Carbon Primer

Forest Carbon Trading and Marketing in the United States

1. Introduction

During the 1992 Earth Summit convened by the United Nations Conference on Environment and Development, a rudimentary framework for a global emission trading system was presented in a “side show” in a tent. Concern over climate change was limited to a few scientists and environmentalists and the idea was received with great skepticism. The concept of emissions trading was but a theoretical chapter in economics textbooks.

Fourteen years later, the situation is quite different. Market-based mechanisms such as emissions trading have become widely accepted as a cost-effective method for addressing climate change and other environmental issues. Dealing with environmental issues is quickly moving out of the confines of corporate environmental departments into the realm of corporate financial strategy.

The recent results from the emerging carbon markets are encouraging. In May 2006, the World Bank reported on the global market for trading carbon dioxide (CO₂ ) emissions stating that in 2005 the overall value of the global aggregated carbon market was 10 times that of 2004. The World Bank reported for the first time that markets are pricing carbon, creating the opportunity for the private sector to efficiently support investments to reduce greenhouse gas (GHG) emissions. Additionally, analysts are now describing CO₂ emissions as a financial market rather than the more traditional commodity market (Capoor and Amborsi, 2006).

The primary event that dramatically increased 2005 global carbon dioxide trading volume was the emergence of Phase I of the European Union Emissions Trading System³ (EU ETS) that went into affect in January 2005 to address 25 European Union country Kyoto Protocol⁴ GHG emission reduction targets. Under the program, regulated sectors in all 25 EU nations took on a binding commitment to reduce CO₂ emissions.

The underlying notional value⁵ of the total EU ETS carbon market is now over US$58 billion. Putting this in context, the EU ETS is now 1.3 times bigger than the 2005 value of all corn, soybean and wheat produced in the United States. It is clear that markets for trading GHG emissions are growing and here to stay.

Due to the inherent ecosystem services provided by forests’ carbon sinks, forests have a role to play in climate change policy and the development of the global carbon markets. The role of forest and other carbon sinks associated with land use changes were first recognized by international treaties during the 1992 Earth Summit; the UN Framework Convention on Climate Change (UNFCCC) which recognized that activities in the Land Use Land Use Change and Forestry (LULUCF) sector can provide a relatively cost-effective way of offsetting emissions⁶, and the UN Convention on Biological Diversity which recognizes the results that slowing the pace of rapid climate change would have in providing for the preservation of biological diversity.

Forest carbon projects offer a practical and credible low-cost option to mitigate CO₂ emissions. In their research report, The Conference Board recently reported that about 44 percent of surveyed companies in the United States are either involved in sequestration projects or considering them to offset GHG emissions (The Conference Board, 2006). Forestry based sinks provide an immediate opportunity to channel financial support for biological diversity that may lead to multiple social and economic benefits. Forest carbon projects also expand the range of international participation in the carbon market in places such as Africa where CO₂ reduction opportunities are very limited due to low levels of fossil fuel use.

Markets for forestry projects internationally are very modest. Currently, the ability of forestry to participate within international markets outside the United States is severely constrained by Kyoto Protocol rules that apply only to afforestation and reforestation projects. Due to the absence of a comprehensive United States GHG regulatory regime mandating emission reductions, e.g. cap-and-trade legislation, U.S. carbon markets have been voluntary. Demand for forestry offset credits (to be explained in the next section) for afforestation and reforestation, and managed forest projects has mainly been driven by voluntary markets developed by a wide variety of non-governmental organizations such as the Carbonfund⁷, The Climate Trust⁸, the National Carbon Offset Coalition⁹, Powertree¹⁰, and Pacific Forest Trust¹¹. These organizations work with established registries and buyers to market forestry offset projects.

In this paper we present an overview of the state of carbon trading and voluntary markets for forestry offset projects, and our analysis of evolving forest carbon markets in the United States.

2. Carbon Transactions – A Primer

³http://unfccc.int/essential_background/feeling_the_heat/items/2913.php
⁴http://unfccc.int/essential_background/kyoto_protocol/items/2830.php
⁵Notional value is used throughout this paper and is the value of the underlying asset (emission allowances in metric tons of CO2 equivalent ) at the spot price. Notional values were calculated by the authors who believe that they represent a more accurate valuation of carbon markets.
⁶http://unfccc.int/methods_and_science/lulucf/items/3060.php
⁷http://carbonfund.org/site/more/media/211
⁸http://www.climatetrust.org/
⁹http://www.ncoc.us/
¹⁰http://www.powertreecarboncompany.com/index.htm
¹¹http://www.pacificforest.org/
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Carbon Farmers

Carbon Primer

Forest Carbon Trading and Marketing in the United States

1. Introduction