Is Brazil the new Saudi Arabia?
Could forestry’s importance in reducing carbon emissions and the rising cost of carbon credits change the world economy?
Forestry is a key element of the carbon emissions reduction puzzle. Trees cover 31% of the world’s land surface, equal to just over 4 billion hectares1. Each hectare of forest removes about 10 tons of carbon dioxide (CO2) from the atmosphere every year2. The world's forests therefore offset the equivalent of 40 gigatons (Gt) of CO2 annually, roughly equal to annual CO2 emissions from fossil fuels. Without the world’s forestland, the climate would be in far worse shape.
Unfortunately, annual forest loss has also hit record levels in recent years. An area of tropical forest the size of Bangladesh is lost annually. Reversing the deforestation that has accelerated in recent years is therefore a critical piece of the solution to the climate challenge. But it is also an opportunity for investors. The use of forestation as a source of carbon credits has raised the profile of the economic incentives – as well as environmental ones – of retaining or rebuilding the world’s forests. Establishing financial incentives may be a slow process, but the value at stake is huge.
The current price of a ton of CO2 within the EU emissions trading scheme is roughly $25 per tonne3. At the $100/t carbon price that we believe will be needed to reduce emissions far and fast enough to limit temperature rises to 2 degrees, the increased value of that forest land would be more than 2.5 times higher, significantly more than the value of forestland today.
Based on a sample of listed forestry companies, we estimate the current value of forestland at around $1500 per acre4. Put another way, the world’s forests would have a combined value around $1.6tr, a huge number but still smaller than the current market value of the world’s oil & gas sector5.
However, following this logic, the shape of global economic power would be turned on its head if forest land value rose by the 2.5x mentioned above.
Saudi Arabia currently has the 49th highest income in the world at about $20,000 per capita. Brazil is 84th in the same table, with income more than 50% lower6. But if we reflect the annual benefit of its forestland to Brazil’s economy at the theoretical price, Brazil’s income per capita would rise to about $25,000, surpassing Saudi Arabia.
Brazil's annual increase in GDP accounting solely for the value of atmospheric C02 extracted by forests
Source: Schroders, February 2019
With political gridlock, our calculations are of course theoretical, but they underline the magnitude of economic impact climate change will have on investors, businesses, and nations. If, how or when such a mechanism is implemented remains unclear but may become more concrete as global climate talks edge closer to a solution, in which forestry will be an unavoidably vital component.
1. http://www.earth-policy.org/indicators/C56/forests_2012 ↩
2. http://urbanforestrynetwork.org/benefits/air%20quality.html ↩
3. https://markets.businessinsider.com/commodities/co2-emissionsrechte ↩
4. https://extension.psu.edu/timber-market-report-2018-2nd-quarter ↩
5. https://www.prnewswire.com/news-releases/77-trillion-global-oil-and-gas-exploration-and-production-market---analysis-2013-2015--industry-forecasts-2016-2025-300242507.html ↩
6. https://databank.worldbank.org/data/reports.aspx?source=2&series=NY.GDP.PCAP.CD&country=# ↩
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.