Nisqually Land Trust: A Case Study
The California carbon market as it stands today can certainly be an important financial incentive for medium-to-large landowners in Washington state, and can even work for projects that are as small as 520 acres.
The Nisqually Land Trust and the Washington Environmental Council (WEC) worked for three years to complete the Nisqually carbon project and to explore the use of the carbon market, specifically California’s regulatory offset program, as an economic driver for landowners to adopt ecologically sustainable management practices in Washington state. Our other important objective with this project was to find a major company based in the Pacific Northwest to purchase the credits voluntarily. The purpose of finding a company that does not otherwise have to reduce its emissions by law was to make a clear connection for the corporate sector and the public that investing in forest conservation not only is an effective way to combat climate change but also provides multiple benefits to employees and communities living near these forests. The full report [put hyperlink in here to full report] captures our lessons learned about the nuts and bolts of project development in addition to how the current regulatory and voluntary carbon markets are functioning. In fact, this project demonstrates a unique blend of both worlds.
We learned a tremendous amount about the complexities of carbon project development, the lessons of which are detailed in the sections below. Our conclusion is that the California carbon market as it stands today can certainly be an important financial incentive for medium-to-large landowners in Washington state, and can even work for projects that are as small as 520 acres but have high carbon stocking.
This is the first project registered under California’s regulatory offset program from Washington state and from the wider Pacific Northwest region outside of California (See the project and credit issuance table here).
As the California market matures, and adopts 2030 emission reduction requirements, the price should increase to the point where projects become more financially attractive both for smaller landowners and for larger landowners who need to make trade-offs with keeping more trees standing for carbon versus selling them as pulp or lumber products. Our financial modeling showed that a price point of at least $20/offset credit (which represents one metric ton of CO2 equivalent) would increase the security and attractiveness of projects for non-industrial owners, which is nearly double current price. However, given the complexity and cost of project development, we do not see this market as ever being a tool for very small landowners (e.g., less than 1,000 acres in most cases and less than 500 acres in less-usual cases).
Complexities of Project Development
The California carbon market would also become more attractive if some of the complexities of the protocol were streamlined and if the final approval stage was made more certain. Having to go through two additional rounds of technical review and approval (third-party-registry review and California Air Resources review) after successfully achieving third-party verification is cumbersome and expensive, and can drive away potential project proponents who do not have the tolerance for that level of process and uncertainty. The most recent version of the protocol, which we have not used, contains additional elements that can make verification more complicated and expensive. This is not the hoped-for direction of the program.
Voluntary Versus Regulatory Markets
While the voluntary-buyer aspect of the Nisqually project is important, using the regulated market ensures that there is stable demand. While more purely voluntary protocols and markets exist, the price for credits is generally lower than regulated markets, and demand is less predictable. We still feel that using a regulated market (and as of this writing California’s is the only one that exists with predictable offset demand in the U.S.) rather than developing a program purely on voluntary demand provides participating landowners more assurance of being able to sell credits into the future.
Outreach to the corporate/business sector is hard but rewarding work. While it took time and effort to find an appropriate and willing voluntary buyer, we found this effort to pay off in terms of building awareness of the importance of using local high-quality forest projects for Northwest-based companies. The relationship and collaboration aspect is also key, and is something we continue to work on as a result of this project. The project also illustrates the need to have low-cost, upfront financing available for landowners, especially those in the non-profit sector or small forest landowners, to be able to take on the risk of project development. Business partners, or third party intermediaries representing businesses who want to purchase carbon credits from high positive impact projects, can sometimes provide low cost financing or philanthropic contributions to assist project start-up and development.
Other Approaches to Monetizing Carbon
Other programs outside of formal offset markets may need to be developed to drive the scale of change that WEC seeks for private forest management in the region. These could be targeted federal programs through the Natural Resource Conservation Service (NRCS), which reach smaller landowners willing to commit to better carbon management practices, but for shorter periods of time. Offset projects rightly require long commitment periods, given that credits are used as a substitute for some reduction in fossil fuel combustion, and forest sequestration can be reversed. Shorter time commitments to get people interested in conservation programs with explicit carbon storage benefits to start are an appropriate complementary mechanism. Such mechanisms could include federal programs through USDA that reward landowners for increasing carbon stocks but do not rely on offsetting, so that a 100-year commitment would not be necessary.
Another key tool would be the development of working-forest conservation easement programs at the state level that have carbon performance standards. The long-term benefits of permanently securing the forestland base for both climate and employment purposes make easements an attractive tool. The transactions costs of monitoring easements for carbon commitments would be much lower than current verification and monitoring requirements of offset protocols (again recognizing the need for rigor in the context of offset programs). An additional possibility would be to add carbon sequestration and emission prevention criteria and performance standards to the Forest Legacy Program (federal funding to states for conservation easements) in order to adapt this important source of funding for private forestland conservation into a more directed tool for mitigating climate change. The program could also be expanded in size to recognize the potential and need to use private forestlands as a key mitigation tool. More funding could help leverage private impact capital to scale up the amount of area brought into carbon-based management approaches.
Until such time as a national or state-level carbon price exists, federal and state governments can still justify spending money to reduce CO2 levels if the cost of doing so is equal to or less than the damages caused by GHG emissions (the social cost of carbon). Alternatively, smaller incremental steps, such as oil-production taxes (at the federal level) or fees on real estate conversion that results in permanent loss of forest cover could provide a revenue source to cover forest conservation programs.
