We welcome to the EnergetixClimate team Elizabeth Zander, who will be working with us during the summer. Elizabeth will be posting information relevant to our friends and clients. Here is her first post on a recently attended forestry offset workshop in Raleigh, NC. The key takeaway: we need to make sure that offsets offer enough value to the landowner to preserve the forest.
Deforestation accounts for almost a fifth of global annual greenhouse gas emissions by releasing carbon dioxide that took ancient trees centuries to sequester. Also, the elimination of forests removes a sink for future carbon sequestration and destroys valuable habitat for wildlife. Any successful climate legislation will have to include incentives for landowners to conserve and replant native forests. Fortunately, the climate bills before the House and Senate, the American Clean Energy and Security Act (ACES) and the more recently proposed American Power Act include offsets generated from forestry projects. Both pieces of legislation allow up to two billion tons of offsets, whose certification will be overseen by the USDA. Each offset project must be proven to be additional, permanent and verifiable.
One of the largest hurdles is legislative uncertainty. Blue Source and Equator LLC, offset financiers and developers, presented at the workshop and discussed the obvious difficulties of investing in such an uncertain market. When will climate legislation pass, and will there be significant funding for forestry offsets like in ACES? Or very little funding as in the American Power Act? Will the legislation include vintage offsets? Currently, projects with a start date after January 1, 2001 will be included, but that might change as the actual passing of climate legislation moves further out the into the future. Until these questions are answered, it will be very difficult to bring liquidity to the offset market.
Even after legislation is passed, there are a series of other barriers to entry in the offset market. For domestic projects, such as conservation in the Southeast, it might be expensive for businesses or private landowners considering the lost opportunity costs of lumber or fuel for the new biomass plants being built by Duke Energy–especially with offset prices likely in the seven to twelve dollar range. For international projects, forest conservation might mean less land available to local communities for needed agricultural space. For all projects, the transactions costs are high and credits may not even be received for six months to two years given the long verification process. To cover the costs, the offset developers presenting at the workshop felt that only plots of land 1,000 acres or larger could provide a large enough pay-back to make it worthwhile. Aggregation of smaller plots of land from multiple landowners might make it possible for smaller parties to participate in the offset market. Finally there is the issue of permanence, which is generally defined as 100 years of carbon sequestration or reduction – the lifespan of atmospheric carbon. It is very difficult to get landowners to commit to 100 hundred years of conserving or reforesting their land.
Despite all these barriers, projects are being successfully financed and completed. Offsets have the potential to greatly reduce the costs of climate legislation, and forestry projects are among the least expensive available. Businesses, like Google, whose shareholders want to be socially responsible tend to prefer offsets generated from conservation and reforestation due to the visually satisfying results and the co-benefits such as wildlife protection. Additionally, investors in forest conservation will receive a majority of their offset credits at the front end of projects, increasing the confidence investors have on their return.