Financial Contracts and the Management of Carbon Emissions in Small Scale Plantation Forests

Under the New Zealand Emissions Trading Scheme, foresters can obtain carbon units as their forests sequester carbon. If they sell these units as they are earned, the units must be repurchased when the forest is harvested, exposing foresters to price risk. This paper examines the way forward markets, futures markets, and carbon lending markets could be used to manage this risk. It argues that carbon lending markets are likely to be the most convenient form for foresters, as they allow the total returns from forestry investments to be increased with minimal risk. The carbon units can be lent to industrial firms or developers of new forests to minimise the carbon risk they face if they make carbon reducing investments.