Perspective - Market News

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?

22/02/2019

Sustainable Investment Team

Schroders

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 opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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