Carbon Offsets Protocol Unlikely to Satisfy Competing Interests

California-based Climate Action Reserve (“CAR”) has released version 3.0 of its Forest Project Protocol, which allows forest lands located anywhere in the country to generate carbon offset credits by following CAR’s accounting and verification procedures. On September 24, 2009, California’s Air Resources Board (“ARB”) approved this revision to a 2007 protocol, clearing the way for use of the revised Protocol in the voluntary emission market administered by CAR. ARB is still developing terms and conditions for use of these credits in California’s mandatory greenhouse gas (“GHG”) cap-and-trade system, slated to begin in 2012.

The revised Protocol is not without controversy. Environmental groups opposed a provision that limits even-age management of timber stands registered under the Protocol, saying that any acknowledgement of that practice would encourage clearcutting.[1] Some of these groups recently challenged timber harvest plans in California for what they claimed was inadequate mitigation of timber harvest impacts on GHG emissions.[2] However, their objection to the Protocol appears unrelated to the ability of managed forests to sequester carbon. The real test for the Protocol will be whether a wider range of timberland owners choose to enroll their lands under the program, as only a handful of projects were registered under its earlier versions. State and national cap-and-trade proponents are banking on a robust offset credit market to limit the cost of reducing GHG emissions. CAR’s Forest Project Protocol offers an early test of that premise.

Forest Carbon Offsets Generally

Forests store carbon in trees, woody undergrowth, and soil. Normal plant growth will increase the amount of carbon stored in an acre of forestland, at a rate that varies regionally and with the age of the forest. Changes in land management practices can reduce or increase the amount of carbon stored in the forest. For example, avoiding conversion of forest lands to other land uses can prevent the release of currently stored carbon and preserve the ability to store new carbon in the future. Alternatively, changes in harvest rotations, conservation, and riparian buffers can increase the amount of carbon stored in forest lands, compared to an “existing practices” baseline. In return for a long-term commitment to management practices that will produce a net increase in carbon stored in forests, forest owners may be able to generate a meaningful revenue stream in today’s voluntary market, and under a future GHG cap-and-trade program.[3]

The Waxman-Markey bill, as passed by the House earlier this year, would create a GHG cap-and-trade regime beginning in 2012, focused on producers and importers of hydrocarbon-based fuels and coal- and natural gas-fired electric utilities. Sources not regulated by the cap could commit to voluntary emissions reductions and sell the resulting credits to offset regulated emissions. In turn, to meet their emissions limits, regulated industries would be able to buy these offsets credits, or trade them in a commodity-type market.

This market is already established on a voluntary basis. In anticipation of a federally mandated cap, offset credits have been traded in voluntary regimes such at the Chicago Climate Exchange, as well as through CAR’s registry. Participation and experience in developing and verifying offset projects will likely prove valuable as mandatory limits on GHG emissions emerge in California, in proposed regional programs, such as the Western Climate Initiative, and in any national cap-and-trade program, if one is put in place.

Climate Action Reserve

The Climate Action Reserve was developed out of the California Climate Action Registry, created by state legislation in 2001. While CAR began as a separate entity, management of the offset and registry programs was later brought together with another program, the Center for Climate Action. CAR develops protocols for carbon offsets projects, and acts as a registry verifying the accounting accuracy of these projects. The protocols provide project eligibility rules, methods to calculate a project’s net effects on GHG emissions and removal of carbon dioxide from the atmosphere, procedures for assessing the risk that carbon sequestered by a project may be reversed, and approaches for long term project monitoring and reporting.

The majority of projects currently registered with CAR generate carbon offsets via landfill or livestock gas collection and combustion.[4] Several forest projects are also currently generating revenue via their carbon offsets with CAR, including the Fred M. van Eck Forest, Love Creek Forest, the McCloud River Project through Pondosa Forest LLC, and Lompico Forest Carbon Project. Also, a new project has been proposed by ConocoPhilips and California’s Dept. of Parks and Recreation to replant 2,500 acres of the Cuyamaca Rancho State Park, which was destroyed by the 2003 Cedar Fire. Under CAR’s protocol, the project will generate 500,000 metric tons of offsets.

Most, if not all, of the current forest offset programs are conservation-based. Prior versions of CAR’s Forest Protocol proved either too complex, or simply too restrictive, to attract participation from actively managed forestlands. Thus, one of the objectives in revising the Forest Protocol was to make it more workable for lands that are under active management. Verifying offsets from forest harvest practices will be put to the test in the most recent Forest Protocol 3.0.

