Investing In Carbon Verde
In general, the prices for offsets are higher in compliance markets than in voluntary markets. Based on a presentation Bayon gave to the Land Trust Alliance earlier this year, the price on March 14 for a "non early action forestry" carbon reduction ton, or CRT, which he identified as a voluntary credit, was $2.50--compared to $8.13 for an "early action forestry" CRT, which he identified as a compliance credit. In contrast, the price for a 2013 California Carbon Allowance (a futures contract) was $14.50 versus $10.13 for a 2013 California Carbon Offset (another futures contract.)
How does this translate into forest acreage? In effect, it depends on the age of the trees. As trees grow, the amount of carbon they sequester grows. But the rate of growth and ultimate amount of carbon produced varies substantially by species. (This is just one aspect of timber economies.)
The CARB has established a common practice number (or baseline) for all parts of the U.S. If a forest owner's land has less carbon on it than the common practice, as determined by the stocking level of trees, the land is not eligible for offset sales. But if the land has more carbon than the common practice, the CARB will reward the landowner for storing carbon on the land by giving him a bonus (the difference between the stocking level and the common practice) in the first year.
To illustrate how the economics works, Bayon shared a study with Financial Advisor that his firm prepared regarding two tracts of land in Georgia. One tract, it turns out, would not be eligible for offsets.
But the stocking level of hardwood on each acre of the other tract represented 107 metric tons of carbon dioxide equivalent compared to a common practice of 88. That means the land would be eligible for 19 credits per acre in the first year, totaling 68,305 carbon credits for 3595 acres. At $8.13 per carbon credit, that's $555.319.65 in gross revenues for the first year.
And EKO's projections suggest that this parcel of land could represent 696,823 carbon credits over the next 25 years.
Although a few private timberland owners are developing projects for carbon credits (Sierra Pacific is currently working on 4 different projects), Bayon says carbon prices probably need to rise to $50 to $100 per CRT before most of them would consider storing carbon for sequestration and credit. In the meantime, EKO is busy buying as much carbon as it can for as low a price as it can by offering to partner with landowners--usually by providing a service in exchange for carbon. It will help with or develop a project (including creation, assessment and verification), provide capital to buy land, or enter into future contracts or even just buy an option on carbon credits.
In one case, EKO did not do any of the work to get the project off the ground. But it made a loan to the landowner with 10,500 acres of cottonwood, sugarberry, sycamore, green ash and pecan in Arkansas so it could complete the project. According to Bayon, the first credits for that deal (announced in January 2011) should be issued in three to six months.
"There's a huge distinction here," he says. "We're not buying the land. We are buying the carbon."
A former investment banker, Ellie Winninghoff is a writer and consultant. She can be reached at: ellie.winninghoff (at) gmail (dot) com.