Carbon Trading Adds Value to Forest Land: How Landowners Can Participate in Environmental Service Markets
Carbon Credits: Discover the basics of how carbon credits work and how they could change the future of the forest products industry.
By Matthew Harrison
Date Posted: 3/1/2009
Corporations across the U.S. are searching for ways to reduce harmful atmospheric emissions in the wake of federal incentives created over the last decade. As large companies strive to reach financially practical means of meeting emissions reductions goals, some landowners are finding additional revenue through environmental service markets.
The Chicago Climate Exchange (CCX), for example, provides a forum for managing and offsetting greenhouse gas (GHG) emissions. Through the CCX and similar markets around the world, participating members strive to meet voluntary carbon reduction goals.
Carbon trading has become the primary platform for companies attempting to offset potentially hazardous carbon emissions. By purchasing carbon credits, companies that produce harmful emissions can receive positive credit if they cannot physically or financially alter plant operations to reduce emissions output.
Carbon credits through the CCX are known as Carbon Financial Instrument (CFI) contracts, which represent the equivalent of 100 metric tons of carbon dioxide. Each CFI contract serves as a legally binding document that ensures the reduction of carbon dioxide in the atmosphere.
Even as organizations like Ford Motor Company, International Paper, and other CCX members strive to reduce their emissions, they only represent one side of the equation. Other CCX members without significant GHG contributions act as Offset Providers, who can then register carbon offset projects.
Landowners also play a pivotal part in the CCX by participating in eligible offset programs aimed at carbon sequestration or other recognized GHG reduction strategies. Offset projects involving below 10,000 metric tons of carbon dioxide are typically sold through Offset Aggregators, who bridge the gap between landowners and participating CCX members.
In addition to acting as the middle man for landowners and the CCX, aggregators offer financial and technical management to landowners or other entities who wish to become involved in environmental service markets.
“Our mission is to provide a means through which buyers and sellers of environmental credits can connect to transact with each other,” said Josh Margolis, CEO of Cantor CO2E. Cantor CO2E spans five continents to provide financial and technological solutions to entities seeking environmental and energy solutions.
Josh remarked that Cantor CO2E is especially well equipped for helping clients in the agricultural and forestry sectors realize emission reduction opportunities by “changing operations in a way that reduces GHG according to methodologies by state, local, and international entities.”
Cantor CO2E specifically helps landowners with the development of the projects to the point where reductions can be quantified, recognized, and certified per appropriate standard, Josh said. When an offset project is deemed certifiable, Cantor CO2E and similar companies do much of the hands on work of marketing and selling credits, in addition to delivering profits to landowners.
Carbon Trading Quietly Gains Momentum as Landowners Get Educated
As carbon trading becomes a widespread financial option for big businesses and brokers, many landowners are left wondering how to get involved in carbon trading. Michal Blazier, an associate professor of forestry at Louisiana State University, works to educate landowners about the benefits of emerging markets for environmental services like carbon trading.
“There’s an increasing level of interest in it,” Michael noted of carbon trading. In order to be successful, though, landowners must assess potential costs of starting carbon offsets projects, and compare that figure with what they expect to earn. Although immediate expenses may seem prohibitive, landowners should try to estimate expected revenue from carbon offset projects for 10, 15 and 20 years. Carbon offset projects are long term investments that require strategic planning, much like a retirement savings account.
Michael added that landowners and farmers he has worked with in the southern U.S. are mostly receptive to carbon offset projects, but many feel that there is not enough value in it to justify some of the extra responsibilities.
In fact, after one conference in May, participant surveys suggest that only 10% of landowners thought that carbon trading is likely to reduce carbon in the atmosphere. Furthermore, only two percent of participants believed that carbon offset projects could be successfully implemented into their current land use strategy.
Still, Michael has met plenty of landowners who have left similar meetings interested in gaining a supplementary source of income from carbon offset projects.
“The people that seem most interested in environmental services are people that already have conservation easements,” Michael said. “I see that as an environmental service that [is] gaining popularity.”
Michael added that landowners are finding that they can add environmental services like carbon sequestration onto conservation easements. “That’s an encouraging sign,” he said.
According to Michael’s research, farmers and landowners are most commonly participating in conservation reserve programs. Specifically, farmers are setting aside farmland and converting it into hardwood forests, which would fall under CCX’s Afforestation Forest Carbon Emission Offset Project.
