Climate Change and Forests: Emerging Policy and Market Opportunities

Chapter 21. Developing Forestry Carbon Projects for the Voluntary Carbon Market: A Practical Analysis

Regulated carbon markets create value through governments’ legislation of emission reduction requirements and definition of market rules. Such regulatory activity creates standardized units of trade and rules regulating, among other things, the creation of offsets that can be sold into the market. In addition to the regulated carbon market, a vibrant voluntary market in carbon offsets has developed . This market includes trade in a myriad of types of offsets, or “carbon credits ,” with varying qualities and prices.1 Whereas the role of forestry carbon in markets established directly under the Kyoto Protocol is limited, significant opportunity exists in the voluntary market because of a simple market driver: People like trees.2 In addition to helping mitigate climate change, forestry projects can deliver multiple other benefits, such as biodiversity habitat and water quality preservation. This advantage distinguishes forestry credits from credits arising from energy and industrial emission reduction projects—for example, projects that improve energy efficiency or reduce industrial gas production—which apply technology-based solutions. Our objective in this chapter is to explain how forestry projects can capture the imagination of buyers in the voluntary market to deliver credible, marketable carbon products that meet a growing demand for carbon offsets. We consider the development of voluntary markets and the role of forestry projects—specifically reforestation, avoided deforestation, and managed forests—and then discuss the way changes in ownership of commercial forests have enabled the development Developing Forestry Carbon Projects for the Voluntary Carbon Market: A Practical Analysis marisa meizlish and david brand 21 311 of business models that include forestry carbon in addition to timber production. We then look at the management systems required to develop credible forestry carbon products and provide a checklist of elements for product development. Finally, we identify some potential buyers of voluntary carbon and present strategies for the future development of the voluntary market. Carbon Markets Take Shape Long before there was a Kyoto Protocol or a European Union Emissions Trading Scheme (EU ETS), carbon transactions were taking place. Pioneering deals in the late 1980s and early 1990s (see chapter 20) paved the way for retail and voluntary markets to develop. By the late 1990s, companies whose entire business focused on creating and trading carbon credits were born, and the concept of voluntarily offsetting greenhouse gas emissions was being adopted.3 The overall carbon market shuddered for two or three years after the United States withdrew from the Kyoto Protocol in March 2001, but shortly afterward the voluntary markets started to diversify. For example, the Chicago Climate Exchange (CCX) was established in 2003 as the first trading platform for voluntary carbon credits. Retail carbon companies, whose business is to market emission reduction products to companies and consumers who wish to offset their carbon footprints, proliferated. At the time of writing there are nearly ninety such companies worldwide.4 On the demand side, the concept of businesses offsetting some or all of their emissions began to form part of corporate environmental and sustainability practices. It is now beginning to be used to differentiate brands and products, such as “carbon neutral” products, airline travel, and car loans.5 Some investment funds that focus specifically on acquiring carbon credits are now also allocating portions of their portfolios to acquiring Verified Emission Reductions (VERs), the units for voluntary carbon credits.6 Even with these developments, the voluntary market remains difficult to categorize , and its boundaries difficult to define. The entry into force of the Kyoto Protocol in February 2005 raised the profile of carbon trading not only in the regulated but also in the voluntary carbon market. Estimations are that the market is growing by 100 percent or more per year and could be trading 400 million tonnes of carbon dioxide equivalent (t CO2e) by 2010. Prices for VERs in 2006 averaged U.S.$10, up from $7 in 2005.7 Generating Carbon Credits from Forestry Projects The emergence of carbon markets can be good news for the forestry sector, insofar as it creates incentives for the conservation and sustainable use of forests. Not 312 marisa meizlish and david brand only can forests provide renewable energy fuels and the lowest embodied energy building material, but trees also sequester carbon dioxide from the atmosphere as they grow. Combined with the additional environmental and social benefits of forests, the growth of renewable energy and carbon markets provides a...