.
FORESTRY CARBON ASSETS UNDER CALIFORNIA AB 32:
CURRENT BUSINESS PRACTICES, FUTURE VIABILITY AND ANCILLARY BENEFITS
ALEXIS SCHWARTZ
MASTERS OF ENVIRONMENTAL MANAGEMENT
ENVIRONMENTAL ECONOMICS & POLICY: BUSINESS & ENVIRONMENT
APRIL 24, 2017
ADVISORS: JESKO VON W INDHEIM AND LORI BENNEAR
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits Table of Contents
1.
ABSTRACT
3
2.
EXECUTIVE SUMMARY
4
3.
INTRODUCTION
CAP AND TRADE
CALIFORNIA AB 32
CALIFORNIA AB 32 U.S. FORESTRY PROTOCOL
4.
CRITIQUES OF FORESTRY PROJECTS
5.
CENTRAL HYPOTHESIS
6.
DATA
BUSINESS PRACTICES
ANCILLARY BENEFITS
FUTURE VIABILITY
5-9
5-7
7-8
8-9
9-13
13
13-17
13-15
15-16
16-17
7.
METHODS
17-19
8.
RESULTS
19-26
BUSINESS PRACTICES
ANCILLARY BENEFITS
9.
19-23
23-26
CONCLUSION
26-27
10. FUTURE VIABILITY
27-28
11. APPENDIXES
29-30
APPENDIX I
APPENDIX II
29
30
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits Abstract
The primary objective of this study was to conduct an
encompassing analysis of current forestry carbon offset business practices
under California A.B. 32. This study goes beyond the critiques of the
forestry carbon offset approach and highlights current business practices,
examines fringe benefits, and hypothesizes the viability for small and large
landowners moving forward. ARB faces an issue when it comes to large and
small landowners: to require immense reporting deters TIMOs and large
landowner companies, while having such high transaction costs deters small
land-owners from engaging in climate change mitigation tactics, but the asset
proves itself to be a worthy investment going beyond climate change
mitigation tactics and entering a realm of biodiversity conservation and
improving community economic development. Thanks to an industry wide survey,
the business practices of this newly developed asset are becoming clear and
showcases future business strategy plays.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits Summary
The primary objective of this study was to conduct an encompassing analysis of current forestry
carbon offset business practices under California A.B. 32. There have been widespread critiques of the
forestry carbon offset approach used in California A.B. 32 by both large landowners and the USDA.
This study challenges some of those critiques by highlighting successful current business practices and
examining the ancillary benefits of forest projects. Finally, this study evaluates the viability for small
and large landowners moving forward. The majority of this study’s data was retrieved from the Air
Resources Board Offset Credit Issuance Table (CIT) and an industry-wide survey given to carbon
project developers and partners.
The results of this study show that the amount of carbon sequestered in forestry projects (ton
of CO2-eq Sequestration Total per project) is far more reliant on the amount of carbon sequestered per
acre (tCO2-eq/Acre Sequestration Rate) than on the total acreage of the project (Acreage of Project).
To achieve profitability, a firm should aim to pick land that sequesters certain carbon sequestration rate
per acre rather than targeting total acreage. These findings are true for a minimum of $100,000
investment (the smallest investment size surveyed).
The study also uses the CIT to estimate ancillary benefits of forest projects. Through GIS
analysis, I was able to conclude that 88% of current carbon projects are located on geographically
prioritized vulnerable habitats as determined by a Clinton N. Jenkins, Kyle S. Van Houtan Stuart L.
Pimm, and Joseph O. Sexton’s 2014 study, “US protected lands mismatch biodiversity priorities.”
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits Given this data, the forestry approach has proven to provide ancillary benefits in addition to
climate change mitigation, contrary to its critiques. The future viability will be determined on evolving
market tools and willing development actors.
Introduction
With global efforts addressing the reduction of greenhouse gas (GHG) emissions, an array of
emission goals and mitigation tactics have been developed. Emission goals aim at targeting pointsource pollution and dictate the net emissions for a designated area. For the purpose of this study, we
focus on mitigation strategies under a cap-and-trade scheme adopted by the State of California in 2012.
