Green Horizons

In trying to find the right words to explain the current state of affairs with respect to carbon offsets, I came across an article by Matt Smith and Jon Pomp of FORECON EcoMarket Solutions, LLC, that appeared in the Forest Landowners Association’s Nov/Dec issue of Forest Landowner. With their permission, here is the gist of the article.

If you have been wondering what has been happening with “the carbon credit thing” lately, you are not alone. Over the past few years, forest landowners and managers have been bombarded with information about the emerging markets related to forest carbon sequestration. Recently, however, the excitement and the message on forest carbon markets has changed significantly, leaving many wondering what is happening, whether or not this new market is or was real, and what they should or should not be doing now and in the future.

Carbon offset market development in the U.S. has included multiple overlapping efforts, including voluntary markets like the Chicago Climate Exchange (CCX), voluntary standards or protocols like the Voluntary Carbon Standard (VCS), as well as emerging regulatory markets like those developed in California (CAR) and the northeast (RGGI). This rapidly evolving market has spurred a new age of innovation, investment and debate.

As exciting as these developments have been, real opportunities for forest landowners have been quite variable, with the keys to success lying in details that are mired in policy jargon and fine print of carbon program and/or market rules. In addition, realizing income from carbon depends heavily on numerous factors including a landowner’s willingness to both commit to positive sequestration through growth for some period of time and to employ forestry activities that were additional to their previously chosen management regime.

The Feast
Over the past few years, the CCX has represented the most forestry-friendly, low-cost and well-defined carbon reduction program in the U.S. As such, most of the program promotion to private forest landowners has been for CCX-approved pooled projects, such as those available from groups like FORECON EcoMarket Solutions, LLC, The Delta Institute, The National Carbon Offset Coalition, as well as others. With historic CCX market prices averaging near $3.50 and spiking at more than $7 per tonne in July 2008, many of the early forestry projects provided positive financial results for landowners. As a result, project developers and forest landowners alike were encouraged at the prospect and benefits of this exciting new market.

The Famine
Then right on the heels of this boom came the bust: the global economic crisis of late 2008. As a result of this crisis, carbon programs and offset credits became somewhat of a feel-good luxury item that would have to take a back seat to survival measures for many emitters.

It was also around this time that many sectors began placing the newly-developed forestry offset protocols of the Climate Action Reserve (CAR), the VCS, and others on a pedestal as higher in quality than the CCX. Many of these groups and individuals felt that these protocols provided them with the long-lasting vision of quality climate benefits they were searching for from an offset because their protocols were much more rigorous (and restrictive) than those of other programs like the CCX.

The expansion of the market space to include CAR, VCS and other programs combined with the economic crisis, concerns related to the emerging federal program, and the lack of a long-term commitment from the CCX would significantly change the market-wide outlook for 2009. As a result, prices have plunged dramatically with CCX prices currently trading around $0.15 per tonne, while VCS and CAR credits have been relatively stable at between $4 and $10 per tonne. The current economic realities for the CCX has led to a virtual standstill in interest from forest landowners in offset project development from the private sector, while interest in other markets and/or programs is stable or even increasing.

The Future
It appears that the market is currently stuck in a “pre-regulatory rut.” Until there is clear understanding of what will and will not be allowed under the eminent federal cap-and-trade program, little forward momentum is expected in the forest offsets sector. We have essentially entered a somewhat painful transition period from the open voluntary markets to a defined regulatory market in the U.S.

What will it take to return to the growth phase of the carbon market? First, the adaptation of a federal program. Second, an announcement from the CCX on its continuation as a market past 2010. Third, an improved synergy amongst carbon program rules, such as uniform definitions on additionality, permanence and leakage.

So, what is the forest landowner to do in the meantime? It goes without saying that this is a time of cautious optimism. In fact it is hard to argue with a position to “wait and see” what the Feds deliver on in 2010 or 2011 before moving ahead with a forest offset project.

Currently, the CCX is still the most forestry friendly program, and although prices are exceptionally low right now, interested landowners willing to take some risk still have this option. With this in mind, the risks involved must be fully understood before embarking on CCX project development and market entry. The most financially attractive opportunities for forestry offset projects appear to be with programs like the VCS and CAR. However, these programs are more cost intensive and restrictive, and also require longer-term commitments when compared to the CCX.

Every forest landowner situation is unique. It goes without saying that you should carefully weigh your decisions regarding project development, market entry and investment in the realm of carbon.