Timberland Investment

Warmer temperatures brought on by climate change will lead to drier soils and reduce tree photosynthesis and growth in forests later this century, according to a new University of Minnesota study published in the journal Nature.

That important conclusion comes as scientists have speculated the opposite: that a warming climate might speed up a forests' photosynthesis and facilitate growth in cold-weather climates found in North America, Europe and Asia.

"These results have important implications for the future," said Peter Reich, a professor of forest resources in the College of Food, Agricultural and Natural Resource Sciences and the study's lead author. "Typical dry spells already occur frequently enough to erase most of the potential benefits to tree growth of warmer summer temperatures. In a warmer future, the extra evaporation from warmer plants and soils will make those dry spells drier, further suppressing photosynthesis."

Cool summers slow the growth of forests in cold places. That's why scientists had hypothesized that warmer climatological conditions might help increase a forest's growth rate in the future.

In their study, University of Minnesota researchers looked at more than 2,000 young trees from 11 different species—including birch, maple, oak, pine and spruce—growing in 48 plots in two forests in northern Minnesota. During the three-year study, researchers increased temperatures at the test plots—without use of chambers of any kind—by 3.4 degrees Celsius (6 degrees Fahrenheit), an increase that might happen in Minnesota by the end of the 21st century.

During the course of the study, researchers routinely measured photosynthesis at the plots to see how fast leaves were taking carbon dioxide out of the air to make sugars for the trees. Researchers found that:when soils were moist, photosynthesis was higher in plants growing at warmer than at ambient temperatures;in moderately to severely dry soils, which occurred during two-thirds of the growing season, warmer temperatures reduced photosynthesis;as a result, photosynthesis was reduced—on average—by the experimental climate warming.

"These results show that low soil moisture will slow down or eliminate any potential benefits of climate warming on tree photosynthesis even in moist, cold climates like Minnesota, Canada and Siberia," said Reich.

A number of important lumber-related developments have come out of North America over the last week:

The US-Mexico-Canada Agreement (USMCA)
The USMCA was recently inked, which does not mention softwood lumber specifically but does renew the very important Chapter 19 dispute resolution mechanism. With the negotiations of the USMCA now complete, this leaves open the possibility that the US and Canada may now focus on resolving the contentious trade disputes regarding softwood lumber.

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United Steelworkers Strike Notice

The union representing roughly 2,000 sawmill workers in Northern BC, including Quesnel and Williams Lake, recently issued a 72-hour strike notice.

The most recent development as of this writing is that BC sawmill workers have now been banned from working overtime hours, which can make it difficult for producers to quickly adjust to market conditions or the arrival of fresh logs to the mill.

Erratic US Housing Market
US homebuilding was up in August but existing home sales slowed as prices have soared out of reach for many buyers. The US housing market—already struggling with tight inventory and rising building costs—faces a fresh headwind as 30-year mortgage rates rise close to the 5 percent threshold for the first time in years. The rise in mortgage rates so far this year means a potential homebuyer would pay about US$35,000 more interest on a US$220,000 loan over 30 years. Home prices are also soaring in conjunction with mortgage rates.
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All of these factors appear to be combining to produce a level of uncertainty in the market. Prices for 2x4 dimensional lumber have dropped precipitously since hitting an all-time high in June; Douglas fir green 2x4s are down nearly 50%. The table below provides a comparison of the all-time high prices (June 2018) and current prices (mid-October 2018) for benchmark dimension softwood lumber 2x4s vs. their previous historical highs of 2004/05:

ND Paper LLC has increased its presence in Maine, reaching an agreement to purchase the Old Town pulp mill that closed three years ago, saying that it will create more than 100 jobs in the Penobscot County community.

The U.S. subsidiary of Hong Kong-based Nine Dragons Paper Holdings Ltd. recently purchased the Catalyst paper mill in Rumford and hopes its latest deal will be completed in 30 days. The sale is a cash deal for an undisclosed sum.

“We are absolutely thrilled to restart the Old Town Mill and return well over 100 high paying jobs to Penobscot County,” Ken Liu, CEO of ND Paper, said in a statement Wednesday. “By leveraging our existing manufacturing platform in Maine, combined with the financial capacity to wisely invest in the mill’s production capabilities, we expect to create a very strong future for this facility.”

