0
7.0
LEV ($000/ha)
6.0
5.0
4.0 P&L 800
3.0 P&L 600
2.0 Sawlog
1.0
Clearwood
.0
Price
Price Process
Figure 5.28: Land expectation value for a radiata pine stand managed on the optimum
rotation for different regimes, with forestry only and with carbon, under different carbon-price
processes.
5.3.2. Douglas-fir
Figure 5.29 shows the long-term average rotation age for three Douglas-fir regimes
under forestry only, carbon forestry where: the price is known with certainty
($22/t CO2-e); the carbon-price follows an independent process, and; carbon-prices
follow a random walk. In each case the land expectation value is calculated for a
stand managed on the optimal rotation age (Figure 5.28).
As for radiata pine the impact of carbon-price risk is to increase the optimal rotation
compared with the situation when carbon-price is known for certain (Figure 5.29).
The delay in harvest is greater when carbon-prices follow an independent process
compared with a random walk. The optimal rotation is also slightly longer for regimes
with lower timber values; plant-and-leave compared with sawlog (Figure 5.29).
87
80
70
60
Rotation (yr)
50
40
30 P&L 1200
20 P&L 800
10 Sawlog
0
Price
Price Process
Figure 5.29: Optimal rotation age for a Douglas-fir stand managed on the optimum rotation for
different regimes, with forestry only and with carbon, under different carbon-price processes.
Figure 5.30 shows the land expectation value for the three Douglas-fir regimes under
forestry only, carbon forestry where: the price is known with certainty ($22/t CO2-e);
the carbon-price follows an independent process, and; carbon-prices follow a random
walk. LEVs are slightly lower when carbon-prices follow an independent process
compared with deterministic carbon-prices. When carbon-prices follow a random
walk, LEVs are highest.
5.0
4.0
LEV ($000/ha)
3.0
2.0 P&L 1200
1.0 P&L 800

Sawlog
.0
Price
Price Process
Figure 5.30: Land expectation value for a Douglas-fir stand managed on different regimes,
with forestry only and with carbon, under different carbon-price processes.
88
5.4. Carbon Pooling under Carbon-Price Risk
The previous sections have analysed how an individual forest owner may change
stand and estate-level forest management under carbon-price risk. This section
presents a simple example of how carbon pooling among several small forest owners
may be used to reduce exposure to carbon price risk under the current Emissions
Trading Scheme regulations.
For this example, three forest owners (A, B and C) each have a one hectare stand,
planted in 1994, 2000 and 2007 respectively. The stands are identical in every other
way, with the growth rate matching the national average yield table used in New
Zealand’s Green House Gas inventory. Each owner intends to harvest at age 28
years.
Because A’s stand was planted in 1994, it is subject to the fast-growing forest fix,
meaning that harvest liabilities in the first rotation are limited to credits earned. This is
not required for B’s 2000 stand, because credits earned are greater than liabilities at
the end of the rotation. However, growth from planting before the start of the
commitment period, i.e. until age 7, goes uncredited. Only C can capture the full
credits for the growth of their stand during commitment periods, which are assumed
to be continuous.
Because each forest owner may generate significant carbon liabilities on harvesting,
they investigate the benefits of pooling credits. Each forest owner receives different
advice on future carbon-prices (Figure 5.31), though all follow similar trends: a rise in
the carbon-price, followed by a correction back to current levels, then another rise
and correction before levelling off at double the current price.
45
Owner A
40 Owner B
Owner C
35
30
25
20
15
10
0
2000 2010 2020 2030 2040 2050 2060 2070 2080
Year
Figure 5.31. Alternative carbon-price series assumed by each forest owner for the carbon-
pooling example.
Using these carbon-price lists, each forest owner calculates the discounted value for
their expected carbon credits and liabilities alone, i.e., excluding timber returns and
89
forestry and carbon compliance costs. The rotation length is fixed at 28 years, rather
than changing in response to carbon-price. Credits and liabilities are calculated on an
individual block basis. Therefore the discounted revenue for a combined pool is
simply the sum of the individual owners' net present values, and credits and liabilities
are similarly summed.
Because of the relationship between carbon-price fluctuations and the timing of
harvest, each carbon-price list favours a different owner. Under price list A, Owner A
generates the highest net present value, under price list B, Owner B’s stand has the
highest value, while under price list C, Owner C’s stand has the highest NPV. The
fourth price list simply assumes a constant price, which favours Owner B (Table 5.1).
Table 5.1. Net present value ($/ha) by forest owner under alternative carbon-price lists. The
maximum value is shown in bold.
Price List Owner A Owner B Owner C Mean
A 5,659 5,373 4,941 5,324
B 2,526 5,466 4,749 4,247
C 2,303 3,714 4,782 3,599
D1 2,547 3,848 3,508 3,301
1
Price list D is a constant $15/ t CO2-e carbon-price
Owner A tries to persuade Owners B and C to pool carbon credits and liabilities. As
each has 1 ha, the plan is to split the cash flow three ways. All owners would avoid
potential cash flow problems (Figure 5.32), because liabilities are split three-ways.
However, while Owner A would have a small reduction in net present value under
carbon-price list A, they would receive a large increase under the other carbon-price
lists. Owner A has most to gain from any deal, given the timing of their harvest and
the fact that they do not get credit for all their stand growth11.
11
Assuming their harvest liabilities are capped by the fast-growing forest fix, they can maximise
subsequent uptake by removing all residues prior to establishing the next rotation.
90
2.0
.0
2008 2018 2028 2038 2048 2058 2068 2078
-2.0
Annual Carbon Revenue ($000)
-4.0
-6.0
-8.0
-10.0
-12.0
-14.0 Owner A
Owner B
-16.0 Owner C
pool average
-18.0
Figure 5.32. Individual and shared (“pool average”) credits and liabilities
Owners B and C decide that they would be better off without Owner A’s stand pulling
down their average return – but whether they pool or not comes down to their view of
the likelihood of particular price trends and their decision making criteria under risk.
If the analysis is repeated but with Owner A excluded, the results in Table 5.2 are
obtained.
Table 5.2. Net present value ($/ha) by forest owner under alternative carbon-price lists,
pooled net present value, and difference (regret).
Price List Owner B Owner C Shared Difference B Difference C
A 5,373 4,941 5,157 -216 216
B 5,466 4,749 5,108 -358 358
C 3,714 4,782 4,248 534 -534
1
D 3,848 3,508 3,678 -170 170
1
Price list D is a constant $15/ t CO2-e carbon-price
Criteria for making decisions under risk are based on assigning probabilities to the
different carbon-price lists and calculating an expected (average) value (Tapiero
2004, Wisniewski 2006). In this example, if each of the four price lists was
considered equally likely, the expected net present value for Owner B is $4,600, but
is less for Owner C; $4,495. Pooling would therefore only be advantageous to Owner
C.
If probabilities are unknown, then one of the criteria for “decision making under
uncertainty” (Tapiero 2004, Wisniewski 2006) can be used to decide whether or not
to pool carbon risk.
• Under the optimistic maximax criteria, owners seek to maximise their returns:
o Owner B’s best possible result occurs under carbon-price list B,
without pooling (Table 5.2);
91
o Owner C’s best result occurs under carbon-price list A if they do pool
(Table 5.2).
• Under the pessimist’s maximin criteria, owners seek to maximise their
minimum payoff:
o Owner B would fare worst under carbon-price list C, with an
improvement if he pools;
o Owner C would also choose to pool under this criteria, to improve their
returns under carbon-price list D.
• Under the minimax regret criteria, owners seek to minimise the maximum
‘opportunity cost’, or loss, from making the wrong decision. For example, if
Owner B decides not to pool and price list C eventuates, his decision will
have cost him $534:
o if Owner B does decide to pool, the maximum possible regret is only
$358, so pooling would be their choice under the minimax regret
criterium;
o the reverse holds for Owner C – they would choose to not pool, with a
maximum potential regret of $358 should carbon-price list B
eventuate.
Discount rate has an influence on these results – at 12%, Owner C is always better
off pooling, while at 4% most of the decisions would be reversed.
Clearly there is also an opportunity to adapt management in response to prevailing
prices; both for timber and carbon. Manley and Wakelin (1995) implemented these
decision criteria within a FOLPI models examining regime portfolio optimisation under
future log price uncertainty, and the approach could be extended to include carbon-
prices. However, deal making among prospective pool partners would appear to be a
difficult task involving matching growers' risk profiles as well as their credit/liability
profiles.
92
6. Priority Gaps and Workplan
Summary
This study has been completed to the best of the methodologies currently available.
In this section we list the advancements in tools and knowledge that would enhance,
clarify and simplify this research, and make it readily available to a potentially wider
range of users.
Current tools and systems revolve and evolve around the standard forestry practices
of growing for timber, as this is where the data and the need currently lie. To expand
the current suite of tools to include the new options posed by carbon forestry, we
must consider the following gaps:
• Growth modelling:
o More species, on a wider variety of sites;
o Shorter and longer rotations;
o Cutting studies and grade yields for diverse species and regimes.
• Carbon modelling:
o Inclusive in growth and estate level- modelling;
o Most functions are currently based on radiata – need to be researched
in a species-by-species fashion.
• Economic modelling:
o An integrated stand- and estate-level modelling system, incorporating
timber and carbon for multiple species;
o Harvesting costs for shorter and longer rotations;
o Financial risks involved, including timber price risk, carbon price risk
and physical risks of damage to forests
These gaps are summarised in terms of fundamental knowledge, functions and

modelling systems in Table 6.1.
Subsequent to identifying the gaps this section also proposes a workplan that, if
implemented, would bring together and clarify the insights in this report and make
them more accessible to forest managers.
6.1. Priority Gaps
The literature review and modelling analysis have highlighted key areas where there
is inadequate information to accurately model the impacts of planted forest
management on carbon stocks and for addressing carbon price risk. The key areas
are:
• Species-site decision support.

