By: Matt Smith, CF,ACF, EMS-A, Director of Land Management, Forecon Inc.

Carbon Sequestration? What’s this all about?

The greenhouse affect, global warming, biofuels, alternative or “green” energy, carbon neutrality, emissions reduction, carbon sequestration. . ..these are just a sample of some of the terminology that has become increasingly prevalent in the mainstream media today. The global initiative to reduce the impacts of fossil fuel consumption combined with the controversial issue of dependence on foreign oil sources has developed into what could be considered a renaissance period for the international community when it comes to environmental policy and responsible environmental practices. It certainly appears that the time has arrived for real progress on the issue of global warming and its impacts on our society.

So, what does this all mean for forestry? There are four main methods by which a greenhouse gas emitting entity can reduce its emissions to get under an emissions cap. These include the reduction of point emissions, reduction of the entities’ carbon “footprint” by using alternative fuels or energy sources, the purchase of offset credits from another entity that has reduced its emissions below the cap, or the purchase of offset credits from sequestration projects (projects that fix carbon in some way). Forests are just one type of sequestration project that can participate as an offset in many registries and markets today. When considering forestry offset projects, there are four primary types: afforestation, reforestation, managed forests, and forest conservation projects.

While afforestation, reforestation, and forest conservation are all important aspects of forest carbon sequestration, the primary focus of this article is sustainably managed forests. Managed forests are somewhat controversial in the carbon world today. It is believed however, that this forestry offset type that has perhaps the greatest potential here in the US. Forests that are managed for some mix of objectives and benefits such as recreation, biodiversity, wood products, esthetics, and high quality water, benefit society most by providing all of these co-benefits along with clean air and reduced GHG buildup in the atmosphere. This suite of environmental services is matched by no other type of offset.

A Test Case For Sustainably Managed Forests

So, what is the income potential of participation by managed forests in carbon markets? Over the past few years we have been asking that question ourselves. In order to fully understand the potential for managed forests as offset projects we decided to test the actual performance of a tract of managed forest, which we'll call the K tract. The K tract is a 9,000+ acre privately owned tract of high quality hardwood forest in the northeastern US. At the date of the analysis, the tract is comprised of a mix of age classes distributed in even aged stands across the property.

Although there are a variety of market opportunities available for carbon offset credits at this time, our analysis is based on the only open market available here in the US, the Chicago Climate Exchange (CCX). CCX is the world's first and North America's only voluntary, legally binding rules-based greenhouse gas emission reduction and trading system. It started its first pilot period in 2003 with 13 members. The CCX now has approximately 250 members including companies such as; Rolls Royce, Dow, DuPont, Ford, IBM, IP, Mead Westvaco, Stora Enso NA, also municipalities such as the State of New Mexico, cities of Boulder, Chicago, Portland, Berkeley, Oakland and many others.

Our test was built to answer one primary question: “How would the K tract have performed as a forestry offset project from 2001 to 2006 had the landowner entered the CCX without changing their management plan?” Our test involved the establishment of baseline carbon stocks from existing forest inventory, modeling growth using the CCX approved NE TWIGS growth model, and removing harvest volumes annually, all under the CCX rule set. Other edits included adjustments for other activities such as forest road construction. It should be noted that during the analysis period, total harvest levels equated to roughly 40% of overall growth. This is a key factor in the calculation of net volumes of carbon for the project.

In order to get our analysis started it was necessary to establish our projects baseline carbon stocks for the beginning of 2001. To accomplish this task we converted per species volume estimates from a 2001 forest inventory to its carbon dioxide equivalent. The result was overall estimates of carbon stocks that averaged 28 MtCO2e per forested acre. Using this baseline data and the actual harvest levels along with estimates of growth from the NE TWIGS growth model, net sequestration for the K tract was calculated for each year. The results revealed that our managed forest sequestered an average of about 14,850 MtCO2e annually, or about 1.69 MtCO2e per forested acre per year.

After calculating the sequestration levels for our forest, we then calculated the estimates of income through the sale of the resulting carbon “credits” on the CCX platform. At the time of the project carbon credits sold for values between $.95 and $3.70 per MtCO2e. Using these historical prices for carbon, our project yielded gross income of $135,738.00 for the period. The cost side of our analysis breaks the various costs for the project into two categories, start up costs and participation costs. Start up costs can include forest inventory costs, costs of third party certification of sustainability (such as SFI or FSC), and lastly, project preparation costs. Participation costs include fees associated with aggregation, trading, reporting, and verification. These costs are incurred after the project is approved and are dependent on the scope of the project and the amount of carbon generated for trading or banking. For the K tract the total costs for participation for the six year period equated to $91,779.53 The end result of our economic analysis for the K tract revealed net revenue from the sale of carbon credits of $43,959, or about $.83 per forested acre per year. These results are summarized in the table below:

While $.83 per forested acre per year is a positive economic outcome, it is hardly worth getting excited about. Landowners faced with the decision as to whether or not to enter this ecosystem market will not be likely to do so at thislevel of financial incentive.  Carbon in Harvested Wood Products As we consider the outcome of this historical analysis and look to the future for managed forests in carbon markets, it is important to keep our eye on policy and rule set developments that are on the horizon. From a broad perspective, as we think about accounting for sequestered carbon from our forests it's easy to understand that growth and harvest are the key factors influencing our net carbon stocks. Growth represents our sequestration and harvest equates to our “emission”.

The problem with this train of thought is that the harvesting of trees does not fully release the associated carbon stocks to the atmosphere. Wood is made into products, which then have a lifespan of their own. Consequently, the wood tied up in harvested wood products in use contains sequestered carbon that can be accounted for and is not emitted at the time of harvest.

If we implement the DOE 100 year depreciation model method for harvested wood products in use on the K tract, the resulting net revenue increases from $.83 per forested acre per year to $1.14 per forested acre per year, a 37% increase in net revenue. While this income level is still not very significant, you can see the impact of this policy development on the projects economic performance.

The Current Market Result:

When we completed the K tract analysis in August of 2006, the sale price of one MtCO2e on the CCX platform was $4.35. This is significantly more than the $.95 to $3.70 per MtCO2e used in the historic K tract economic analysis. If we take the sequestration estimates from our K tract analysis and apply the current price of carbon for each year in the period, our net income estimates rise to nearly $4.70 per forested acre per year. If we then add in the ability to take credit for harvested wood products in use our net revenue rises to $5.92 per forested acre per year, or total net revenue just over $310,000 for the six year period. As you can see, market conditions and policy developments are creating an income opportunity for forest landowners that could be significant over time. It is at these levels of net revenue that we believe forest landowners will be interested in making the commitments and investments required to participate in carbon markets.

Matt Smith, CF,ACF, EMS-A, Director of Land Management, Forecon Inc. msmith@foreconinc.com, or call (716) 664-5602, ext.313