Moving Forestry to the Forefront of the Carbon Market

An estimated 16% of the total global GHG emissions are directly attributed to the destruction of tropical forests. Forest carbon based projects, which include reforestation, afforestation, improved forest management and Reducing Emissions from Deforestation and Forest Degradation (REDD), have evolved from the early stages of the carbon market and were some of the first carbon finance projects designed to mitigate GHG emissions and generate voluntary carbon offsets. As the voluntary carbon market has grown and the necessary building blocks have been cemented, specifically in respect to standards, protocols and registries, forestry projects have also matured and legitimized.

Recent discussions, within the US and at an international level, have increasingly looked to include forestry based projects within the regional compliance sectors which indicate both the importance of the voluntary market as a commercial incubator and the acceptance of large scale forestry projects expanding in the regulatory markets. That said, whilst being well positioned for future compliance markets, forestry projects remain a fundamental voluntary product with increasing market appeal to large corporate buyers which will continue to mobilize future regulatory and voluntary demand.

A great deal happened in the climate change policy arena in 2009 and while uncertainty and speculation remain around climate policy at the international and regional levels, recent policy and market developments suggest the role of forests in climate change mitigation will continue to grow. As we all know, the United Nations Framework Convention on Climate Change (UNFCCC) undertook intense negotiations that culminated in early December with COP15 in Copenhagen. Forestry was an important component and REDD made encouraging progress resulting in a draft decision text. The failure to progress other negotiation streams prevented the text for a REDD mechanism from being formally approved by the parties.  The climate policy landscape in the US in 2009 and 2010 has been turbulent to say the least. Despite the continued uncertainty and speculation on when and what the Senate Bill will ultimately produce, The American Power Act under Kerry and Lieberman has positioned forestry projects as a significant offset category which is encouraging for both US based and international forestry projects.

A research report conducted by EcoSecurities and partners, including Conservation International and Climate, Community & Biodiversity Alliance (CCBA), set out to analyze the perceptions and opinions of offset buyers towards forestry as an option for corporate offsetting in this dynamic period of policy development. The report is based on the survey responses of over 150 corporate organizations representing a wide range of sectors and geographies.

The survey showed that the majority of respondents have a very positive perception towards forestry as a viable offset category. Many of the participants also indicated a growing acceptance toward forestry projects compared to previous years. Despite the inconclusive results from COP15, which disappointed many constituents, the appetite for forestry as a voluntary offset option does not seem to have been negatively impacted.

Forest carbon projects score highly in relation to other offset categories based on the projects’ ability to generate sustainable co-benefits to indigenous communities and biodiversity elements. Reforestation with native species and avoided deforestation were rated the most ‘highly desirable’ project types and purchasers showed a preference for projects located in developing countries, especially South America.

In addition to the traditional demand in the voluntary market, there is an increasing interest from buyers who fall under current regulatory schemes as well as those likely to be regulated in the future, i.e. pre-compliance. Compliance interest in forestry is particularly strong among buyers from North America and Australasia. While buyers based in North America show preference to domestic projects, the most important factor remains certification under a leading market based standard. According to the report, the most attractive carbon standard is the Voluntary Carbon Standard (VCS), however respondents from North America were also particularly interested in Climate Action Reserve (CAR) and the CCB Standards combined with a credible carbon accounting standard, and even indicated a willingness to pay a price premium for this additional certification.

The “State of the Forest Carbon Markets 2009″ research conducted by New Carbon Finance suggests that the upward trend in the total volumes transacted for forest carbon credits over the past few years continued in 2009 despite signs that overall activity in the voluntary markets was on the decline. Other key forest carbon market developments recently seen include the positive progression for forestry certification; for example, VCS registered its first Agriculture, Forestry and Other Land Use (AFOLU) project, and Climate Action Reserve (CAR) published its new version of Forestry Protocols, increasing activities around domestic forestry in the US. Furthermore, the number of afforestation/reforestation (A/R) projects registered under the Kyoto Protocol’s Clean Development Mechanism (CDM) increased significantly in 2009 and a substantial increase in trading activity of compliance forest carbon credits, primarily forest backed Assigned Amount Units (AAUs) coming out of New Zealand, took root in the market in 2009.

There appears to be increasing support and momentum for forestry projects in relation to policy and regulatory developments, but the real driver and key influencer remains the voluntary market. Once policy is instituted at the global level then large-scale forestry projects will be well positioned to scale. In the meantime, the emergence of forestry projects in the developing world and North America, and the development of core market components – primarily standards and corporate demand – will continue to move forestry to the forefront of the carbon market.

Steve Baczko is Senior Commercialization Manager at EcoSecurities, a recognized carbon market pioneer that has amassed one of the industry’s largest and most diversified portfolios of carbon credits