ARTICLE IN PRESS

Journal of Forest Economics 16 (2010) 1–10

Contents lists available at ScienceDirect

Journal of Forest Economics

journal homepage: www.elsevier.de/jfe

Optimizing joint production of timber and carbon

sequestration of afforestation projects
Roland Olschewski a,, Pablo C. Benı́tez b
a
Swiss Federal Research Institute WSL, Zürcherstr. 111, CH-8903 Birmensdorf, Switzerland
b
Department of Economics, Carleton University, 1125 Colonel By Drive, Ottawa, ON, Canada K1S 5B6

a r t i c l e in f o a b s t r a c t

Article history: Optimizing harvesting decisions has been a matter of concern

Received 7 May 2008 in the forestry literature for centuries. However, in some
Accepted 23 March 2009 tropical countries, growth models for fast-growing tree species
have been developed only recently. Additionally, environmental
JEL classification: services of forests gain importance and should be integrated in
Q23 forest management decisions. We determine the impact of a
Q51 joint production of timber and carbon sequestration on the
Q57 optimal rotation of a fast-growing species in north-western
Ecuador, comparing different optimization approaches and
Keywords:
taking the latest developments of the Kyoto Protocol into
Carbon sinks
account. We find that payments for carbon sequestration have
Certified Emission Reductions
CDM substantial impact on the rotation length: in contrast to an
Faustmann optimum of 15 years when focusing on timber production only,
Hartman joint production leads to a doubling of the rotation length,
which means that timber harvest should be postponed until the
end of the carbon project.
& 2009 Elsevier GmbH. All rights reserved.

Introduction

Optimizing the harvesting decision has been a matter of concern in the forestry literature for
centuries. However, in some tropical countries growth models, which allow for determination of
optimal rotation periods for certain fast-growing tree species, have been developed only recently.
Additionally, environmental services provided by forests – besides timber production – are gaining
importance and need integration into the forest management decision. Payments for such services

 Corresponding author. Tel.: +41 44 739 25 62; fax: +41 44 739 22 15.
E-mail address: roland.olschewski@wsl.ch (R. Olschewski).

1104-6899/$ - see front matter & 2009 Elsevier GmbH. All rights reserved.
doi:10.1016/j.jfe.2009.03.002
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2 R. Olschewski, P.C. Benı́tez / Journal of Forest Economics 16 (2010) 1–10

might have an impact on optimal rotations as well as the attractiveness and financial outcome of
afforestation projects.
We aim at determining the influence of payments for environmental services on the optimization
of the harvesting decision, assuming joint production of timber and carbon sequestration.
Early contributions to this topic have been provided, e.g., by Price and Willis (1993) focusing on
discount-rate aspects, and Hoen and Solberg (1994) reporting a case study of forest management
planning in northern Europe. In contrast, we focus on afforestation projects in the tropics, comparing
three different optimization approaches, while taking the latest developments of the Clean
Development Mechanism (CDM) and in the markets for Certified Emission Reductions (CER)
into account.

Methodology

Three approaches concerning the determination of the optimal rotation period are to be
compared: first, we focus on the maximum sustained physical timber yield, followed by a financial
analysis of the optimal timber management decision and, finally, we deal with the optimal condition
for a joint production of timber and carbon sequestration.

Maximum sustained timber yield

The maximum sustained timber yield (MSY) is determined by choosing the rotation age, which
maximizes average annual physical timber production. Eq. (1) gives the condition to be satisfied,
with V standing for timber volume and T indicating rotation age:

! VðTÞ
MaxfVðTÞ=Tg; V 0 ðTÞ ¼ (1)
T T
The optimal rotation reflects a situation where the marginal timber increment equals the average
annual harvest volume (Bowes and Krutilla, 1989). For illustration purposes, Eq. (1) can be rearranged
resulting

V 0 ðTÞ 1
¼ (2)
VðTÞ T
Fig. 1 shows optimal rotation TY based on maximum sustained timber yield. However, as this
calculation is based on yield data only, financial aspects such as opportunity costs of delaying the
harvest are neglected.

V'(T) 1
V(T) T
V'(T)
1 V(T)
T

V'(T)
V(T)

TY T

Fig. 1. Optimal rotation for maximum sustained timber yield.

