July 16, 2018, 8:35 am
Thinking About Carbon? This Should Get You Started.
Written by John B Sabine III

The carbon market is gathering steam as individuals and corporations are voluntarily snatching up carbon credits and northeastern states and California are enacting legislation to regulate carbon emissions.  As owners of carbon gobbling forests, landowners may have the opportunity to incorporate a new income stream into their timberland financial portfolio by selling carbon credits.


Global climate is a complex system and understanding its trends over time is hotly debated worldwide.  However, significant scientific data suggest that atmospheric temperatures have been on the rise over the last century.  This rise in global temperatures, also known as global

warming, has been attributed to an increase in carbon dioxide and other greenhouse gases (GHGs) in the atmosphere that trap heat from the sun.  This process, called the greenhouse effect, is thought to be driven by anthropogenic GHG emissions from cars, power plants and other manmade sources, in addition to natural variations in climate.  Though GHGs are always present in the atmosphere and necessary to keep the earth habitable, the concentrations of carbon dioxide and other GHGs have risen substantially since the Industrial Revolution and have reached levels not seen in 400,000 years.  Scientists say the world’s atmospheric carbon dioxide is increasing by three billion metric tons per year.


The consequences of climate change may have profound ramifications for humanity and the world as a whole.  Some of these changes are already being observed in the natural world. Polar ice is melting. Glaciers around the globe are in retreat. Storms are increasing in intensity. Predictions about the future consequences range from sea level rise, to increased frequency of droughts and floods, changes in agricultural production and the spread of disease.

Compliance Markets
Excessive GHG emissions are a global problem and every country on the planet contributes to the problem. In the US, the largest contributors to total GHG emissions are the electricity generation and transportation sectors; significant emissions also come from other commercial and agricultural activity and from residential and industrial buildings. While the US government has not passed legislation to regulate GHGs, a number of states have taken it upon themselves to develop their own programs. These programs are having significant impacts on the carbon market in the US. California (Global Warming Solutions Act of 2006) and many northeastern states (Northeast’s Regional Greenhouse Gas Initiative (RGGI)), have passed legislation capping GHG emissions.


California, along with a number of other western states and Canadian provinces are members of a coalition called the Western Climate Initiative (WCI).  This group has agreed to a loose set of guidelines for reducing GHG emissions over the next 15 years. In December 2010, the California Legislature ratified a bill to instate a GHG cap and trade program.  California was the first of the group to actually pass enabling legislation, however a number of Canadian provinces (BC, Manitoba, Ontario, Quebec) have stated they will have programs in place by 2012, and several states (Montana, Oregon, Washington, New Mexico) have stated that they will have legislation in place by 2015.


California is the ‘big dog’ of the WCI because emissions in California account for about 50% of the total emissions of those states and provinces in WCI.  The California legislation will take effect in 2012, at which time the state will issue a number of allowances, which are permits to emit GHGs.  The number of allowances that they issue will set the cap on emissions in the state.  Early on, the cap is likely to closely match business as usual emissions, however, the cap will quickly fall in subsequent years, with the ultimate goal for the program is to have emissions down to 1990 levels by 2020 for regulated entities (power generation, manufacturing, transportation sectors).  The program allows for allowance banking, so emitters who have extra allowances may bank them for future use.  This is expected to generate immediate interest in acquiring allowances, even though emitters may not need them to meet compliance obligations in the short term.  A market for allowances is already developing, in the form of futures contracts.

An additional provision of the legislation is the inclusion of offsets within the cap and trade program.  Offsets are defined as GHGs reductions, avoidance or sequestration that occur outside of the regulated entities under the cap and trade program. Offsets are often referred to as carbon credits.  The California program allows the use of offsets to meet compliance obligations, but can only constitute 8% of the total.  Ninety-two percent must be state-issued allowances.

California is concerned about how this program will affect the economy within the state, so they are including a number of controls to keep the price of allowances within reason.  They will set a floor and ceiling price.  Though the numbers are not set in stone as of this writing, its thought that the floor will start around $10 and the ceiling will start about $50, both increasing into the future.