The afforestation program financially rewards landowners who commit to maintaining carbon stocks in forestry for at least 15 years. Eligible projects include tree planting and halting tree harvests for the duration of the contract.
CCX also offers two other categories for landowners to consider: Long-Lived Wood Products and Managed Forest Projects. Long-Lived Woods Products offset projects reward forest landowners for production of timber that has demonstrated carbon mitigation benefits. Wood products such as furniture and construction material have the potential to store carbon for years.
This is specifically designed to put more emphasis on replacing carbon intensive construction practices, such as the use of aluminum beams in residential markets, and to reward landowners whose harvested timber will retain carbon for years. Pallets probably wouldn’t count because they have a relatively short shelf life and are hard to track after production. Unfortunately, we were not able to obtain specific information about the implication for pallets before publication.
For a forest landowner to participate in the Long-Lived Wood Products offset project, though, he or she must provide certification for sustainable management. Thus, the Long-Lived Wood Products offset projects often coincide with Managed Forest Projects. Eligible projects can earn offset credits for additional net carbon sequestered in forest holdings from the previous year. Landowners must also participate in a recognized forest certification program such as the Sustainable Forestry Initiative or Forest Stewardship Council to earn CCX approval.
Landowner Involvement Comes with Risks, Rewards
Carbon offset projects can provide a reasonable supplementary income for landowners. Participation requires plenty of preparation and documentation, though, which some landowners may find burdensome.
“If you can’t demonstrate emissions reductions, then there’s no real opportunity in the context of emissions trading,” warned Josh. “The real goal is to prove that emissions are higher [now] than they will be in the future as a result of a change in operations.” Once a landowner proceeds to the next step, aggregators like Cantor CO2E help them evaluate whether the value achieved by such changes are worth the price of implementing them. If the carbon offset project can provide value to the landowner, it will likely be perceived as a value to potential buyers as well.
Furthermore, landowners must acknowledge that certain constraints may be unacceptable and must consider them thoroughly, Josh suggested. For instance, a landowner that relies on revenue from five or ten year tree harvests may not wish to participate in an offset project that restricts cutting for 15 years.
Aggregators prepare much of the paperwork and consult with landowners prior to any changes in land use. “We would be involved in the process through initial assessment and then on to application and methodology, verification of the reductions, getting a third party to verify the reductions, monitoring the reductions over time, bring the reductions to markets, and selling the reductions,” Josh said.
Burl Carraway, Sustainable Forestry Department Head of the Texas Forest Service, exemplifies who would be hired for third-party verification of a carbon offset project. According to Burl, most landowners do not even need to step foot in their forests during the process. “When a landowner signs a contract with the aggregator, there is language in there that allows a verifier onto your property,” he said.
Depending on the type of project, Burl and his team will inspect a sample of trees in a stand and core them to verify ages. Verifiers may also use planting records and tree measurements used in building statistical models to assess tree growth and potential carbon dioxide sequestration.
Verifiers also validate basic information, such as acreage and ownership. “We figure if you’re paying taxes on it, then you must own it,” Burl added. “In general, we make sure that a hurricane didn’t blow all the trees down or a wildfire didn’t burn all the trees at some point.”
Although a lot of the work is done for landowners once they get involved in a carbon offset project, Michael remarked that independently-minded landowners seemed more reluctant.
“One of our surveys shows that once [landowners] realized they couldn’t directly trade carbon themselves, that they needed to go through aggregators to be able to enter the market, they were a little more hesitant,” Michael said. “They felt like there’s another party that could intercept some of the revenue.”
While true, Michael was quick to point out similarities between carbon trading and other financial markets. “It’s analogous to stock trading. We still need stock brokers to trade our stocks, and we still need aggregators,” he added. Although aggregators will likely require a percentage of the profits for their involvement, pricing and assorted fees often depend on the scope of the project, as well as the geographic location.
Perhaps there will come a time when environmental services like carbon credits can be traded independently online or through other settings, but environmental service markets are still in their infancy. Even so, entities like the CCX are providing a new forum for trading and a new source of income for environmentally conscious landowners.
The Bush administration signaled support for the concept by establishing the Office of Ecosystem Services and Markets. Sally Collins, a long-time Forest Service associate chief was named to direct the government’s efforts to support carbon trading. The new office began shortly before Bush left office. It appears the Obama administration will continue the move toward bringing market solutions to reduce pollution and mitigate climate change.
Learn More about Carbon Credits
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