Reforestation: costs of CO2 removals?

Reforestation costs are modelled in this data-file, acquiring pastureland, planting new forests to absorb CO2, over a 50-year cycle. As a good rule of thumb, we think $50/ton CO2 prices, $50/m3 timber, and 3% pa land appreciation will unlock an 8% unlevered IRR at Yield Class 16 (5 tons of CO2 per acre per year). CO2 price sensitivities range from $0 to $100/ton.

What are the typical costs of reforestation projects, which plant new forests to pull CO2 out of the atmosphere, using the 400M-year-old technology of ‘trees’. Our roadmap to Net Zero sees potential for a 15GTpa CO2 sink, at an average cost of $50/ton, capturing 5 tons of CO2 per acre per year (data here), from 3bn acres globally (note here).

Reforestation starts with land. Our model includes a total cost of $5,000/hectare to acquire and reforest pastureland. This is based on our database into land costs, seedling costs and planting density, while the costs of specific site preparation techniques are built up in the data-file (chart below).

Forests will grow on rotations of 20-200 years, but we have modelled a 50-year rotation in our base case. Biomass accumulation rates follow a sigmoid profile, and our base case is set at yield class 16 (chart below-left, more on yield classes here and here). Biomass can be harvested from the forest. However, the CO2 accounting is important (note here). If the wood is sold into pulp/paper, wood fuel or biomass power, then our model ‘gives back’ the CO2 and does not allow credits to be booked. Timber prices are tracked here.

Also note that in practice, thinning is an important part of forestry management to prevent over-crowding of maturing stands, which will result in tall, spindly, unhealthy trees. Thinning operations will be ‘lumpy’, but in our charts above, we have modelled it ‘smoothly’.

Other reforestation costs are drawn from our other analysis. Some of the best and most detailed data we have seen to date captures the whole of Finland’s forestry industry (superb nay sublime). This informs our opex costs ($/hectare/year) and our harvesting costs (in $/m3).

Reforestation costs are estimated at $50/ton of CO2 removal credits, $50/m3 for harvested timber and a base case of 3% pa land appreciation, in order to unlock an 8% unlevered IRR on a 50-year reforestation project. The cash flow profile looks a little bit unusual, compared to our other economic models, due to the long investment life.

Sensitivities can be stress-tested in the data-file. Reforestation costs can realistically require CO2 credits in a range of $10-100/ton, depending on hurdle rates, the value of timber, yield class, land acquisition costs, site preparation costs, tax regimes and other costs. But we still think $50/ton CO2 is a good average estimate.

Copyright: Thunder Said Energy, 2019-2024.