STT's transition: A further reflection

 

Why Valuing Forests Matters

One of the more curious features of the forestry debate is that many people who would happily support mechanisms such as the Renewable Energy Target become deeply uncomfortable when forests are assigned an economic value.

The objection is understandable. Once forests are given a dollar value, carbon credits become tradeable assets. Tradeable assets invite markets. Markets invite speculators. Before long, the conversation turns to the "financialisation of nature."

Yet that criticism risks missing a much larger problem.

The real danger may not be that forests acquire a financial value.

The real danger may be that they don't.

The lesson from renewable energy

For decades Australia's electricity market suffered from a fairly obvious market failure.

Existing generators, whether coal, gas or hydro, earned revenue from selling electricity. New renewable projects had to recover large upfront capital costs but received little recognition for the environmental benefits they created.

The Renewable Energy Target addressed this by creating Large-scale Generation Certificates (LGCs). Retailers were required to acquire and surrender LGCs. That obligation created demand, which gave certificates value.

The genius of the scheme was not that it subsidised renewable energy. It was that it monetised a benefit the existing market was failing to recognise.

The wind farm or solar farm suddenly had two products:

• electricity; and
• renewable attributes represented by LGCs.

The market could now "see" something that previously existed but had been invisible.

The result was one of the most successful investment signals Australia has produced.

What happens when the signal disappears?

As the LGC scheme winds down by 2030, a policy vacuum is beginning to emerge.

Existing generators continue operating because their ongoing costs are relatively low. New generation must recover substantial capital investment without the same degree of policy support.

The contrast is becoming increasingly apparent.

New transmission assets such as Marinus proceed because regulation provides a mechanism to recover costs.

New generation faces much greater uncertainty.

The result is an imbalance in which ageing fossil fuel generators often receive an unintended extension of life, not because they represent the best long-term outcome, but because alternatives are not being properly rewarded.

The problem is not that new technologies lack value.

The problem is that the value is no longer being recognised.

Forestry faces the same challenge

A remarkably similar issue exists in forestry.

For generations Tasmania's forest accounting systems have recognised the value of trees that can be harvested.

Future timber revenues are estimated, future harvesting costs deducted, and the resulting cash flows discounted back to a present value.

In this framework, the forest is primarily valued because it can produce timber.

For years I have argued that this approach has a significant weakness.

The valuation relates to the current crop of standing timber rather than the forest estate as a perpetual resource.

The costs required to perpetuate that resource, such as regeneration, major roading and other long-term obligations, are not fully captured within the valuation itself. They appear elsewhere in the accounts or in future years.

The result is that standing timber may appear valuable on the balance sheet even while the ongoing process of harvesting, regenerating and maintaining the estate struggles to generate meaningful profits or cash.

Carbon changes the equation

What is interesting about STT’s latest accounts is that they reveal a second source of value emerging from the same forests.

Carbon.

Trees that remain standing can generate Australian Carbon Credit Units (ACCUs).

Like LGCs, ACCUs exist because government has established a framework that recognises and measures a previously unpriced benefit.

In STT's case, seven registered carbon projects covering 2,157 hectares now support a carbon asset valued at almost $10 million.

The significance of that figure is not whether one agrees with carbon markets.

The significance is that the accounting system is beginning to recognise that forests produce something other than timber.

For decades the balance sheet effectively said:

Trees have value because they can be cut down.

Now it is saying:

Trees also have value because they can remain standing.

That is a profound shift.

The conservation dilemma

Some conservationists are uncomfortable with this development.

They worry, not unreasonably, that carbon credits can be used to legitimise activities that would otherwise be unacceptable.

A company purchases ACCUs.

The company continues emitting.

The credit becomes a social licence.

That concern should be taken seriously.

But it is worth remembering that recognising value and determining how that value is used are two separate questions.

The fact that LGCs had a value did not force governments to allow unrestricted trading.

The fact that water has an economic value does not prevent governments regulating water use.

The fact that a forest stores carbon does not require society to allow carbon credits to become a greenwashing mechanism.

Policy can always determine how assets may be used.

Markets and regulation are not mutually exclusive.

Environmental safeguards can be strengthened.

Credits can be retired.

Surrender obligations can be imposed. Recognising a value for carbon does not require those credits to be sold to offset somebody else's emissions.

For instance, rather than endlessly debating whether STT’s annual $12 million Community Service Obligation payment constitutes a subsidy for native forest logging, governments could instead link public funding directly to the generation and surrender of ACCUs arising from public forests. Such a system would openly recognise carbon storage as a public good, provide a transparent alternative to conventional subsidies, and remove one of the principal criticisms of carbon markets by ensuring the credits are retired rather than used to greenwash activities elsewhere. Carbon would become a land-management outcome, not merely a tradeable commodity.

The greater risk

The greater risk may be the failure to recognise these values at all.

Economists have long understood that resources allocated free of charge tend to be overused.  

Decisions are then made as if those values were worth little or nothing, not because that is their true value, but because the accounting framework fails to recognise them.

When biodiversity has no recognised value, it disappears from decision making.

When carbon storage has no recognised value, it disappears from decision making.

When ecosystem services have no recognised value, they disappear from decision making.

The system is not neutral.

It simply places a value of zero on those outcomes.

For decades that is effectively what happened in forestry.

Timber value was measured.

Carbon value was not.

The result was not a market-free decision. It was a decision that favoured one form of value because it was the only one visible.

A lesson for Tasmania

The most interesting aspect of STT’s latest accounts is not the size of the carbon asset.

It is the principle.

For the first time, the accounts are starting to recognise two competing sources of value arising from the same forest:

• future timber production; and
• future carbon storage.

That mirrors the lesson Australia learned in electricity markets.

Important values often remain invisible until policy creates a framework to recognise them.

The Renewable Energy Target did not create the value of renewable energy. It revealed it.

Carbon accounting may be doing something similar for forests.

Whether society chooses to use ACCUs, surrender requirements, direct government funding, biodiversity credits or some other mechanism is ultimately a matter of policy design.

But the first step is recognising that standing forests create value.

Ignoring that value does not protect forests from financialisation.

It simply ensures that decisions continue to be made using an incomplete balance sheet.

And as the history of both electricity and forestry demonstrates, when important values are left off the ledger, poor decisions often follow.