To date, greenhouse gas mitigation funding covers a cumulative 4 million hectares of forests worldwide. According to the IPCC (Brown et al., 1996), forestry has the potential for offsetting approximately 15% of the world’s greenhouse gas emissions, a partial solution to the overall problem. If this investment trend continues, we may see a huge infusion of new capital into the forestry sector, which will have enormous implications for forestry, sustainability and conservation.
The potential size of the forestry-based offset market is still very dependent on policy decisions; on how they will be accounted for and which forestry activities will be accepted under the CDM and JI mechanisms. As mentioned in Section 2.5, the IPCC has prepared a special report (IPEC 2000), which will assist policy makers on deciding on these issues. It is generally positive about the feasibility of this greenhouse gas mitigation option. It has been estimated that, if unconstrained by policy regulations, the forestry-based carbon offset projects could attract billions of dollars of carbon funding, which in turn could leverage much higher levels of investment in the forestry sector as a whole.
In order for investment to be directed, however, markets have to be developed. Suppliers will have to learn about this new commodity or environmental service generated by their enterprises. A new production possibilities now exists, involving the relative values of traditional forest products and of this new environmental value of carbon sequestration, and forest managers have to become aware of it in order to maximise forest output.
Investors will need to identify the full extent of their environmental liabilities and utilise market mechanisms to lower them through the purchase of credits or options. For the environment this may mean a huge infusion of new capital into forestry activities world-wide enabling some global environmental targets to be met more cheaply.
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BOX 4: AUSTRALIA PLANTATIONS TIMBER AND PROSPECTUS BASED FOREST INVESTMENT FUNDS Australian Plantations Timber (APT) is a forestry company specialised in commercial plantations of eucalyptus trees in Western Australia, South Australia and Victoria. Every year, since 1992, APT raises capital from investors for the establishment of new forest plantations, based on investment prospectus offering a pre-tax rate of return of about 7-8 %, derived from the sale of the eucalyptus trees harvested at the end of an 11-year rotation. In 1999, with the assistance of an environmental finance company specialised on the greenhouse gas mitigation sector, APT included provisions in its prospectus to enable the sale of the carbon sequestration credits which may arise from its forestry operations, becoming the first private company world-wide to do so. In practice, the prospectus alerted investors that the rates of return of this fund could potentially be increased through the sale of carbon credits. Estimates suggest the internal rates of return could rise by 1-3 % depending on the value accrued through carbon sales. The prospect of higher returns led to an increased amount of investment into APT: the 1999 prospectus was oversubscribed and the company had to limit its capital uptake to A$136 million, because of constraints related to land availability and operational capacity. APT plans to plant 25,000 ha of new forests in 2000, as opposed to the previous rates of 2-3,000 ha. In April 2000 APT floated in the Australian Stock Exchange, with initial market capitalisation of A$340 million and shares valued at A$3.20 each on the first day of trading. Stock analysts from Macquarie Equities in Australia have valued the company at A$4.50 per share and have attributed A$0.50 of the share price to the value of carbon credits to be produced by APT’s plantations. APT is currently working towards selling the carbon credits generated, and is likely to benefit from the various financial mechanisms that have been developed to facilitate the trade of carbon credits, creating liquidity for this new type of securities. Amongst them, the Sydney Futures Exchange have plans to launch futures contracts on carbon credits and their derivatives, and a series of brokers are already offering derivatives such as options based on carbon. This case study provides an example of how carbon credits are beginning to be used for promoting the funding of forestry activities. Increasingly, carbon is being incorporated into project finance structures, in addition to other debt and equity sources of finance, leveraging the amount of capital that is currently available for forest finance. With regards to the environment, this type of project is fully
aligned with Australia’s objectives of increasing forest cover, in order to
reduce salinisation problems currently affecting large tracks of agricultural
lands. In relation to the Kyoto Protocol, this example illustrates the
additionality effect that extra financial returns can generate. In global
terms, this demonstrates how market approaches could facilitate reaching global
environmental objectives at optimal financial costs. |