Cap and trade has been used as alternative to emission taxes and aims to systematically control the
amount of harmful gases emitted (The Cap) while letting the invisible hand of the market create a
balance of allocated credits (The Trade). This allows the regulating entity to bypass the issue of
distributional equity and decreases the necessity of industry specific intel. In other words, instead of
understanding marginal abatement costs for each emitting entity, cap-and-trade schemes allows a firm
to determine their necessary amount of credits either obtained through an auction process or trading
scheme.1
After the regulating entity sets a predetermined amount of emissions, most cap-and-trade programs
impose consequences if firms do not have enough permits to cover their emissions. These negative
incentives are usually at a cost much higher than compliance. For example, Europe’s cap-and-trade
system imposes a 100€ fine for failing to have obtain a credit for GHG emissions, but credits sell in the
Goulder, Lawrence H. “Markets for Pollution Allowances: What Are the (New) Lessons?” The Journal
of Economic Perspectives, vol. 27, no. 1, 2013, pp. 87–102. www.jstor.org/stable/41825463.
1
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits market at just over 15€.2 By creating discounted credits available for purchase cheaper than regulatory
fines, cap-and-trade creates a relatively steady demand given the assumption that supply of credits does
not excessively exceed demand.
Some cap-and-trade programs have suffereded from an oversupply of credits or an overprovision of
offset allocations. Oversupply of credits can result from the intrinsic nature of measurement errors with
cap limits.3 By regulating an intangible object (greenhouse gases) that is subject to increases from
population and commerce growth, but decreases from technology innovation, locking down an
effective cap has been difficult for many cap-and-trade programs around the globe. This results in price
decreases from depressed demand within the market. For each developing carbon market, the supply of
credits and offsets has been an integral measure to consistently oversee and regulate.
For this study, my analysis will solely focus on the California’s AB 32 cap-and-trade system,
which, relative to many GHG cap-and-trade system, has maintained stable prices during its 3-year
existence. More specifically, this study will focus on a particular asset within California’s AB 32: The
Forest Management carbon offset. Under California AB 32, firms can satisfy emissions requirements
through a combination of emissions reductions and carbon sequestration. Carbon sequestration assets
are known as offsets as they allow a firm to offset some emissions reduction activity. As Dr. Kotchen at
the Yale School of Forestry notes,
“Offsets are based on the idea that agents need not reduce their
own emissions in order to reduce the amount of GHGs in the
atmosphere; instead, they can pay someone else to reduce
emissions and achieve the same effect on atmospheric
concentrations.”4
2
Ibid
Ibid
4
Climate Change Economics, Vol. 1, No. 2 (2010) 9. DOI: 10.1142/S2010007810000091 EXPLAINING THE
PRICE OF VOLUNTARY CARBON OFFSETS (n.d.): n. pag. Web.
3
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits Under California AB 32, entities under the regulated sectors obtain credits through monthly auctions
and are open to trade freely to address emission needs. To sequester current carbon in the atmosphere,
8% of carbon emissions are allowed to be covered by carbon offsets. 5
CALIFORNIA AB 32
California’s AB 32 held its first carbon credit auction in 2013, linked and expanded the
market with Quebec in 2014 and, by 2015, covered 85% of the carbon emissions in the state of
California. California AB 32, unlike the EU Emissions Trading System, has maintained stable
credit and offset pricing due to a staged increasing price floor and adequately distributed credit
allotment.
5
Climate Change Economics, Vol. 1, No. 2 (2010) 9. DOI: 10.1142/S2010007810000091 EXPLAINING THE
PRICE OF VOLUNTARY CARBON OFFSETS (n.d.): n. pag. Web.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits Figure: Decreasing Cap Source: ARB
Aside from a quick blip in the summer of 2016 due to policy skepticism, prices of credits
and offsets have held steady throughout the program. With the general success of the market,
attractiveness to outside investors and its stability makes it an interesting point for analysis of
private or profit-motivated conservation measures. My assumptions for my project will be based off
the data provided by forestry projects completed and listed under California AB 32 and my future
assumptions will be based off historical trends.
CALIFORNIA AB 32 U.S. FORESTRY PROTOCOL OFFSETS
Under California AB 32, there are 25 forestry projects, 96% of which are IFM and 4% are
avoided conversion. Here I define what IFM and avoided conservation projects are.

Improved Forestry Management (IFM): These projects are developed under the U.S. Forestry
Protocol and, for the case of this study, does not include the newest protocol. IFM projects use
standing forests in the domestic US as a base for carbon sequestration projects. The carbon
sequestered by improving forest biomass is quantified by using the methodology for carbon
quantification shown in Appendix I. Projects quantify the tCO2-eq sequestered by keeping the forest
standing for 100 years from the project start date. This equivalency is then converted into equivalent
tCO2-eq offsets that may be sold to entities under compliance of California AB 32. (citation?)

