Transacting Forest-Generated Carbon Credits

As the demand for carbon offsets increases, markets are continually exploring new ways to generate carbon credits. Though CO₂ emissions reductions are typically the most desirable form of offset, supply of carbon credits generated from forestlands is gaining momentum in the marketplace. Forests (ultimately trees) represent natural sinks for carbon, absorbing CO₂ and storing the carbon within their fibers. Since this is part of a natural process, forest carbon projects are often less costly than other carbon sequestration projects.

There are four basic types of forestry projects that are eligible for the creation of carbon credits:

• Afforestation – The planting of trees on lands that have not been forested for a number of years
• Reforestation – The planting of trees on previously forested lands that have been left fallow and have not naturally regenerated
• Forest conservation – The placement of an easement or other legal restriction over a forested property enrolled in the program to prevent a land-use change that would not sequester carbon
• Long-lived forest products – Carbon credits received for carbon stored in long-lived forest products, typically dimensional lumber. Credits may be issued based on an estimate of the carbon that would remain sequestered after 100 years.

Program/Protocol Requirements

No single nationally accepted standard or registry exists for estimating, verifying, and registering carbon offsets. Therefore, many programs and protocols have been developed in the private and public sector to ensure offset credibility and consistency. Many of these programs currently accept forest carbon credits as offsets and provide specific standards for their verification and registration. Some of the current guidelines and protocols that accept various forms of forest carbon credits include the U.S. Department of Energy’s 1605b guidelines, the Chicago Climate Exchange, the Voluntary Carbon Standard, the California Climate Action Registry, and the Regional Greenhouse Gas Initiative. The verification protocols and forest carbon projects accepted vary for each, but most share common elements. The process for transacting forestry carbon credits typically includes:

• Selecting a greenhouse gas reduction program and/or protocol under which the credits will be verified and sold
• Conducting an initial carbon baseline study including timber cruise, carbon conversions/calculations, and report
• Verifying carbon credits through an approved third party verifier
• Marketing and selling credits through direct sale, aggregation, or a greenhouse gas exchange

One requirement common to nearly all of the existing programs is that any qualified forest carbon project must include a commitment to sustainable forest management. This is typically accomplished by enrolling the project into an approved sustainable forest certification program, such as the American Forest and Paper Association’s Sustainable Forestry Initiative (SFI). Sustainable management certification of forestlands typically requires a screening process with annual audits.

Another common element of most programs is the establishment of a carbon pool where some portion of project credits is held in escrow. Carbon pools are intended to protect carbon credits against any loss of inventory resulting from natural disaster such as hurricane, insect infestation, or fire. In the event of a natural disaster, the pool of credits can be drawn against to replace losses. Most programs require 20% of any enrolled lands be set aside in a carbon pool and these credits cannot be accessed until the contract period is over.

Nearly all programs require third party verification of reported carbon credits. The role of the verifier differs between programs, but typically includes verification of the methodology used to calculate carbon credits, verification of timber cruise accuracy, and verification that the project meets all other program requirements. In all cases there are rigid restrictions on the level of contact a verifier may have with a project manager.

Most programs also include an additionality requirement. Additionality means that all projects must demonstrate that the carbon sequestered exceeds what normal practices would capture – i.e., the carbon sequestered is “in addition” to what would be captured if that forest carbon project were not in place. For example, if a fallow field were planned to be reforested whether or not the forest carbon project were to take place, it would not meet the additionality requirement.

Project Example

In general, U.S. registries tend to restrict the use of forestry-related projects as carbon offsets. For example, the RGGRGGRGGI program allows only afforestation projects to be used as viable offsets and even the types of these projects are limited. However, within the last few months the Chicago Climate Exchange (CCX) released a protocol providing for carbon offsets associated with long-lived forestry products. To illustrate the potential of this new protocol, consider the following example:

