A Landowner's Guide to Carbon Offsets
Carbon markets present one way for timberland owners to derive value from well-managed forests. In order to help landowners participate in these growing opportunities, Ecotrust has created this guide. It gives a background on existing markets and helps landowners take an initial look at what’s involved in selling forest carbon into the markets.
We’ve organized it around these questions:
- What are carbon markets?
- Is my forest a good fit for a carbon project?
- What are the eligibility requirements all projects have to meet?
- How do the different markets and third-party verification programs work?
- What is the step-by-step process for selling carbon into a market?
What are carbon markets?
There are two major categories of carbon markets. The first is a regulated market created by “cap and trade” regulations at the state and regional level. These markets set a total allowable amount of greenhouse gas emissions — the “cap”— to limit the impact to the climate to an acceptable level. In order to prevent an amount of emissions from exceeding this cap, each major polluter (e.g., industry, energy producers, transportation) is allowed a specific amount.
Under a regulated market, emitters of greenhouse gases generally have two means to meet their obligations. They can 1) reduce their overall emissions or 2) they can purchase an offset from another emitter that is below its cap — this is the “trade”. Offsets can also be purchased from organizations that reduce overall greenhouse gases through actions such as growing trees.
Forestland owners can also sell forest carbon credits onto the voluntary market, in which businesses and individuals voluntarily buy credits to offset the emissions of, say, their business operations for a year or a long plane trip, in the case of individuals. Though this market isn’t regulated by government, forest carbon credits that meet high standards can generate significant revenue. Today, there are many forest carbon “protocols” developed by non-profit organizations to quantify, track, and manage voluntary carbon reductions according to rigorous standards.
Is my forest a good fit for a carbon project?
If you own and manage forestland, you may be able to sell carbon credits generated from management activities on your land. However there are several questions to consider before pursuing detailed eligibility requirements.
- Am I planning to purchase new forest land or adopt a new management regime?
Projects require some change in management to be eligible for participation. This new management could include: a change in land ownership, the adoption of a new management plan, reforesting previously unforested lands, protecting forests that are planned for removal, or extending the length of harvest rotations.
- Do I have enough forest land holdings to make a carbon project worthwhile?
Project development costs are high and at today’s carbon prices, this usually means that projects on less than 1,000 acres will not generate a profit.
- I have a relatively young forest. Is that a good fit for a carbon offset program?
While forests of all ages are eligible, forests with timber volumes greater than the regional average are likely deliver more credits in the first year under some protocols.
- Do I have to commit to a new management regime for the long term?
Carbon projects are required to store additional carbon for 50 to 100 years in order to qualify for payments.
What are the eligibility requirements projects have to meet?
While eligibility requirements differ depending upon the protocols you follow, there are several elements that all rigorous forest carbon protocols share:
A forest carbon project must create additional carbon in its trees and other plant biomass, beyond business-as-usual scenarios. That can be accomplished through things such as selective tree harvesting and land management for wildlife habitat. But a project would not receive credits for following state laws; for example, carbon stored from trees planted after harvesting would not constitute additional carbon in California, Oregon or Washington, since reforestation is required in all three states.
A forest project must establish a carbon storage baseline, which represents the amount of carbon that would be stored in the forest and harvested timber without the new forest carbon project. Additional carbon stored by the project is compared against this baseline. A baseline could rely on historical practices or practices of similarly situated neighbors.
Leakage is defined as a loss of carbon in forests outside of a project area. For example, if a forest landowner is reducing his harvest on lands managed to store additional carbon, he cannot increase his harvest on another area of land to make up for lost timber revenue.
The climate benefits of forest carbon sequestration would be compromised through harvests or a change in ownership and management that reduced the carbon stored on the project lands. To guard against this, project developers need to provide legal assurance as to the permanence of forestry projects. Most projects will need to guarantee carbon storage for 100 years.
All forest projects create a buffer pool of carbon credits that are held in case of forest fires, insect outbreaks, or other unplanned activities. A percentage of carbon credits from each project are not sold on the carbon market and, instead, kept in reserve to guard against risk.
How do the different markets and third-party verification programs work?
For forest landowners, the most important greenhouse gas market was created through the adoption of the California’s Assembly Bill 32: The Global Warming Solutions Act. This law allows for a certain percentage of all greenhouse gas offsets to be produced through forest management, reforestation, and the prevention of forest clearing. Today the California regulated market is the largest carbon market in the world that allows managed forests to generate offset credits.
The state has targeted greenhouse gas emissions for the year 2020 of 427 million metric tons of carbon dioxide equivalent (MMtCO2e), some 80 million metric tons below projected levels given current trends. In phases beginning in 2013, different categories of greenhouse gas emitters (energy producers, industrial manufacturers, etc.) will be capped at a set level of emissions. These entities will be allowed to meet their overall targets through reductions or offsets. Up to 8% of the total emissions targets may be met from the forestry sector, and one quarter of those forestry offsets can come from outside the United States. Today, the California offset market remains the only legislated and regulated market in the U.S. and it has defined strict methods for quantifying and verifying offset credits from forestry activities. Because of the regulated demand, prices for these carbon credits will be higher than those under a voluntary system.