• Management options outside the scope of traditional timber regimes:
o Both shorter and longer rotations;
o Species other than radiata pine and Douglas-fir;
o Smaller and larger log-piece sizes;
o Plant and leave regimes at higher stockings;
o New sites;
o Management for wood density improvement.
• Economic data for management of species other than radiata pine and
Douglas-fir.
93
• Adequately incorporating carbon in stand-level and estate-level models.
• Incorporating risk (price and physical) in stand-level and estate-level models.
In identifying specific gaps this section follows the flow of information through the
modelling framework (Figure 6.1). Gaps are identified below under each level of the
framework given in Figure 6.1 and summarised in Table 6.1 as gaps in:
• fundamental knowledge;
• functions, or;
• modelling systems.
Level

1
C-Change C-Change 2
C-Change Density
Volume 3
Grade yields Volume
Grade Yields
Density
Stocking
Financial Spreadsheet
LEV Harvest cost function Cartage cost
Stand-level

4
Estate-level
Monte Carlo FOLPI
Optimal estate
Price risk

mix of regimes
Figure 6.1: Framework for modelling planted forest management decisions for increasing
carbon stocks and addressing carbon price risk.
6.1.1. Growth Modelling

• Site/species matching and productivity information for species other than radiata
pine is badly needed.
• All growth-and-yield models apart from radiata pine and Douglas-fir need
significant improvement in their predictive ability to forecast the impacts of a
range of regimes.
• All growth-and-yield models need improvement to predict growth of stands older
than 50 years, particularly to simulate permanent forests.
• Consequence of carrying higher stockings over longer rotations needs to be
assessed where risk of stand collapse, disease, windthrow is increased.
• All growth models are specific to the sites where the Permanent Sample Plots are
monitored. Expansion of planted forests onto new lands will mean that
Permanent Sample Plots will need to be extended to include the new areas
where carbon forests may be favoured.
• New growth models based on environment and site variables are needed to
replace indice-based models.
• Soil and climatic data is inadequate for a large number of Permanent Sample
Plots. Process-based models are not currently available and paramatised for
New Zealand species and/or soil and climatic factors.
94
• The current study focused on one site to enable comparison among species.
Ultimately, species growth models need to enable comparisons of different
species across different sites.
• Wood Density functions are needed for species other than radiata pine and
Douglas-fir.
• The effect of changes in management regime on wood density is poorly
understood.
6.1.2. Carbon Modelling: C- Change

• C-change estimates for species other than radiata pine are based on the radiata
pine allometric functions, with changes made to wood density assumptions. C-
change should be calibrated for other species.
• Above ground/below ground partitioning is not known in New Zealand for species
other than radiata pine and Douglas-fir.
• Species-specific wood decay functions are required. The current function is
based on radiata pine.
• Density values are not well documented and validated for species such as
cypresses and redwoods, particularly as they vary by age.
• Functions relating density-volume interactions in C-change are needed.
Incorporating soil characteristics (C/N ratio) is essential as a key approach to
increasing stand volume growth is fertilising stands which will impact the density-
volume interaction.
6.1.3. Grade-yields, Density and Carbon LEV

• Log grade yields are not well known and/or validated for species other than
radiata pine and Douglas-fir. Change in log grade yields with rotation age can not
be taken into account.
• Tree taper, stem size distribution, and branch size all need to be modelled for
species other than radiata pine and Douglas-fir to enable realistic yield tables by
log grade.
• The cost of harvesting smaller and larger piece sizes is not well known. Harvest
cost structures are built around current forest practices, so for longer rotations
little is actually known on the harvesting costs.
• Carbon compliance costs are not yet well known.
6.1.4. Estate-Level and Carbon Price Risk

• FOLPI requires development to represent and track carbon across multiple
rotations, species and regimes.
• Carbon price processes are not well understood, but are a critical influence on
the extent to which planted forest management can respond to carbon price risk.
This indicates the need for further investigation of carbon-price risk. This could be
based on experience from other carbon markets, e.g., The European Union and
Chicago Carbon Exchange, using carbon price data from sources such as
PointCarbon12. Foresters and economists must be linked together to examine
thoroughly the extent of the possible risks in the carbon market.
• Understanding and estimating owner specific physical risk to forests and
incorporating these in models of forest management risk (Watt et al. 2008).
• Incorporating risk into the stand- and estate-level models used in this study will
enable forest owners and investors to more easily include these risks in their
decision making.
12
http://www.pointcarbon.com/
95
• Linkages must be improved among a diverse range of models from growth to
carbon to stand-level economics to estate-level. An integrated stand- and
estate-level modelling system, incorporating timber and carbon for multiple
species is needed. Such a system will greatly enhance and speed the
assessment of alternative management options for carbon forestry.
96
Table 6.1: Framework for main knowledge gaps and their priority.
Knowledge Type Priority Description
Fundamental knowledge 1 Matching species to sites and resultant productivity
2 Understanding carbon-price risk and price processes
3 Behaviour of permanent forests derived from exotic species at high stockings
4. Stability of high volume stands on eroded hill slopes
5 Identify genetic material, particularly for radiata pine, which provides the highest biomass
overall
6 Identify exotic and native species with the potential to provide high biomass, with relatively
low climatic, site, disease and market risk
Functions 1 Robust log grade yields tables for species other than radiata pine and Douglas-fir
2 Density values by age for all minor species, i.e., species other than radiata pine, Douglas-
fir and some eucalypts
3 Costs associated with harvesting larger piece sizes
4 Above/below ground biomass dynamics after harvest for coppicing species.
5 Above ground/below ground partitioning for species other than radiata pine and Douglas-fir
6 Decay functions for species other than radiata pine and Douglas-fir
7 Density-volume interactions
8 Improved mortality functions at high ages and stockings for all species.
Models and modelling systems 1 Development of integrated growth-and-yield systems for species other than radiata pine
and Douglas-fir
2 Improvement of systems for integrating carbon and other eco-system services
3 Incorporating site and environmental factors using GIS tools
4 Extensive sampling of soil and climatic data in conjunction with Permanent Sample Plots
5 Modelling density changes with change in stand management
6 An integrated system for evaluating estate-level forestry-growing and carbon-sequestration
decisions (species, site, climatic and soil factors, rotation, yields etc), incorporating spatial
considerations
7 Incorporating carbon-price and physical risk in stand- and estate-level models
97
6.2. Workplan
6.2.1. Stand-Level Management Decisions
In this report we have used material from Maclaren (2004) to review the potential for
short- to medium and long-term sequestration and risks associated with this for six
exotic tree species. These were examples only. Other exotic and native tree species
need to be considered in terms of:
• Growth potential, in particular biomass, and matching this potential to site
suitability;
• Site requirements, in particular, suitability on sites that are economically and
environmentally feasible options for carbon forestry;
• Climatic risk, taking into consideration changing climatic risk under global
warming;
• Pests and diseases, again taking into consideration how these may change
with global warming;
• Market risk.
Site-species interactions in particular are poorly understood and require further
exploration.
Setting priorities for research investment is always difficult. One approach, adapted
from Leith Knowles’ work with Douglas-fir, is to develop a matrix of research issues
by stage and rank these according to how important they are and how well these
issues are being currently addressed (Table 6.2).
Radiata pine was identified as being likely to remain the pre-eminent planted forest
species in the near future. Enhancing this species’ biomass potential is therefore
important. Listing the most common available radiata pine seedlots / plant material
for commercial plantations and the genetic make-up of these seedlots could be
combined with the predicted breeding values for key traits (diameter, density) to help
predict the basic differences in the biomass potential of these seedlots. Various non-
genetic effects (e.g. site, silviculture, etc) could then be added in order to model the
long-term effects of genetic-site interactions on biomass overall.
98
Table 6.2: Research programme guide, and example ranking for Douglas-fir from Leith Knowles.
Stage 1 Research issues Stage 2 Research issues Stage 3 Research issues Ranking
Provenance trials, seed stands and other gene resources 4
Tree breeding programme 4
Nursery practice – e.g., provision of suitable planting stock 2
Deployment – e.g., vegetative propagation, 4
clonal, etc)
Siting requirements – e.g., frost limitations, 4
rainfall, wind
Foliar nutrient guidelines 3
Establishment practice- e.g., site prep, stock handling, nutrition 2-3
Silvicultural response – e.g., initial stocking, timing and intensity 4
of pruning or thinning
Development and fitting of mensurational 4
functions e.g., growth modelling, volume
and taper functions
Growth measurement – Trial series of PSPs with range of sites 4
and treatments
Wood properties measurement, e.g., density, MFA, spiral grain 4
Utilisation studies- e.g., appearance or 2-3
performance, fitness for purpose
Modelling value chain – e.g., link trees to 4
logs to timber/products
Processing issues – e,g,, improve sawing, drying 3
Product performance -fitness for purpose 4
Health – e,g, current and future risks 4
Environmental concerns (e.g., tree spread) 4
Environmental services – e.g., water use, 6-7
erosion control
Carbon – e.g., biomass studies 5-6
Integration models - including economic 4
Information available overseas and active links to other research PNW, UK,
providers France
Ranking: 1. has never been an issue, and unlikely to be in the future, 2. has been adequately addressed. Not an issue for further research, 3. is being addressed. Ongoing
research can be reduced, 4 Is being addressed. Ongoing research needed at current level, 5. is being addressed, but current effort is inadequate. Some increase justified, 6.
is being addressed, but current effort is inadequate. Considerable increase justified, 7. is not being addressed. We are starting from scratch.
99
6.2.2. Estate-Level Management Decisions
While the estate-level results from this study are in broad agreement with the stand-
level results, additional estate-level scenarios should be explored to consider the
impact of more realistic estate-level management constraints on the general results
found here:
• implications of opting into the Emissions Trading Scheme for corporate
forestry with different age-class distributions, particularly more uneven
distributions, and a greater proportion of Kyoto forest;
• implications of constraints such as the requirement to supply a pulp mill or
appearance sawmill with minimum annual volumes. Previous studies have
shown that such constraints overturn the results of stand-level regime
analysis (Manley and Wakelin 1990);
• stand- and estate-level results would be affected by price trends in timber and
carbon over time, prices of timber relative to carbon, and discount rate.
Sensitivity of managers to price risk will also affect decisions, as discussed in
the section on Carbon Pooling.
Estate-level models for identifying optimum strategies to sequester carbon must
include spatial considerations. This is important for several reasons. Firstly, for
meeting Emissions Trading Scheme regulations, which currently require a forested
area to remain forested as part of the ETS. Secondly, so that the normally high costs
of harvesting are minimised, i.e., harvesting in any one year is constrained, where
possible, to a block/blocks, thereby reducing the cost of transport and moving
harvesting equipment and crew.
Model I type estate models, i.e., where a decision variable represents the amount of
land allocated to a set of management activities over a planning period, make it
easier to track each unit of land. This makes it possible to address spatial issues.
FOLPI could be adapted to handle Model I type formulations and also linked to GIS
visualisation. This would mean moving away from the croptype concept. Using linear
programming solvers that are suitable for handling integer solutions would also have
to be explored.
6.2.3. Carbon-Price and Physical Risk