• A wood mill operation in the southeastern U.S. produces 750 million board feet of oriented strand board (OSB) annually from loblolly pine. Verified emissions from the on-site stationary fuel source equate to 12,000 tons of CO₂ annually.
• client intends to market the carbon credits from the OSB on the CCX, utilizing the new CCX protocol for long-lived forestry products. Given these variables, the annual CO₂ sequestered by the OSB OSB mill is calculated at 538,239 tons of CO₂.
• Under the CCX protocol, all project emissions must be offset prior to the generation and sale of credits. A such, the annual CO₂ emissions are deducted from the annual sequestration, leaving a balance of 526,239 tons of CO₂ sequestered. The CCX also requires 20% of the sequestered emissions to be put aside in a carbon pool, leaving a balance of 420,991 tons of CO₂ available for sale. (See Carbon Calculations box below for calculation details.)
• Since its inception in 2003, the price on the CCX has ranged from $0.71 to $5.75 per carbon credit (ton of CO₂), representing potential total annual revenue ranging between $298,904 and $2,240,669. This estimate assumes that (1) all credits qualified for and were approved by the CCX, (2) the client has all of the lands associated with this project certified under the SFI or a similar CCX-approved sustainable forest certification program, and (3) all of the associated lands are enrolled in the CCCCX sustainable management protocol. In addition, these estimates do not reflect the cost to have the emissions reductions estimated and verified by a 3rd party, and these estimates do not reflect the cost to participate on the CCX or through another broker or retailer of carbon offsets.
• One additional note of caution related to a potential chain of custody issue associated with carbon credits derived from long-lived forestry products – to ensure that ownership of any carbon credits is clear, any sale contracts of forest products should clearly state that the seller retains the carbon rights.

Transacting forestry carbon credits in the current marketplace is not a straightforward, standard process. Location, type of forest carbon project, and the trading platform used all affect the details of a transaction. Until a single platform emerges as the international standard, or until proposed federal regulation dictates one, there will remain a level of uncertainty. In the end, forestry carbon sequestration projects must be evaluated on a case-by-case basis to determine how best to maximize benefit and returns.

Author: Shawn McMahon, Senior Project Manager, Forest Management Services division, Environmental Services Inc. (ESI). ESI specializes in a broad array of environmental assessment services, including forestry projects.

Climate Leaders Formalize Carbon Reduction Efforts

The U.S. EPA’s Climate Leaders program is an industry- government partnership through which organizations develop long-term climate change strategies, set aggressive greenhouse gas (GHG) emission reduction goals, and measure progress. Participating corporations benefit from the program by positioning themselves as corporate environmental leaders, reducing costs through efficiency improvements, and mitigating risks associated with potential regulatory developments. Through the program, corporate partners have access to technical assistance related to GHG emissions inventory preparation and reporting. Participation also enables partners to demonstrate a record of achievement and enjoy the associated positive publicity.

Program Roles and Responsibilities

Success of the Climate Leaders program requires both EPA and corporate partners to make concrete contributions. Partners commit to developing enterprise-wide emissions inventories, setting GHG emissions reduction goals, developing a GHG corporate inventory management plan, reporting annual progress, and publicizing participation, goals and progress. In exchange, EPA provides public recognition to partner organizations through press events, public service announcements, and various speaking engagements. EPA sponsorship of the program provides credibility through transparency and the review process. Finally, EPA provides technical assistance related to inventory preparation and the inventory management plan.

Inventory Protocol

Based on the GHG Protocol developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), the Climate Leaders GHG Inventory Protocol consists of:

1. Design Principles – overall guidance on defining inventory boundaries, identifying GHG emissions sources, defining and adjusting a base year, defining minimum data requirements and optional reports
2. Core Modules (required GHG emissions reporting) – direct emissions associated with onsite fuel usage, GHG process-related emissions, and refrigeration and air conditioning, as well as indirect emissions related to electricity and steam purchases
3. Optional Modules – reporting options related to a partner’s unique emissions and reduction activities such as offset investments, renewable energy, offsite waste disposal, product transport, employee commuting, business travel, and international operations

Reporting requirements consist of the Inventory Management Plan (IMP), the Annual GHG Inventory Summary and Goal Tracking Form, and the review process. The IMP documents the organizations GHG emissions inventory data collection emissions calculations and data storage processes. EPA provides a checklist to assist in the development of the required information and requires completion of the basic components within one year of partnership inception. The Annual Summary must be submitted annually to demonstrate progress toward the emissions reduction goals. It includes CO₂e emissions by source type, historical data, and progress toward goals. EPA reviews partners’ IMP and corporate GHG inventory data, including one site visit. Partners that elect to obtain third party certification of their data prior to submittal to EPA can receive an abbreviated review process.