Because only 8% of a regulated entity's compliance obligation can be offsets, they will probably not be as valuable as allowances themselves.  The spread between the two is expected to be 15-20%.  So if an allowance trades for $20 in 2013, an offset is expected to trade for about $16-17.  The fact that allowances have a price control in place and offsets trade at close to this price, offers some reassurance that offset prices will remain high in the future.

RGGI – A Note of Caution
As a note of caution, the Regional Greenhouse Gas Initiative has not gone to plan so far.  RGGI is a regional cap and trade program that includes a number of states in the Northeast that have been active since January 2009, and is similar to the California program.  There is a floor price ($1.86) on

allowances and offsets are allowed as well.  However, the cap that was set under RGGI was based on business as usual emissions from the years prior to 2009.  Following the start of the program, a deep recession began.  Along w ith the recession came a dramatic decrease in production and therefore emissions in the Northeastern US.  Emissions decreased by so much that the cap that was established for the region was well above actual emissions.  Regulated entities (in this case only power generation) have banked many, many more allowances than they will need for a number of years, all bought at or near the floor price of $1.86, because the market is flooded with too many allowances.  Offsets, while a part of this program, are nonexistent because of a lack of demand.  Most recently, some states are considering dropping out of RGGI.


Of course there is the chance that the California program could go the way of RGGI.  These programs are intended to reduce emissions.  The market for allowances and offsets is based on the need to meet compliance obligations, so if a downturn in the economy occurs and industry-wide emissions are reduced, the market for offsets and allowances suffers.  Many are arguing, though, that California will not go the way of RGGI because the cap for California is being set post-recession.

Voluntary Market
Many environmentally conscious organizations and individuals seek to mitigate their GHG emissions by participating in the voluntary carbon market.  Large organizations may independently fund carbon projects to offset their GHG emissions, while smaller organizations and individuals may purchase offsets from offset suppliers.  The voluntary carbon market has been growing rapidly over the past few years, however the current recession has taken its toll.  In 2008, market value was estimated at $728 million (126.6 MtCO2e transacted), up 52.7% from 2007.  This value fell 47% to $387 million in 2009 (93.3 MtCO2e transacted, taken from “State of the Voluntary Carbon Markets,” Bloomberg New Energy Finance, 2010).

Through the process called carbon sequestration, trees use carbon dioxide from the atmosphere to

grow.  Carbon is a primary ingredient in plant tissue; therefore, forests, which contain large amounts of plant tissue serve as very important carbon sinks.  Worldwide, forests contain the largest supply of above-ground carbon, about 1,146,000 million metric tonnes.  It is estimated that 155 million metric tonnes of carbon dioxide are removed from the atmosphere by forests annually.


Forests play a major role in the global carbon cycle and consequently have the capacity to mitigate the effects of climate change.  For this reason, forestry has a place rightful in the carbon market.  Forestland owners who agree to maintain or improve carbon stores in their forests through easements, improved forest management, and reforestation can sell the resulting carbon credits on the market.  These credits are referred to as forest carbon offsets. Forest carbon offsets are particularly attractive in the carbon market and fetch a premium price because of many environmental co-benefits, such as protection of wildlife habitat, water quality, and aesthetics.

Forest Project Types
Forest carbon offset projects are divided into three general categories, depending on the circumstances by which carbon stocks are maintained or increased on the property.  Each project type has a set of criteria for feasibility.

Reforestation – Returning land that is under stocked with timber to fully stocked.  To qualify, land must have been under stocked for the previous 10 years, or subject to significant natural disturbance.

Avoided Conversion – Protecting forests that are under threat of conversion to other uses, such as development or agriculture.  To qualify without penalty, the fair market value of the anticipated alternative land use must be at least 40% greater than the value of the current forested land use.

Improved Forest Management – Modifying forest management to maintain or increase carbon stocks current level.

