Carbon Primer

Forest Carbon Trading and Marketing in the United States

7. Forestry Project Accounting Issues for U.S. Registries

The Kyoto Protocol and subsequent COP meetings have identified forest project accounting issues that are handled differently by the four primary registries in the U.S. and which affect the eligibility and transaction costs of participating in these registries. These issues include baseline setting, additionality, leakage, and permanence.

a. Baseline Setting

Carbon baselines must be established as a means for determining the point from which the net change in carbon stocks are measured so that emission reduction credits can be issued. Typically, baseline carbon values are determined through standard forestry biometric methods that include direct and statistically designed and modeled measurement techniques.

b. Additionality

Since the environment must benefit from any forestry offset project where emission reduction credits are issued, the amount of carbon sequestered must be additional to what would have occurred without the project. For forestry projects, this can be subjective. An example of a forestry project that demonstrates additional carbon sequestered is an afforestation project. However, a sustainably managed forest project can sequester more carbon over the same long term planning horizon as an afforestation project. When harvesting occurs, the recognition of harvested wood products that have long-lived life cycles is a legitimate carbon pool associated with managed forests. Additional carbon can also be sequestered through a change in rotation length or in harvesting less volume than planned. In states that have strict forest practices regulations such as California, projects that manage forestlands below regulated levels could also generate additional net changes in carbon stocks.

c. Leakage

Leakage is a term that addresses the impact that the project might have, i.e. an increase or decrease in sequestered carbon, outside the boundaries of the project, and can be difficult to measure for forestry projects. Large projects may shift activities in ways that were not intended, e.g. an afforestation project in one location may displace an afforestation project in another area. Market-based leakage can occur where a project may alter the supply and demand forces of forest product markets, e.g. where large forestry projects might reduce the supply of timber.

d. Permanence

Ensuring that a forestry project is permanent can be difficult since the amount of carbon sequestered might be “emitted” through natural disasters such as wildfire, insects, and hurricanes, or through management activities. When these events occur, some registries require that the reduction in sequestered carbon be included in the net change calculations so that credits previously issued can be paid back and no additional credits can be issued until the net change in carbon stocks is again positive.

Table 3 provides a summary of the ways that the primary U.S. registries address these issues.

Table 3 – Forestry Project Accounting Issues³¹

Issue	DOE 1605(b) Registry (Voluntary)	California Climate Action Registry (Voluntary)	Chicago Climate Exchange (Voluntary)	RGGI Registry (Mandatory – active in 2009)
Baseline Setting	Entities report annual change in emissions relative to a Base Value, calculated as the emissions in the year prior to reporting, or an average of up to 4 prior years. Verification is encouraged.	Baselines on projects must reflect management over time (under California Forest Practices Act as a minimum) and corresponding quantification of carbon stocks. Baseline initiation can be year of entry in the Registry or, until 2008, any year after 1989. For forest conservation, county default baselines are available. Verification is required.	Base year measurements establish the baselines, and annual carbon stock changes are reported. Verification is required on medium and large projects.	Base year measurements establish the baselines, and carbon stock changes are reported not less than every five years. Verification is required.
Additionality	Additionality not specifically required. All stock changes after base year are considered (implied) additional.	Additionality calculated by subtracting baseline carbon, estimated above, from project carbon.	All registered credits must be declared additional. All stock changes after base year are considered (implied) additional. Afforestation or reforestation projects must have occurred since January 1, 1990.	All offset projects are additional if projects are established on lands that have been non-forested for at least 10 years preceding the project.
Leakage	Small emitters must certify that reported reductions weren’t from activities likely to cause increases elsewhere in the entity. (Internal leakage). No guidelines for calculation. No requirement for external leakage calculation.	Activity-shifting leakage within entity boundaries must be quantified. If forest products are reported, market leakage estimation is encouraged.	Project owner must attest that all forest land outside the project, but within their control, is managed sustainably. (Internal leakage)	Project applications must be verified that sustainable forestry practices are planned. (Internal leakage)
Permanence	Carbon stocks are to be fully accounted in periodic inventories which has the effect of netting out gains and losses. Casualty losses do not need to be reported, but regrowth after casualty cannot be reported until the original stock is replaced.	Project area must be secured by a perpetual conservation easement. Sequestration is credited on the year it occurs, and must be maintained thereafter without additional credit. If entity stops reporting, reductions are no longer valid. A perpetual conservation easement to ensure permanent forest use.	Credits are based on net change in sequestered carbon, and once used, must be permanently retired. Projects place 20% of earned credits in a reserve pool to cover potential shortfall at the end of the reporting period. Conservation easement or other proof that forests will be maintained is required. Demonstration of sustainable management practices and long term commitment to maintaining carbon stocks in forests.	Credits are based on net change in sequestered carbon and may be permanently retired after stage 1. Projects receive 90% of the net change to protect against loss of sequestered carbon. Permanent conservation easement and demonstration of sustainable management practices.

8. Conclusion and Synthesis

³¹This table was adapted from R. Neil Sampson’s 2005 paper, “Terrestrial Carbon Sequestration Activities, Voluntary GHG Registries, and Market Trading Programs”, and updated to include the final DOE 1605(b) rules, and revised to include the newly published RGGI Model Rules.
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