Carolyn J. Henri

Most woodland owners know that their trees take in and give off carbon dioxide during the process of growth. Forest carbon sequestration can be viewed as a product that is gaining market value-people are finally willing to pay for the atmospheric services rendered by forests. Developing forestry-based carbon offset projects is a way for woodland owners to access this market and sell the carbon sequestration services of their forests. This article will 1) cover some of the political background that has led to the development of this market; 2) discuss the specific steps involved in developing a carbon project; and 3) review the present and predicted market for carbon offset credits.

The Science of Global Warming

Carbon is transferred to and from the earth's atmosphere in a continuous cycle (see Figure 1). Carbon dioxide and other gases that naturally occur in the atmosphere capture solar radiation and reflect it back to earth. This warms the surface of the earth and is referred to as the "greenhouse effect." Without this effect, our planet would be about 56 degrees F colder on average.

Since the industrial revolution began in the late 1800s, humans have been pumping greater amounts of so called "greenhouse gases" into the atmosphere, largely from land clearing and consuming fossil fuels. Levels of greenhouse gases (GHGs) such as CO2 have increased 30 percent since the 1860s, while levels of other important GHGs including methane and nitrous oxide have increased by 100 percent and 15 percent, respectively. Most scientists agree that these increased concentrations are reflecting greater amounts of solar radiation and causing the earth's surface temperature to rise.

The Kyoto Protocol and Forestry

Concerns about global warming led to a series of joint international initiatives in the late 1980s and 1990s. These culminated in the signing of the Kyoto Protocol, an international treaty mandating individual nations to reduce their GHG emissions levels. The United States has signed the treaty, agreeing to GHG reductions seven percent below 1990 levels. One hundred fifty-eight governments signed this historic treaty, which will go into effect once it is ratified by 55 of the signatory nations.

The 1997 Kyoto Protocol explicitly recognizes afforestation and reforestation as methods countries can use to reduce GHG levels and meet their treaty obligations. Less clear is the role that forest "sinks" (already existing forests that hold large reserves of carbon) will play. Many questions remain over how forests and forestry projects will be counted to offset GHG emissions. There are high expectations that these pending issues will be resolved later this year when the parties reconvene in The Hague.

Forestry-based Carbon Offset Projects

The basic strategy behind a carbon project is to keep more carbon in the forest system than would otherwise remain under a "business as usual" scenario. The increased amount stored through the carbon project is the "marketable" carbon. The forest system can be divided into four main carbon pools: live plants, detritus (down and decaying material), soil and forest products (see Figure 2). Increasing carbon in any of these pools will keep the carbon from leaving the system and returning to the atmosphere in the form of CO2.

Most projects focus on increasing the amount of carbon in the live plant pool. Activities such as afforesting bare land, improving stocking levels, and silvicultural practices such as fertilization and mycorrhizal inoculation of seedlings can all count toward carbon credits, as long as these practices are above and beyond your usual activities and are not required by law. Growing trees for biomass energy can also be considered as a carbon project.

Conservation measures that keep carbon from leaving the live plant and/or detritus pool can be counted as carbon offset activities. Increasing buffers to larger than mandated size, reducing harvest levels to below the allowable cut and increasing the amount of slash left in the forest can all be elements of a project. More extreme activities would include leaving land in forest cover that could be converted to other uses (such as housing developments) and voluntarily choosing to preserve commercial forest areas.

There are five main steps to developing a forestry-based carbon offset project:

1. Determine the activities that will form the basis for the carbon offset credits, and quantify the amount of carbon these activities will sequester or preserve over the life of the project.

2. Consider having the project verified and certified by an independent auditor. While not mandatory, certification increases the "quality" and market value of your credits. Accounting houses such as PriceWaterhouse Coopers and long-time certifiers Société Générale de Surveillance (SGS) are developing expertise in this field.

3. Obtain approval of the project by the relevant government agencies. In the case of domestic projects, this agency is the Department of Energy. In the case of international projects it includes the relevant agency in the host country and an inter-agency panel in the country of the project developer. In the U.S. this panel is the U.S. Initiative on Joint Implementation (USIJI).