Setting GHG Emission Reduction Goals

Once a partner has completed its base year GHG inventory, EPA works with the company to set appropriate, individualized GHG reduction goals that are corporate-wide (or cover at least all U.S. operations), based on most recent data available, have a 5-10 year timeframe, are expressed as an absolute GHG emissions reduction or reduction in GHG intensity, and are aggressive relative to the appropriate industry sector. EPA individually evaluates each proposed reduction goal against projected benchmark GHG emissions improvement rate for each partner’s sector, looking for goals that markedly exceed the projected benchmark performance for that sector. EPA also considers the partner’s current emissions intensity and those of its sector in order to appropriately account for reductions that the partner has already achieved. The ratio of GHG emissions over an appropriate normalizing factor (typically a physical or economic metric) becomes the partner’s Key Performance Indicator to measure GHG intensity. The Annual inventory data documents progress toward the goal, and once a partner reaches its initial goal, a new goal is set. Of the approximately 160 current corporate partners, EPA reports that 11 have achieved their initial goals. Of the remaining group, about half have set goals and half are in the process of goal development.

Assessing Environmental Progress

According to The Greenbiz Index, an inaugural report from Greener World Media that assesses the environmental progress of U.S. companies according to 20 indicators, business has become only slightly greener in recent years. (For the complete report, visit greenbiz.com.) Despite the difficulties noted with obtaining adequate data for making such an assessment, the trends identified are significant in terms of how corporate America is responding to market forces associated with operating in a more environmentally sustainable manner. In its assessment of 20 indicators, the GreenBiz Index rated U.S. companies as losing ground (sinking), in a holding pattern (treading), or progressing nicely (swimming).

The Good News

Companies are progressing in several notable areas, including carbon transparency, clean technology investments and patents, energy efficiency, green office space, paper use and recycling, quality of (environmental) management, and toxic emissions reduction. Carbon transparency, the willingness of companies to disclose their greenhouse gas emissions and the risks/opportunities therein, was measured by the 2007 level of response to the nonprofit Carbon Disclosure Project (the coordinating body for more than 300 institutional investors representing $41 trillion in assets). Since its initiation in 2003, the number of U.S. reporting companies has grown from 27.7 percent of the FT500 to 38.1 percent; from 65 total U.S. responses to 146. This trend is interpreted as an increasing willingness to own up to an organization’s operational efficiencies associated with carbon emissions and pursue the associated opportunities of improving operations, reducing risk, making money, and improving public perception.

Similarly, investments in clean technology (and associated patents) increased 13 percent in 2006 to a total of $48.28 billion, largely fueled by a 132 percent increase in venture capital investment. Post-election political commitment toward greater energy independence and climate change mitigation could spur even greater investment, particularly in stagnant government-funded research. Regarding energy efficiency, the U.S. economy continues its positive long-term trend downward from 9.4 BTUs per dollar GD P in 1950 to 2.25 in 2006, although the trend has slowed over the last two decades due to the proliferation of energy draining computers and peripherals. Additional gains are considered attainable but may require greater use of economic incentives, competitive pressure, or technological innovation. Green building, on the other hand, as measured by the number of U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED ) projects, is skyrocketing with 5,423 new construction project registrations in 2007, up from 1,792 in 2003, and 535 existing building projects in 2007, up from 88 in 2004. Although the numbers remain modest, the trend is impressive.

