Carbon Markets 101

Cap and Trade

A carbon market or greenhouse gas trading system is a method for reducing carbon dioxide (CO₂) and other greenhouse gases by putting a price on releasing carbon. This method for cutting pollution has been successful in controlling other pollutants like the Acid Rain Program—part of the 1990 Clean Air Act— which successfully reduced sulfur dioxide (SO₂) pollution (the main cause of acid rain). SO₂ is released when coal is burned to generate power. To reduce SO₂ emissions, a market with a nation-wide yearly limit of SO₂ was established. Participants (mainly companies, but also citizen groups) were given the ability to release a certain amount of SO₂ a year known as "credits". Participants could use these credits to create a limited amount of pollution when generating electricity or other activities. Since the number of credits given to all companies is set (i.e., cap) companies that create more emissions need to buy extra credits from another company or organization or face a fine (i.e., trade). Hence the name, cap, and trade.

Extra credits are created when participants voluntarily reduce the amount of SO₂ released into the atmosphere by installing pollution controls or using cleaner fuel. These credits could be banked for future use or sold. The cap for SO₂ emissions (total number of credits) was slowly lowered over time which resulted in the successful reduction of SO₂ emissions. Private citizen groups could buy credits to remove additional credits from the system. By 2008, SO₂ emissions were reduced by 56%, compared to 1990 levels. This is estimated to have prevented up to 20,000-50,000 premature deaths annually according to the EPA.

Currently, there are two mandatory greenhouse gas cap and trade markets in North America. The Regional Greenhouse Gas Initiative (RGGI), is a cap and trade program for large power stations Northeast. Pennsylvania does not participate in RGGI. The other market is Western Climate Initiative, a cap and trade for several industries in California and three Canadian Providences. The European Union also has a cap and trade program called the "European Union Emission Trading Scheme" (EU ETS). Most of these programs allow participants to buy carbon offsets as a form of credit.

Carbon Offsets

Buying a carbon offset is when a participant (person, company, government, other group) buys a unit of carbon, usually a ton, to counteract greenhouse gases released by their activities. For example, if someone were to fly from Pittsburgh to Las Vegas a carbon offset can be bought to make up for the greenhouse gas released by the flight. An increasing number of organizations are looking to voluntarily offset their carbon emissions as part of their environmental sustainability plans. Offsets are sold on private marketplaces like the Voluntary Carbon Standard, American Carbon Standard, Green-e and the Gold Standard to name a few.

Offsets are produced in mainly two ways: emissions removal or emission reduction. Emissions removal is when greenhouse gases are taken out of the atmosphere and stored. This can be done in several ways like growing a forest, managing a grassland, or pumping greenhouse gases underground. Reductions occur when places that produce a large amount of greenhouse gas are paid to emit fewer gases. For example, a large landfill that releases a large amount of methane into the atmosphere would be paid to burn that gas for power. This would not only generate power, but also reduce the impact on the climate.

Undertaking one of these efforts is called a project. Different markets have different requirements for projects. Some requirements include doing a social good, storing emissions for a long time (i.e., permanence), and having projects of a certain scale. Projects must also have a low likelihood of accidentally emitting controlled greenhouse gases (i.e., incidental release). This can happen occasionally like when a large fire burns down a forest. Projects must also be timely—they start impacting greenhouse gases quickly—so planting a forest in tundra (where trees grow very slowly) would not be timely. The seller takes all these factors into account, and then sells the offsets to people looking to buy them. Most markets annually certify projects to ensure that the project is working as promised. Not all carbon markets or projects are the same, and it is important to look at each market or project before becoming involved in them.

Where do Forests Fit in?

Forestry is a popular style of creating carbon offsets for many reasons: trees already exist and are storing massive amounts of carbon—unlike many other carbon capture technologies—they reproduce themselves, support many other lifeforms, and they can pull carbon from the air with emitting greenhouse gases. Sustainably managed forest can improve the lives of people surrounding them by providing jobs, recreation, and food. Finally, forestry is already a well-established science with many trained practitioners (foresters) and several large industries. This means that guidelines for sustainably manage forests are already established, equations about tree growth already exist, and management tools do not need to be invented.

There are some risks to using forests as carbon storage sites. They can catch fire, pests (insects, bacteria, viruses, and fungi) kill millions of trees each year, and they can be converted to other uses (e.g., development). If any of these events occurred there would be an incidental release. Trees grow slowly and–like all living things—they die, which means poorly-planned forestry projects can release unwanted greenhouse gases and not fit the requirement of timeliness. Poorly planned projects can also cause additional damage to ecosystems by doing things like planting non-native species or not sustainably harvesting. Overall, forestry projects are excellent for offsetting greenhouse gas emissions, but—like everything—care must be taken in implementing the project and there are some risks.

Who is Buying Carbon?