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Optimal financial timber management decision

As is well known, Faustmann (1849) based the optimal rotation calculation on the maximization
of the net present value (NPV) of an infinite chain of rotations (Eq. (3)) with P representing timber
stumpage price, C planting costs, k number of rotation, i real interest rate:
X1
PVðTÞeiT  C
NPV ¼ lðTÞ ¼ ðPVðTÞ  CÞekiT  C ¼ (3)
k¼1
1  eiT

!
MaxflðTÞg; l0 ðTÞ ¼ 0
T (4)
n
PV 0 ðTÞ ¼ i½PVðTÞ þ l 

Eq. (4) provides the condition for the optimal Faustmann rotation, where marginal benefits of
delaying the harvest (on the left-hand side) equal opportunity costs caused by this delay (on the
right-hand side). The term [PV(T)+l*] reflects the combined value of land l* and timber stock PV(T) at
time of harvest. Replacing l* by the right term of Eq. (3) and rearranging Eq. (4) gives Eq. (5) and
allows for a graphical illustration in Fig. 2 (compare Bowes and Krutilla, 1989):
PV 0 ðTÞ i
¼ (5)
PVðTÞ  C 1  eiT
Compared with the maximum sustained yield calculation, the Faustmann solution leads to a
shorter optimal rotation TF due to the fact that the rotation events are monetized and discounted.
This conventional Faustmann model refers to timber production only. Further environmental services
provided by forests, such as carbon uptake, watershed protection or the provision of recreational
sites, are not taken into account. Note, however, that for specific levels of rotation costs as well as a
price – size gradient effects a longer rotation than MSY could result.

Joint production of timber and carbon sequestration

Joint production is given when the same production activity leads to several outputs. Here, we
consider forests providing commercial timber as well as non-timber forest amenities and assume
that forest management strives for maximizing the net present value of this joint production over an
infinite planning horizon. The rotation age that maximizes the net present value is called the
Hartman rotation (Hartman, 1976). In our case an afforestation project generates a growing stock of
timber and simultaneously provides an environmental service, namely the sequestration of carbon
from the atmosphere leading to a growing carbon stock in biomass. Eq. (6) shows the combined NPV
r of the joint production of timber l and carbon sequestration c, where the monetary flow generated

Rates
PV'
V' PV-C
1 V
T

i
1-e -iT

TF TY T
Fig. 2. Optimal rotation TF for economic timber management.
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Rates

PV'
V' PV-C
1 V
T

i
1-e-iT

TFTHTY T
Fig. 3. Optimal rotation TH for joint production.

by the environmental service is denoted by g (compare Bowes and Krutilla, 1989):

RT
PVðTÞeiT  C þ 0 gðtÞeit dt
NPV ¼ rðTÞ ¼ lðTÞ þ cðTÞ ¼ (6)
1  eiT

MaxflðTÞ þ cðTÞg; r0 ðTÞ ¼! 0

T
0
PV ðTÞ þ gðTÞ ¼ i½PVðTÞ þ rn  (7)

The condition for the optimal rotation is given in Eq. (7). Similar to Eq. (4), the opportunity costs of
postponing the harvest equal the benefits of this delay, which now comprise additional revenues
from sequestering carbon. Inserting the right term of Eq. (6) as r* into Eq. (7) gives
" RT #
PV 0 ðTÞ 1 0 gðtÞe
it
dt gðTÞ
¼i þ  (8)
PVðTÞ  C 1  eiT ½PVðTÞ  Cð1  eiT Þ PVðTÞ  C

Eq. (8) differs from (5) on the right-hand side by taking carbon revenues into account, which
makes a delay of the harvesting decision more attractive (Hartman, 1976). Consequently, a longer
optimal rotation period is to be expected as shown in Fig. 3, where the intersection point of the
dotted line (representing the right side of Eq. (8)) and the graph for [PV0 /(PVC)] gives the Hartman
rotation TH for joint production of timber and carbon sequestration.
While timber revenues can be derived based on market prices, carbon revenues deserve a closer
look, as withdrawing carbon dioxide from the atmosphere is a public good characterized by non-
rivalry in and non-excludability from enjoying the positive effect of mitigating climate change.

