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Opening Carbon Markets to New Participants

Words by 3p Contributor
Investment & Markets
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By Mik McKee

Earlier this month my colleague, Sheldon Zakreski, wrote an article describing how carbon pricing spurs economic development in rural communities in Oregon. Taking this concept one step further, the evolution of carbon markets, particularly for forestry, may also open carbon markets to a whole new set of participants. Furthermore, this market evolution will potentially result in new opportunities where carbon revenue can help advance conservation and stewardship objectives.

Historically there have been a number of barriers limiting the ability and willingness of many landowners to participate in both voluntary and compliance carbon markets. For forest project owners, overcoming scale has been the greatest challenge. Project development costs are significant, and revenue generated during the offset issuance period must be sufficient to cover monitoring and verification costs incurred well into the future. Only at a certain scale is the volume of offsets large enough to generate sufficient revenue to cover development and these future costs.

Demonstrating that projects sequester carbon dioxide above business-as-usual, is a second barrier that limits participation for many landowners. The California Air Resource Board (ARB) protocols for U.S. Forest Projects set a common practice baseline, and landowners that wish to develop a project under these protocols must show that their land is stocked above this value in order to generate offsets in the early years of project implementation. Landowners with stocking levels significantly above the common practice level are issued a sellable “flush” of credits early on, and so much of the associated revenue comes quickly. While this has been beneficial for many early entrants into the market, landowners with stocking levels at-or-below the common practice value have not yet been able to participate in the compliance market.

Currently the California compliance market is the most robust market for carbon offsets in the United States, and so most project developers focus on this opportunity. ARB protocols ensure that offsets transacted on the compliance market are both additional and verifiable, and while this is undeniably positive from a carbon sequestration and greenhouse gas mitigation perspective, numerous opportunities to advance conservation-based objectives fall by the wayside.

At The Climate Trust, we are working to change the paradigm whereby landowners with low stocking levels are engaged. Similar to our efforts to boost rural economies, The Trust’s staff are working to identify ways to expand the range of feasible carbon projects and thus encourage a new group of market participants. Our strategy is to incentivize project development by offering landowners access to a new source of conservation finance. The amount of capital available is determined by the anticipated value of the carbon offsets a project will generate, and is repaid as the offsets are issued and commercialized. Our intent is to offer this capital — a combination of program related investment (PRI) dollars and funds raised from impact investors — to help finance activities beyond project development, like land acquisition, capital improvements or conservation objectives. In order to ensure that projects generate high-quality offsets with the maximum commercial value, we are committed to working within the established protocols that ARB and the other offset registries have developed.

In order to change market participation, we are focusing our efforts on addressing the issue of project scale–both in terms of overall acreage and volume of offsets delivered. Rather than targeting large landowners whose projects deliver the majority of offsets early on, we are exploring ways to take a more patient approach by focusing on which projects will perform over a 10- to 15-year period.  Our expectation is that this strategy will enable us to partner with a new group of landowners with forests stocked at, or just slightly above, common practice values, and who are seeking to advance long-term conservation and stewardship objectives.

Secondly, we are assisting other organizations with their efforts to aggregate non-industrial private timberland owners. the Pinchot Institute for Conservation has launched an innovate program called the Forest Health-Human Health Initiative, which will enable small landowners to participate in the voluntary market by transacting offsets generated across their collective properties. While this project is still in development, the results and lessons learned will be used to expand this model throughout the Pacific Northwest as well as other regions in the U.S.

Finally, the Trust frequently sees opportunities to use voluntary protocols in cases where landowners may not have projects that are large enough or eligible for the compliance market. Because it is often less expensive to develop projects under these protocols, scale is not as great a barrier. Additionally, under some voluntary protocols the project baseline is established by modeling management activities such that they maximize the net present value of the forest. Offsets are awarded based on the difference between what is occurring under the project scenario and what would occur if the property were managed to maximize its present value.

We believe that by combining projects with other conservation opportunities, like easements or long-term sustainable management objectives, these protocols demonstrate the same level (if not greater) of permanence as is achieved through ARB protocols.

There is still a great deal of work to be done to make carbon markets more accessible for many landowners. At The Climate Trust, we are committed to this work because we believe increased landowner participation is one of several critical variables determining the future size and strength of the forest offset market. To that end, we will continue to foster creative thinking with respect to how carbon is valued, who is able to benefit from that value, and how it can be used to advance other conservation-based objectives.

Image credit: Flickr/Alias 0591

Mik McKee is the Senior Analyst, Forestry for The Climate Trust

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