Review Reports - Two Manifestations of Market Premium in the Capitalization of Carbon Forest Estates

Round 1

Reviewer 1 Report

The article is complicated, unclear to the reader. I has the impression that only the Author is able to fully understand what he means. The text requires knowledge of forestry, finance and real estate valuation methods. The text should be written so as to be "understandable" to an ordinary reader. Therefore, key categories require a clear explanation, and not the assumption that the reader knows everything what the author knows. Below, I formulate specific comments to the text.

The title of the article is inadequate. It is about forest real estate. Why this carbon?
The abstract and the tekst does not explain what the purpose of the article is? What's the main problem? I also do not understand what is the relationship between the topic undertaken and climate change?
Categories such as proportional goodwill and inflated bare land value require some explanation. What it mean? What do they mean in practice? It is about importance for the owners of forest lands or potential buyers of these lands.
What was the author's basis for estimating these: proportional goodwill and inflated bare land value?
I do not understand completely what are the grounds for such author's formulations as:
a) proportional goodwill is closer to reality within the Nordic Region, resulting in continuity problems but a reduced capital expense for carbon storage.
b) the observations are arranged in relation to a common reference, resulting as the financial feasibility of different management actions on enhanced carbon sequestration under the two manifestations of inflated capitalization.

What this is about? Where did these conclusions come from? There are more such conclusion in these article.

I also completely do not understand the conclusion that the application of inflated bare land value (vertical axis) increases the expected value of stand volume by 2% to 23%?
There are a lot of charts in the article to which there are very sketchy comments. Moreover, not everything that is shown in the figures is understandable, for example what the numbers mean: 7/10; 07/10; 21/04 etc.
As for the scale of empirical analysis, the conclusions (part 5) are very laconic and unconvincing to me.

Author Response

Thank you very much. The author finds it easy to agree.

The author admits that understanding the contents of the paper does require significant knowledge and skill within the areas the Reviewer mentions. The paper can be made more understandable – however it probably cannot be made understandable for any “ordinary reader”. A more detailed account of the improvements made follows.

The title of the article is inadequate. It is about forest real estate. Why this carbon?

Obviously, the original version of the paper did not explain this clearly. The introduction is now started with a paragraph which discusses forestry as an industry with negative carbon emissions, earlier work on the economics of carbon sequestration in forestry, and then the describes the novel approach taken in this paper.

The abstract and the tekst does not explain what the purpose of the article is? What's the main problem? I also do not understand what is the relationship between the topic undertaken and climate change?

Thank you, this issue is intimately related to the previous one, and hopefully becomes corrected simultaneously.

Categories such as proportional goodwill and inflated bare land value require some explanation. What it mean? What do they mean in practice? It is about importance for the owners of forest lands or potential buyers of these lands.

Thank you.
Discussion of possible manifestations of inflated capitalization starts on line 159, within section “Materials and Methods; financial considerations”. The concept “proportional goodwill” is introduced first. It is introduced as an intangible asset on line 168. There is a rather significant theoretical development in Eqs. (7) to (12). At the end of the section, an alternative to the intangible goodwill is given as the inflation of bare land value, as a tangible asset. This is given at lines 209-218.

The following subsection “2.2. The two datasets applied” provides numerical inflation values applied to the datasets, and justifies them on the basis of literature references, as well as on the basis of direct observations (lines 238-244).

The validity of the numerical values is discussed in the Discussion, on lines 629-640, along with further references.

There is another significant development in the text. After the discussion of the numerical values, a paragraph has been added that introduces a theoretical background for the proportional goodwill (lines 641-649). The author thinks the appropriate place for this is in the Discussion since the author was not aware of this theoretical background while developing the formulae.

What was the author's basis for estimating these: proportional goodwill and inflated bare land value?

This question was answered above.

I do not understand completely what are the grounds for such author's formulations as:
a) proportional goodwill is closer to reality within the Nordic Region, resulting in continuity problems but a reduced capital expense for carbon storage.

