Rising Tree Mortality Undermines Forest Carbon Investment Returns

As SEC climate disclosure rules push companies to ensure carbon offsets represent real, lasting climate benefits, investors face a critical blind spot: forest carbon projects often underestimate tree mortality risks, creating a mismatch between projected returns and ecological reality that could significantly impact forest carbon investments.

The Hidden Variable

Forest carbon projects operate in a structural contradiction. Project developers face powerful incentives to present optimistic growth scenarios that maximize credit generation, while ecological data tells a starkly different story about increasing tree mortality.

The evidence is mounting. Research published in Nature Plants reveals climate-driven forest mortality events have been increasing globally, with a consistent decline in recovery rates since the 1990s. More troubling for investors, the study found that recovery of forest canopy water content—a key indicator of tree health—lags significantly behind vegetation greenness. This means the standard metrics used to assess forest recovery may systematically overestimate actual carbon sequestration potential.

This isn't merely an academic concern. When wildfires tear through forest carbon projects in California, the resulting carbon losses expose fundamental weaknesses in how mortality risks are assessed and priced into forest carbon projects.

The Financial Calculus

The financial stakes are substantial. At a carbon price of approximately $20 per ton, forest carbon contributes about 21% to total timberland investment returns. This represents a return premium of about 115 basis points—nearly double the typical enhancement from sustainable forestry certification.

But these returns depend entirely on mortality assumptions that often don't match ecological reality. Buffer pools—the primary risk management mechanism for forest carbon projects—typically withhold 15-20% of credits in California's forest offset protocol. These pools can withhold up to 50% of a project's credits in high-risk scenarios, dramatically reducing revenue and investment attractiveness.

Even small changes in mortality assumptions dramatically alter carbon credit pricing. A sensitivity analysis by the US Forest Service found that a 1600% change in forest growth or decomposition resulted in only a 40% change in total system carbon after 80 years—revealing how current pricing models may significantly overvalue long-term carbon storage potential when mortality risks increase.

Forest Type Matters

The financial impact varies dramatically across forest types, creating both hidden risks and overlooked opportunities for investors who understand ecological differences. Research published in Nature Geoscience found that boreal and temperate forests are now the main global carbon sinks, while tropical forests are nearly carbon neutral due to degradation.

Not all forests face equal mortality risks. Climate change-induced tree mortality is exacerbated towards the warm or dry limits of species ranges, as demonstrated by a study of 12 common European tree species that found 9 species showed increased mortality linked to temperature and rainfall changes.

This creates dramatically different risk profiles that smart investors can leverage. Boreal forests store approximately 65% of the world's forest carbon, primarily in soils, with a carbon turnover rate of about 50 years—more than twice that of temperate or tropical forests.

Beyond the Buffer Pool

Forward-thinking investors are moving beyond traditional buffer pools to more sophisticated mortality risk management strategies.

Remote sensing technology offers cost-effective solutions for monitoring tree mortality. Sentinel-2 imagery costs between $33 to $63 per square kilometer for monitoring forest health—dramatically less than ground sampling techniques. An improved YOLOv7 model recently achieved 94.31% precision in detecting standing dead trees using airborne remote sensing imagery, enabling near real-time mortality monitoring at scale.

Insurance products specifically designed for forest carbon projects represent another promising approach. The nature-based carbon market could present a $1.3 billion opportunity for the insurance industry, with dedicated insurance coverage potentially replacing buffer pool contributions at lower cost. As Tom Aldridge from Blackford noted, "Insurance fosters confidence which, in turn, attracts investment."

The Nature Conservancy's successful parametric insurance model for coral reefs demonstrates how this approach can work. Their policy in Hawai'i provides pre-agreed payouts for ecosystem repair based on specific climate-related parameters rather than actual loss assessment, with a similar initiative in Mexico providing nearly $850,000 for reef recovery after Hurricane Delta.

Mortality-Aware Investment Strategies

JPMorgan Asset Management has pioneered mortality-aware investment approaches, noting that advanced forestry management techniques enhance both financial returns and biodiversity. Their approach includes portfolio diversification across forest types and ages to mitigate mortality risks.

Investors who accurately account for mortality risks can identify undervalued projects with realistic mortality assumptions while avoiding overvalued projects with optimistic scenarios. When conducting due diligence, investors should ask:

1. How do the project's mortality assumptions compare to ecological data for similar forest types in the region?
2. What monitoring systems are in place to detect mortality events early, and how frequently is data collected?
3. How are disturbance risks specifically incorporated into financial projections and buffer pool calculations?

As SEC climate disclosure rules and the EU's Corporate Sustainability Reporting Directive increase pressure for transparency in carbon offset permanence, mortality-aware investment strategies will become not just a risk management tool but a competitive advantage in carbon markets. The investors who master this hidden variable will be positioned to capture the true value of forest carbon while avoiding the pitfalls of systematically underestimated mortality.