The Carbon Market Decision

Woodland owners are being given multiple options for reimbursement from sequestering carbon through various carbon market organizations.  Before making a decision to participate in a carbon market contract, it may be best to ask several questions so as to match the carbon market choice to one's situation and objectives.

Penn State Extension provided the following excellent summary of considerations when facing such a decision:

If you are thinking about joining a carbon program, there are some things that you, the landowner, should ask before signing on the dotted line.

Questions

How long is the contract?

Because of the requirements set by the California Air Resources Board for compliance markets, programs that sell your carbon on a compliance market (also known as a regulated market) often have long contracts (100+ years). Programs that sell your carbon on a voluntary market generally have more flexibility and have contracts that range from one year to 30 years. It is important to consider how the length of contract fits with your forest and your goals for your forest. For example, enrolling in a 20-year harvest deferral program could be inappropriate for an 80-year-old aspen forest, since the aspen are at the end of their life and will likely be dead within the next five years. Instead, the aspen should be clear cut to maintain a healthy diverse ecosystem.

What kind of market does the project sell into?

The dollar value of credits traded on compliance and voluntary carbon markets is often different. Compliance markets tend to sell carbon credits at higher prices compared to voluntary markets, but compliance market programs also require longer contracts with tighter reporting criteria compared to the requirements associated with voluntary markets. Payments to landowners provided through voluntary markets are also generally not enough to offset the opportunity costs of other land uses, but payments could still provide some extra income to help reduce management expenses. Both markets have been growing consistently for the last decade and are expected to eventually provide more robust compensation for participating landowners in the future.

What happens in the case of a land transition?

The average landowner in Pennsylvania is over 65, which means it is important to think about what will happen to a forest after the owner passes on. This is especially important given the length of some carbon contracts. Some carbon programs set up commitments that are tied to the deed (like a conservation easement), so the new landowner will have to continue in the carbon program, but they will be the one receiving payments. Other programs may not be tied to the deed. In this case, if the new owner does not continue in the project, then the previous owner (or their estate) may become responsible for paying back all the payments received for storing carbon, as well as a fee for early withdraw. In that case, it may be safer for current owners to require the next owner to stay in the contract, but having a lean on the title may also affect property values.

What happens in the case of an accidental release?

An "accidental release" is when the sequestered carbon sold is unintentionally released into the atmosphere through an act of nature that cannot be prevented or foreseen. Examples include an emerald ash borer outbreak, which kills almost all the ash in an ash-dominated forest. Windstorms and wildfire can also damage stands, which affects how trees grow and the expected amount of carbon stored into the future. In most cases, the project developer keeps a pool of unsold carbon credits to help buffer the impact of accidental release associated with their program in the future. Here the project developer assumes the risk and the landowner is not held responsible. However, not all project developers are able to assume all forms of risk, so some programs may still hold landowners responsible for certain unforeseen events. Be sure to find out how a program defines accidental release and what your responsibilities are.

What happens if there is an intentional release?

An "intentional release" is when the landowner knowingly releases carbon in violation of their contract. This could happen when the forest is cut down to build a shopping mall because the payments associated with development exceeds other forms of income associated with keeping the forest. Importantly, owners who cause an initial release are almost always expected to repay all the income they received from providing carbon sequestration services and may have to pay fees. Owners who enroll in a carbon contract but later want to invest in other land uses need to account for not only the carbon payments forgone, but also the cost of repayment and contract termination fees.

How much will I get paid and what is the payment schedule?

Some programs are transparent and advertise upfront how much money the landowner will make. Other programs are more careful about disclosing how much the landowner will make and require the owner to invest some time working with their contractors to figure this out. Before signing up, always be sure to establish how much money you will make, or how much you are willing to accept if you are required to place a bid. Also, payments are not always delivered on an annual basis or in a lump sum. This can make it hard to compare different types of contracts because payments made in the future are generally worth less than payments delivered today. For example, a program advertising $300 a credit may be very appealing, but if that is paid over a 100-year contract it may have less value compared to one paying $100 a credit over 10-years. Investors will often use the Equivalent Annual Annuity Approach (EAA) to compare projects with different time periods, payment levels, and interest rates. If you plan on making enrollment decisions based primarily on financial compensation, it may be a good idea to get professional advice.

How is verification done?

Most voluntary programs use a third-party auditor to ensure the carbon is actually sequestered. Auditors may use remote-sensing (aerial images from planes or satellites) or have a professional occasionally go into your forest to conduct on the ground measurements. Often by signing up for a project, you are giving permission for the auditor to access your land. So, it is important to understand what your commitment is and to work with the project developer to make sure verification works with your land uses. For example, if you own the forest to hunt deer, you probably do not want an auditor in your forest during deer season.

What happens if a carbon program goes bankrupt?

Most carbon programs are very new. Not all are well funded by investors and some may have a risky business plan which can cause them to go bankrupt, like the Chicago Exchange. It is prudent to understand what your responsibilities are and how payments would be impacted if the developer goes under.

What happens to your data?

While this may not be top of mind for most landowners, the data about your land (who owns the land, how the owner manages/intends to manage, and what rights the landowner owns, etc.) can be valuable private information. It is always best to know what is happening to your data, if it is being sold to other companies or how it is safely stored.

Who is buying the carbon credits?

Some landowners may want to support certain buyers and others may be concerned that their actions are merely allowing certain polluters to continue polluting. Since some programs sell carbon credits on the open voluntary market, the buyers could be anyone including corporations, NGOs, government agencies, or private individuals. Other developers work with specific buyers to supply customized carbon offset projects to meet designated social responsibility goals. Talk to your project developer to determine who receives the carbon credits you generate.

Wrap-up

While forest carbon projects are an appealing new way to generate revenue from a forest and a means to fight the climate crisis, it is very important to balance the requirements of the project with goals for your forest. If the program does not line up with your goals, do not sign up for it. The marketplace is changing rapidly, and new programs are coming online almost every day. If current programs do not align with your goals or ethics, a new one may start soon that is a better fit. From a climate mitigation perspective, the most important thing a landowner can do right now is to keep forests as forests.