References indicating the validity of the proportional goodwill are given on lines 238-244 (Materials and Methods). Further references, as well as direct observations, are given on lines 629-640 (Discussion). A rather significant addendum to the text is the new paragraph appearing on lines 641-649, indicating a fundamental reason for the proportional goodwill.

The continuity problem is shown in Eqs. (6) to (9). A sentence has been added on line 168 to make it clear that this is called the “Continuity problem”. Also, another paragraph has been added, discussing the continuity of a few time derivatives, and identifying the source of the continuity problem.

A sentence has been added on lines 217-218, stating that inflated bare land value does not induce any continuity problem.

The reduced expense for the carbon storage is given on lines 457-464, as well as on lines 488-491 (“Results”). A sentence has been added in both contexts for clarity.

b) the observations are arranged in relation to a common reference, resulting as the financial feasibility of different management actions on enhanced carbon sequestration under the two manifestations of inflated capitalization.

The statement the Reviewer quotes has been taken from the Introduction. The Introduction is not designed for providing all the details of the treatment. The Introduction is merely supposed to introduce the forthcoming content. The details are given when the actual treatment is explained. That is, in the Discussion, on lines 543-552. The details are the following:

When the growth model has been applied on growing stands as early as applicable, control parameters have included not only thinning restrictions but also the selection of tree species, as well as initial sapling densities. The capital return rate deficiencies plotted in Figs. 13 to 15 however are case-specific: financially optimized treatment for any tree species and sapling density is taken as a reference point. It is possible to replot these Figures with one common reference. We here select spruce stands with sapling density 1200/ha as the common reference. The reason for this is that the capital return rate achievable according to Fig. 4 is only slightly less than with spruce stands with greater sapling densities, but the duration risk is much less [46,47,48].

I also completely do not understand the conclusion that the application of inflated bare land value (vertical axis) increases the expected value of stand volume by 2% to 23%?

It is stated on lines 425 to 431:

In the absence of any thinning restrictions, management procedures maximizing the capital return rate correspond to a particular expected value of commercial timber appearing per hectare. Such average timber storage is shown in Fig. 11, for the seven stands observed at the age of 30 to 45 years, and in the case of the nine setups where the growth model is applied as early as possible. It is found that the application of inflated bare land value (vertical axis) increases the expected value of stand volume by 2% to 23%.

In other words, Fig. 11 reports findings from the data, rather than conclusions. There are two datasets. Any of them is described in a two-dimensional graphic. The horizontal axis shows the expected stand volume with proportional goodwill. The vertical axes shows the expected stand volume with inflated bare land. The latter is always bigger, and the difference is from 2% to 23%.

There are a lot of charts in the article to which there are very sketchy comments. Moreover, not everything that is shown in the figures is understandable, for example what the numbers mean: 7/10; 07/10; 21/04 etc.

Thank you. The meaning of the mentioned notation is now clarified in any Figure Caption where it applies.

As for the scale of empirical analysis, the conclusions (part 5) are very laconic and unconvincing to me.

In the Conclusions, nothing is written about the scale of empirical results.
It is said that there is “linear scaling”, i.e., multiplication by a constant. That is found in Eq. (12); the constant is 1/(1+u).

An important amendment has been made in the Conclusions, as well as in the Discussion and in the Abstract. Invariance of management practices to proportional goodwill applies in operative measures only; it does not apply when the real estate market is exploited. On the other hand, the discontinuity makes that the real estate market should be exploited. This state of matters was inadequately expressed in the discussion, as well as in the conclusions.

