By Ellie Winninghoff
When California's "cap and trade" system for greenhouse gas emissions opens for business next January, it will be the first regulated carbon market in the world to accept credits in the form of "offsets" created by forestry projects in the U.S. And therein lies opportunity, says Ricardo Bayon, co-founder of EKO Asset Management Partners, a New York-based investment and advisory firm that creates value from environmental assets and monetizes them.
"There is a basic economic shift happening," he says, explaining that our economic system was created when capital and labor were scarce but natural resources and the ecosystem services they provide (clean water, flood control, carbon storage, etc.) were abundant. "The supply of ecosystem services is going down," he says, "and demand continues to go up. That means prices are going to go up."
Earlier this year, the firm closed the EKO Green Carbon Fund, the first fund in the U.S. focused on investments in land-based carbon assets emanating from forestry, avoided deforestation (i.e. getting paid not to cut down forests) and agriculture. Investors include Wolfensohn & Co., BP and ultra-high-net-worth individuals such as Alexander and Ben Goldsmith, Lord Jacob Rothschild, and David Blood.
Bayon says the fund is the first of many such products his company plans to roll out, though they don't have any specific timeframe regarding when the next product will be issued. He notes that they're starting with carbon and will move into more ecosystem services such as water and the like.
Forests: A Unique Type Of Carbon Offset
Under the California Air Resource Board's new regulations for the 2006 Global Warming Solutions Act (AB 32), the cap on greenhouse gas emissions (GhGs) shrinks each year. The state has given allowances, or rights to emit, to companies in sectors representing the largest sources of emissions (electricity, oil refining, and cement manufacturing,) and if they emit more, they must buy either allowances from another regulated emitter or credits in the form of offsets. Although using offsets is a way to compensate for emitting too much, they may only represent up to eight percent of an emitter's allowances.
Offsets, which represent reductions in carbon emissions, only apply to unregulated sectors not under the cap. So even though forestry companies don't have to buy allowances, they can sell offsets. Not all markets accept the same types of offsets, however, and each market accepts different standards and has different protocols. To date, California's Air and Resource Board, or CARB, has established protocols for four types of offsets (urban forests, livestock manure digesters, destruction of ozone depleting allowances and US forests) and three types of forestry projects (reforestation, improved forest management, and avoided conversion), each with its own protocol.
Not every timberland owner can claim offsets. An offset requires a distinct intervention and something called "additionality," a concept that refers to how much carbon a project contributes relative to how much would be stored without that project. What is the baseline for comparison? The "usual and customary practice" (typically industrial forestry), what's required by law, or some sort of marriage of the two. And a pivotal question is how long the forestry project will be there.
Here's why. If you install an energy device that saves 50% of your energy consumption and GhGs each year, you've avoided those emissions permanently--even if the device breaks down in year three. But if you cut down less of a forest for five years and then cut it all down in the sixth, you've lost all the extra carbon that was stored during the first five years. The CARB has addressed this issue of "permanence" by stipulating that every forestry carbon credit sold must be based on a project in place for 100 years.
Although this may sound draconian, people are willing to put up with permanence because forestry projects have ancillary benefits, says Bettina von Hagen, managing director of Ecotrust Forest Management, in Portland, Oregon. "When you sell [forestry] carbon, you are also enhancing biodiversity, water quality and scenic and recreational values," she says. "So there are very different dimensions than with other types of carbon offset projects."