All forest project protocols for the California carbon market require the adoption of a new management regime that sequesters more carbon than the “business-as-usual” scenario. Projects on forests that plan on continuing harvesting activity will generally follow an improved forest management methodology. Management practices that are considered “improved” include extended rotations, greater retention of trees at harvest, and forest thinning that can both reduce fire risk and stimulate growth.
The California forest protocol is based heavily on the Climate Action Reserve’s forest project protocol described below.
Voluntary Forest Carbon Project Protocols
Voluntary credits are a way for individuals and corporations to reduce their carbon footprint by purchasing credits that are verified by outside auditors and tracked by official registries. The most rigorous of these voluntary registries have protocols that assure any reduction is real, verified, and permanent. In most cases, carbon credits approved by these entities can be treated as equal to credits that meets government requirements under cap and trade legislation. Two of the strongest voluntary protocols are detailed below.
Climate Action Reserve (CAR)
The Climate Action Reserves is a nonprofit organization headquartered in California and created by that state’s Air Resources Board (ARB) to develop methods for quantifying greenhouse gas reductions as a first step in the adoption of greenhouse gas legislation for the state.
CAR began developing a voluntary forest project protocol in 2003 for projects within the state of California. Today they have completed revised versions which allow projects in all 48 states in the continental U.S. CAR has chosen to create a single methodology for each type of forest project activity rather than allow outside groups to develop and approve multiple methods. It takes U.S. Forest Service data sets as a regional average, and allows forest managers to receive credits for carbon stored above this level. Some other eligibility requirements for CAR projects include:
- Native species diversity must be maintained
- Forest management on the project site must not be required by law
- Additional carbon sequestered must be stored for 100 years
- Broadcast fertilizers are not allowed
- Maintenance of downed woody debris
- Project activities must not have been started more than six months prior to listing the project with the reserve
Verified Carbon Standard (VCS)
The Verified Carbon Standard has developed methodologies for agriculture, forestry, and other land uses that are applicable on a wide range of land management projects around the world. These methodologies define the eligibility of a forest and management plan to generate carbon credits as well as the method to quantify these credits. Anyone is allowed to develop a methodology, but it must be reviewed and approved by accredited auditors prior to its adoption by VCS. Once approved, any landowner may use it.
Key elements that distinguish the current VCS forestry methodologies from other protocols include:
- Deductions of overall credits based on risk that are slowly returned to the landowner based on project performance.
- Leakage calculations that estimate shifts in harvests from the project area to neighboring sites not owned by the project landowner.
- Many methodologies require certification under an accepted third-party certification system (Forest Stewardship Council, Sustainable Forestry Initiative, etc.)
- Differing lengths of commitment for the project lifetime
- Two stage audit by the verification body that includes a desk review, followed by a site visit and review of field data.
What is the process for selling carbon into market?
Launching a forest carbon project can take a significant investment of time, money, and planning in order to get off the ground. A landowner should perform a feasibility study to determine if adopting a project can help him achieve his long-term management goals. In many cases, the long-term stream of revenue generated by carbon credits can provide financial diversification for a landowner, especially as prices for carbon will tend to be linked to timber prices.
The basic steps for completing a project include:
Determining a protocol
Every forest carbon project is different, and some protocols match a landowner’s goals better than others. Determining the requirements, the fee structure, and the current prices for each protocol will help a landowner decide the best course of action.
All projects require detailed field sampling of the various carbon pools. While many land managers typically complete timber inventories as part of their overall management practices, the additional measurements required to cover the variety of carbon pools with high levels of confidence can add 25–50% to the overall cost of the inventory.
Initial project development also requires sophisticated modeling of carbon volumes. In most cases, this requires several weeks of work to calibrate data for entry into the model, to create specific scenarios, and to model the business as usual and project scenarios.
Project document development
Each project must develop documents that describe the project and ensure that the activities outlined will be eligible for the project type. This documentation can be completed by the landowner or an outside project developer, and in many cases may require the assistance of certified foresters to attest to the details of the new project scenarios.
Once all the project field work, modeling, and documents have been completed, the forest owner must hire an accredited party to perform a verification. This includes a site visit to review the property and inventory accuracy. It also includes an office visit to review all the management planning details, carbon modeling, and project documents.
Selling carbon credits requires knowledge of the different buyers looking to purchase credits. Often this involves generating a term sheet or brief document describing the project, terms of sale, and amount of credits generated. This can be distributed to a wide variety of buyers to begin the process of creating a sales contract.