ND Paper plans to make capital investments in Old Town and restart the mill in the first quarter of 2019 with the capability of annually producing 275,000 air dried metric tons of unbleached kraft pulp.

ND Paper purchased what is now called the Rumford Mill in June and this week announced it will invest $300 million in that mill and another it owns in Biron, Wisconsin, over the next two years. ND Paper said the $111 million investment in the Rumford Mill will support 650 jobs and create another 50.

ND Paper is headquartered in Oak Brook Terrace, Illinois. Nine Dragons Paper is Asia’s largest producer of containerboard, which is most commonly used in making cardboard boxes.

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The agreement calls for ND Paper to acquire the bleached kraft pulp mill, as well as 100 acres of property in Old Town.

Prior to the mill being idled in the fourth quarter of 2015, the mill manufactured and distributed 155,000 air dried metric tons of bleached hardwood kraft pulp annually.

In reading about the pulp and paper industry, so much news focuses on the declines in printing and writing paper and newsprint. True, North American paper and paperboard production declined 25% since the start of the 2000’s, but the industry still has the capacity to use over 300 million tons of wood annually. Pulp and paper remains a massive and important industry. Different paper sectors have experienced divergent fortunes, with packaging and household paper far more resilient than newsprint and printing and writing papers. Much of the activity in the paper sector is in conversions to packaging, tissue or fluff pulp to service those thriving markets.

The end-use sector served by mills regionally provides important context to understand pulping capacity. The South has clear advantages over other regions, with the majority of both household/sanitary and packaging capacity. This has served as a bulwark against the paper industry’s overall decline over the past decade (Figure). Total pulping capacity in 2018 is 91 million tons, 12% less than the sector’s 103 million tons of capacity in 2008. Capacity declined in every region, but end-use exposure affected the scale of those shifts. The South has been and remains the largest pulping region, growing from 52% to 58% of North American capacity. Every other region shrank in proportional relevance, led by Eastern Canada, which represented 16% of total capacity in 2008, compared to 13% in 2018. Western Canada’s proportion dropped the least (0.5%) and remains around 10%.

The drop in pulping capacity is a function of mill closures. Between 2008 and 2018, the number of pulp mills decreased by 18%, while average pulp mill capacity increased 7%. Average capacity declined only in East Canada (0.6%), which also saw the greatest drop in operable pulp mills (30%). Average capacity increased in the other regions through investments and closure of smaller facilities. No new pulp mills have been built, though a small number of mills that were not operating in 2008 have reopened.

Over the past decade, Eastern Canada has consistently been the fourth-largest installed base of regional softwood lumber manufacturing capacity in North America, behind the U.S. South, the U.S. West, and Western Canada. However, the region has gained importance as a source of incremental production and capital investment, offsetting lost production in the wake of the mountain pine beetle infestation and devastating fires suffered in Western Canada. Eastern Canada currently accounts for 12.0 billion board feet (BBFT) of softwood lumber capacity (17% of North America’s total capacity), a modest reduction from a decade ago. However, production is on track to reach 11.8 BBFT this year – the seventh consecutive year of production gains (Figure 1). With a utilization rate of 98%, Eastern Canada lumber producers are making the most of their assets.

The narrowing rift between capacity and production is driving investment. Figure 2 maps announced, active and completed capital investment projects in Eastern Canada over a five-year period, beginning in 2016 and including projects with expected completion by 2020. Overall, these projects are modest in size, totaling less than 700 MMBF in softwood lumber capacity. Still, these investments, along with the highest utilization rates in North America since 2016, highlight the important role played by the region in North American production. The most remarkable take-home from the map is the broad and diversified effort to upgrade, improve or expand capacity at existing mills to, in part, offset lost production in Western Canada and serve the U.S. export market.

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In fiscal 2018, the Teacher Retirement System's stock market investments gained a return of 13.4 percent to reach $9.49 billion in value, while bond investments posted a return of 1.3 percent to end up at $2.57 billion, according to Aon Hewitt.

The system's private equity investments earned a return of 22.3 percent to reach $2.03 billion, while real estate investments gained 10.8 percent to end up at $1.41 billion, the consultant said.