Markov decision process models are a very flexible way of formulating problems
incorporating risk, including price and physical risk. These models can also readily
incorporate stand-level data from deterministic models, as was done for this study.
As such, Markov decision process models are a useful first step to incorporating risk
in stand-level decision making. The model developed for this study could be
extended to include:
• timber price risk;
• physical risk to planted forests, such as catastrophic loss due to pests
and disease or extreme weather events. Including these risks would
enable a more complete comparison of different tree species which
differ in their risk of catastrophic loss;
• growth uncertainty, due to limited data available for estimating growth
models for some species on longer rotations. Again, including this
uncertainty would enable a more complete comparison of different tree
species.
100
Acknowledgements
We thank Kevin Maloney, Barry Poole, Rob Webster, Mark Dean and Mark Self for
providing access to information on forest management for E. fastigata, redwood,
Douglas-fir and radiata pine. NZ Forestry Ltd and NZ Redwood Co. Ltd kindly
provided access to the redwood growth model. Bruce Manley kindly provided a
version of the Financial spreadsheet used for calculating land expectation values.
Hamish Marshall kindly contributed to the development of the research approach.
Chris Goulding, Peter Beets, Russell Dale, Sarah Heine, and Bob Shula participated
in workshops identifying key management decisions and priority gaps for further
work. Kai Ilmonen, Bhubaneswor Dhakal, Haydon Jones, Lindsay Bulman, and Oliver
Chikumbo provided valuable contributions to the literature review. John Threadgill
provided assistance in running the FOLPI model. Bhubaneswor Dhakal and Joseph
Buongiono provided assistance with development of the Markov decision process
model used in the carbon-price risk analysis. Marie Heaphy, Rowland Burdon, David
Bergin, Toby Stovold and Margaret Richardson provided useful reviews of previous
drafts of this report. Finally, Peter Lough and Bryan Smith of the Ministry of
Agriculture and Forestry provided useful feedback on the research approach and
report.
101
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Appendix A: Stand-Level Models
Appendix A.1: Stand-Level Assumptions
General Assumptions
1 Growth and management of all species were represented using the following
models:
Radiata pine FFR Radiata Calculator (Kimberley et al. 2008)

Douglas-fir FFR D.Fir Calculator (Knowles 2005, 2008)
C. lusitanica Cypress growth model (Berrill 2004)
Redwood Redwood growth model (Kimberley and Dean 2005)
E. fastigata Eucalyptus growth model (van der Colff and Kimberley
2005)
2 The carbon content of tree fibre was modelled using the C_Change carbon
model (Beets et al. 1999). This model is implicit in the radiata pine, Douglas-fir
and redwood models, but must be used in conjunction with the E. fastigata and
C. lusitanica models. In either case, C_Change is used to convert a volume yield
table into carbon content.
3 Silvicultural costs are given in Appendix A.3, and are included in each land
expectation value calculation, discounted appropriately.
4 At felling, the merchantable timber is a mix of different grades depending on the

regime and felling age. This is calculated by the growth model for radiata pine
and Douglas-fir, but for the remaining species we must base our log grade
proportions on limited cutting study data and expert opinion (see Species
Assumptions and Appendix A.5 below).
5 Harvesting costs per m3 were calculated in the Financial spreadsheet according

to the formula:
Total harvesting cost = 5.8138 + 28.565 / MTS + 3 + 2 + 15

Log + load cost Overhead Roading Cartage
where MTS = Mean tree size (m3 /tree) (B. Manley pers. comm.)
6 Land expectation values were calculated based on a pre-tax discount rate of 8%.
7 Carbon prices of $0/t CO2-e, $12 /t CO2-e, $22/t CO2-e and $38/t CO2-e were
used and were held constant over time for the stand- and estate-level analyses.
The base case carbon price was $22/t CO2-e.
8 Emissions Trading Scheme compliance cost was estimated to be $60/ year.
9 Annual forestry overhead cost was $50/ year.
Radiata pine
Radiata Calculator used to age 70 years.
Two minor modifications to the Radiata Calculator were necessary to obtain the data
required to estimate land expectation value:
109
• Implicit in the calculation of the net present value in the Radiata Calculator is
a matrix of regime costs at a given time. This was taken from the
programming and utilised in the separate Financial spreadsheet.
• The binary search used to approximate the pruning age when the
specification is given by diameter over stubs (DOS) was modified to range
between 0 and age 20 instead of 0 and the rotation age so as to give
consistent answers, regardless of time of harvest. This will provide erroneous
results if used for prunings past 20 years.
Labour costs of $38 per person-hour were used (J. Lane and M. Dean pers. comm.)
Site productivity based on Bay of Plenty region with site index of 32.5 m and
300Index of 27.2 m.
Basic density at age 25 of 464 kg/m3. This is used by the Radiata Calculator to
provide a density gradient across the whole rotation age.
Clearfell yield 85% for clearwood and sawlog regimes, 75% for plant and leave
regimes (G. West pers. comm.)
Planting costs were calculated within the Radiata Calculator for $38/hour labour cost,
and 50c/ tree seedling cost.
Harvesting costs, calculated within the Financial spreadsheet, were between $34/m3
and $45/m3
Growth improvements were applied as a percentage increase in the 300Index.
Density improvements were applied as a percentage increase in input density (as