Meanwhile, paper intensity, as measured by thousands of tons of paper per billion dollars GD P, continues its positive trend downward (from 11.4 in 1997 to 8.8 in 2006) while paper recovery rates continue upward (from 44.2 percent in 1997 to 53.4 percent in 2006). Similarly, American companies are gradually reducing their toxic emissions, as measured by EPA’s Toxics Release Inventory (TRI) data. Although loss of U.S manufacturing has been a contributing factor, (17 percent between 2001 and 2005), improved environmental processes and management systems also contributed to the 22 percent decline during the same period. Finally, the Index identified significant improvement in quality of management, as indicated by an analysis of the Intangible Value Assessment, a rating service of Innovest Strategic Value Advisors. By examining average scores in nearly 50 sectors over eight years, steady progress in the quality of environmental management and governance is evidenced by a rise of 31 percent in average ratings.

The Bad News

Although only two indicators were identified as losing ground—carbon intensity and e-waste—the implications in those two areas are significant. Carbon intensity (million tons of CO 2 equivalent per million dollars of GD P) decreased slightly in 2006 for the first time since 2001. However, U.S. government projections through 2030 indicate an expected increase of 36 percent in CO 2 emissions over 2006 levels, a striking contrast to the 80 percent decrease by 2050 that is claimed as needed to avoid worst-case consequences of climate change.

In the area of electronic waste, or e-waste, the news is equally discouraging. Despite modest increases in both the business sector (up to 15 percent of computer products are now recycled), and the consumer sector (recycling up to 11.4 percent in 2006 from 10 percent in 2000), 90 percent of U.S. e-waste is either exported to other countries or filling up landfills. A remedy for this situation will require significant expansion of recycling and “take-back” laws affecting electronics companies.

No News

Finally, the Index noted several areas of environmental performance where progress has been limited. Those areas include the adoption of alternative-fuel vehicles for corporate fleets, building energy use, carbon trading, corporate reporting, employee commuting, environmental management systems, green power use, packaging intensity, and pesticide use. Furthermore, the authors note several indicators that should be considered as part of the big picture, but which lack good data sources. These include:

• water efficiency - amount of water used per unit of GDP
• materials efficiency – to better measure waste generation and recycling
• green IT – to offset the energy drain associated with the proliferation of energy-intensive data centers
• green job creation – to measure the jobs created through all of the related activities
• green business growth – to measure the size, scope, and growth of green businesses

LOW HANGING (GREEN) FRUIT For an individual organization, implementing cleaner/ greener processes can be challenging, often requiring complex financial and engineering analyses. However, significant gains can also be achieved by making multiple small changes. Among the most do-able:

Reduce business travel. Conference online for: Sales meetings Internal meetings Training Product support Print wisely Review onscreen first Print double sided Tile images onto one page when possible Scan and email rather than print and mail Manage mobile devices Recycle old devices and encourage employees to do so Upgrade only when needed Computing considerations Buy expandable/upgradeable hardware Consider computer leasing Look for “take back” providers Recycle discarded equipment Network printers to minimize equipment Turn off electronics when not in use Use a power strip and unplug to eliminate power leakage Request electronic documentation rather than printed manuals

Environmental Policy and Economics Professional Strengthens Trinity Team

Trinity is pleased to announce that Robin Langdon, an 18-year veteran in the fields of emissions trading and environmental policy/regulatory analysis, has joined Trinity’s Sustainability and Environmental Management group as a Managing Consultant. Most recently with U.S. EPA’s Office of Air Quality Planning and Standards, Robin was charged with shifting the regulatory focus from an emissions-unit approach to a sector-based approach. She also participated in discussions regarding the development of a regulatory framework to address greenhouse gas emissions and climate change.

Previously, Robin managed emissions trading activities at Cantor Fitzgerald. She oversaw all aspects of client transactions including price negotiations, development of sales agreements, regulatory approvals, account management, and transaction tracking. Her work also included evaluating and documenting emission reduction credits and assessing and advising industrial and governmental entities regarding market-based opportunities.

At Trinity, Robin strengthens our Climate Change Services practice in the areas of pricing and policy analysis and U.S. voluntary carbon trading markets. She will track ongoing market developments and assist clients in evaluating opportunities available through those markets. Contact Robin in Trinity’s Raleigh office at (919) 544-7811 or by email at rlangdon@trinityconsultants.com.