Why Use the California Offset Protocol?
The California forest offset protocol is the most rigorous in the nation.
WEC and the Nisqually Land Trust chose to use California’s regulatory offset program rather than a strictly voluntary program like the Verified Carbon Standard or American Carbon Registry. We went this route for two reasons. First, the California forest offset protocol is the most rigorous in the nation. Any company buying these credits would be able to easily defend the authenticity of the emission reductions represented by a California Air Resources Board offset credit (known as an Air Resources Board Offset Credit, or ARBOC).
Second, while we hope to create voluntary demand from corporations in the Pacific Northwest that would not otherwise have to reduce their carbon emissions, we did not want landowners to be left completely dependent on the vagaries of the voluntary offset market. Prices in the voluntary market tend to be weaker than regulatory markets, and the volume of demand can be fickle (Forest Trends, 2015). The California market provides for planned demand with a price floor that allows for more certain financial projections.
Key Lessons on Project Development
Clear and thorough documentation of every step of project development is critical.
Development of forest carbon offset projects under California’s system requires a persistent attention to accuracy and full documentation of every requirement laid out in the 133 page protocol and accompanying regulations. For details, see full lesson learned report. The need for accuracy in measurement of on-site carbon stocks, (measuring tree height, diameter, species, and defect for standing live and dead trees in the project area) necessitates investment in high quality inventory design and implementation that is more intensive than typical forestry inventories. While this is expensive, it is worthwhile to spend money upfront, rather having to pay for potential mistakes later during the verification process.
Clear and thorough documentation of every step of project development is critical. For carbon stock calculations, this means showing equations for each species and processes for calculations in a manner that verifiers can repeat all the steps. The same goes for baseline modeling: all decisions that go into justifying why baseline management represents a reasonable depiction of the “without” project conditions and clear technical explanations of how the modeling was conducted will help verifiers repeat was done. If as a land trust, you hire technical consultants to develop your project, ensure that they have experience in going through development and verification on ARB projects.
The overarching lesson is to keep verification costs to a minimum.
We learned that verification of forest offset projects through California’s regulatory system is an exercise in expecting the unexpected. The level of scrutiny that the program receives from outside groups who are skeptical of forest-based offsets and offsets in general has created pressures on ARB to ensure that every detail of project verification is examined intensely. This has lead to un-expected delays and cost increases, not just for our project but for many others that have gone through the system.
The overarching lesson is that in order to keep verification costs to a minimum, being as clear and precise and overly cautious as possible in all aspects of project development and documentation leads to the fewest issues. Also staying in close communication with the verifiers and ARB when there are uncertainties in protocol interpretation helps reduce problems later.
A third party registry has to review the project documentation as per the cap and trade regulations.
Once a project has received a positive verification statement, the third party registry with whom the project was originally listed (Climate Action Reserve or the American Carbon Registry) has to review the project documentation as per the cap and trade regulations. Our experience was with the Climate Action Reserve. They reviewed the Nisqually project and issued Registry Offset Credits in a timely manner – within 30 days.
Once Registry Offset Credits have been issued, the project operator needs to submit a “Request for Issuance” form and the main project documentation to ARB for final review and approval of Air Resources Board Offset Credits (ARBOCs). This process is supposed to take no more than 45 days. However, if ARB has questions or finds issues on which they want follow-up, credit issuance can take much longer than that. For the purposes of entering into credit sales contracts, it is important to know going in that credit issuance timelines can be uncertain. If a credit buyer needs delivery by a certain date, the project owner/seller should include language in the sales contract that allows for the unpredictability at the tail end of the project-development process.
FSC and Carbon Projects
FSC certification is a key part of crating a stable supply of sustainable lumber.
Forest Stewardship Council certification is an important part of creating a stable supply of lumber from ecologically sustainable forest management. Joining FSC with California Carbon Offset projects also creates some project development efficiencies. This is due to the large degree of overlap between FSC certification criteria and the natural forest management requirements of the protocol.
Overall Financial Feasibility and Risk
Feasibility and risk depend on the project’s size and current price of carbon.
Financial feasibility and risk depend on the size of the project and the current price of carbon on the market. Prices of $10/ton (current market price) require project sizes of at least 2,000 acres to safely cover long-term carrying costs and have a net positive revenue stream at a 5% discount rate. At $20/credit, projects of 1,000-1,500 acres are feasible, depending on site productivity. Because the California Cap and Trade regulation has a statutory price floor that increases by 5% per year, the current offset price of $10 per credit (metric ton of CO2e) is unlikely to drop much below this level (though political uncertainty over the market can cause downward pressure on prices). Again, the Nisqually project was unusual in that it had high initial carbon stocking rates. Many situations faced by land trusts, small forest landowners, and tribes might not match those initial conditions.
The future of carbon projects depends on different variables.
Carbon projects are a tool in the toolbox for private land owners. The future of carbon projects depends on different variables. California’s carbon market holds potential to draw in even more landowners if they extend their cap and trade program to incorporate newly legalized reduction requirements through 2030. However, there are likely many landowners who are not interested in developing offset projects but who may be interested in some other type of incentive to increase carbon storage on their lands. We see both medium term and permanent easements with carbon performance standards as potential tools to broaden the scale of good forest carbon management. Programs that pay for carbon management from a price on carbon and that structure the payments as something in addition to, rather than as a substitution for decreasing fossil fuel emissions hold great promise.