Agricultural investments posted a 3.3 percent return to reach $195 million. Timber investments recorded a 1.2 percent return to end up at $267 million last fiscal year, according to Aon Hewitt.

The system's opportunistic alternative investments gained a return of 0.7 percent to end up at $984 million. Infrastructure investments totaled $182 million and cash totaled $179 million at the end of the fiscal year.

Investors tired of poor returns, are getting out of timberland — at what some say is the wrong time.

Leading the exit are CalPERS and Harvard.

The California Public Employees' Retirement System, Sacramento, in the third quarter sold most of its $2 billion timberland portfolio, with few plans of investing again; instead, the $358.9 billion system will focus on core real estate. CalPERS' consultant said the fund sold the investments at a loss.
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CalPERS' forestland portfolio underperformed its benchmark for the one, three, five and 10 years ended June 30. The portfolio earned 1.9% compared to the 3.8% benchmark return for the year; an annualized -2.4% (3.4% benchmark) for the three years; -1% (6.1%) for the five years; and -1.1% (4.1%) for the 10 years ended June 30. These returns do not include additional markdowns from the sale of the Crown Pine Timber portfolio, Mr. Junkin said.

Meanwhile, Cambridge, Mass.-based Harvard Management Co., which manages Harvard University's $37.1 billion endowment, is also selling off portions of its timberland portfolio, sources said.

Harvard Management Co. reported in September that natural resources, including timber, experienced a challenging year in its 2017 fiscal year and the endowment took write-downs and sold assets, some at or above their previous valuations. "Our natural resources platform will take multiple years to reposition," the report noted without providing details. Harvard is reportedly attempting to sell majority or minority stakes in a $700 million portfolio of timberland in South America.

Fundraising by timber investment managers is way down. Two funds raised a combined $600 million so far in 2018, down from seven funds that raised $1.4 billion in all of 2017 and eight funds that raised $3.1 billion in 2008, according to data from London-based alternative investment research firm Preqin.

More than 30 timberland funds manage about $57 billion of assets for investors "who cite the long-term investment horizon, low correlation with the general economy, biological growth regardless of economic conditions, and a relatively stable stream of cash flows as appealing characteristics of the asset class," according to a recent report by MetLife Inc.'s agricultural finance group, which oversees agricultural and timberland assets.

Matthew Lynch, Hartford, Conn.-based managing director and head of real estate and private markets at UBS Asset Management, said poor returns are driving investors out of the asset class into other real asset sectors.

Timberland assets earned 0.48% for the quarter ended June 30, down from 0.92% in the prior quarter and 0.7% in the second quarter ended June 30, 2017, the NCREIF Timberland index showed. The Total Timberland index had a 3.57% trailing return for the year ended June 30. Timberland market value per acre was $1,804 as of June 30, down from $1,824 a year earlier, according to NCREIF.
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Between January 2017 to June 2018, average prices for commonly traded lumber in the U.S. increased by 40%, according to the Wood Resource Quarterly. During the same period, sawlog prices were practically unchanged in the South and rose about 28% in the Western U.S.
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Some industry insiders say institutional investors are downsizing their timber exposure at the wrong time, when prices for timberland are way down. They also say the investors got into their current portfolios at the wrong time.

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Some timber managers and investors are buying timberland, seeing opportunities as some holdings are priced at a discount. In July, BTG Pactual Timberland Investment Group invested alongside British Columbia Investment Management Corp., Highland Capital Management, and Medley Management Inc. bought 1.1 million acres of prime East Texas timberland from CalPERS for $1.39 billion. The market value of CalPERS' investment in Crown Pine Timber — known as Lincoln Timber, a hedge fund of one managed by timber management organization Campbell Global — was $1.6 billion as of June 30. In October 2007, CalPERS had committed $2.2 billion to invest in 1.5 million acres in eastern Texas and western Louisiana, documents on CalPERS' website show.

The battle for Phaunos Timber Fund (PTF) has intensified with CatchMark Timber Trust (CTT.N), a US real estate investment trust, announcing it is considering a $0.57 per share equity offer.

The potential bid beats a rival offer of $0.49 per share in cash from Phaunos’ former manager Stafford Capital Partners and would see shareholders receive around $284 million in CatchMark shares.

