  Forests will have two notable economic roles in the future: providing
renewable raw material and storing carbon to mitigate climate change. The
pricing of forest carbon leads to longer rotation times and consequently larger
carbon stocks, but also exposes landowners to a greater risk of forest damage.
This paper investigates optimal forest rotation under carbon pricing and forest
damage risk. I provide the optimality conditions for this problem and
illustrate the setting with numerical calculations representing boreal forests
under a range of carbon prices and damage probabilities. The relation between
damage probability and carbon price towards the optimal rotation length is
nearly linear, with carbon pricing having far greater impact. As such,
increasing forest carbon stocks by lengthening rotations is an economically
attractive method for climate change mitigation, despite the forest damage
risk. Carbon pricing also increases land expectation value and reduces the
economic risks of the landowner. The production possibility frontier under
optimal rotation suggests that significantly larger forests carbon stocks are
achievable, but imply lower harvests. However, forests' societally optimal role
between these two activities is not yet clear-cut; but rests on the future
development of relative prices between timber, carbon and other commodities
dependent on land-use.
