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Carbon Marketing Evolving

A recent Congressional Budget Office study projected that carbon offsets could be a $60 billion market in 2012, on a par with U.S. corn and wheat markets, and “as it grows beyond that, it will make forestry mitigation opportunities more important,” says Jeffrey O’Hara, senior economist, Chicago Climate Exchange (CCX).

A recent Congressional Budget Office study projected that carbon offsets could be a $60 billion market in 2012, on a par with U.S. corn and wheat markets, and “as it grows beyond that, it will make forestry mitigation opportunities more important,” says Jeffrey O’Hara, senior economist, Chicago Climate Exchange (CCX).

O’Hara, who is also staff liaison to the exchange’s Forestry Committee, developing new products and business opportunities, told participants in a Climate Change Legislation Workshop at Mississippi State University, “We think carbon is going to be a big market.”

CCX is the world’s first and North America’s only carbon and environmental derivatives exchange.

Global carbon emissions are estimated at 35 billion metric tonnes yearly; top polluters are the U.S. and China, 7.2 billion each, and Europe, 5 billion.

“The U.S. appetite for carbon trading is strong,” O’Hara says. CCX is now trading 3,000 to 5,000 contracts per day, with 20 percent of the largest carbon dioxide-emitting utilities in the U.S. participating; 11 percent of the Fortune 500 companies; and 17 percent of the Dow Jones Industrials companies.

“The Obama administration has put greenhouse gas reductions at the forefront of its goals,” he says, and forests will play a significant role in carbon mitigation.

“The take-home message: It’s important to learn about the rules and opportunities in this market. As we’re in this transitional period, there is definitely an opportunity for forest carbon offsets to play an important role.”

Christopher Galik, research coordinator, Climate Change Policy Partnership, Duke University, says, “This is very much an evolving marketplace,” and that carbon offsets can provide a means of keeping costs of greenhouse gas mitigation for polluters lower than otherwise would be the case.

“They could provide a seven-fold decrease in costs by 2050.”

Forest offset participation in climate policy will be impacted by the resolution of several accounting issues, including additionality, baseline, leakage, and permanence, he says.

“Different approaches for dealing with these accounting issues have implications for forest offset project development and implementation, and can even affect the price at which projects become financially feasible,” Galik says.

Other factors that can affect project feasibility include forest type, site productivity, timber prices, transaction costs, and the type of project undertaken.

David Miller, chief science officer, AgraGate Climate Credits Corporation, has been a key player in helping to establish the rules on carbon offsets of the Chicago Climate Exchange and developing carbon credit protocols for agriculture so farmers, ranchers, and landowners can participate in carbon programs.

He says current carbon prices “aren’t sufficient,” that a bare minimum of $4” per metric tonne is needed to get any value out of carbon credits.

AgraGate is operating 14 different forest pools, each with specific characteristics, Miller notes, including a southern pine plantation pool, and pools for southern mixed forests, southern hardwoods, and northern hardwoods. There are 14 different forest pools, each with specific characteristics. The typical pool is 100,000 acres.

Several landowners could work through an aggregator to reach that level. Aggregators are versed in the complex rules involved, have approved contracts, and can ease the hurdles individual landowners face in participating in this market.

Foster Dickard, senior forester, USA Region for the Rainforest Alliance, a conservation organization, notes that RA offers an array of services related to validation, verification, standards, methodology testing, evaluation, and design, connecting companies with opportunities for carbon offsets, sourcing connections and advice, contributing to climate change policies, and reducing businesses’ carbon footprint.

“We currently have 30-plus projects all over the world,” he says.

During project operation, RA implements quantification, monitoring and data quality, verification, and reporting procedures.

Emily Schultz, associate professor, Forestry Department, Mississippi State University, with a research focus in inventory, quantitative, and computational forestry applications, says a tree biomass and carbon estimation system (carbon calculator) can provide forest landowners and managers with the ability to simulate many forest management scenarios and evaluate costs and benefits for the carbon market and biomass/biofuels market.

The results can then be compared with more traditional markets and other volume/weight units used for merchandizing other products.

Equations for all major forest species in the Gulf South and Southeast were researched, with 347 systems evaluated, Schultz says.

“We wanted a very comprehensive estimating system that integrates key equations, with as much flexibility as possible, so as many people as possible could use it, and downloadable from the Internet.”

Robert Grala, assistant professor of forest economics, Forestry Department, Mississippi State University, whose research interests focus on opportunities for strengthening competitiveness of U.S. forest sector, says carbon markets are getting increased attention because of new income opportunities for landowners in addition to the income they can derive from timber.

In a study comparing loblolly pine and cherrybark oak through more than 200 scenarios with two Chicago Carbon Exchange carbon offset protocols, the loblolly pines accumulated more carbon up to 30 years; after 30 years, the cherrybark oak accumulated more.

In this example, using a $4.25 carbon price, by managing loblolly pine for both timber and carbon sequestration, the landowner could derive an additional $300 per acre at 35 years, without having to make significant changes in management, Grala notes.

If carbon prices were at $10 per ton, it could be as much as $500 more per acre at 35 years.

“If you’re already managing land for timber, the additional costs for carbon participation can be relatively small,” he says.

James Henderson, assistant Extension professor of forest economics, Forestry Department MSU, outlined two 30-year carbon scenarios for pine plantations, one with improved varieties and one thinning at 15 years, the other with a new varietal and no thinning.

The no-thinning regime uses improved seedlings designed to yield sawtimber-sized material with lower initial planting densities.

While these varietal seedlings cost more initially, their greater yield, and ability to produce sawtimber without thinning could allow for two 15-year carbon contracts back-to-back, as opposed to only one for the improved seedlings, Henderson says.

At present, stocks for the varietal are somewhat limited and more expensive, but as they become more widely available it is expected that the cost will come down.