Phaunos, which holds its annual general meeting in Guernsey this afternoon, has responded by saying it will ‘engage with CatchMark to understand fully its proposal’ which represents a 16.3% premium to Stafford’s offer.

Jerry Barag, CatchMark president and chief financial offer said: ‘The Phaunos portfolio fits our existing strategy for acquiring institutional quality assets with superior productivity that can generate durable growth for our stock holders. It presents a compelling opportunity worth our study and analysis.’
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Liberum analyst Conor Finn said CatchMark’s indicative offer looked attractive but questioned whether CatchMark shares would be a good fit for Phaunos investors.

‘We believe most of the Phaunos share register would not be long-term holders of CatchMark. This is likely to create downward pressure on CatchMark’s share price,’ he said.
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Phaunos' board has rejected Stafford's bid as undervaluing the company, saying it will deliver more value for shareholders with an orderly wind-up and sale of its investments. Stafford has denied this saying the board's asset realisation programme will be slower and far more uncertain than its offer.

The bid tussle has embroiled Phaunos in a legal row with Rayonier, the majority investor in New Zealand's Matariki Forestry Group which represents three quarters of the company's assets. Rayonier says Phaunos breached a confidentiality agreement by publishing a valuation of Matariki in its formal response to Stafford's offer. It claims it now has the right to buy the rest of Matariki at a 20% discount, which if true would diminish the break-up value the board is seeking.

A large-scale land purchase by an American forestry company west of Taupō will see 1148ha of farmland converted into a redwood forest.

The $7 million purchase north of Taumarunui, near Matiere, by The New Zealand Redwood Company was approved by the Overseas Investment Office in July.

The venture was likely to create six full-time jobs and increase New Zealand's export returns because the bulk of the timber will be exported to the United States in a processed form, the OIO consent said.

Taupō-based NZRC was formed in 2001 by the Soper Wheeler Co of California, a 100-year-old forestry firm.

As housing starts continued to slow in July, southern yellow pine (SYP) lumber prices followed suit before momentarily reversing course to stop a steady four-week slide. Forest2Market’s composite southern yellow pine lumber price for the week ending August 17 (Week 34) was $446/MBF, a 5 percent increase from the previous week’s price of $423/MBF. Year-over-year, week 34’s price represents an 18 percent increase from the same week in 2017.

The price reversal was likely driven by new SYP orders, which surged in week 34 to their highest level of 2018. While shipments didn’t reach into record territory, they were quite strong and at levels not seen since late May when SYP prices reached a peak of $576/MBF. Price volatility has been the norm thus far in 2018; the trend is likely to continue as the timing of the recent price increase and flood of new orders may foretell strong housing starts numbers for August, which will be released by the US Census Bureau on September 19.

A closer look at some of the prices we have seen since the beginning of the year:

1Q2018 Average Price: $449/MBF
2Q2018 Average Price: $523/MBF
YTD Average Price: $482/MBF

A tree that could ultimately vanish from New York under the relentless assault from a voracious invasive beetle is now worth more than ever as timber.

The value of ash trees has been on a steady climb in recent years as the state tried to quarantine areas infested by the emerald ash borer, an invasive beetle that came into the state from an infestation that started near Detroit in 2002.

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This summer, with the borers infesting 43 of the state's 62 counties, DEC dropped that logging quarantine as no longer effective. Applauding the move, the logging industry said it might be time to cut remaining ash trees as timber before the borers get them.

This summer, the price for ash timber in parts of New York hit a peak of $600 per 1,000 board feet, about triple what it was shortly after the beetles first arrived in the state, according to bi-annual stumpage reports issued by the state Department of Environmental Conservation.

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The average price for ash had climbed to about $300 per 1,000 board feet when the state began its quarantine in 2015, according to DEC stumpage reports at that time.

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The eventual loss of ash will forever change an industry that uses ash to produce bats for major league baseball.

Ash wood has long been a staple of the Rawlings baseball bat factory in Dolgeville, Herkimer County, where bats have been made for more than six decades. As recently as 2012, ash accounted for about 90 percent of the bats made there.

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A glut of timber has piled up in the Southeast. There are far more ready-to-cut trees than the region’s mills can saw or pulp. The surfeit has crushed timber prices in Mississippi, Alabama and several other states.