Avoided Conversion: Under California AB 32, any private forestland under direct threat to become
deforested may be eligible as an Avoided Conversion project. Avoided conversion prevents private
land deforestation and helps forest-owners by allowing them to register their land as conservation
easements and transfer the forest to public ownership (excluding federal ownership). (citation?)
Due the price incentive strategy of the cap-and-trade market, carbon offsets have historically
sold at a discounted price to credit price-floor. This “new” market of forestry compliance offsets is
the subject of my analysis.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits As of January 25, 2017, 96% of forestry projects listed on the CIT are under the IFM
umbrella, or 24 out of 25 projects, with only one avoided conversion project completed under
compliance. The California AB 32 program covers approximately 85% of all of the state’s
emissions. With the 8% carbon offset cap, approximately 6.8% of all emissions in California can,
potentially, be covered through the carbon offset program. At present forestry, both early action
and compliance, compose of 21,077,266 compliance offsets and 13,276,494 early action forestry
offsets composing 62.8% of total offsets. As of January 2017, compliance forestry projects make
up approximately 38.5% amount of total offsets. By dividing this compliance per year under
management, we see that this 210,291 tCO2-eq covers roughly 1/3 of all coal powered electric
power under California’s annual energy related emissions. 6
Critiques of Forestry Projects
A critique by large landowner timber firms and by the United States Department of Agriculture
in recent studies, is the development of carbon credits on a land may temporarily (100 years) halt
the production of timber, but it does not decrease the market demand for timber. Thus, the supply
of timber products lost by creating a carbon project merely moves creation of supply to another
parcel of land. This is a phenomenon referred to as “leakage.” Although this is important to
point out, the USDA report fails to mention that the creation of forest projects under U.S.
Forestry Protocol California AB 32 addresses leakage in their contentious Eligibility Protocol
6
"U.S. Energy Information Administration - EIA - Independent Statistics and Analysis."Environment U.S. Energy Information Administration (EIA) - U.S. Energy Information Administration (EIA).
Department of Energy, n.d. Web. 17 Mar. 2017.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits 3.1.3.. The Eligibility Protocol 3.1.37, stipulates that if a project operator is conducting any
harvesting in their land-holding portfolio and wants to develop a California market IFM carbon
project, they would have to meet requirements for those projects on all landholdings. This would
require that the firm to employ one of the following on each parcel of land within their portfolio:



Certification
o Such as Forest Stewardship Council (FSC) Certification on their timber products
or as verified carbon offset projects
Adhering to Long-Term Management Plans monitored by state or federal governments
Meet un-even age management practices.8
o Harvesting by picking particular trees in a forest instead of harvesting entire
plots of timber land at once
As Barbara Bamberger, an ARB IFM spokesperson pointed out, “different harvest practices flesh
out nuances of protocol.” Because of the un-even age protocol, large landowners are having a
more difficult time meeting requirements in properties where state law is relaxed and does not
stipulate harvesting practices. Un-even age management incites a multitude of new costs to the
firm and is notably more expensive. To meet the Eligibility Protocol 3.1.3 on all land, large
landowners and Timber Investment Management Organizations (TIMOS) are weighing the cost
and benefits of creating new carbon projects. The costs of reporting, sustainable un-even
management, certification and government oversight, are acting as a deterrence of TIMOs that
would have previously been suitable carbon project development candidates. When pushed about
the rational of such deterrence, Mrs. Bamberger noted that “ARB wanted to ensure they are
crediting and providing credits for companies providing additionality and taking place of
7
"Workshop Comments Log." California Environmental Protection Agency Air Resources Board. N.p.,
