An overview of the economics of plantations in Canada

Background
AN OVERVIEW OF THE ECONOMICS
OF PLANTATIONS IN CANADA
Dan McKenney 1 , Denys Yemshanov 1 , and Terry Hatton 2
Canadian Forest Service,
1 Great Lakes Forestry Centre, Sault Ste. Marie, ON
2 Industry and Economics Branch, Ottawa, ON, Canada
• Plantation establishment is driven by a mix of objectives,
watershed protection, fibre production and site rehabilitation.
• Carbon markets change the decision calculus!
• With rising energy costs there is a need to (re)assess the
investment potential of plantations
• A 3-year Federal “Forest-2020” program was established to
help assess afforestation strategies – i.e. plantations on
agricultural land
• This talk : F2020, Data needs, Economic model, Results
Forest-2020 Plantation
Demonstration Assessment
Program
Objectives
• Analysis on the use of large-scale afforestation as an effective
climate change mitigation measure
• Demonstrate fast growing plantations across Canada
• Explore potential investment models to attract funds
for future plantations
Work plan
• Evaluate existing information / Fill information gaps
• Develop models to predict land availability and afforestation uptake
• Test afforestation interest and participation rates
• Conduct economic and social impact assessments
A Cost-Benefit Information
System for Afforestation
(CFS-AFM and CFS-FBM models)
• Linking biophysical growth and carbon
models with the cost-benefit framework
• Use spatial inputs (maps)
• Dynamic spatial calculations (i.e., harvest
allocation/planting, wood transportation)
• Net present value and break-even
price analysis
• Monte-Carlo simulations and
automated sensitivity analysis
Two models have been developed:
• CFS-AFM (Afforestation Feasibility Model) – Faustmann-like, lump sum
• CFS-FBM (Forest Bioeconomic Model) – annual, finite time horizon
CFS-AFM
(Afforestation Feasibility Model):
Infinite series of rotation (Faustmann-
Hartmann model)
Lump-sum economic outputs (NPV, PV and
break-even prices),
Uses regional yield tables and site
suitability map
Afforestation scenarios only
5-pool carbon model
Project-level accounting on a lump-sum
basis
Modelling framework:
CFS-AFM and CFS-FBM
CFS-FBM
(Forest Bioeconomic Model):
Finite time horizon with annual tracking
of costs, fibre yields and carbon values
Annual economic outputs (cash flows,
NPV, PV and break-even prices)
Uses National and Provincial Forest
Inventory biomass equations
Complex silvicultural strategies with spatial
allocation of harvest/planting
18-pool flow-based carbon model
Project-level accounting on an annual
basis (e.g., Kyoto commitment periods)
Data Summary
• Species tested – hybrid poplar, red pine, Norway/ white spruce, green ash,
black walnut, (fast-growing willows – work in a progress)
• Agricultural land base – SPOT-VGT land classification (1-km map)
• Growth rates - Regional yield tables and site suitability coefficients (1-km map)
• Silvicultural costs – regional estimates by Province/ecozone
• Harvest / hauling costs – FERIC transportation costs model
• Land opportunity costs – StatsCan 2001 annual land rental values
(good correlation with the site quality)
• Fibre prices – local bids on wood tenders and mill gate prices
• Carbon values – CCX (Chicago Climate Exchange) as a North-American
reference (i.e., ~$3.4/t CO 2 for 2005-06), also the theoretical $10/t CO 2 .
We also provide break-even carbon prices
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Input examples
Growth rate assumptions: Hybrid poplar
(MAI), m 3 /ha/year (CFS-Edmonton)
list ccsuid
ROI, (%) – real rate of return yielding NPV = 0
Output Metrics of Interest
Break-even carbon value, ($/t CO 2-e ) – the carbon unit price yielding NPV = 0
(Carbon price is 0 when NPV is positive)
Physical carbon, (t/ha) – total ecosystem carbon sequestered over a project life
(minus carbon in harvested biomass and decay emissions)
USA
Geographical variation of the output metrics
(helps to identify economically attractive areas for afforestation)
150 0 300 600 900
Km
Other metrics include Present Values and break-even wood prices
Urban areas MAI, m3/ha/year
< 4
4 - 6
6 - 8
8 - 9
9 - 10
10 - 11
11 - 12
12 - 13
13 - 14
14 - 15
15 - 16
16 - 17
17 - 18
18 - 19
19 - 20
20 - 21
21 - 22
22 - 23
23 - 24
Results: ROI
Returns on investment, % (real rate)
Afforestation scenarios (~70-75 years time horizon)
“Best” Red Norway Black
area, ha * pine spruce walnut
Hybrid poplar
Fibre only scenario
Max.value 4.6 3.6 3.7 2.8
10k 4.3 3.4 3.5 2.5
100k 4.1 3.3 3.3 2.3
500k 3.8 3.1 2.9 2.1
Fibre + carbon scenario – Carbon at $3.4/t CO2
Max.value 5.2 4.3 4.1 5.1 [6.0] **
10k 4.8 4.1 3.9 4.7 [5.7]
100k 4.5 3.9 3.7 4.2 [5.2]
500k 4.2 3.6 3.2 3.9 [4.9]
* The regions with the highest NPV values
** ROI from a single rotation (25 years) – shown in brackets
Hybrid poplar –75-year horizon (3 x 25-year rotations)
Other species – 70-year horizon (1 x 70-year rotation)
150 0 300 600 900
Km
Int.rate of return
0
USA
< 1%
1 - 2%
2 - 3%
3 - 4%
Results: ROI
Geographical Variation
Hybrid Poplar: Return on Investment (%)
(fibre + carbon at $10/tonne CO 2-e )
4 - 5%
5 - 6%
6 - 7%
7 - 8%
8 - 9%
9 - 10%
10 - 11%
11 - 12%
Urban areas
Results: Carbon
Break-even carbon price ($/t CO 2-e )
and physical carbon accumulation (t/ha):
“Best” Break-carbon even price, $/t CO 2-e Total ecosystem carbon, t C/ ha **
area, ha * Red pine N.spruce B.walnut H.poplar Red pine N.spruce B.walnut H.poplar
Max.value 0 *** 2.3 3.1 2.0 109 98 109 159
10k 0 3.3 4.8 2.7 100 98 109 148
100k 0 4.0 6.6 3.0 96 98 106 139
500k 2.1 5.7 10.2 3.5 91 88 100 132
* Areas with the highest NPV values
** Above- and belowground ecosystem pools minus harvested wood and biomass decay
(IPCC method)
*** Zero carbon price means positive NPV for a 4% discount rate
Hybrid poplar –75-year horizon (3 x 25-year rotations)
Other species – 70-year horizon (1 x 70-year rotation)
Conclusions
• Returns from fibre approach 4% on average – not likely to induce large
scale industry investments (7-9% needed?)
• Main challenges include low growth rates, high costs of land use
conversion and silviculture and low value of fibre
• Some native species (Red pine) have better economic potential than
hybrid poplar in selected regions (Ontario)
• Carbon incentives boost ROI, however the effect is highly dependent on
the carbon price assumptions:
- 0.7-2% ROI increase for current N. American carbon prices (CCX)
- 3-4% increase assuming $10/t CO 2-e price expectations
• Other benefits may be required to improve a competitiveness of
afforestation projects and achieve industry-level rates of return
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Forest-2020 PDA
web page:
http://www.nrcan.gc.ca/cfs/national/what-quoi/afforestation/economics_e.html
http://www.nrcan.gc.ca/cfs/national/what-quoi/afforestation/f2020_e.html
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