Carbon accounting

The Conference of the Parties (COP9) of the Kyoto Protocol decided on the accounting rules for
non-permanent Certified Emission Reductions (CER, tonnes of CO2) of reforestation and afforestation
projects, and, thereby, provided a framework for establishing markets for carbon credits. CER are
certificates of greenhouse gas emission reductions obtained from project activities in developing
countries and include permanent reductions through emission avoidance as well as non-permanent
reductions by forestry projects (Olschewski and Benı́tez, 2005). These certificates, which have to be
verified by an independent entity, are expected to be traded like any other commodity.
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During the first commitment period from 2008 to 2012 there are two possible ways to account for
non-permanent carbon sequestration in forests: temporary and long-term credits (UNFCCC, 2003).
While both are measured in tonnes of carbon dioxide, a temporary credit (tCER) is defined as a
CER issued for an afforestation or reforestation project activity under the CDM, which expires at the
end of the commitment period following the one during which it was issued. Once expired, a
tCER can be reissued several times during the project as long as the forest exists. In contrast, a
long-term credit (lCER) expires at the end of the crediting period of the overall afforestation
or reforestation project (Olschewski and Benı́tez, 2005), and cannot be reissued (Neef and
Henders, 2007). These different types of accounting procedures have impact not only on the
amount of CER ascribed to reforestation projects but also on the risk and the value of the
certificates.
CO2-emitting enterprises in Annex-1 countries, which have to fulfil reduction commitments, must
decide whether to reduce their own emissions or to buy credits at market prices. Potential buyers are
supposed to be indifferent between (i) buying a permanent credit today and (ii) buying a non-
permanent credit (lCER or tCER) today and replacing it by a permanent one when the initial credit
expires. This indifference is reflected by Eq. (9), where t is the lifetime of CER units, p is the price of
CER units, the sub-index of p indicates the lifetime of the CER units (pt is the price per tCO2 for a
credit valid for t-years and pN is the price for a permanent credit), and d is the discount rate of
potential buyers in Annex-1 countries (Olschewski et al., 2005):
p1
p1 ¼ pt þ (9)
ð1 þ dÞt
Buying a non-permanent CER becomes attractive if its price is lower than the price per tonne CO2
of a permanent CER minus the discounted price of a permanent CER in year t, when the expiring non-
permanent CER has to be replaced. Therefore, the maximum price that an enterprise would be
willing to pay for temporary carbon credits, pt, results from Eq. (7):
 
1
pt ¼ p1 1  t (10)
ð1 þ dÞ
Note that Eq. (10) is valid for both lCER and tCER since these credits only differ with respect to their
expiring time. In the following we focus on temporary credits with an expiring time of 5 years and
assume a project with maximum duration of 30 years, which is given by official carbon accounting
rules (compare Olschewski and Benı́tez, 2005; UNFCCC, 2003).

Results

We selected a region in the north-western part of Ecuador, which is considered one of the world’s
hot-spots for biodiversity (Myers et al., 2000). Land use is very dynamic with the highest
deforestation rates within the country due to timber extraction and conversion to agricultural land
(Sierra and Stallings, 1998; de Koning et al., 1999). Pasture area has doubled in the region between
1974 and 1995, mainly caused by clear-cutting forests (INEC, 1995). However, most of the pastures
are degraded and only a few forest plantations exist (de Koning et al., 2005).

Maximum sustained timber yield

The calculation of the maximum sustained timber yield is based on a Cordia alliodora growth
model of Alder and Montenegro (1999) for medium-quality sites. Marginal timber increment
equals the average annual harvest volume according to Eq. (2) at the age of 18 (see Fig. 4). Note
that, due to unreliable estimates close to zero age, we assumed a linear increment during the first
5 years. This procedure runs the risk of overestimating true increment and carbon storage at an early
phase of a forestry project (Price, 1994). However, it did not affect any of the optimal rotations
calculated.
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Growth Rates Cordia alliodora-Plantation

(based on Alder & Montenegro, 1999)
25%
V'(T)
V(T)
20%
1
T
15%

10%

5%

0%
0 5 10 15 TY 20 25 30 35 40
Rotation length (years)

Fig. 4. Optimal rotation for maximum sustained yield of Cordia alliodora.