2013. Web. 17 Mar. 2017.
8
Agency, California Environmental Protection. Compliance Offset Protocol U.S. Forest Projects (n.d.):
n. pag.Https://www.arb.ca.gov/cc/capandtrade/protocols/usforest/forestprotocol2015.pdf. Web.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits emissions that are not being steadily removed [elsewhere].” 9She continued that by incorporating
such stipulations ARB ensures “[Credits] are additional, carbon sequestered increases [and is]
done so in a manner that maintains biodiversity, supports native species, [aren’t] plantations,
[and carbon isn’t] being leaked.”10 It was also noted that by practicing un-even age harvesting, a
biodiversity conservation externality is incorporated. ARB aims to allow native and vulnerable
habitats to continue to flourish thus allowing species that demand certain ecosystems to remain
stable. Species such as the spotted owl, which can rarely be found in <100-year-old forests, yet
flourishes in 100-200+ year forests, can be safeguarded under Eligibility Protocol 3.1.3. Thus,
Eligibility Protocol 3.1.3 creates ancillary benefits; in addition to safeguarding against leakage
and ensuring additional sequestration, it also potentially protects rich ecosystems under the 100year blanket. Conversely, large landowners and TIMOs argue that not all timber and forest land
is created equally. They argue that land in their portfolio that is located in less critical
biodiversity areas and has already undergone even-age management makes the benefits of
practicing un-even age management neglable.
When addressing the critique purported by the United States Department of Agriculture
in their “Do Carbon Offsets Work? The Role of Forest Management in Greenhouse Gas
Mitigation” study, the fault in the USDA logic resides in the fact that they approached the
subject through a singular lens: agriculture. Instead of analyzing forests as ecosystems and the
economic benefits they derive, they assessed the projects in just terms of agricultural economics
and climate change mitigation.
9
Barbara Bamberger, ARB Forestry spokesperson, personal communication March, 2017
Barbara Bamberger, ARB Forestry spokesperson, personal communication March, 2017
10
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits The USDA briefly comments on the difficulty of carbon sequestration quantification. The
process, which is arduous and can hardly be considered exact science, can and should be
meaningfully questioned. There are many drastic improvements that could be made in the
verification process that could increase data efficiency and decrease transaction costs. This
would allow small landowners to enter the realm of carbon project development and decrease
barriers to entry. This was not the point that they made, instead they asserted that:
“Tracking the allocation of forest carbon across live and dead
trees, understory shrub and herbaceous vegetation, soils, the forest
floor, forest litter, harvested wood products, and energy wood is
far more difficult than conducting traditional inventories of
commercially valuable wood based on bole size…and other
policies that encourage managing forests for carbon benefits do not
require such accurate accounting. Policies that encourage use of
wood in place of other materials that require large amounts of
fossil fuel to create—steel, aluminum, plastic, concrete, and other
nonrenewable materials”11
Although the argument has some points of validity, the USDA failed to acknowledge that the
intricacies of biodiversity in a forest ecosystem once wiped out cannot be replicated by a timber
farm or plantation. Although their argument may be true when discussing basic materials, the
premise of “Do Carbon Offsets Work? The Role of Forest Management in Greenhouse Gas
Mitigation” may have been inappropriate platform for this discussion. Asserting that the
“carbon-trading protocols miss the biggest opportunity available for mitigation because they
don’t factor in what happens outside the forest,”12 is a clear indicator that the USDA did not
11
United States Department of Agriculture Forest Service, Rt Issue: 155. "DO CARBON OFFSETS WORK?
THE ROLE OF FOREST MANAGEMENT IN GREENHOUSE GAS MITIGAT." PNW (n.d.): n.
pag. Pacific NorthWest Research Station. Science Findings. Web.
12
United States Department of Agriculture Forest Service, Rt Issue: 155. "DO CARBON OFFSETS WORK?
THE ROLE OF FOREST MANAGEMENT IN GREENHOUSE GAS MITIGAT." PNW (n.d.): n.
pag. Pacific NorthWest Research Station. Science Findings. Web.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits consider what happens inside the forest. Although their study was to assess mitigation strategy,
mitigation strategy is rarely assessed as a singular objective and must often be considered within
a sustainable system analysis. Their assertion that creating furniture and building materials from
wood forever sequesters the carbon into a usable good is an inappropriate replacement for IFM
or avoided conversion carbon offset projects. This is not to say that their assertion that wood
materials are intrinsically better than metals or plastic is false, but that it is in no shape or form
an equal alternative to replace IFM projects.