The volume of Southern yellow pine, used in housing and to make paper, has surged in recent decades as farmers replaced cropland with trees and as clear-cut forests were replanted. By 2020, the amount of wood growing per acre of timberland in many counties will have more than quadrupled since 1980, U.S. forestry officials estimate.

It has been a big loser for some financial investors, among them the country’s largest pension fund. The California Public Employees’ Retirement System spent more than $2 billion on Southern timberland, and harvested trees at depressed prices to pay interest on money borrowed to buy. Calpers sold much of its land this summer at a loss. A spokeswoman for the pension fund declined to comment.

It’s also been tough for the individuals and families who own much of the South’s forestland, and who had banked on its operating as a college fund or retirement account. The region has more than six million owners of at least 10 wooded acres, say academics and forestry consultants. Many of the owners were counting on forests as a long-term investment that could be replenished and passed on to heirs.
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The housing crash 10 years ago worsened the developing timber glut by depressing lumber demand and prompting woodland owners to postpone harvests. Mills closed.

Housing has come back in much of the country, pushing prices for finished forest products such as two-by-fours and plywood to historic highs during the spring and summer building season. Prices for logs, as well, have moved up in the U.S.’s other big timber-producing region, the Pacific Northwest, where supply is kept in check by wood-boring beetles and periodic wildfires.

In the South, timber prices haven’t stopped sliding. Adjusted for inflation, the price of Southern pine is down about 45% since 2007, according to Daowei Zhang, an Auburn University professor of forest economics. So-called saw timber, for making lumber, is at a 50-year low, adjusted for inflation.
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In the 1950s, the U.S. Department of Agriculture started dangling forestation incentives to stem erosion and prop up crop prices. At the depths of the 1980s farm crisis, when prices for agricultural commodities plunged, the Reagan administration launched the Conservation Reserve Program. Starting in 1986, it promised farmers annual payments of about $30 to $50 for each acre they planted with trees or grasses.

Many seized the offer. By 1994, more than 2.2 million acres of farmland in the South had been converted to pine plantation, much of it in Mississippi, Alabama and Georgia. Other federal forestation programs added about 2.5 million acres more, according to Auburn’s Mr. Zhang.

Meanwhile, timber was gaining popularity as an investment idea. People reasoned that trees would grow, and thus gain value, no matter what the stock market did. Investors large and small snapped up forestland that big paper companies put on the market to take advantage of the interest. Researchers reported in 1998 that residual fertilizer in the soil of former farms was helping trees grow faster.

A crush of maturing trees arrived just as U.S. housing markets collapsed in 2007 and 2008, creating a supply imbalance that in some places has never ended. Even with increased demand from the housing recovery, there remain about 25 years’ worth of softwood supply in the Southeast, said Brooks Mendell, chief executive of Forisk Consulting, which advises timber investors.

In parts of Mississippi and Alabama, the glut is even worse. “It’s unclear we’ll ever have timber prices like we did 10 or 20 years ago,” Mr. Mendell said.

Southern mill owners—who buy logs from landowners and resell them as poles, lumber and pulp—anticipate wide margins for years because their raw material is so cheap. Billions of dollars of new saw mills and mill expansions have been announced by the likes of Georgia-Pacific and Canada’s Canfor Corp. Lumber is more practical than logs to haul long distances to stronger markets.

The arbitrage inspired last year’s merger of Deltic Timber Corp. and Potlatch Corp. Deltic’s three Arkansas mills offered profits amid depressed prices for Potlatch’s Southern timber. The combined company quickly added a second shift to a mill in Ola, Ark., and a more efficient kiln for drying wood at another mill.

More mills could help timber prices, but building one of today’s modern computerized mills, and finding the skilled labor to run it, is a complex task. “Can they install a mill in a rural town in Mississippi and be able to go hire a hundred workers who want to work in a saw mill?” asked PotlatchDeltic Chief Executive Michael Covey at an investor conference in New York this summer. “It’s going to take a few years for those Southern log prices to tip back up.”

