Two Manifestations of Market Premium in the Capitalization of Carbon Forest Estates

Abstract

In this study, the effect of capitalization premium in forest estate markets on forest management and climate change mitigation economics is investigated. It is shown that proportional goodwill in capitalization induces linear scaling of the financial return, without any contribution to sound management practices. However, there is a financial discontinuity, as harvesting deteriorates goodwill. Such deterioration might be partially avoided by entering the real estate market. Conversely, a capitalization premium set on bare land as a tangible asset would increase timber storage and carbon sequestration. Observations indicate that the proportional goodwill is closer to reality within the Nordic Region, resulting in continuity problems.

Two Sets of Boundary Conditions in Cyclical Systems with Goodwill in Capitalization

“…There are certainly occurrences where the goodwill values are temporarily disturbed on the market. However, observations indicate there is a long-term valuation trend in accordance with the proportional value premium [10,11,20]. The example results of this paper are strictly applicable as long as the market premium in forest estates can be given in terms of proportional goodwill as introduced in Equations ( 7) and (8).…”

“…It appears that either accepting or abandoning the periodic boundary condition of Equation (1) may result in dramatic consequences, as demonstrated above in Figures 1-5. Such consequences depend upon the intangible market premium [8][9][10][11], applied as proportional to the tangible value [10,11,20]. The present author is not aware of earlier studies discussing the financial consequences of either accepting or abandoning a periodic boundary condition within a cyclical business.…”

“…Boreal forestry is adopted as an example of a cyclical productive system with intangible goodwill values. As the justification of the existence of goodwill value includes an expectation of future gains, liquidity aspects, as well as psychological factors [8][9][10][11], observations have indicated that the goodwill value is approximately linearly proportional to the value of tangible assets [20].…”

“…Sixteen different sets of initial conditions, regarding boreal forestry, are used to implement the above theoretical results. The sets of initial conditions originate from two different datasets, described in five earlier investigations [20][21][22][23][24]. Briefly, the datasets are described as follows.…”

“…Technically, the application of the datasets is the following. Any of the 16 initial conditions, monetized as described in references [20][21][22][23][24], is written in a computer program. Then, a time evolution from any initial condition is established according to the growth model [28], in terms of 30-month timesteps.…”