The Carbon Offset Market
The Carbon MarketValuation and trading of a forest ecosystem
serviceKaren Zilliox BrownUF SWS 6932Fall 2016
Carbon sequestration is the process by which atmospheric carbon
dioxide is taken up by trees, grasses, and other plants through
photosynthesis and stored as carbon in biomass (trunks, branches,
foliage, and roots) and soils. The sink of carbon sequestration in
forests and wood products helps to offset sources of carbon dioxide
to the atmosphere, such as deforestation, forest fires, and fossil
fuel emissions. (USDA definition)
Rate of sequestration depends on tree species, age of stand,
stocking level, and site index (Mercker)The Service: Carbon
Sequestration (Gas regulation and climate regulation)
The Service: Carbon Sequestration (Gas regulation and climate
regulation)Recognized role of greenhouse gas emissions in global
climate change (Susaeta, Noss, many others)Carbon dioxide in
particular, a main contributorPace of average annual temperature
rise, and myriad adverse effects, are a chief concern to scientific
community, world governments, and citizens
The Framework: Global Climate InitiativesKyoto, 1997Copenhagen,
2009Paris, 2015Marrakesh in 2016Nations agree to reduce emissions
to a specific level or reduction rate, by a target date, in order
to curtail global temperature averages from rising by a determined
increase that has been deemed significant Forests role in the
global carbon cycle is considered towards a nations
emissions-cutting efforts (Stainbeck)
Marketplace solutions for carbon exchange
One carbon credit=one tonne of atmospheric carbonWorldwide
standard unit of measurementCap and trade system: carbon emitters
can purchase offsets for excess emissions in the forestry sector,
among othersSequestration services are transportable
Carbon markets for forest landowners:Getting
started1.Feasibility study2.Certification and
enrollment3.Monitoring by an independent party to determine storage
estimate4.Contract for a carbon sequestration term, including any
penalized activities5.Issuance of carbon credits for services
provided6.Credits enter the marketplace for sale, also called
retiring of credits (Jenkins)
Carbon firms appealing to landowners interests:Finite
CarbonGreen Assets
Forest practices for sequestration:Improved Forest Management
(IFM)
Also called Sustainably Managed Forest option in some
plansCarbon sequestration based mainly on lengthening rotations for
timber speciesCan be beneficial for landowners when longer-lived
timber results in higher value products once harvestedSaw timber
vs. pulpwood ratio(Stainbeck)
Forest practices for sequestration:Improved Forest Management
(IFM)
Sequestration is valued based on the increase of carbon storage
vs. the BAU scenario (Soto)Sequestration must exceed deficits
created from approved practices including thinning or prescribed
burning (Mercker)Relationship between timber prices, carbon prices,
and landowner choices (Kothke)
Forest practices for sequestration:Afforestation
Carbon storage increases are much higher than the previous land
usage, especially if degraded Can be a total gain if land was
previously devoid of vegetation (Kothke)AF has the greatest
increase of storage over baseline of all forest practices
(Soto)Thinning and burning may be allowed with some AF contracts,
during some period of the termSome markets ONLY recognize AF
projects (Jenkins)
A path to the carbon market for southern forest
landowners?Forested lands in the south projected to decline by 6%
over 35 years (Mutandawa)Landowners with timber may seek to derive
a variety of products off the landTraditional timber, pine
strawHunting leasesNow, ecosystem servicesLandowners who manage for
aesthetics, wildlife, recreation are likely to engage in carbon
markets, with little impact to current management (Mutandawa)
A path to the carbon market for southern forest
landowners?Viability of markets depends on an option of no-penalty
for forest management practicesLikelihood of market exchange
overall low under the following economic conditions
(Brown):ExcludabilityTransaction costs/Implementation
costsRivalnessAvailability of buyers and sellersThere are, however,
few negative externalities associated with providing carbon