Reviewer 2 Report

This manuscript deals with the effects of capitalization premium on some forest investments and their forest management consequences. The aims and objectives of the paper could fit in the editorial policy of this journal, although maybe a forest economics journal could be more suitable. My overall recommendation is that the manuscript does not deserve publication in its current form in Energies. My comments are listed as follows:

• General Comment: First of all, the author has published papers recently in the same line (methodology, case study, etc.) The author should explain the novelty of this manuscript related to previous papers in detail. Secondly, the manuscript is too large. There are a lot of Figures, and some of them could be deleted or moved to an Annex or a Supplementary Material Section. Perhaps a summary table with the main results would be very appropriate.
• Introduction: The main objective of the manuscript is not clear. It should be rewritten. Besides, some sentences approaching the goodwill concept in some forest investments could be helpful for the readers.
• Material and Methods. I miss a paragraph with all the hypotheses made in this analysis under the financial, firm, and forest management points of view.
• Results: Regarding capitalization Figures, I do not understand why some lines stopped at 30-40 years and others not. I interpret that this is the optimal financial forest rotation, but it is not clear in the text or in the Figures (A Table could be more informative).
• Discussion Section: It mainly focuses on explaining the Results, and some comparisons with other papers could be of interest. Besides, a reader could ask for a comparison of the results (optimal rotation age, capitalization value, etc.) with the reality. Are the results the same?
• The Conclusions Section is quite scarce… after 17 Figures.

Author Response

Thank you very much.

Obviously, the original version of the paper did not explain the focus clearly. The introduction is now started with a paragraph which discusses forestry as an industry with negative carbon emissions, earlier work on the economics of carbon sequestration in forestry, and then the describes the novel approach taken in this paper.

General Comment: First of all, the author has published papers recently in the same line (methodology, case study, etc.) The author should explain the novelty of this manuscript related to previous papers in detail. Secondly, the manuscript is too large. There are a lot of Figures, and some of them could be deleted or moved to an Annex or a Supplementary Material Section. Perhaps a summary table with the main results would be very appropriate.

Thank you again.

Now, the first paragraph of the Introduction is supposed to relate the content to earlier studies.

The paper contains new theory. It is given in Equations (5) to (12).
The datasets have been used before. However, here they are used to study issues appearing in the new theory. The Author admits there are many Figures, and he is not happy about that. There are two datasets, and any of them contains many series of data. Any data series is deterministic – it contains averaged observations only. Variation is to be addressed through comparing different data series within any dataset. Finally, repeatability of findings can be addressed by comparing the two independent datasets.

There are results, appearing in the datasets, which do verify earlier findings. These are indicated in the sections “Results” and “Discussion”. However, conclusions presented focus solely on the outcomes of the new theory.

Introduction: The main objective of the manuscript is not clear. It should be rewritten. Besides, some sentences approaching the goodwill concept in some forest investments could be helpful for the readers.

Yes, the Introduction has been amended.

Material and Methods. I miss a paragraph with all the hypotheses made in this analysis under the financial, firm, and forest management points of view.

There are no hypothesis in this paper.
New mathematical theory has been developed, inspired by earlier theory on the one hand, and market observations on the other hand. Then, the consequences are investigated within the two datasets.

There are two more significant text amendments in the revision. Firstly, time derivatives are discussed on lines 183 to 190, and the concept “continuity problem” is elaborated. Secondly, in the Discussion, on lines 641 to 649, a fundamental reason for the existence of the proportional goodwill is introduced.

Results: Regarding capitalization Figures, I do not understand why some lines stopped at 30-40 years and others not. I interpret that this is the optimal financial forest rotation, but it is not clear in the text or in the Figures (A Table could be more informative).

Thank you. The text describing Figs. 6, 7, 8, 9,and 10 has been amended.

Discussion Section: It mainly focuses on explaining the Results, and some comparisons with other papers could be of interest. Besides, a reader could ask for a comparison of the results (optimal rotation age, capitalization value, etc.) with the reality. Are the results the same?

Results based on the new theory cannot be compared with earlier ones since the theory has not existed before.

The Conclusions Section is quite scarce… after 17 Figures.