specified above).
Log prices were a 12-quarter average of MAF log prices (P. Maclaren pers. comm.)
Log specifications as given in Appendix A.4. (P. Maclaren pers. comm.)
Pruning ages for first, second and third lifts – where applicable – were set based on
diameter over stubs (DOS) of 17 cm, 18 cm and 18 cm (G. West pers. comm.).
Douglas-fir
Douglas-fir Calculator used to model up to age 90.
As for the Radiata Calculator, year-by-year regime costs were obtained to calculate
the land expectation value in the Financial spreadsheet (T. Adams pers. comm.)
Silvicultural costs were calculated within the D.fir Calculator using a labour rate of
$38/ hour.
Additional release costs of $200/ ha in year 1, and another $200/ha in year 2 for the
low-stocked regimes (800 stems per ha) were added to the Financial spreadsheet (H.
Dungey pers. comm.)
Seedling costs were $0.72 per seedling (H. Dungey pers. comm.)
Clearfell yields were (Mark Dean pers. comm.):
110
• Sawlog regime – 88%;
• Plant and leave 1200 stems per ha – 80%;
• Plant and leave 800 stems per ha – 75%.
Site productivity set using Bay of Plenty regional averages with site index of 32.8 m
and 500Index of 18.3 m (D. fir Calculator Index table (Knowles 2005, 2008)
Log prices and specifications were the defaults set in the D. fir Calculator
(L. Knowles, 2008)
Harvesting costs calculated within the Financial spreadsheet ranged from $35/ m3 to
$50/ m3
Using an average density at age 25 (406 kg/ m3) the D. fir Calculator calculated a
density gradient for the entire rotation age.
Redwood
The redwood growth model was used to a maximum age of 90 years
At present, the redwood growth model has no thinning function. Therefore, a yield
table must be obtained in two parts from two separate runs with different initial
stockings to characterise the stand before and after thinning. The required initial
stocking for the thinned run is found using the mortality function.
The mortality rate was kept constant for all regimes (0.4% per year) (P. Silcock pers.
comm.)
Coppicing was allowed for second rotations, so C_Change was modified so that
coarse root matter decays to 70% of the original mass after harvesting. New growth
(of coarse root) only starts when the above-ground matter requires it (based on root
mass in first rotation). Fine root matter decays away and re-grows between rotations
as usual. This resulted in a small increase in the average carbon sequestered with
minimal effect on land expectation value (P. Silcock pers. comm.)
Log prices were based on a 3-year average of 'run of bush' logs in Mendocino
County, USA. These were converted to 'at wharf gate' values and adjusted for New
Zealand log grades. Finally a correction factor of 0.75 was applied to account for the
difference between United States and New Zealand prices (Rob Webster, Graham
West pers. comm.)
Log grade proportionalities were from the Mendocino County, USA study (Rob
Webster pers. comm.)
Silvicultural costs were from the Redwood handbook, with a seedling price of
90c/ seedling. Release costs in years 1 and 2 were a flat rate of $200/ ha.
A density of 330 kg/ m3 (M. Kimberley, M. Dean, C. Low, and R. Webster pers.
comm.) was used in the carbon calculation. Unlike in Radiata pine and Douglas-fir
there is no density function to calculate the change in density with age, so a constant
value was used throughout.
E. fastigata
The E. fastigata growth model was run to 80 years. This is twice the intended
maximum age.
111
The model predicts a yield table from planting to harvesting based on a
measurement of basal area, stocking and site index at a given age. Here we used
age 9 as a reference age (old enough to be reliable, but before thinning) and
permanent sample plot data for all Bay of Plenty E. fastigata aged 8 to 10 years.
The growth model has a fixed mortality rate, irrespective of stocking, making it easy
to retrospectively calculate input stockings at age 9. Using a reduced Permanent
Sample Plot dataset with mean age 9 (range 8-10), and a mean stocking based
around the calculated figure for age 9 (±200 sph), we obtained the figures:
Initial stocking (stems/ha) 1100 800

Age (years) 9.0 ± 0.613 9.0 ± 0.7
Stocking (stems/ ha) 992 ± 36 721 ± 90
BA (m2/ ha) 32.0 ± 10.2 27.8 ± 10
MTH (m) 17.5 ± 4.4 16.8 ± 4.3
Volume (m3/ ha) 172.9 ± 84.5 149.2 ± 73.3
Site Index14 (m) 27.9 27.0
No. of plots 25 43
Site index was based on the national average mean top height (MTH) at age 15 of 27
m.
The calculator output forms a yield table of stocking, MTH and volume over time.
Growth improvements, where applicable, are added as a percentage increase in
volume, and then fed into C_Change.
C_Change output is in units of carbon tonnes, which are converted into tonnes of
CO2 equivalent with the multiplication factor of 44/12.
The assumed density of E. fastigata is 470 kg/m3 (K. Maloney pers. comm.). This
was assumed constant over the entire rotation.
The output volume of timber (including any multiplication to account for growth
improvement) was assumed to contain the same split of log grades regardless of
age. Approximate log grade proportionalities were from the Eucalyptus Handbook
(Nicholas 2008).
Estimated log prices from the Eucalyptus Handbook (Nicholas 2008)
Silvicultural costs were from the Eucalyptus Handbook (Nicholas 2008)
Harvesting costs were calculated in the Financial spreadsheet for all ages above 25
years (ranging from $34/ m3 to $53/ m3). Calculated harvest costs for age 15 pulp
regimes were too high, so values of $22/ m3 at 800 stems per ha and $25/ m3 at
1100 stems per ha (K. Maloney pers. comm.) were used.
Planting costs were $1.17 per tree + 40c per tree seedling costs (K. Maloney pers.
comm.).
A constant mortality rate of 1.15% per year was used in the calculator.
13
Variance in mean given as 1 standard deviation
14
Calculated within model from input data
112
C. lusitanica
The Cypress Growth Model was run to age 90 (though it is not recommended to run
the model beyond age 35).
A constant mortality rate of 0.968% per year was used in the Cypress Growth Model,
irrespective of stocking.
The Cypress Growth Model relies on an input of a single set of measurements for
age, stocking, basal area, mean top height and region (North Island). From this the
Site Index is calculated automatically.
As for E. fastigata, we used age 9 as a reference age, and obtained stocking, basal
area and mean top height from Permanent Sample Plot data from the whole Bay of
Plenty. We used all data aged 8-10 years, and within ±200sph from the calculated
value of the stocking at age 9. Due to the fixed mortality rate these were calculated to
be 916 stems per ha, 733 stems per ha and 550 stems per ha for initial stockings of
1000, 800 and 600 stems per ha, respectively. The following figures were obtained.
Initial stock 1000 800 600

Age (years) 9.0 ± 0.815 9.0 ± 0.7 9.0 ± 0.8
Stocking (stems/ ha) 916 ± 98 733 ± 82 550 ± 91
BA (m2/ ha) 20.2 ± 5.9 18.2 ± 4.8 15.3 ± 5.0
MTH (m) 10.6 ± 1.1 11.0 ± 1.2 10.8 ± 1.9
Volume (m3/ ha) 85.3 ± 32.0 80.1 ± 25.6 67.7 ± 30.8
Site Index (m) 28 28.6 28.3
No. of plots 21 53 63
C_Change needs mean top height, volume and stems per ha to be extrapolated back
to age 0. Stems per ha can be done using the mortality function. Mean top height and
volume were extrapolated back using a simple power function (Mark Kimberley pers.
comm., as implicated in other growth models):
Volume = V0 + α t 2.7
where V0 = 0.0000064 x initial stocking m3 (Mark Kimberley pers. comm.)
t = time (years)
α is determined by the values at age 9
Height = H0 + β t 2.7
where H0 = 0.5m
β is determined by the values at age 9
Before the yield table is sent to C_Change, the volumes are multiplied by a
percentage to represent any growth improvement.
The output from C_Change is in units of tonnes of carbon, so to get units of tonnes
CO2-e this must be multiplied by the relative molecular weight factor of 44/12.
An age-independent density of 420 kg/m3 was used, based on harvest aged trees
(McKinley et al. 2000).
Silvicultural costs, log prices and log grade proportions came from a discount model
(Nicholas 2007, Milne 2008).
15
Variance in mean given as 1 standard deviation.
113
An additional release cost was added in year 2 for plant and leave regimes due to the
lower stockings (Heidi Dungey pers. comm.)
Harvesting costs ranged from $31/ m3 to $55/ m3 calculated in the Financial

spreadsheet.
114
Appendix A.2: Scenario Details
Short Rotation Growers - New Investors
Site Specific Basic Initial Clearfell Final Density Growth