creditsIncreased risk of standing timber Market fluctuations in
timber and in carbon
ChallengesVariable market rate for Mte carbon (Mercker)$12.95,
September 2016 (www.calcarbondash.org)
Transaction/Implementation costs not well known or understood
(Galik)Accounting techniques can result in variability in valuation
(Galik)Functions as an economy of scale Prohibitive of small tracts
of landProduction and transaction costs decline with
acreageImplementation costs fall off as stand matures (Galik)
A path to the carbon market for southern forest
landowners?Participation depends on continued regulationVoluntary
markets are also trading with companies seeking to lower their
impact (and promote a clean image)May become less significant as
industry cuts emissions (Mercker)Sequestration is temporary;
emission output reductions are permanent (Elbakidze)If no market
for carbon, then carbon is not a management consideration for
forest landowners (Mercker)If there is a market, carbon
sequestration services are yet another product delivered by
forested lands to owners (Mercker)
ChallengesUnlike many other ecosystem services, atmospheric
carbon has a value attributed to it and is currently traded in the
economyBut, like the challenges of valuation with all ES, this
service has been performed by ecosystems for free, and will
continue to be done for free even if the market value for it
dissolvesThat value is based on enforcement of regulation, though
voluntary offset purchasing does occur
Where does it go from here?Several contract types are available
to forest landownersImplementation and transaction costs must come
down More research and modelling needed in southern ecosystems
Dependent on continued and tightening regulation of industry
emissionsBut, if markets remain viable, many landowners are willing
to participate with forest management (Mutandawa)
Where does it go from here?The carbon exchange market is still
young, and new players are entering every dayUncertainty is present
in any traded commodity; carbon is no different, and the price is
thus reactiveIt does have its challenges to address, and more ahead
indeedStay tuned
ReferencesDwivedi, P., et al., 2012. Impacts of payments for
carbon sequestered in wood products and avoided carbon emissions on
the profitability of NIPF landowners in the US South. Ecological
Economics 78, 63-69.Elbakidze, L., McCarl, B.A., 2007.
Sequestration offsets versus direct emission reductions:
Considerations of environmental co-effects. Ecological Economics
60, 564-571.Galik, C.S., Cooley, D.M., Baker, J.S., 2012. Analysis
of the production and transaction costs of forest carbon offset
projects in the USA. Journal of Environmental Management 112,
128-136.Jenkins, D., Smith, M.S., 2013. Carbon offsets: is there a
path to market? Association of Consulting Foresters The Consultant,
25-29.Kothke, M., Dieter, M., 2010. Effects of carbon sequestration
rewards on forest management-An empirical application of adjusted
Faustmann Formulae. Forest Policy and Economics, 12,
589-597.Mercker, D. "W217 The Business of Carbon Credit Trading for
Forest Landowners," The University of Tennessee Agricultural
Extension Service, 09-0191 W217-4/09,
http://trace.tennessee.edu/utk_agexfores/42Mutandwa, E., Grala,
R.K., and Grebner, D. L., 2016. Family forest land availability for
the production of ecosystem services in Mississippi, United States.
Forest Policy and Economics 73, 18-24.Noss, R.F. 2000. Beyond
Kyoto: Forest management in a time of rapid climate change.
Conservation Biology 15:3, 578-590.Soto, J.R., Escobedo, F. J.,
Adams, D.C., 2014. An Overview of Carbon Markets for Florida Forest
Landowners. University of Florida, IFAS Extension document
FOR319.Stainback, G.A., Alavalapati, J. R. R., 2002. Economic
analysis of slash pine forest carbon sequestration in the southern
U.S. Journal of Forest Economics 8, 105-117.Susaeta, A., Carter,
D.R., Adams, D. C., 2014. Sustainability of forest management under
changing climatic conditions in the southern United States:
Adaptation strategies, economic rents and carbon sequestration.
Journal of Environmental Management 139, 80-87.USDA Forest Service.
October 7, 2016. Valuing ecosystem services; Carbon sequestration.
http://www.fs.fed.us/ecosystemservices/carbon.shtml