Growth Rates Cordia alliodora-Plantation

(based on Alder & Montenegro, 1999)
25%
PV'
PV-C
20%

15%

10%
i
1-e-iT
5%

0% TF TY
0 5 10 15 20 25 30 35 40
Rotation Length (years)

Fig. 5. Optimal Faustmann rotation for Cordia alliodora.

Optimal economic timber management decision

Based on a field survey we considered economic aspects in determining the optimal rotation
comprising the following: planting costs in the first year sum to $408/ha and the present value of
further maintenance between years 1 and 10 amounts to $376/ha. Commercial timber volume is
calculated according to growth estimates determined by Alder and Montenegro (1999). We ignore
price–size effects on rotation length, assuming that the timber price per m3 is unaffected by
increasing trunk diameter above 20 cm. Applying these data and a timber price of $20/m3, results in
an optimal economic rotation of 15 years according to the Faustmann rotation model and the
respective condition of Eq. (5) (Fig. 5).
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Accumulated CO2-Storage
700
600
500 36
46
56 56
46
(tCO2/ha) 400 77 77 77
300 120 120 120 120
200
100 267 267 267 267 267

0
0 5 10 15 20 25 30 35 40
Years

Fig. 6. Accumulated CO2 storage in Cordia alliodora plantation.

Joint production of timber and carbon sequestration

Before the optimal rotation for the joint production can be calculated, carbon revenues of the
plantation have to be determined. Fig. 6 illustrates the carbon sequestration potential and shows how
temporary CER are assigned to the afforestation project. We determined the carbon sequestration
potential based on stem biomass estimations for trees with a minimum diameter of 10 cm at breast
height. Owing to lack of specific data we followed Brown (1997) and applied general expansion
factors for tropical broadleaf species to take biomass of roots, stump, branches and leaves into
account. In the next step we calculated the accumulation of carbon by multiplying the overall dry
biomass per hectare by 0.5, which represents the proportion by mass of carbon. Finally, we obtained
mass of carbon dioxide as the basis for credit calculation by the molecular mass of carbon dioxide in
relation to the atomic mass of carbon.
During the first 5 years of growth, the cumulative carbon storage is equivalent to 267 tCO2/ha, thus,
267 temporary CER are to be issued and rewarded by a one-off payment in year 5. They expire after 5
years, but could be reissued and sold together with additional 120 tCER corresponding to the carbon
accumulation between years 5 and 10. Consequently, 387 tCER are available for the next 5 years. In year
15 an additional 77 certificates are generated; together with the reissued 387 tCER they add up to 464
credits available until year 20. During the following 5-year periods a further 56 and 36 credits are
produced so that 510 and 546 tCER, respectively, can be provided and generate a corresponding income
at the beginning of the last two 5-year periods before the project ends in year 30. For successor rotations
we assume constant prices and the same timber volume as well as carbon accumulation.
Obviously, there is a huge difference between the project duration of 30 years, which maximizes
carbon revenues, and the optimal Faustmann rotation of 15 years concerning timber production only.
The optimization condition in Eq. (8) allows us (i) to calculate the optimal rotation for the joint
production of timber and carbon sequestration and (ii) to determine the impact of changes in prices
for the environmental service on the harvesting decision.
Various estimates of prices for permanent credits have been developed in the past. The BioCarbon
Fund proposes a lower limit for a price margin of $3/tCO2 (The World Bank, 2003). Den Elzen and de
Moor (2002) estimated an equilibrium price of about $4.5–$5.5 per tCO2. The International Emission
Trading Association forecasts CER prices that range from $9.9 to $13.7 (IETA, 2003), whereas the
OECD Global Forum on Sustainable Development expects prices from $9 to $22 referring to emission
allowance trading within the European Union ETS (Grubb, 2003). During the course of the year 2007,
the market price of ETS credits for the Phase II (2008–2012) floated between $20 and $30 and is
currently about $35 per tonne of CO2 (PointCarbon, 2008).
Given this range of prices for permanent credits, we apply Eq. (10) with a discount rate of three
percent, which reflects the current low interest level in Annex-I countries, and a permanent credit
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Growth Rates Cordia alliodora-Plantation

(based on Alder & Montenegro, 1999)
15%
PV'
PV-C
12%
i
9% 1-e-iT

6%

3%

0%
0 5 10 15 20 25 30 35 40
Rotation Length (years)

Fig. 7. Optimal Hartman rotation for Cordia alliodora.

