This piece was written with Paula Swedeen of the Pacific Forest Trust
A new issue brief, released today by the World Resources Institute and the Pacific Forest Trust, looks at the economic opportunities for southern landowners created by emerging forest carbon offset markets. This new revenue stream can offer real rewards to landowners who steward their forests for climate benefits.
Original economic analysis done by the authors suggests that under current market conditions (offset prices in the $8-$12/metric ton CO2e range), income from carbon offsets may be sufficient in some instances to pay property taxes or the “incremental” costs of sustainable forest management certification. From a purely financial perspective, however, revenue from offsets in today’s still-developing market is not likely sufficient to outcompete real estate development in the region. However, the authors found that if carbon prices exceed $20-25/metric ton of CO2e, the value of emissions reductions from forests begins to look like an attractive part of an investment portfolio that could include timber harvesting in addition to carbon sequestration. Further, if prices exceed $30/metric ton of CO2e , they start to compete with current timber values for mixed hardwood in some locales in the South. Projections for average offset prices under the California cap and trade system (see below) are in $30 range for the period of 2013 to 2020 .
Emerging voluntary and compliance markets (driven as a result of a regulatory requirement) often have provisions for greenhouse gas reductions or emissions avoided by preventing forest conversion or by changing forest management practices. These reductions or avoided emissions are considered “forest carbon emission reductions.”
A “forest carbon offset” is a metric ton of carbon dioxide equivalent (CO2e), the emission of which is avoided or newly sequestered and is purchased by greenhouse gas emitters as a cost-control mechanism to compensate for emissions occurring elsewhere.
This issue brief is an introductory resource for southern woodland owners, nongovernmental organizations active in the region, offset project developers, and other forest carbon offset market stakeholders. It provides essential information to help understand the key issues and opportunities associated with tapping into forest carbon offset markets in the U.S. South.
What is the current economic viability of forest carbon offset projects?
Forest carbon offset projects have the potential to be economically viable depending on a variety of factors. These projects incur a number of costs, including project development expenses, transaction costs, and opportunity costs (of selling to development, for example). The revenue side of the equation is a function of the market price for offsets and the expected number of offsets the project will likely yield. The latter can differ depending on forest type, accounting methodology, project size, and a variety of factors, depending on the project type.
The authors analyzed an existing project in Virginia to find out, given a certain price of a metric ton of CO2e, how many carbon credits and how much net profit could be generated from a 2,400 acre property.
In the scenario, the landowner harvests fewer forest products annually (40 percent less) than the amount of wood grown on the parcel for a specific period—allowing them to accrue more carbon over a 100-year period (Figure 1). The landowner then receives credit for not harvesting a portion of the carbon stored in the growing forest that could otherwise be legally cut and harvested. This “40 percent harvest” scenario would earn an undiscounted profit from carbon offsets alone of $1.29 million over a 100-year period. If the undiscounted cash flow was spread out evenly over a 100-year time period, this would result in an average of $5.38 per acre per year, not counting the revenue from timber harvesting. This scenario includes costs of inventory, verification, transaction fees, and a modest pricing assumption of $8.50 per metric ton of CO2e rising to $12 per metric ton of CO2e after 12 years.
Forest carbon offset standards applicable to southern landowners
Programs with forest carbon offset standards that are legally applicable to projects in the southern U.S. include:
- Climate Action Reserve (CAR)1, www.climateactionreserve.org
- Verified Carbon Standard (VCS), www.v-c-s.org
- American Carbon Registry (ACR), www.americancarbonregistry.org
- The Gold Standard (GS), www.cdmgoldstandard.org
To sell or not to sell?
Woodland owners should enter these markets with realistic expectations. Forest carbon offsets—and the voluntary and compliance markets for them—are still relatively new and offset prices, for the most part, remain low. Project development for carbon offset projects also takes time and upfront resources. Therefore, economic returns to woodland owners will be modest per acre at least in the near term. As a result, anticipated revenues from forest carbon offsets by themselves are unlikely to be as large as profits that can be gained from selling off forests for residential or commercial development.
But this conclusion should not dampen interest. For instance, returns will likely improve if forest carbon offset demand and carbon prices in either voluntary or compliance markets were to increase, as is currently projected for the California market. Likewise, for some woodland owners, even a small new revenue stream is sufficient to cover property taxes, sustainable forest certification costs, or other incremental expenses associated with forest ownership and improved forest management. Furthermore, as documented in other issue briefs that have been recently published, other types of incentives are available for southern woodland owners that could help them maintain their forests.
Although forest carbon offsets by themselves are not a complete solution to needs and challenges of conserving southern forests, they do provide yet another option in the portfolio of approaches that can be utilized to sustain the critically important ecosystem services provided by these forests for the benefit of millions of people.
More information about forest carbon offset prices, trading volumes, and other developments in both voluntary and regulatory carbon markets from online and published resources are provided by the Ecosystem Marketplace and the World Bank.
To access this brief and other issue briefs in the Southern Forests for the Future Incentives Series, and to learn more about southern U.S. forests, visit: www.SeeSouthernForests.org. Developed by WRI with support from Toyota, this interactive site provides a wide range of information about southern forests, including current and historic satellite images that allow users to zoom in on areas of interest, overlay maps showing selected forest features and drivers of change, historic forest photos, and case studies of innovative approaches for sustaining forests in the region. To order free hard copies of this issue brief, and other briefs in the Southern Forests for the Future Incentives Series, please contact us
At the time of publication, only CAR has a nationally applicable forest carbon offset protocol that is eligible to generate early action offsets in a compliance market¬--California’s Greenhouse Gas Emissions Trading Program. In addition, the California Air Resources Board will have its own protocol (very similar to CAR’s) available for use directly with the compliance market by the end of October, 2011. This protocol was established under California’s AB32 law (The Global Warming Solutions Act of 2006), which sets to goal for greenhouse gas reductions and calls for the market-based program, and will be complemented by a broader set of regulations, also to be finalized at the end of October, governing the cap and trade system. ↩