Central Hypothesis
As forestry management and carbon offset programs become staples within California
AB 32, it is imperative to examine the emerging projects and business models. This study aims
to aggregate current forestry offset practices under California A.B. 32 being practiced in the
current market. Also, given the critiques forestry offsets received from the USDA, I aimed to
widen the breadth of the offset’s effects. Aside from the positives of climate change mitigation
and profit, how do these offsets provide benefits? It is my hypothesis that current business
practices have developed a profitable product with beneficial externalities. Externalities include
economic benefits in low-income areas and promoting biodiversity. This analysis will examine
the efficacy of projects by utilizing a set of criteria which examines: (1) current program logistics
and developer business practices (2) habitat vulnerability (3) and future potential of sequestration
in relation to private owner forest land and subsequent development of projects.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits Data
The data collected in this study comes from a variety of sources, but most notably the Air Resources
Board Offset Credit Issuance Table (CIT) and a personally designed survey for TIMOs, RET, family
owners and offset project developers. The (CIT) is a public online directory of offset projects that have
been issued for the purchase of sale under California AB 32. To be clear, this is not a sales listing, but
information on completed project offsets to increase transparency and maintain compliance records.
The CIT used in this study was updated January 11, 2017 and accounts for 21,029,149 compliance
forestry and 13,276,494 early action offsets through 55 U.S.13 Forestry projects. The CIT showcases the
spread of developers that are currently listed for U.S Forestry protocol projects. With 55 forestry
projects, 25 are compliance and 30 fall under early action. Of the compliance projects, 36% were
developed by Finite Carbon, 16% were developed by New Forests: Forest Carbon Partners and 8%
were developed by Green Assets. (It is interesting to note that 11% of forestry projects were developed
for tribes within the United States, with private partnerships.14) The registry includes a standard project
documentation link that details the location, developer, mapping information and registry forms, as well
as size of project size in both acres and offset issuance.15
BUSINESS PRACTICES: A survey was also delivered to each carbon offset developer listed on the CIT.
This survey was developed to extract pertinent information needed to conduct my study and were filled
out anonymously to maintain developer integrity. This was completed through the medium Survey
13
14
22, 2017 Last Updated: February. ARB Offset Credits Issued (n.d.): n. pag. Web.
22, 2017 Last Updated: February. ARB Offset Credits Issued (n.d.): n. pag. Web.
15
Ibid
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits Monkey and comprised of 9 questions that aimed to establish a set of data ranges. Every firm on the
CIT was contacted, thus attempting to get the widest breadth of data. The questions were as follows:
1. Under the forestry umbrella, what is the average size or range of monetary investment into a single
carbon offset project in US dollars?
2. Under the forestry umbrella, what is the average size or range of the length of time to complete a
single carbon offset project?
3. Under the forestry umbrella, what is the average size or range of the amount of carbon offset credits
created by a single carbon offset project?
4. Under the forestry umbrella, what is the average size or range of IRR through a single carbon offset
project?
5. Under the forestry umbrella, what is the average size or range of revenue percentage reinvested into
a future forestry carbon offset project from a previous forestry carbon project? (IE: What percentage of
revenue from Carbon Offset Project A is reinvested into a Carbon Offset Project B?)
6. Do you have any GIS or mapping available of completed projects only? (ARB may provide such
mapping tools for private firms if it is unavailable.)
7. Under the forestry umbrella, what social effects are considered when creating a carbon offset
project and what are the measures to ensure social benefits are maintained?
8. Under the forestry umbrella, what percentage of the majority stake is returned to the landowner?
(range acceptable)
9. Is your organization nonprofit or private?
The survey results did not require a name for the carbon developer to ensure that no competitive data
would be extractable this study, this was due the competitive process of development and attempts to
maintain integrity of the developers who kindly completed the survey. An NDA was disclosed to firms
who required it. Potential issues that arise through the survey was the option of “private or nonprofit” in
the last question; as a developer, may identify as private developers such as a private equity firm,
TIMO or RET, which have different development practices. Another issue, although not witnessed
within the questions, was the possibility of monetary investment definition; this question was meant to
be inclusive of all investment contribution. The range of time to complete a project was from initial
development day to listing on the CIT. Due the sensitivity of this data, the acquiring of data was
difficult, but appreciated.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits ANCILLARY BENEFITS: To evaluate the ancillary benefits of habitat protection from forestry carbon
projects, I used Clinton N. Jenkins, Kyle S. Van Houtan Stuart L. Pimm, and Joseph O. Sexton’s 2014
“US protected lands mismatch biodiversity priorities” study published through the Proceedings of
National Academy of Sciences. This study highlighted current prioritization of habitats within the
United States in the form of map and GIS data.16 This allowed me to cross analyze the current location
of carbon projects under California AB 32 with the mapping data provided in this study.
