A 4,500 acre forest supplies the water for the residents  of Forest Grove.  The city owns most of the land in the watershed and contracts with a company to manage this asset.  Water quality and quantity are important forest management objectives.  In addition, healthy stream habitat supports cutthroat trout, steelhead, and coho salmon. 

Forest growth produces timber,  an ecosystem good with an established consumer market.  Forest Grove chose to generate revenue by managing the forest for timber production under stringent stewardship standards.  The 4,500 acres are certified by the Forest Stewardship Council (FSC), an internationally recognized certification authority that promotes high standards of forest management practices. 

The forest plan segments the landscape into three categories - forest reserve, sensitive areas, and active management.  The forest reserve class includes 30% of the total land area.  Analogous to the fractional reserve system of the federal banking system, Forest Grove's watershed  managers reserve 30% of the land area in a mature, complex stand structure with multiple canopy layers.  Forest stands adjacent to streams are retained to trap sediment sources from roads and actively managed acres.  The fractional reserve protects watershed services for both human and fish communities.  The second management class, sensitive areas covers another 30% of the forest, and the city actively manages 40% of the forest.

A market price premium required time and creativity to achieve.   In 2008, about one third of the harvest volume was sold to buyers with a preference for certified wood, and customers paid a 10-12%  premium.  To achieve the increased margin required a significant change in marketing and a new distribution channel for the products.    A commodity market drives the typical solid wood supply chain  in which most players adopt a  low cost producer strategy to maximize margin.   The mill purchases the logs, processes the logs into lumber which is then sold to wholesale distributors.  The wholesaler markets to the retailer who then sells to the end customer.  This structure of a commodity market has not supported a price premium for the landowner with high stewardship standards.

Forest Grove's strategy restructured the market distribution channel.  An experienced log broker controls the wood from the forest stand to the customer.    The log broker contracts with a mill for manufacturing services, controls the logs to ensure FSC chain of custody, and then works directly with a consumer segment that  prefers certified wood.  One customer's preference for quality wood is so strong that members of his family corporation traveled to the watershed for a site review.

The resource manager for Forest Grove does question whether customers pay the price premium based on the certification or based on the higher quality lumber produced from large logs.  In the consumer market driven approach to stewardship incentives for landowners,  the log characteristics and land conditions are bundled, and the consumer may only be aware of the lumber quality.  

The Photo Atlas documents examples of the structures in the forest reserve.

Ann and Richard Hanschu manage 494 acres of forest owned by their family corporation.  The initial 160 acres were purchased in 1956, and included an old mill site on the property adjacent to a stream.  The mill produced lumber in the 1920's and was abandoned by its owners after timber harvest.  For three decades little if any forest management occurred on the property.

Anne's father adopted management objectives when he acquired the property:  1) Take advantage of education and extension resources, 2) Invest only in activities that resulted in increased production, and 3) Retain material on the forest floor that regenerates the inherent productivity of the soil. 

The forest condition today includes 70 year old mature Douglas Fir stands.  This portion of the ownership has received three commercial thinning treatments.  The Douglas Fir stands have a less complex structure than the riparian restoration project on the property.  For decades, the Hanschu's have allowed large woody debris to accumulate in the riparian zone, sometimes to the dismay of downstream neighbors intimated by the potential for flooding.  Current state regulations require large woody debris to enhance fisheries habitat.     The neighbors have labored to recruit debris that matches the conditions of the Hanschu stream channel.

A recent evaluation of the stream using fish shocking survey techniques verified the habitat quality; fish have returned. The fishery recovery does restrict logging operations within the riparian zone.  An estimated $144,000 of timber will not be logged in the regulated reserve adjacent to the stream.  The owners note that the result is acceptable to their family, but added that unlike other forest owners, personal income is not dependent on the forest resource.  The regulations have reduced income for other family woodland owners in the vicinity.  The tree farmers provide a public benefit through riparian management , but incur a net loss in asset value.

Peter Hayes, a neighboring tree farmer to the Hanschu property and owner of the family corporation Hyla Woods, discussed an historical context  for the  evolving practice of forestry in the United States.  Peter characterizes five phases of forest practices:

In spite of a conflict  between a land ethic that recognizes land as a community, and an ecosystem  market practice that segments the community into distinct commodities, Hyla Woods has taken  steps to prepare for ecosystem markets.  A fundamental  management objective is to care for the land and its inherent characteristics.   In order to document the health of the land resulting from that objective, the owners  measure and track performance of  the resource, beyond timber production.  The long-term objective is to sell credits for carbon, habitat or water (quality and quantity).  In the interim, the family business strategy includes FSC certification (since 1997), managing the supply chain by operating their own mill, and direct sales of  certified products to customers.  Similar to the Forest Grove watershed management, Hyla Woods modified the supply chain through these practices.  Mill ownership allows for control of the wood from land to customer and reduces production costs compared to contracting with external mills.