Greenhouse gas cap and trade markets and offsets are typically started by governments through agreements like the Kyoto protocol, but there has been a shift in markets. Currently, most greenhouse markets are driven by large companies, whose customers now seek sustainable products, and non-governmental organizations (NGOs) like the Nature Conservancy and World Wildlife Foundation who view these reductions as part of their mission. Companies like Amazon and Microsoft are also partnering with NGOs like the Nature Conservancy to expand opportunities and fund new projects. These partnerships have resulted in an increase both the number and variety of carbon projects. Credits from these projects are valued anywhere from $8-$125 a ton, depending on market conditions, the marketplace, and the project. At this price, private individuals are beginning to become a force in the carbon market. They are now buying carbon offsets to compensate for their personal carbon emissions, that come from activities like flying or eating meat.

Kinds of Programs

Forests sequester carbon in many different ways and not all forests are the same. The complexity of the carbon cycle above and below ground makes it very difficult to measure all the carbon that is sequestered. As a result, current projects are limited to measuring (and selling) carbon stored only in trees, where sequestration rates are better understood. There two main types of projects used to sell carbon: captured-based or practice-based.

Captured-based projects are the traditional carbon offset, where the volume of carbon stored over a set timeframe is measured (i.e., tons) and sold. This type of project requires annual or bi-annual survey to see how much carbon has been stored. Only measured carbon can be sold in a market. Unfortunately, these surveys are expensive because they take time to conduct, require skilled practitioners, and must be remeasured annually. Capture-based projects must achieve economies of scale, by being done a large land base (generally 1,000 acres or more) to help make them profitable. Some capture-based projects allow for landowners to harvest timber, but some do not. Those that do not allow harvesting are called "harvest deferral" projects. Contract lengths are also long (65-100 years) because carbon markets often require a certain amount of permanence.

A practice-based project is a relatively new type of project currently being tested by some nonprofit groups. This type of project pays landowners of all sizes (usually there is a minimum of 30 acres to participate) to conduct forest management practices that are known to sequester carbon. This can mean removing invasive species to allow native trees to grow or managing forests to grow to a larger size. These programs allow for timber harvesting within certain guidelines (e.g., they are sustainable, or forests are not high-graded). Practice-based programs also tend to have shorter contracts (20-60 years) compared to captured carbon contracts.

Why are Programs being Piloted in Pennsylvania?

As the idea of carbon programs becomes more accepted and more programs are initiated they need a place to be tried out, and it seems that Pennsylvania is where many of these programs are being piloted. There are for several reasons this like the unique pattern of landownership in the state and number of ecosystems in the state. The largest category of landowners in Pennsylvania are small private landowners followed by state and local governments, industrial forest landowners, and the federal government. This is different from the western states where the largest forestland owner is the federal government or southern states where forests are owned by large industrial firms as well as private individuals. Pennsylvania also contains a wide variety of forest types and ecosystems which are conducive for meeting carbon reduction requirements such as permanence and timeliness. Finally, forestry is well established in Pennsylvania and owners are open to managing their forests for timber and other non-timber forest products (e.g., ginseng, natural gas, wind energy). When combined all these factors make Pennsylvania the perfect place for marketers to test their projects because they can interact with different landowners, in different ecosystems, and forestry is already accepted.

Current Market Service Providers

While forest carbon is a growing market and there is an increasing number of new programs are coming to Pennsylvania, currently two are dominate: the Family Forest Carbon Program and the Natural Capital Exchange. The Nature Conservancy has two programs underway, the Family Forest Carbon Program, which is a practice-based program for small landowners (people who own less than 2,000 acres), and the Working Woodlands program for large landowners (2,000 acres or more). Both of these programs are practiced-based. The Natural Capital Exchange is also available for forest owners of all sizes (a harvest deferral program). Payments are based on delaying harvest for at least one year.

Are Carbon Projects Right for You?

While carbon offsets may be appealing as a new stream of revenues, it's important that landowners evaluate projects and decide whether these programs are right for them and if the programs align their goals for owning a  forest. Most projects require long contracts (20-100 years depending on the project) and landownership may change over the length of these contracts. Different programs handle transitions in landownership in very different manners, some programs are tied to the deed and the new owner must continue following the contract. In other programs it is up to the new owner to decide whether or not to stay in the program; generally, if the new landowner opts out, the landowner that started in the carbon deal will have to pay back any money they got from the carbon program along with interest and fees. Besides just considering landownership, it is important to think about the condition of the forest. Most contracts set some restrictions around how landowners manage their forests, like a yearly maximum harvest or allowing only certain types of harvesting strategies. Make sure these restrictions align with the best management of the forest and the goals of the landowner. These carbon contracts can be flexible and tend to be negotiated with individual landowners to help fit with their needs and objectives. Carbon sales may provide a source of income while forests are growing or for landowners who are hesitant to harvest timber, but it is important for landowners to think about what is the best future for their forest and consult with professionals (both legal and forestry) before signing up.