Forest Protocol 3.0

In developing version 3.0, CAR sought broader application of the Protocol to include private commercial forests not included in a land trust, private non-timber forests (oak woodlands), and public lands. This reflected recognition that forest-based emission offsets would not achieve their potential unless the program was made more attractive to the owners of commercial timberlands. Extending the program to public lands also recognizes the carbon storage potential of state and federally owned forest lands. At the same time, CAR’s goal was to make improvements to the Protocol’s clarity, accuracy, conservativeness, environmental integrity, and cost-effectiveness.[5]

Key updates include changes to reforestation projects definitions and requirements, changes to sustainable harvesting and natural forest management criteria, including the inclusion of a requirement to maintain standing living carbon stocks, changes to the designation of required and optional carbon pools for GHG accounting purposes, modifications to wood product accounting related to landfill carbon, and changes to reversal risk ratings.[6]

Revised requirements for sustainable harvest management and “natural forest management” have proved controversial with some in the environmental community.[7] They are particularly interested in the so-called “co-benefits”[8] of the Protocol, beyond GHG reductions, including protection of water quality, fish and wildlife habitat, recreation, and aesthetics. They maintain that the practice of clearcutting is inconsistent with these other environmental values. However, non-GHG environmental values already are addressed in a variety of state and federal laws applicable to timberland management. Those other legal constraints are built into the Protocol’s accounting methods for “baseline” conditions. Landowners must go beyond the requirements of existing law to qualify for offset credits. The issue these groups pose is whether participants also should be required to adopt practices that go beyond existing requirements and are unrelated to increasing GHG sequestration. This is likely to be a key policy debate as Forest Project Protocol version 3.0 is implemented by California, and if it is considered as a model for any future regional or national counterparts.

Other significant changes include eliminating a 10-year waiting period for reforestation projects. This revision allowed the Cuyamaca Rancho project, mentioned above, to qualify. The revised Protocol also reflects CAR’s continued concern about the potential for changes in land use resulting in release of carbon sequestered in forestry offsets. Projects are susceptible to financial failure, overharvest, conversion of woodlands, wildfire, disease or insect outbreak, or other catastrophic events. To provide flexibility, CAR dropped a requirement that land owners accept a permanent easement allowing CAR to enforce the land use commitments for which it grants offset credits, replacing it with a requirement to commit to monitoring and verifying a project for 100 years following the issuance of credits for GHG reductions or removals.[9] . However, less restrictive landowner commitments come at a price: participants who do not agree to a permanent easement must pay a higher premium to buffer against “reversal risk.” That is, despite recognizing the potential for unintentional reversal due to natural causes, version 3.0 includes 5% - 40% premiums on repaying carbon offsets if a project is intentionally reversed before the end of the 100-year term.[10] These restrictions, along with risk reversal reserve accounts and transactional limitations, are typically seen as a significant drawback to timberland owners, and could make the offset program unattractive.

CAR has also changed the legal definition of acceptable logging levels that establish the amount of carbon offsets a landowner could receive. In version 3.0, the baseline is calculated using U.S. Forest Service data, which results in a higher threshold for “business as usual.”[11] The change limits the amount of credits that owners of more mature, carbon-rich forests can receive, and may make avoiding conversion of these lands a less profitable option in terms of carbon offsets.

Finally, another key update included requirements and guidance for accounting for carbon in harvested wood products; that is, the average amount of carbon that is likely to remain stored in wood products over a 100-year period.[12] In order to address the uncertainty about storage of carbon contained in wood products in landfills, any landfill carbon storage is excluded from calculations in years where a project’s actual harvesting volumes exceed the estimated baseline harvesting volumes. CAR recognized that this exclusion is erring on the side of conservativeness, but asserted that these cautious requirements are necessary to reduce the risk of overestimating a projects capacity for GHG reductions and removals.[13]

Conclusion

The new protocols for forestry offsets remain controversial, both among timberland owners and environmental advocacy groups. American Forests, a conservation group, praised the new protocol for its “rigorous set of guidelines and standards,” [14] but other conservation groups have called it too permissive, arguing that it will result in encouraging landowners to fell more trees. For their part, owners of commercial forests have continued to assert the need for continued flexibility to accommodate necessary changes in forest practices over time while still maintaining the profitability of carbon offsets.

For more information on forestry offsets, please contact Alyssa Moir or Svend Brandt-Erichsen, of Marten Law Group’s Climate Change and Sustainability practice group.