The benefits from the Hayes Strategy  include a 10-12% price premium, less market volatility for certified wood than commodity products, and a substantial price premium in individual sales.  For example, a recent sale price of $585/mbf outperformed an average commodity price in the region of $275/mbf.  The price premium is a welcome change to thirty year decreasing revenue trend for stumpage and wood product markets.   Will consumers sustain a price premium for good wood at volume and price levels that influence forest stewardship practices?  If the consumer market votes no with its wallet, private landowners  will need to pursue other markets. 

The Photo Atlas includes sites from the Hanschu property, including managed stands and stream restoration.

The Tualatin River's water quality depends on cold stream temperatures.   Forest Grove water consumers generate increased storm water runoff and sewage effluent that require treatment.  Clean Water Services manages the water treatment systems for the community.  A post treatment discharge of the water is a point source of thermal pollution.  The utility could invest in brick and mortar to cool the water before discharging to the river.  Clean Water Services opted for an investment in natural capital as an efficient alternative.  The investment establishes forest structure on parcels adjacent to the river.  The strategy changes the pattern on the land, from grasses and brush (or crops) to forest stands.

Engineers estimated a cost of $60 million to expand the treatment facility to cool the water.  Annual operating costs would incur another $2 million for energy.    The land based investment in green infrastructure includes site preparation, planting, and control of competing vegetation during the period of stand establishment.  Average costs are $4,000-$5,000 per acre.  In addition to restoration work in progress along 35 miles of stream,  Clean Water Services augments water flow   by releasing water from  storage facilities. 

A collaboration between the utility and the Conservation Reserve Enhanced Program (CREP) offers incentives to private landowners to participate in restoration.  Clean Water Services funds 1 CREP staff position.  Individual landowners sign a twenty year agreement, and receive an annual payment.  Similar to the Conservation Reserve Program, the annual payment is based on a soil rent,  an estimate of crop productivity in current market value.  By displacing crops or other uses, the program pays an ecosystem service rent to the landowner for the right to  plant and grow the forest canopy on the parcel.   For priority areas in CREP, like these riparian areas, the annual payment ranges from $80-$300 per acre. 

The restoration projects contribute to jobs in the region.  Clean Water Services contracts with local nurseries to collect native seed  from trees local to the watershed, plant the seed, and grow the seedlings for up to three years.  The work also supports forest management firms by increasing the acres under contract for site preparation, planting and brush control.

The strategy also controls costs, as documented by the lowest water treatment rates in the region.  Storm water treatment charges have not increased in recent years.  The restoration investment may provide an additional return to ratepayers in the form of  temperature credit revenue.  The newly established canopy creates temperature credits, measured in units of kilocalories per day.  The future use of these credits include offsets for Clean Water Services operations, reserve credits that are a hedge against stand establishment failure, and the future sale of credits to other organizations requiring thermal offsets. 

Note in the Photo Atlas the shade provided on the river surface from the existing mature canopy.

The tour stops were a small sample of sites within a patchwork  of family, industrial and public landowners in the basin.  The managers of the properties allocate natural capital to achieve objectives of their respective organizations.  The Photo Atlas ground photos capture the footprint of the individual decisions, and the map backdrop paints the landscape aggregate of all landowners. 

In sharp contrast to recent problems with credit default swaps in the financial market, ecosystem services are place based.  In either market reviewed in the tour stops - consumer driven forest certification of good wood or policy driven temperature offsets - the market principle should be simple: give credit where credit is due.  Literally, give credit because managers make space for green infrastructure.  Reducing risk in one sense does involve credit default swaps of a different order for ecosystem markets than the bundled mortgage markets.  Consumers pay a premium for certified wood because of stewardship practices that include fractional reserves.  The fractional forest reserves occupy a place in the watershed and support critical ecosystem services.  These locations are a hedge to sustain services levels impacted by active management.  Temperature credits are valid for restoration projects because the planting produces shade as an outcome of growing trees on specific parcels of land.  Clean Water Services retains a fractional reserve of temperature credits as a hedge against plantation failure.  The validity of each credit is anchored to the status of specific parcels and the status of forest canopy. 

The land managers on the tour understand the principle of place based credit for ecosystem structure.  They are committed to a spatial interest in a functioning landscape.  The challenge for these markets is attracting private investors who recognize, appreciate and share that commitment.   The ultimate test will be the spatial outcome of the market incentives.  Will the incentives be sufficient to influence the individual decisions of landowners in order to achieve a desired landscape scale outcome?  An outcome that can be defined as a configuration of landscape conditions draped across the terrain.  The tour hosts have taken an initial step in that direction, and credit is due.