Yes, the datasets are used to describe variability within any dataset, as well as repeatability among the datasets. Fortunately, the variability is moderate, and repeatability is good. Consequently, the main findings, originating from the theory, can be expressed briefly.

Reviewer 3 Report

The manuscript "Two Manifestations of Market Premium in the Capitalization of Carbon-Forest Estates" presents the analysis of inflated capitalization in forest estates. The methodology is well presented, and numerous relevant references are cited. The problem discussed in the reviewed study is topical and worthy of publication in a journal like Energies.

In general, the paper is long and can be a bit difficult to follow, especially by "Energies oriented" readers – because there is more emphasis on forest economic issues. The relevant results of the study, as announced in the second part of the title "… market premium in the capitalization of carbon-forest Estates," should be given in the conclusions in an essential way.

Specific remarks:

Line 20 - [1,2,3,4,5,6,7,8,9] – it should be [1-9] – this remark concern whole manuscript.

Figure 1. all part of the figure is "a"; there is no "1b" and "1c"

In legend - what means 13/7, 14/06 ... please explain it. It concerns all Figures

what does "a" stand for in the description of the horizontal axis.

Author Response

Thank you very much.

This is an invited paper for a special issue “Techno-Economic and Environmental Analysis of Low-Carbon Technologies”. The specific subtopic is “Negative emission technologies”. In this paper, forestry is taken as a technological solution for negative carbon emissions. Obviously, the original version of the paper did not explain this clearly. The introduction is now started with a paragraph which discusses forestry as an industry with negative carbon emissions, earlier work on the economics of carbon sequestration in forestry, and then the describes the novel approach taken in this paper.

Yes, the paper is long, and difficult to follow. There are two text amendments which make the paper still longer but hopefully make it more comprehensible for serious readers. Firstly, time derivatives are discussed on lines 183 to 190, and the concept “continuity problem” is elaborated. Secondly, in the Discussion, on lines 641 to 649, a fundamental reason for the existence of the proportional goodwill is introduced.

Data is utilized extensively. The datasets are used to describe variability within any dataset, as well as repeatability among the datasets. Fortunately, the variability is moderate, and repeatability is good. Consequently, the main findings, originating from the theory, can be expressed briefly.

In particular, the author has intended to express conclusions compactly. The author does not think the existence of market premium is an essential result, neither a conclusion. Consequences of the premium are essential, and the most important is the financial discontinuity. Other significant results are the invariance of management practices to proportional goodwill, as well as the reduced capital expense of carbon storage.

Invariance of management practices to proportional goodwill applies in operative measures only; it does not apply when the real estate market is exploited. On the other hand, the discontinuity makes that the real estate market should be exploited. This state of matters was inadequately expressed in the discussion, as well as in the conclusions and has now been corrected, in terms of a third significant text amendment.

Specific remarks:

Line 20 - [1,2,3,4,5,6,7,8,9] – it should be [1-9] – this remark concern whole manuscript.
Figure 1. all part of the figure is "a"; there is no "1b" and "1c"
In legend - what means 13/7, 14/06 ... please explain it. It concerns all Figures

Thank you.
The author thinks the final arrangement of reference numbers has to be done in the final editorial stage. There are new references, and all the references have been renumbered. There is an editorial requirement of tracking changes, and all reference numbers are now shown in two versions.

what does "a" stand for in the description of the horizontal axis.

A standardized symbol for the year as a unit of time is "a", taken from the Latin word “annus”.

ttps://en.wikipedia.org/wiki/Year#Symbols

Round 2

Reviewer 2 Report

Although I would prefer another kind of response to some of my comments, the manuscript can be accepted in its current form.

Author Response

Thank you very much.

A technical correction has been made in Figs. 12 to 16. For proportional goodwill, the scale of the capital return rate deficiency per excess volume unit is somewhat greater than given in the original Figures. There are some related textual changes, marked in the manuscript.