Species Index index density Regimes stocking yield Tending stocking Rotation ages improvements improvements
E. fastigata 27.5m n.a. 498 kg m-3 Plant and Leave 1100 n.a. n.a. 1100 15, 30, 40, perp 0%, +10% 0%, +10%, +20%
(Base) 800 n.a. n.a. 800 15, 30, 40, perp 0%, +10% 0%, +10%, +20%
2Prune age 4,8
(age 15) Clearwood 1100 n.a. Thin age 10 350 15, 30, 40, perp 0%, +10% 0%, +10%, +20%
Sawlog 1100 n.a. Thin age 10 500 15, 30, 40, perp 0%, +10% 0%, +10%, +20%
Medium Rotation Growers - Corporate Forestry
Radiata pine 32.5m 300Index 464 kg m-3 Clearwood (base) 900 85 3 Prunes, thin age 9 350 25, 30,35,40,perp 0%, +10% 0%, +10%, +20%
27.2m Sawlog 900 85 Thin age 9 450 25,30,35,40 perp 0%, +10% 0%, +10%, +20%
Plant and leave 600 75 n.a. 600 25,30,35,40 perp 0%, +10% 0%, +10%, +20%
800 75 n.a. 800 25,30,35,40 perp 0%, +10% 0%, +10%, +20%
-3
Douglas-fir 32.8m 500Index 406 kg m Sawlog (base) 1400 88 Thin 15m MTH 500 40, 50, 60, perp 0%, +10% 0%, +10%, +20%
18.3m Plant and Leave 1200 80 n.a. 1200 40, 50, 60, perp 0%, +10% 0%, +10%, +20%
800 75 n.a. 800 40, 50, 60, perp 0%, +10% 0%, +10%, +20%
Long Rotation Growers - Small Forest Owner / Landowner
Thin age 10 (prune

-3
C. lusitanica 28.6m n.a. 420 kg m Clearwood (Base) 1000 n.a. 6, 8, 10) 350 25, 40, 60, perp 0%, +10% 0%, +10%, +20%
Sawlog 1000 n.a. Thin age 10 500 25, 40, 60, perp 0%, +10% 0%, +10%, +20%
Plant and Leave 600 n.a. n.a. 600 25, 40, 60, perp 0%, +10% 0%, +10%, +20%
800 n.a. n.a. 800 25, 40, 60, perp 0%, +10% 0%, +10%, +20%
2Prune age 8, 11
Redwood 35m BA 40/400 330 kg m-3 Clearwood (Base) 800 90 Thin Age 11 400 40, 50, 60, perp 0%, +10% 0%, +10%, +20%
2
145m Sawlog 1000 90 Thin Age 11 500 40, 50, 60, perp 0%, +10% 0%, +10%, +20%
(age 40) Plant and Leave 600 80 n.a. 600 40, 50, 60, perp 0%, +10% 0%, +10%, +20%
800 80 n.a. 800 40, 50, 60, perp 0%, +10% 0%, +10%, +20%
Note. Perp = perpetuity, or as best modelled by the available software

For Radiata pine this is 70 years, for E. Fastigata it is 80 years, and is 90 years for all others.
Rotation ages in italics are impractical combinations, but are included to complete the matrix
115
Appendix A.3: Silvicultural Costs
Radiata pine Douglas-fir Redwood C. lusitanica E. fastigata
Cost per tree $0.50 $0.72 $0.90 $0.80 $0.40

additional improvement cost
+10% growth / tree $0.20 $0.30 $0.50 $0.20 $0.20
+20% growth / tree $0.50 $0.75 $0.70 $0.50 $0.50
+10% density / tree $0.15 $0.25 $0.40 $0.20 $0.20
Planting costs (year 0) $1.17 per tree $1.17 per tree $1.17 per tree $1.17 per tree $1.17 per tree
Release costs (year 1) $0.23 per tree $200 $200 $300 $280
$200 for 800sph $300 for P+L
Release costs (year 2) n.a. reg $200.00 (low stockings) $240
Total establishment
costs for base regime $1,710 $2,846 $2,056 $2,270 $2,022
Base regime stocking 900sph 1400sph 800sph 1000sph 1100sph
Labour costs / man hr $38 $38 n.a. n.a. n.a.

Supervision* 12% 12% n.a. n.a. n.a.
Slope* 8% 8% n.a. n.a. n.a.
Hindrance* 2.00 2.00 n.a. n.a. n.a.
Prune1 (at 900sph) ~$365 n.a. $875 $1,500 $500
age 4-5 n.a. 8 6 3
Prune 2 ~ $378 n.a. $915 $1,200 $500
age 6-7 n.a. 11 8 5
Prune 3 ~$615 n.a. n.a. n.a. $600
age 7-8 n.a. n.a. n.a. 10
Thin ~$315 n.a. $440 $500 $350
Age 8-9 n.a. 11 10 10
Thin no prune ~$260 ~$527 $440 n.a. n.a.
Age 8 17 11 n.a. n.a.
* Supervision, Slope and Hindrance are calculator inputs specific to the Douglas-fir and Radiata pine
calculators and affect labour time and costs
116
Appendix A.4: Projected Log Prices and Specifications
Radiata pine Douglas-fir Redwood C. lusitanica E. fastigata
grade
P1 n.a. n.a. $232 $250
P2 calc from PLI calc from PLI $193 $150 $150
S1 $86 $165 $170 $125 $100
S2 $83 $145 $100 $100
S3 $66 $125
L1 $67 $80 $139 $80 $40
L2 $67 $70 $77
L3 $66 $60
Pulp / Firewood $45 $40 $30 $55
PLI = Pruned Log Index
Radiata pine
Grade Pruned S1 S2 S3 L1 L2 L3 Pulp
Pruned 1 0 0 0 0 0 0 0
Length min 4.2 4 4 4 4 4 4 4
Length max 6 6 6 6 6 6 6 6
SED minimum 350 400 300 200 400 300 200 100
Branch maximum 0 6 6 6 14 14 14 100
Grade specific conversion 100% 100% 100% 100% 100% 100% 100% 100%
% downgraded to poorest grade 0% 5% 5% 12% 7% 7% 12%
Douglas-fir
Log Grade Pruned S1 S2 S3 L1 L2 L3 S4 L4 Pulp
Pruned (1) or unpruned (0) 1 0 0 0 0 0 0 0 0 0
Length min (m) 3.7 4.8 4.8 4.8 3.6 4 4 4 4 4
Length max (m) 5.5 6 6 6 6 6 6 6 5.5 5.5
SED minimum (mm) 300 400 300 200 400 300 200 150 150 100
Branch maximum (cm) 0 6 6 6 10 10 10 6 10 15
Grade specific conversion 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
% downgraded to poorest grade 1% 5% 5% 5% 5% 5% 5% 5% 5% 0%
For all other species precise log grade specifications do not exist, approximate
equivalents to radiata pine were used instead. Given the limited data available, it is
meaningless to specify these log grades too precisely.
117
Appendix A.5: Merchantable Log Grade Split
The data on merchantable log grade split is based on cutting studies (see Appendix
A.1: Stand-level Assumptions) for a harvest aged tree, and have been converted into
approximate grades based on radiata pine specifications. These log grade
proportions are assumed to be unchanged with growth from that age onwards. For
radiata pine and Douglas-fir the log grade splits vary with tree age and are calculated
in the Radiata Calculator and Douglas-fir Calculator.
Species Redwood C. lusitanica E. fastigata
Regime Clearwood Sawlog Plant and Leave Clearwood Sawlog Plant and Leave Clearwood Sawlog Plant and Leave
Grade
P1 27.4% 10%
P2 9.2% 5% 20%
S1 39.6% 62.3% 50% 30% 35% 25% 48% 60% 25%
S2 10.4% 16.4% 10% 25% 30%
S3
L1 2.6% 4.1% 10.0% 15% 17.5% 25% 16% 20% 25%
L2 11.0% 17.3% 30.0%
L3
Pulp / Firewood 15% 17.5% 50% 16% 20% 50%
Tot av log price / m3 $171.04 $141.22 $132.03 $111.50 $93.00 $66.25 $93.20 $79.00 $62.50
Av. log price inc. waste $153.94 $127.10 $118.83 $100.35 $83.70 $59.63 $83.88 $71.10 $56.25
Waste (% tot vol) 90% 90% 90% 90% 90% 90% 90% 90% 90%
118
Appendix A.6: Modelling system and flow of data
Starting Parameters
Site Index, 300Index, altitude, latitude, tending
conditions, regime parameters, stocking, rotation
age, growth improvements, density improvements
etc.
Growth Model
Yield Table
Volume, stocking, mean top height, basal area.
For Radiata pine + D. Fir volume by log grades + some
economic information
C_Change
Carbon Table
Yield table of carbon sequestered over time
Economic Variables
-Costs to owner by year inc.
planting, harvesting,
pruning, cost of
improvements etc.
-Carbon price, overheads
and compliance cost. Financial Spreadsheet
-Log Prices
LEVs
LEVs due to Forestry, Carbon and
combined
C_Collector
Species Data
Storage of year-by-year info (yield
tables, costs, carbon sequestrated)
Storage and graphing of results at
time of harvest (LEV, tot. volume, total
carbon, average carbon stored over
infinite time span)
Yield tables +
carbon Results at time of
harvesting
FOLPI Multi-species results Matrix
119
Appendix B: Estate-Level Models
The FOLPI estate-level model manipulates net stocked areas over time, and gives
annual estimates of costs, revenues, growing stock and harvest volumes based on
multiplying the areas by values in look-up tables that:
• apply specifically to the area harvested, e.g., yield tables in the normal sense,
expressed in m3/ha, or harvesting costs expressed in $/ha;
• apply to the standing forest, e.g., an entry at age 4 for pruning cost ($/ha),
volume in standing trees (m3/ha), carbon stock in harvest residues from the
previous rotation (t C02-e/ha).
For example, the area at age 4 in a given year is multiplied by the carbon stock per
ha value in the table to give estimates of age 4 carbon stock in that year. Total
carbon stock is derived by summing the stock at each age in that year.
Appendix B.1: Croptypes