4. Issue and sell the carbon offset credits.

5. Conduct ongoing monitoring and reporting to ensure that activities backing the credits remain in place once the credits have been sold.

A New Market Emerges

Beginning in the 1960s environmental concerns have become increasingly important in local as well as national and international economies. The costs and benefits of clean air, water, and the protection of natural areas are now being recognized. The emergence of a new market for carbon can be seen as an extension of this trend. The market for carbon offset credits is driven by the premise that carbon emissions will soon be (and in some cases already are) regulated or capped. If there are limits imposed on the amount of carbon emissions, then the right to emit carbon will become a saleable commodity.

Many of the structural details of this market are not yet worked out. Even so, there have been several carbon offset trades and the number of transactions is growing. Trading systems exist through private brokerage houses, and public trading entities such as the Chicago Board of Trade and the Sydney Futures Exchange in Australia are currently developing systems to trade carbon offset credits. Trades are still sporadic and the product is not yet standardized. Furthermore, prices fluctuate widely and price discovery is extremely difficult because most trades are not made public. These are all normal symptoms of any new market in its early stages. Present buyers of carbon offset credits include electric utilities, oil and gas companies, auto manufacturers and other energy-intensive industries. Recent prices have ranged anywhere from fifty cents to eight dollars per ton of CO2 equivalent.

Several modeling and simulation efforts are underway to predict the future size and value of this market. By one estimate, 620 million metric tons of CO2 offsets will be needed internationally to meet compliance targets established by the Kyoto Protocol. The United States alone will require 420 million metric tons. Expected prices range anywhere between $8 and $40 per ton. One European simulation estimates a value of $38 per ton by the year 2008, the first year of the five-year compliance window established by the Kyoto Protocol.

Risk and Reward

Undeniably there is still a great deal of uncertainty surrounding GHG emission policies. On top of this, the role of forestry in any future emissions reduction scheme is still being debated. Because of these uncertainties, undertaking carbon projects at this time implies considerable risk to the landowner that the credits will not have the same value in the future. On the other hand, the opportunity to do well by doing good seems too great to forego. Forests play an important positive role in the global carbon cycle, and forest landowners should be able to benefit from the services their forests provide, just as they do from any other forest product.

What's Your Carbon Worth?

Let's assume a woodland owner has 10 acres of Site II or III Douglas-fir land in western Oregon. According to the Oregon Forest Resource Trust, on average, each acre planted in Douglas-fir in western Oregon can sequester 185 metric tons of carbon over a 65-year period. If this same 65-year-old forest is harvested, 18 percent of this carbon storage can be counted as carbon emissions offset. This gives our landowner 33.3 tons per acre or a total of 333 tons of "marketable" carbon on the harvested property (185 metric tons carbon x 18 percent x 10 acres).

While carbon is stored in wood as organic carbon, it is sold in the emissions market as CO2 equivalents. The conversion between organic carbon and CO2 is 1:3.67. So, 333 tons of carbon becomes 1,222 tons of CO2 equivalents. Assuming a current price of $1 per ton of CO2 equivalent, that carbon has a value today of $1,222. The landowner has the option of selling the credits now or waiting to sell the credits at some later date, say in 2008, the first year of the compliance period under the Kyoto Protocol. If we estimate that the price will rise to $8/ton CO2 by that date, the same 1,222 tons would have a net present value of $5,282 ($9,776 at an 8 percent discount rate). Return the landowner would be $5,282 less the costs of implementing the carbon project.

Dr. Carolyn Henri is portfolio manager and project analyst for CFix Corp, a Bellingham, Wash.-based company that invests in carbon projects. A family forest owner in Snohomish County, she can be reached at (360) 676-9400, ext. 211.

This article appeared in the Northwest Woodlands Magazine, Summer 2000- Published quarterly by the World Forestry Center as a benefit of membership in the Oregon Small Woodlands Association, Washington Farm Forestry Association, Idaho Forest Owners Association and Montana Forest Owners Association.