FUTURE VIABILITY: For assessing future viability projects I required data on the amount of private land
potentially available for forest projects. These data were obtained from the “U.S. Forest Service 20112013 National Woodland Owner Survey.” The Forest Service 2011-2013 National Woodland Owner
survey gave pertinent info on the breadth of private forestland within the United States. According to
the study, approximately 441 million acres, mostly located in the habitat vulnerable Southeast, are
owned by some 11 million private forest owners with 95% of the forest land owned by individual or
family forest owners.17 For the purpose of this study, I wanted to solely focus on private forest owners
greater than 10 acres as potential source of forest for carbon offsets.18 Of the 11 million private forest
owners, 10+ acre owners comprise just 4 million of the individual and family ownerships, but currently
control of approximately 269 million acres. Of these ownerships, family and individual owners average
around 66 acres and 42% have intentions of improving the habitat. For that reason, I further reduce the
269 million acres by an additional 58%, thus resulting in 156,020,000 acres of potential forest land
16
As a note, it must be known that I am a former student of Dr. Stuart Pimm leading me to the choice of
his prioritization study.
17
Service, U.s. Forest. Who Owns America’s Trees, Woods, and Forests? (n.d.): n. pag. Web.
18
Ibid
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits available to carbon offset development. This was done in response to in California AB 32 policy that
require landowners to account for all land, including non-project land, in reporting for forestry carbon
projects. For large landowners, such as Weyerhaeuser, the largest landowner in America, accounting
for ~13 million acres within the United States, these new stipulations provide an almost impossible
roadblock. It is in my opinion, that private forest lands of smaller stature, will end up being more viable
partners for carbon project development. These assumptions about the data are limited as I was unable
to access the exact geographic location of these individual and family owned forests and thus the range
represents the current tCO2-eq/acre rates as witnessed from previous carbon projects. The breadth of
the results is representative of such unknowns.
Methods
The primary objective of this study is to conduct an analysis of current forestry carbon offset
business practices, compare current patterns to habitat vulnerability and then to further hypothesize the
potential value of future forestry carbon offsets from private and individual forest stocks within the
United States. The data collected from the survey and CIT was most used to establish baseline business
practices, while allowing me to forecast a rough potential viability of available forestland. For habitat
vulnerability, the mapping data from the CIT was cross analyzed with pre-determined points of
conservation priority.
The business practice and forestry carbon project generalities analysis was done run through
STATA and RegressIt running descriptive analysis of the data sets to allow a big picture point of view.
It then allowed me to qualitatively assess the more significant factors of the dependent variable: tCO2eq Sequestration Total. Because of the size of the sample, some of my analyses are done qualitatively
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits instead of being able to analyze a set statistical correlation. When determining profitable size &
sequestration rate minimums on future investments, I used a basic IRR formula with the following
assumptions:

The investment size would be $100,000

The price of each carbon offset would be $10

16% of the total carbon sequestered would be allocated to the California AB 32 Buffer
Account

An accuracy test post-test would conclude that the price per carbon offset would fall
between $1.50-$2.00

That the return on equity would be from a 40% minority stake in the net profit

That there would be a $550,000 discounted trust from the revenue for future transaction
costs
To analyze the ancillary habitat benefits of forestry carbon offsets, priority conservation areas
(shown in Figure 1) were cross-referenced with forestry carbon offset project areas to assess overlap.
As a precursor to my analysis, I wanted to highlight current habitat protectionism within the United
States. As is evident between Figure 1 to Figure 2, “although the total area protected [within the United
States] is substantial, its geographic configuration is nearly the opposite of patterns of endemism within
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits the country.”19
To determine priority of habitats, Pimm, Jenkins, Houtan and Sexton first prioritized vulnerable
species and habitats defined as species with small geographic ranges or large species whose habitat is
being encroached upon. To determine the values seen in the Figure 1’s legend, Pimm, Jenkins, Houtan
and Sexton, “calculated a priority score equal to the proportion of the species’ range that is unprotected
(i.e., not in IUCN I to VI protected areas) divided by the area of the species’ range. This score increases
as range size decreases, in accordance with the well-established relationship between range area and
extinction risk.”20 i.e. the higher the score, the greater the risk in terms of vulnerability. This map was
used and cross referenced in regards to the current geographic locations of carbon offset projects under
the California AB 32 U.S. forestry protocol.
It is important to note that I included the GDP per capita of the counties where projects were found
as a qualitative note in the ancillary benefits section. As can be noted in the survey questions, I asked
each participating firm about the social measures integrated in project development. This was done to
analyze if social aspects were considered through the process. Environmental regulation and assets are
often considered to encroach on economic growth, I aimed to determine if carbon offsets could bypass
this common misconception.