FOLPI uses the concept of ‘croptypes’ to represent forest area (García 1990). Forest
stands allocated to the same croptype are assumed to share the same yield table,
costs and revenues, even if they are currently at different ages. Croptypes are
typically defined based on factors such as location, species, regime, and site quality.
Croptypes may also be separated purely for modelling and reporting convenience.
The FOLPI models developed for this project used three main factors to distinguish
croptypes:
• Species and regime, with a unique yield table and schedule of costs and
revenues used in each case;
• Kyoto status (i.e. whether the forest area within the croptype resulted from
post-1989 afforestation or not), with the same croptype data used in either
case;
• Rotation number (i.e. first rotation versus subsequent rotations), which differ
according to the level of initial post-harvest residues from a previous rotation.
Two different ownership classes, differing in their croptypes and initial age-class
distribution, were analysed at the estate-level:
• corporate forestry, which includes a mix of Douglas-fir and radiata pine, with
the majority of forest area being non-Kyoto forest (Table B.1);
• small landowner forestry, which includes a mix of radiata pine, E. fastigata
and redwood, with all forest area being Kyoto Forest and a significant area of
bare agricultural land (Table B.2).
Table B.1: Corporate forestry croptype regime description

Croptype Species Regime Initial Stocking
(stems per ha)
RDCL Radiata pine Clearwood
RDSW Radiata pine Sawlog
RDPL6 Radiata pine Plant and leave 600
DFSW Douglas-fir Sawlog
DFPL8 Douglas-fir Plant and leave 800
DFPL1 Douglas-fir Plant and leave 1200
Table B.2: Small landowner forestry croptype regime description
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Croptype Species Regime Initial stocking
(stems per ha)
RDCL Radiata pine Clearwood
RDSW Radiata pine Sawlog
EFPU E. fastigata Pulpwood
EFPL8 E. fastigata Plant and leave 800
EFPL1 E. fastigata Plant and leave 1200
RWCL Redwood Clearwood
RWSW Redwood Sawlog
RWPL6 Redwood Plant and leave 600
Croptype Areas
Initial areas by croptype for the two estates are given in Table B.3 and Table B.4 with
age class distributions for the corporate resource shown in Figure 4.3.
Table B.3: Corporate forestry initial areas by croptype

Croptype Description Initial area (ha)
Radiata pine clearwood – post-1989 Kyoto forest,
RDCLKR1 rotation 1 605.1
RDCLNK Radiata pine clearwood – pre-1990 non-Kyoto forest 100845.5
RDSWKR1 Radiata pine sawlog - post-1989 Kyoto forest, rotation 1 364.7
RDSWNK Radiata pine sawlog - pre-1990 non-Kyoto forest 65179.2
DFSWKR1 Douglas-fir sawlog - post-1989 Kyoto forest, rotation 1 9.7
DFSWNK Douglas-fir sawlog – pre-1990 non-Kyoto forest 3657.3
Total area 170671.3
Table B.4. Small landowner forestry initial areas by croptype

Croptype Description Initial area (ha)
Radiata pine clearwood – post-1989 Kyoto forest,
RDCLKR1 rotation 1 22.0
Redwood clearwood – post-1989 non-Kyoto forest,
RWCLKR1 rotation 1 6.6
E. fastigata clearwood – post-1989 Kyoto forest,
EUCLKR1 rotation 1 5.0
Total area 33.6
Yield, Revenue and Cost Data

In the estate-level analysis every croptype is described by a yield table which is
derived from the stand-level analysis (Appendix A). Every yield table for a Kyoto-
compliant croptype is represented by two versions:
i) Kyoto Forest on first rotation (code KR1);
ii) Kyoto Forest on second rotation (code KR2).
This split recognises that after harvest in the first rotation carbon from roots and
residues remain on site into the second rotation, decaying over time. These residues
result in higher initial levels of carbon in the second rotation. All non-Kyoto forest
(NK) was assumed to be second rotation or greater.
Silvicultural costs, harvest costs and harvest revenues were obtained from the stand-
level analysis. These were included within the FOLPI data file. Site preparation and
121
planting costs, and annual overheads were included within the appropriate input files
for FOLPI.
Carbon Data
Total stand carbon (t CO2-e/ ha) was obtained from the stand level analysis
(Appendix A) and used both directly in the FOLPI data file, as well as to create a
“carbon increment” variable (t CO2-e/ ha/ year). The carbon increment variable was
multiplied by the carbon price to create the carbon revenue variable, which was also
net of the assumed $60/ ha Emissions Trading Scheme compliance costs.
Carbon liabilities at harvest are based on the amount of carbon removed from the
forest in the form of stem carbon. The latter was estimated for each potential
clearfelling age as a proportion of stand carbon, based on data in the national
average carbon yield table used in the New Zealand’s annual greenhouse gas
inventory. Proportions used were 50% from age 0 to 24 years, increasing to 58% by
age 45 onwards.
The carbon variables were included in all croptypes, to allow future analysis of
potential post-2012 accounting rules. However, in these models the carbon variables
associated with non-Kyoto forests were ignored.
Each Kyoto Forest croptype is re-planted into a second rotation Kyoto Forest
croptype, which differs from the first rotation croptype only in the amount of total
stand carbon. This recognises that after harvest, below ground biomass and residues
slowly decay on site. The amount of residues and below ground biomass depends on
the stand management regime age at which the stand was harvested. However,
FOLPI can potentially harvest areas from different regimes and at different ages, and
these differences are lost after replanting, when they are assumed to share a
common yield table. This means that accounting for post-harvest residues is not
accurate, as discussed later. We initialised second rotation stand carbon using the
average carbon left on site for a clearwood regime radiata pine harvested at 28 years
old.
The full set of variables contained within the FOLPI data files are in Table B.5.
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Table B.5. FOLPI input file variables:
Code Type Description
SCOST Cost Silvicultural costs
PRUNED Pruned log volume

SAW Sawlog volume
PULP Pulplog volume
STEMCARB Stem carbon
REVENUE Revenue Timber revenue
HARVEST Cost Harvest cost (incl roading)
CARBLIAB Cost Carbon liability at harvest
CARBON Total stand carbon, including above- and below-ground
biomass, deadwood and litter, but excluding mineral soil
carbon.
CARBINC Total annual carbon increment
CARBREV Revenue Annual carbon revenue
NEWPREP Cost New planting site preparation and planting cost (unused)
REPREP Cost Replanting site preparation and planting cost
OHCOST Cost Annual overhead cost
Appendix B.2: Estate-level Model Structure

Clearfell Age Constraints
Minimum and maximum allowable clearfell ages were set to reduce the size of the
linear programming matrix, but were only binding constraints in the case of the
minimum for Douglas-fir.
Minimum clearfell age Maximum clearfell age

Radiata pine 24 90
Douglas-fir 44 90
Redwood 24 90
E. fastigata 10 90
Replanting Options
All areas harvested from first and second rotation Kyoto forest croptypes were
allowed to be replanted into any of the available second rotation Kyoto forest
croptypes. It was therefore assumed that sites were equally suited for all species and
regimes. Non-Kyoto croptype areas could only be replanted into non-Kyoto
croptypes.
No afforestation or deforestation was allowed, and it was assumed that replanting

would take place immediately after harvesting.
Objective Function
All models maximised discounted net revenues over a 98 year planning horizon,
either with or without the inclusion of net carbon revenues from Kyoto-compliant
stands. A user defined objective function was used to facilitate this, with forestry net
revenue defined as:
+ REVENUE – HARVEST (from harvested stands);
123
- SCOST – REPREP (from residual (unharvested) stands at ages where these
operations occurred);
- OHCOST (from all stands).
And carbon net revenues defined as:

+ CARBREV (from harvested KF stands, based on growth in these stands);
+ CARBREV (from residual (unharvested) KF stands, based on growth in these
stands);
- CARBLIAB (from harvested KF stands, based on stem carbon removed from these
stands).
Other Constraints
Non declining total volume constraints were applied to the corporate forestry estate.
No other constraints were used.
Appendix B.3: Modelling Issues
There are two methods for incorporating credits for carbon stock changes in FOLPI
models. The first is to calculate stocks in successive years and calculate the
difference. The "CARBON" variable enables this, allowing the objective function to be
expressed as: 22* (Carbon stockyear2 - carbon stockyear1) + 22*(Carbon stockyear3 -
carbon stockyear2) + etc, where 22 is the price of a carbon credit in $/ t CO2-e)
The second is to sum increments and subtract the harvested stem carbon. The
"CARBINC" and "CARBSTEM" variables were used to create the corresponding
revenues and costs; CARBREV and CARLIAB). This approach was used in the
models.
However, neither approach deals accurately with post-harvest residues. If age 30

harvest residues are assumed, then CARBINC values at the start of the next rotation
could be too low (if harvesting actually took place at younger ages), or too high
(following harvesting at older ages).
Table B.6 shows the comparison for harvesting at ages 25 and 35 compared with
age 30, e.g. if harvest was at age 25, then subsequent increment will be 8 t CO2-
e/ ha too low because the model is decaying residues that shouldn't have been there
in the first place.
124
Table B.6: Difference between second rotation increment following age 30 harvest and age
25 harvest or age 35 harvest (t CO2-e /ha/year)
Age 25 vs 30 35 vs 30
1 -8 7
2 -7 6
3 -6 5
4 -5 4
5 -5 4
6 -4 3
7 -4 3
8 -3 2
9 -3 2
10 -2 2
11 -2 2
12 -2 1
13 -2 1
14 -1 1
It would be possible to correct this in the spreadsheet after the FOLPI run, and
recalculate net present value and carbon stock changes after optimisation. However,
this runs the risk that the optimisation would have produced a different strategy if the
correct level of residues were available. The only solution available in FOLPI is to
expand the number of croptypes to include replanting croptypes that are unique to
regime/clearfell age combinations, but this would greatly increase model size. An
alternative is to use an estate modelling system based on a different formulation.
125
Appendix C: Models for Carbon Price Risk
Appendix C.1: Estimating Price Risk
Carbon-Price Risk
Price risk is a measure of the variability in future value of a commodity, which may
affect the return of current investment. Carbon-price is inherently variable, and
carbon forestry investment decisions therefore require an understanding of this price
risk.
Due to the recent development of the carbon credit market there was inadequate
historical data to construct stochastic models of the carbon price process. As a
substitute, this study uses the United States SO2 price to asses the inherent risk in
carbon-price. The United States SO2 market is similar to the carbon emission
trading scheme as they are both air pollutants operating under a cap and trade
market.
SO2 prices were estimated from annual price series, obtained by averaging biannual
data from 1995 to 2003. The figures from 2004 to 2006 were removed from the
dataset to avoid problems associated with new policy shocks in 2004. The price
series was then inflation adjusted using the United States consumer price index.
For our analysis we used the time-series analysis method followed by Reeves and
Haight (2000, pp. 233-236). This involved the following steps:
• Conditions of normality and serial correlation in the time-series may be invalid
if the price series do not meet the definition of stationarity, which is the
absence of upward or downward trends in the series over time (Thomas
1999). Price series stationarity was determined by estimating and testing an
autocorrelation function with an increasing number of periods and the
augmented Dickey-Fuller test.
• Because the price series was non-stationary the first difference of the SO2
price series was calculated to make the series stationary.
• To determine the form of the price process the partial autocorrelation function
(PACF) was estimated. The price process may be either a moving average
(the PACF slowly decays to zero with increasing periods) or autoregressive
(the PACF includes significant terms up to q periods then drops to zero). For
the SO2-price series an autoregressive price process was identified.
• The price process model, identified from the PACF, including the variance of
the error term was estimated by time series regression using the first
differenced data.
• The regression model showed an independent white noise process, which
implies that the SO2 price next year is unrelated to today’s price, but varies
randomly about the long-run average price within an estimated range;
Pt = P + ut where P is $24/t SO2 and ut has a standard deviation of
$13.6/t SO2.
Timber-Price Risk
As for carbon-price risk, the estimation of risk in future timber price requires historical
data. Unlike carbon however, New Zealand log prices have been well documented
for many years and are available in quarterly reviews. For consistency the quarterly
log price data were reduced to an annual price series. The log-prices were in New
126
Zealand dollars per cubic metre and inflation adjusted in accordance with the
consumer price index of September 2000.
The same methods as used for carbon price risk were used for timber price, as in
Reeves and Haight (2000). The steps were:
• The augmented Dickey-fuller test and autocorrelation for the undifferenced
price series suggested that the undifferenced series was stationary. This
implies that the price process could be modelled by an equation of fixed
coefficients estimated directly from the price observations (Thomas 1999).
• The results of the PACF estimation for the undifferenced price series
indicated that the price process was autoregressive.
• The regression model showed an independent white noise process, which
implies that the log-price next year is unrelated to today’s price, but varies
randomly about the long-run average log-price within an estimated range;
Pt = P + ut where P is $114/ m3 and ut has a standard deviation of $30/ m3.
Appendix C.2: Markov Decision Process Model

In this study we used a Markov decision process model (Buongiorno 2001,
Buongiorno and Gilless 2003, Chap 17) to identify how the optimum harvest decision
is affected by carbon price risk.
The Appendix is organized as follows. First, the stand and market states, and
decisions for even-aged stands are defined, and the transition probabilities between
market states are presented. These transition probabilities give the probability of
moving from one particular market state to another. For this study transition
probabilities between stand states were deterministic, i.e., a stand moves from one
state to another with certainty. Next a linear programming model was used to
estimate the optimal rotation and associated forest value. These were estimated
considering the effect of price variability and serial correlation, based on the carbon-
price process estimated in Appendix C.1.
Forest Stand States

The stand total recoverable volume (m3/ha) and second rotation carbon sequestered
(t CO2-e/ha) in the following age classes define the state of an even-aged stand. This
data was from the stand-level analysis (Appendix A). The data shown in Table C.1 is
for radiata pine managed on a clearwood regime. 5-year age-classes were used to
keep the model a manageable size.
127
Table C.1: Even-aged radiata pine clearwood stand state description
Stand Age Volume Carbon
(m3/ha) (t CO2-e/ha)
0 (bare land) 0 0
5 0 272
10 0 335
15 202 479
20 363 695
25 512 903
30 640 1088
35 750 1254
40 845 1404
45 932 1545
50 999 1688
55 999 1842
60 999 2015
Growth between Stand States

Stand growth was assumed deterministic for this study. A stand in age-class 5 would
be certain to reach age-class 10 in 5-years if it was not harvested. If a stand in age-
class 30 were harvested and replanted it would be certain to reach age-class 5 in 5-
years. The transition probabilities for stand growth, with (Table C.2) and without
harvest (Table C.3) are shown below.
Table C.2: Stand transition probabilities for growth from current stand state to next stand state
in 5-years with harvest and replant.
Ending Stand State

Stand 0 5 10 15 20 25 30 35 40 45 50 55 60
0 1
5 1
10 1
15 1
20 1
25 1
30 1
35 1
40 1
45 1
50 1
55 1
60 1
128
Table C.3: Stand transition probabilities for growth from current stand state to next stand state
in 5-years without harvest and replant.
Ending Stand State

Stand 0 5 10 15 20 25 30 35 40 45 50 55 60
0 1
5 1
10 1
15 1
20 1
25 1
30 1
35 1
40 1
45 1
50 1
55 1
60 1
Because stand state 0 is bare land, the stand remains in bare land if there is no
harvest and replant.
The stand transition probabilities in Tables C.2 and C.3 can be modified to include
other risks and uncertainty. For example, the risk of catastrophic forest loss due to
forest pests, wind damage, etc., can be included in Table C.3 as the probability of a
stand ending in age-class 5. The probability represents the likelihood of the stand
being lost in a 5-year period. Uncertainty in forest growth models can be included in
Table C.3 as probabilities of a stand remaining in its beginning state or ending in the
next oldest age-class in 5-years.
Carbon Market States

It was assumed that the price fluctuation around the mean price was normally
distributed, with a zero mean and a constant standard deviation of 13.6 (Appendix
C.1). Using this standard deviation the range of possible prices was divided into three
categories, approximating a normal distribution. This lead to three carbon market
states:
Market state: Low Medium High