WITH Brett Kavanaugh’s fraught confirmation battle still raging across the street at the Capitol, the Supreme Court got back to work on October 1st on a quieter note. In the justices’ hands was a three-inch amphibian known as the dusky gopher frog. One of the most endangered species in the world, the dusky gopher numbered 135 in 2015—all of them living near a pond in Mississippi. Weyerhaeuser Co. v United States Fish and Wildlife Service asks whether the federal government erred in 2012 when it designated 1,544 acres in Louisiana as additional “critical habitat” essential to the species’ survival.

The area in question belongs to Weyerhaeuser and a few other lumber companies, all unhappy that the Fish and Wildlife Service’s move has, in the words of Timothy Bishop, the company’s lawyer, diminished the value of their land by “tens of millions of dollars”. Mr Bishop told the justices that since no dusky gopher frogs currently reside on his client’s land, and wouldn’t survive there without a transformation of its terrain, the Endangered Species Act (ESA) does not authorise the government to set it aside as “critical habitat”. The land isn’t even the animal’s habitat, he reasoned, so it makes no sense to deem it critical to their conservation. “We would have to totally change the way that this land operates”, Mr Bishop said, “in order to accommodate the frog”.

The loggers’ land caught the eye of the agency because it is home to a rare and peculiar geographical feature crucial to the frogs’ reproduction: “ephemeral ponds” that fill up annually and dry out by summer. The larvae and tadpoles develop in these small bodies of water and make it through because there are no fish to gobble them up. But with decreased rainfall and environmental change, ephemeral ponds are in short supply.
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The colloquy between the justices and the lawyers focused on how significant a change to existing lands the law could reasonably expect. In an extended exchange with Justice Elena Kagan, Mr Bishop granted that if all that was needed was “a very minimal change” like “digging a few holes”, the ESA may permit the government to designate unoccupied tracts as critical habitat. But the dusky gopher frog’s idiosyncrasies also require nearby uplands with open-canopy forests and a particular type of ground cover serving as herbaceous highways between the trees and the ponds. The 1,544 acres would have to be “totally remade”, Mr Bishop argued, to be hospitable to the dusky gopher.
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Chief Justice Roberts posed the dilemma to Mr Kneedler. If there were ephemeral ponds in Alaska, he mused, “you could build a giant greenhouse and plant the long-leaf pines” there, giving the frog a servicable home albeit at great cost and trouble. Could the government designate such odd spots as critical habitat? No, Mr Kneedler responded, since the law only requires “reasonable efforts” to change the landscape and make it habitable for an endangered species. Planting trees or draining a swamp are reasonable, he said; erecting palatial greenhouses is not. But the chief pressed on: “What’s the limit?” And Justice Alito chimed in: “What’s the definition of reasonable?”
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It seems the four left-leaning justices are inclined to let the government go ahead with its efforts to protect the dusky gopher, while the four right-of-center justices are not. A split decision lets stand the ruling in the court below, and the Fifth Circuit Court of Appeals sided with the government by a vote of 2-1. So if Weyerhaeuser comes down to a 4-4 divide, the croakers, not the loggers, will reap the benefits.

We unravel the complicated debate over N.H.'s biomass industry. This spring, the governor vetoed two energy-related bills designed to subsidize the biomass. [AUDIO]

The previous post referenced the limitation of simply asking our two screening questions (“Big or small? Long or short?”) when evaluating potential disruptions. Some events affect businesses or investments locally, but not the entire industry or market and vice versa. Big changes can affect us locally, globally, or both. As we have long taught and written, timber markets are uniquely local. For strategy development, we want to specify the context of the disruption to best understand its absolute and relative risks, whether positive or negative.

Finance offers a useful analogy by distinguishing between systematic and unsystematic risks. Systematic risk, also called “undiversifiable” risk, refers to exposures and potential losses affecting the entire market or system, such as interest rates and recessions. Unsystematic risk includes “diversifiable” exposures specific to a given firm or industry. We have little, if any, control over systematic (global) risk, while unsystematic (local) risk can be mitigated and managed through diversification, insurance and other approaches.
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This high-level framework prioritizes the relative importance of potential disruptions. It separates the local, tactical issues from the global and strategic. Now we apply this approach to a broader set of potential disruptions.

