1. Introduction
2. Carbon Transactions – A Primer
3. Forestry and the Kyoto Protocol - The International Context
4. The United States Context
5. Global Carbon Markets
6. Trading and Marketing U.S. Forest Carbon Offset Projects
7. Forestry Project Accounting Issues for U.S. Registries
8. Conclusion and Synthesis

Carbon Primer

Forest Carbon Trading and Marketing in the United States

2. Carbon Transactions – A Primer

GHG emission reduction transactions can be classified as either allowance-based or project-based (Capoor and Amborsi, 2006). Both allowance-based and project-based carbon transactions are measured and traded in standard units representing a quantity of CO₂ equivalent (metric tons of CO₂ equivalent = MTCO₂). The goal of any tradeable permit program is to allow market forces to efficiently allocate emission mitigation resources so that the overall emission reduction goal is achieved at the lowest cost. Emission trading programs allocate benefits to entities that reduce emissions at low cost by allowing them to make additional emission reductions, thereby gaining emission allowances that they can sell to those facing high emission reduction costs. Emission trading programs provide a profit incentive to devise lower cost emission reduction methods and technologies as well as environmentally sound land use changes that encourage long-term economic efficiency.

Allowance-based carbon transactions (also called emission allowances) are created by a regulatory or other cap-and-trade body and are initially allocated or auctioned to the user. Emission allowance transactions are based on the buyer’s direct emissions. Buyers must reconcile their emissions account at the end of each compliance period through direct and verified measurements to ensure compliance with their allocated/auctioned emission allowances.

Project-based carbon transactions (also called emission reduction credits) are created using methodologies/rules approved by the organization issuing these transactions from a project that can credibly demonstrate reduction in GHG emissions compared to what would have happened without the project. Forestry offset projects are one category of projects that can provide emission reduction credits. Others include projects such as capturing landfill methane, conservation tillage practices, and alternative energy.

Emission reduction credits should be issued only after their reductions have been verified, which can then be used to offset direct emissions above an organization’s allocated/auctioned emission allowances. The purchase or sale of contracts for emission reduction credits typically carry higher transaction costs and risk than emission allowances. The “quality” of projects for gaining emission reduction credits is directly related to the credibility of the organization issuing the credits, the methodologies/rules for establishing baselines and monitoring the project’s performance, and the requirement for third-party verification. Once emission reduction credits are issued and used to offset direct emissions, they provide an identical environmental improvement in reducing GHG emissions as emission allowances.

3. Forestry and the Kyoto Protocol - The International Context