Price ($/ t-CO2-e) < 16.1 16.1 to 30.2 > 30.2
Probability 0.27 0.46 0.27
129
Transition between Market States
The probability of transition from one market state to another (Table C.4) was
calculated from the following equation:
Pt +5 = a + bPt + u t (1)
where: Pt is the price of carbon in year t;

ut is a normally distributed error term, with mean zero and constant variance
σ2; and,
a and b are parameters
Equation (1) was estimated by ordinary least squares with 9 observations from the
United States sulphur dioxide market. The coefficient of Pt, b, was not significantly
different from zero; thus prices at five-yearly intervals were independent white noise.
ut had a constant standard deviation of σ = 13.6 (Appendix C.1). As prices were not
correlated over time, the transition probabilities between market states are those
shown in Table C.4.
Table C.4: Market transition probabilities for carbon price movements from current market
state to next market state in 5-years with an independent white noise price process.
Ending Market State
Market Low Medium High
Low 0.28 0.25 0.27
Medium 0.46 0.50 0.47
High 0.27 0.25 0.26
Serially Correlated Prices

With a constant price variation of σ = 13.6, transition probabilities for low, medium
and high market states were estimated by simulation using Equation (1) with serial
correlation of b=0.90. Increasing serial correlation leads to an increasing probability
of the market being in the same state in five-years as it is currently (Table C.5).
Table C.5: Market transition probabilities for carbon price movements from current market
state to next market state in 5-years with a serially correlated price process.
Ending Market State
Market Low Medium High
Low 0.87 0.28 0.02
Medium 0.12 0.47 0.14
High 0.02 0.25 0.84
Decisions and Returns

Decisions consisted of harvesting and replanting a stand from a particular state into
bare land, or doing nothing and letting the stand grow into the next stand state. The
possible decisions are dependent on the state of the stand. It was assumed that
stands would be considered for harvest every five years.
130
The immediate returns from the two possible decisions are shown, for the case of
radiata pine managed on a clearwood regime, in Table C.6. The carbon and timber
volumes used to derive these returns are in Table C.1, above.
When the decision is do nothing, the return is the value of the carbon increment over
the last 5-years. When the decision is to harvest and replant, the return is the value
of the harvest minus the cost of the carbon liability associated with the harvest
volume, the harvesting cost and the cost of replanting. These values were taken from
the stand-level analysis (Appendix A).
Table C.6: Immediate return ($/ha) for each decision, do nothing or harvest, for a given stand
and carbon market state.
Market State
Low Medium High
Decision Do nothing Harvest Do nothing Harvest Do nothing Harvest
0 0 -2,742 0 -2,742 0 -2,742
5 3,260 -6,002 5,976 -8,718 10,323 -13,065
10 755 -6,757 1,385 -10,103 2,391 -15,456
15 1,729 -11,793 3,170 -16,580 5,475 -24,238
20 2,592 -4,094 4,751 -11,041 8,207 -22,155
25 2,502 4,207 4,586 -4,823 7,922 -19,273
30 2,220 11,080 4,070 199 7,030 -17,210
35 1,994 17,031 3,655 4,489 6,314 -15,579
40 1,796 22,453 3,293 8,414 5,689 -14,049
45 1,697 27,955 3,111 12,501 5,374 -12,224
50 1,710 31,949 3,135 15,071 5,415 -11,935
55 1,847 29,272 3,386 10,854 5,849 -18,614
60 2,078 26,394 3,810 6,245 6,581 -25,994
Transition Probabilities between Stand-Market States

Decisions in this model are dependent on both the state of the stand and of the
market. Thus the state space consists of 13 stand states (Table C.1) and 3 market
states (Table C.4), a total of 39 stand-market states.
The transition probability between any two stand-market states is the product of the
transition probability between two stand states (Table C.2 and Table C.3) and the
transition probability between two market states (Table C.4). The transition
probabilities describe a Markovian process in which the stand-market state 5-years
hence depends only on the current stand-market state and the decision.
For example, the probability of moving from stand-market state (s = 3, m = H) to (s’ =

4, m’ = L) if the decision is to do nothing, and prices are not serially correlated is
1.00 x 0.27 = 0.27 (Table C.4). If prices were serially correlated the probability of
transition for the same decision is 1.00 x 0.02 = 0.02 (Table C.5).
131
Optimal Rotation
The problem of the forest owner maximizing discounted profits over an infinite
horizon can be solved by successive approximations using the following recursive
equations:
 S 
Vi = max ri ,k + d ∑ P( j i, k )V j  i = 1, …, S (2)
k
 j =1 
where Vi is the expected discounted value of the returns from a stand that starts in
stand-market state i, and continues indefinitely when an optimal rotation is followed,
ri ,k is the immediate return at decision time, which depends only on the
stand-market state and the decision (Table C.6),
S is the number of stand-market states,
d is the discount factor d = 1 (1 + r ) , where r is the interest rate, and D is the
D
interval between decisions, 5 years in this study.
Equation (2) means that the forest owner makes a harvest decision for a given initial
stand-market state that maximizes the sum of the immediate returns and the
discounted value of the expected returns from the same stand, when the optimal
rotation is followed. The solution to Equation (2) gives simultaneously the expected
stand value and the optimal decision policy, where Vi is the expected stand value
inclusive of land and growing stock.
For this study we solved for the optimal rotation using the d’Epeneoux linear
programming formulation of the Markov decision process model (d’Epenoux 1963,
Buongiorno 2001).
Expected Rotation and Land Expectation Value

A useful summary statistic of the optimal rotation is the expected rotation, a measure
of how often a forest owner will harvest their stand. The expected rotation is the
expected time interval between stand-market states that call for the stand to be
harvested when the optimal policy is followed.
The expected rotation is estimated by first calculating the steady-state probabilities of

observing each stand-market state. The sum of these steady-state probabilities over
all stand-market states, for which the optimal decision is to harvest, is the long-term
probability that the forest will be harvested in any 5-year period. The reciprocal of this
probability then, is the expected rotation.
The land expectation value of bare land was also calculated. This allowed
comparison of the affect of carbon price behaviour on the value of stands managed
optimally.
132
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Managing New Zealand planted forests for carbon: A review of selected

Book · December 2008

James Alan Turner Graham West

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Heidi S Dungey Stephen Wakelin

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by James A. Turner, Graham West, Heidi Dungey, Steve Wakelin,

Authors: James A. Turner1, Graham West1, Heidi Dungey1, Steve Wakelin1,

Date: 22 September 2008

Management at the Estate-level

Modelling the Management of Planted Forests for Carbon

Management of Planted Forests for Carbon-Price Risk

1.1. Report Purpose and Organisation

1.2. Carbon Sequestration by Planted Forests: Key

1st rotation 2nd rotation 3rd rotation Multiple rotations Kauri

1.3. Framework for Representing Planted Forest

Kyoto Agreement Qualifying stand age

Strategic plan Species

The lower layer of Figure 1.2 represents the influence of stand-management

1.3.1. Management Decisions

1.3.2. Forest Owner Objectives

Small growers/ land owners

1.3.3. Regulations: Emissions Trading Scheme

Of the examples of species for long-term carbon sequestration considered here

Other important stand-level management decisions influencing carbon sequestration

Management at the Estate-level

2.1. Literature Review Approach

2.2. Short- to Medium-Term Sequestration at the Stand-

For Cupressus lusitanica productivity is influenced by potential root depth, soil

radiata pine 115 199 15.5

Esk 22 E. regnans 105 509 23.1

Pests and Diseases

Pests and Diseases

2.2.2. Regime Choice

2.3. Long-Term Sequestration at the Stand-Level

Pests and diseases

Pests and diseases

Nelson 1 13 11.4 8 36 4.7

Pests and diseases

2.3.2. Regime Choice

2.4. Management at the Estate-Level

2.4.1. Estate-Level Management Constraints

1990 2010 2030 2050 2070

There are two approaches to managing financial risk:

3.1. Carbon-Price Risk

3.1.2. Information on Carbon-Price Risk

3.2. Approaches to Managing Carbon-Price Risk

3.2.1. Transferring Risk to a Third Party

3.2.2. Pooling Risky Investments in a Portfolio

Carbon Pooling for Carbon-Price Risk

3.2.3. Stand-level Management Decisions for Carbon-Price Risk

4.1.1. Stand-Level Management Decisions

Carbon compliance cost

Optimal harvest Markov Decision Minimum risk

The site selected was equivalent to Whakarewarewa Forest, Rotorua, (330 m

Genetic Gain or Productivity Improvement

Carbon Trading Regulations

4.1.2. Estate-Level Management Decisions

Radiata Douglas-fir Redwood C. lusitanica E. fastigata

Carbon compliance cost

Optimal harvest Markov Decision Minimum risk

6.0 Non-Kyoto Radiata Sawlog