Standards and Registries
Currently, there is no uniform standard under which offset projects are developed and sold in the US.  Carbon projects developed in the US that are not regulated by a regional or state trading program use independent third-party administered standards for the validation of offset projects and the verification of their carbon benefits.  There are a number of standards operating in the US market, each with its own requirements and specifications for the quantification, monitoring, and reporting of project-based GHG emissions reductions, removals, and offsets. Generally, carbon credits sold by projects that use the ‘higher quality’ standards fetch a higher value on the market.

In addition, registries serve the market by tracking the ownership of carbon offsets through all market interactions and provide a platform on which carbon credits are registered, bought, sold, and ‘retired’ when they are purchased to offset emissions.  Offsets generally pass through multiple owners before they are used to offset emissions, so registries help to prevent fraud by ensuring that an offset is only retired once.

There are several standards and registries whose purposes are to ensure that carbon offsets bought by businesses and consumers can be trusted and have real environmental benefits.  Below are listed three of the most frequently used, highest regarded standards that have protocols for forestry projects.

Climate Action Reserve – CAR was launched in 2008 under the California Climate Action Registry, which was created by the State of California to encourage and ensure recognition of voluntary actions to manage and reduce GHG emissions. In addition to being a standard, CAR is a registry that serializes and tracks GHG offsets generated according to independently developed quantification protocols.  Carbon projects developed within the CAR protocols are widely regarded as among the highest quality standards for GHG emissions projects and have the tightest restrictions.  Accordingly, CAR carbon offsets, referred to as Climate Reserve Tonnes (CRTs), fetch the highest value on the open market (average $10 per credit in early 2011).  Projects developed under CAR are eligible to receive credits for 100 years from the start date and require a 100-year conservation commitment from the issuance of the last CRTs.  CAR requires that a percentage of credits be set aside in a buffer pool (20% of the total credits certified) to account for the risk of lost due to conversion or natural loss.  A monitoring report must be completed annually for 100 years following the final issuance of credits.  Third party verifications must occur as part of the project initiation and every six years thereafter. Inventories are required at project initiation and every 12 years thereafter.

Verified Carbon Standard – VCS was created in 2005 by the Climate Group, the International Trading Association and the World Economic Forum.  VCS is one of the most popular standards on the carbon market today, however, credits currently being sold under VCS, referred to as Verified Carbon Units (VCUs), are not fetching as high a price as CAR (averaged $5.50 per credit in 2008).  VCS uses third party registries for credit tracking.  An advantage of VSC is that no easement on the property is required.  A buffer pool of credits (10-60%) is required.  This buffer pool is reduced over time, as the risk of conversion is demonstrated to be low.  Annual monitoring is required, as is third party verification at the time of registration and periodically during the life of the project.  Project length ranges from 20–100 years.

American Carbon Registry – ACR was launched in 1996 by the Environmental Resources Trust (founded by the Environmental Defense Fund).  In addition to its proprietary standard, ACR excepts a number of independent standards, including VCS.  No easement is required, however risk of non-permanence is mitigated by either a buffer pool or insurance.  Project length is 10 years, with opportunity for renewal. ACR does not fetch as a high a value for credits as CAR or VSC, averaging $3.80 per credit in 2008.  Third party verification is required every five years.


Your property may qualify to generate and sell offsets into the existing markets in the US.  We can help you get started by performing a feasibility study on your property.  During this study we take a close look at your property and give you an idea of the costs and revenues that would be specific to a carbon project your property and what options you have.  Many landowners are surprised to learn that on-going timber management and carbon are not mutually exclusive.

Should you decide to move forward with a carbon project, Sabine & Waters, Inc. is fully capable of leading you through the process.  Once you have registered offsets, you can sell them, or hold them for as long as you like.


Climate Action Reserve - http://www.climateactionreserve.org

Verified Carbon Standard - http://www.v-c-s.org

American Carbon Registry - http://www.americancarbonregistry.org

California Air Resources Board - http://www.arb.ca.gov/homepage.htm

Regional Greenhouse Gas Initiative - http://www.rggi.org/home

USFS Carbon Sequestration - http://www.fs.fed.us/ecosystemservices/carbon.shtml