Table 1
Optimum rotation for joint production depending on carbon prices.

Permanent certificate price ($/tCO2) Equivalent tCER price ($/tCO2) Optimum rotation length (years)

0 0 15
7 1 17
20 3 21
30 4 24
35 5 29
45 6 -

price of approximately $7, which results in a conservative estimate of the equivalent price for
temporary CER of $1 per tCO2. The payments corresponding to the accumulated carbon storage are
assumed to occur every 5 years and are transformed into constant annuities for the respective time
periods.
The optimal rotation for the joint production for timber and carbon sequestration according to Eq.
(8) is 17 years (Fig. 7), and thus, longer than the Faustmann rotation TF but still shorter than TY (note
that the dotted line represents the right-hand side of Eq. (8)). However, harvesting is delayed only
slightly for 2 years and the question arises of what impact higher CER prices would have on the
result. Thus, we conducted a sensitivity analysis based on the same data but assuming various
permanent certificate prices. Table 1 shows the results.
If the carbon credit price is zero, Eq. (8) reduces to the Faustmann condition given by Eq. (5) and
the optimal rotation is 15 years. With rising prices for permanent certificates, tCER prices increase as
well, and timber harvest is to be delayed substantially. Interestingly, with permanent certificate
prices above $45 (corresponding to a tCER price of $6 per tonnes of CO2) the Hartman condition has
no solution within the given project duration. This indicates that, due to the economic attractiveness
of sequestering carbon, timber would not be harvested. However, the project length is determined by
the CDM rules, which in our case limits the carbon payments until year 30 only.

Discussion and conclusions

We analysed three different approaches to determine the optimal rotation of an afforestation

project in north-western Ecuador. As a result, the maximum sustained yield approach leads to an
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optimal rotation of 18 years, whereas the Faustmann rotation turned out to be shorter: focusing on
timber revenues and taking opportunity costs of a delayed harvest into account, 15 years was
determined as the optimal financial rotation.
Concerning the joint production of timber and carbon sequestration, the Hartman rotation model
has been applied as the traditional approach for accounting externalities in forests (van Kooten and
Folmer, 2004). An early application of the Hartman rotation model to carbon sequestration in forests
has been described in van Kooten et al. (1995). They assume that a forest owner receives a subsidy for
carbon uptake, whereas a tax has to be paid in the case that carbon is released. While no country has
implemented such a tax – subsidy scheme in practice, this analytical approach – though coherent
and important for the economic optimization – remains theoretical in nature. In contrast, we
consider the carbon accounting rules recently established in the international carbon market with
the aim to develop an optimization model that could be applied in practice. However, other aspects
such as liability in case that carbon is released before the certificates expire (e.g. by natural hazards)
play an important role and have to be considered for a comprehensive analysis of practicability.
Interestingly, at low carbon price levels, as forecasted a few years ago, we detected just a slight
change in the harvesting decision, with a harvesting age even remaining below the result of the
maximum sustained yield approach. Including current higher carbon prices in the analysis, leads to
substantially different results: the plantation should not be harvested until the end of the carbon
project, which means a doubling compared with the Faustmann rotation. Note that this result is
based on the assumption that future carbon prices will remain constant (compare Eq. (9)). However,
public projections of carbon prices often suggest increasing prices as mitigation efforts increase over
time (Clarke et al., 2007). Such a development would considerably reduce the attractiveness of tCER
and lCER, as higher carbon prices have to be taken into account when replacing non-permanent
credits by permanent ones (compare Eq. 9).
These results might have strong implications for management decisions concerning carbon sink
projects in the tropics. Land owners willing to participate in CDM afforestation projects have to take
into account that their land-use decision will be irreversible for 30 years instead of 15, with timber
revenues occurring at the end of the carbon project, only. However, the high volatility in the market
for permanent carbon credits leads to a substantial uncertainty concerning future carbon revenues.
In consequence, many afforestation projects in the tropics might not be realized in spite of a
considerable carbon sequestration potential. This could be one reason why until today only one
afforestation project has been officially registered under the CDM.

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