A new issue brief, released today by the World Resources Institute and the Pacific Forest Trust, looks at the economic opportunities for southern landowners created by emerging forest carbon offset markets. This new revenue stream can offer real rewards to landowners who steward their forests for climate benefits.
Original economic analysis done by the authors suggests that under current market conditions (offset prices in the $8-$12/metric ton CO2e range), income from carbon offsets may be sufficient in some instances to pay property taxes or the “incremental” costs of sustainable forest management certification. From a purely financial perspective, however, revenue from offsets in today’s still-developing market is not likely sufficient to outcompete real estate development in the region.
However, the authors found that if carbon prices exceed $20-25/metric ton of CO2e, the value of emissions reductions from forests begins to look like an attractive part of an investment portfolio that could include timber harvesting in addition to carbon sequestration. Further, if prices exceed $30/metric ton of CO2e , they start to compete with current timber values for mixed hardwood in some locales in the South. Projections for average offset prices under the California cap and trade system (see below) are in $30 range for the period of 2013 to 2020 .
This issue brief is an introductory resource for southern woodland owners, nongovernmental organizations active in the region, offset project developers, and other forest carbon offset market stakeholders. It provides essential information to help understand the key issues and opportunities associated with tapping into forest carbon offset markets in the U.S. South.
What is the current economic viability of forest carbon offset projects?
Forest carbon offset projects have the potential to be economically viable depending on a variety of factors. These projects incur a number of costs, including project development expenses, transaction costs, and opportunity costs (of selling to development, for example). The revenue side of the equation is a function of the market price for offsets and the expected number of offsets the project will likely yield. The latter can differ depending on forest type, accounting methodology, project size, and a variety of factors, depending on the project type.
The authors analyzed an existing project in Virginia to find out, given a certain price of a metric ton of CO2e, how many carbon credits and how much net profit could be generated from a 2,400 acre property.
In the scenario, the landowner harvests fewer forest products annually (40 percent less) than the amount of wood grown on the parcel for a specific period—allowing them to accrue more carbon over a 100-year period (Figure 1). The landowner then receives credit for not harvesting a portion of the carbon stored in the growing forest that could otherwise be legally cut and harvested. This “40 percent harvest” scenario would earn an undiscounted profit from carbon offsets alone of $1.29 million over a 100-year period. If the undiscounted cash flow was spread out evenly over a 100-year time period, this would result in an average of $5.38 per acre per year, not counting the revenue from timber harvesting. This scenario includes costs of inventory, verification, transaction fees, and a modest pricing assumption of $8.50 per metric ton of CO2e rising to $12 per metric ton of CO2e after 12 years.
Forest carbon offset standards applicable to southern landowners
Programs with forest carbon offset standards that are legally applicable to projects in the southern U.S. include:
- Climate Action Reserve (CAR)1, www.climateactionreserve.org
- Verified Carbon Standard (VCS), www.v-c-s.org
- American Carbon Registry (ACR), www.americancarbonregistry.org
- The Gold Standard (GS), www.cdmgoldstandard.org
To sell or not to sell?
Woodland owners should enter these markets with realistic expectations. Forest carbon offsets—and the voluntary and compliance markets for them—are still relatively new and offset prices, for the most part, remain low. Project development for carbon offset projects also takes time and upfront resources. Therefore, economic returns to woodland owners will be modest per acre at least in the near term. As a result, anticipated revenues from forest carbon offsets by themselves are unlikely to be as large as profits that can be gained from selling off forests for residential or commercial development.
But this conclusion should not dampen interest. For instance, returns will likely improve if forest carbon offset demand and carbon prices in either voluntary or compliance markets were to increase, as is currently projected for the California market. Likewise, for some woodland owners, even a small new revenue stream is sufficient to cover property taxes, sustainable forest certification costs, or other incremental expenses associated with forest ownership and improved forest management. Furthermore, as documented in other issue briefs that have been recently published, other types of incentives are available for southern woodland owners that could help them maintain their forests.
Although forest carbon offsets by themselves are not a complete solution to needs and challenges of conserving southern forests, they do provide yet another option in the portfolio of approaches that can be utilized to sustain the critically important ecosystem services provided by these forests for the benefit of millions of people.
More information about forest carbon offset prices, trading volumes, and other developments in both voluntary and regulatory carbon markets from online and published resources are provided by the Ecosystem Marketplace and the World Bank.