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Figure 6 [above] summarizes an analysis and ranking for ten selected disruptions based on a forest owner point of view (as opposed to a wood user or manufacturer). This ranks first for global (strategic) exposures and second for local impacts. Each assessment has a “story” that changes based on the profile, objectives and assets of the firm.

Even at this level, the relative ranking highlights critical themes.

1. Tax and environmental policies matter.
2. People matter.
3. Technology matters. 
4. Demand matters. 

Also, time as a strategic idea remains malleable. Discussions with clients and colleagues about potential disruptions reinforce the arbitrary nature of “short” and “long” term in timber. The space and time required for impacts to realize themselves in forestry is beyond the immediate quarter or year (with respect to what the asset can and should do). Value is created consistently over long periods of time, and to the extent we put arbitrary 1 or 5 or 10-year time horizons on the asset, we constrain its performance and change our understanding of the associated risks.

The evidence is in: Urban trees improve air and water quality, reduce energy costs, and improve human health, even as they offer the benefit of storing carbon. And in cities across the country, they are disappearing.

A recent paper by two U.S. Forest Service scientists reported that metropolitan areas in the U.S. are losing about 36 million trees each year. The paper, by David Nowak and Eric Greenfield, was an expansion of the same researchers’ 2012 study that found significant tree loss in 17 out of the 20 U.S. cities studied.

This arboreal decline is happening even in some areas that promote “million-tree” campaigns, Arbor Day plantings, and street-tree giveaways. Cash-strapped municipalities just can’t find enough green to maintain the green. Additionally, many cities are adjusting to population booms, and to temperature increases and drought due to climate change—both conditions that can be hard on trees (while increasing their value as sources of cooling and cleaner air). There’s also a growing recognition of the inequity of tree-canopy distribution in many cities, with lush cover in wealthy neighborhoods and far fewer trees in disadvantaged areas.

To find more funding for urban trees, some local governments, including Austin, Texas and King County, Washington (where Seattle is located), are running pilot projects with a Seattle-based nonprofit called City Forest Credits (CFC). The nonprofit is developing a new approach: generating funding for city tree canopies from private companies (and individuals) that wish to offset their carbon emissions by buying credits for tree planting or preservation.
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The new credits aim to quantify not only the carbon benefits of urban trees, but also rainfall interception, energy savings from cooling and heating effects, and air-quality benefits. CFC has no role in marketing or selling credits for specific projects, but maintains the standards (protocols) and credentialing for other organizations that sell them. A third-party firm, Ecofor, verifies compliance for tree-preservation projects. Tree-planting projects are either third-party verified, or, for smaller projects that cannot afford that, verified by CFC with peer review, using Google Earth and geocoded photos.

To be eligible for the credits, city tree projects must follow protocols created specifically for urban forests—rules governing such specifics as the location and duration of a project and how the carbon will be quantified.

The new credits “are specifically catered to the urban environment and the unique challenges and possibilities there, so they differ from traditional carbon credits,” said Ian Leahy, director of urban forestry programs at the non-profit conservation group American Forests, and a member of the CFC protocol board.
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The fact that credits can cover both stream-side plantings and trees on school property illustrates the complex task of developing a city credit—the protocols and quantification methods must work for the disparate tree species and stewardship strategies of an urban forest, in contrast to the more controlled setting of an industrial plantation.
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Urban credits will be expensive—many times what a commodity credit for carbon might cost. Urban land is not cheap, and urban trees are costly to plant and maintain compared to those on forest land.

However, urban trees offer more public benefits. “Compared to one additional tree left standing in a far-off industrial forest, each additional urban tree we protect has an outsized human impact,” argued Governali, because these trees bring cooling on hot days, better air quality, and even improved mental health. Finally, he noted, the sale of carbon credits from urban trees can help a municipality buy the underlying land and make it a public park, “a place for families to gather, relieve stress, get some exercise, relax, and for children to play and learn.”

At the outset, the work adds to already full urban-forest workloads and stretches budgets, at least until credit revenue from buyers can support the programs. “We’re good at planting trees, but documenting the work to create an official carbon credit is new for us,” said Austin’s Baumer. However, generating credits is one more way to stall or reverse tree loss at a time when people are just starting to understand how critical trees—whether elms, oaks, Douglas firs, or cedars—are to a city’s health and economy.