19
Jenkinsa1, Clinton N., Kyle S. Van Houtanbc, and And Stuart L. Pimmc. "Clinton N. Jenkins." Proceedings of the
National Academy of Sciences. National Acad Sciences, n.d. Web. 27 Feb. 2017.
20
Jenkinsa1, Clinton N., Kyle S. Van Houtanbc, and And Stuart L. Pimmc. "Clinton N.
Jenkins." Proceedings of the National Academy of Sciences. National Acad Sciences, n.d. Web. 27
Feb. 2017.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits Results
I use the data from CIT and the survey to examine the range of tCO2-eq Sequestration
Total over all projects (Figure 3). Looking at the size of project in terms of tCO2-eq, the lower
quartile for forestry projects was 160,296.5 tCO2-eq with an upper quartile of 868,500.5 tCO2eq. The median, 540,828 tCO2-eq, was noticeable lower that the mean of 838,533.72 tCO2-eq.
This can be attributed to three projects which are outliers in terms of project size. Ironically,
these three outliers are all below the average tCO2-eq/acre sequestration rate, but were
considerably outside the normal range in terms of acreage size; in other words they are spatially
large projects that do not sequester carbon efficiently.
Figure 4 shows the range of projects by acreage size. Size by Acreage follows a pattern similar to
the tCO2-eq Sequestration Total, but with a much smaller dispersion of interquartile range. For the
most projects, except the outliers mentioned above, the projects fell between a much smaller range
than found on the tCO2-eq Sequestration Total. This signals that projects are not reliant completely
on spatial size. The continuity in size signals that there is likely a more influential factor that causes
such a range in tCO2-eq Sequestration Total. Through this project, I determined that the range in
tCO2-eq Sequestration Total can largely be attributed to the geographical influences of project
development. This is due to biomass capability, or the value of carbon stored by different
biomasses, found in different geographic regions within the United States. It can also be attributed
to different age ranges of biomass, a factor that heavily contributes to the sequestration rate of
biomass.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits Finally, Figure 5, shows the range of data for tCO2-eq/Acre Sequestration Rates. In terms of
project sequestration by acre, the lower quartile for forestry projects was 17.125 tCO2-eq/acre with
an upper quartile of 94.645 tCO2-eq/acre. The median of 45.75 tCO2-eq/acre was comparable to
the mean 53.99 tCO2-eq/acre. Unlike tCO2-eq Sequestration Total, tCO2-eq/Acre Sequestration
Rates had no outliers and there was no need for accounting for irregular variables. I determined that
the value of each project can largely be attributed to tCO2-eq/Acre Sequestration Rates. To see how
sequestration rates matter, we can examine three projects: CAFR5195 Passamaquoddy Tribe
project, CAFR5029 Brookgreen Gardens project and CAFR5130 MWF Brimstone Project. The
data on acreage and sequestration are given below:
CAFR5195: 573,634 tCO2-eq on 4,300 acres
CAFR5029: 201,277 tCO2-eq on 4,400 acres.
CAFR5130: 9,745 tCO2-eq on 4861 acres.
Notice that with comparable acreage, these projects produced radically different tCO2-eq
Sequestration Totals. This signals that tCO2-eq/Acre Sequestration Rates has a larger correlation
with tCO2-eq Sequestration Total compared to Size by Acreage and tCO2-eq Sequestration Total.
We can also see how the tCO2-eq/Acre Sequestration Rates are significant factors by
analyzing CAFR5076 Trinity Timberlands Project, CAFR5011 Yurok Tribe Project and
CAFR5043 Goodman Forest Project whose data are given below:
CAFR5011: 875,659 tCO2-eq on 7,660 acres
CAFR5076: 847,895 tCO2-eq on 11,900 acres
CAFR5043: 852,630 tCO2-eq on 29,000 acres
These three projects have comparable tCO2-eq Sequestration Total, but CAFR5011 is below the
median Size by Acreage while CAFR5043 is in the upper quartile of Size by Acreage. These
comparative examples highlight the significance tCO2-eq/Acre Sequestration Rates have on tCO2eq Sequestration Total and the subsequent profitability of a project. Future forest projects are more
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits likely to be profitable if they occur on land that has a high sequestration rate and this is more
important that finding a large plot of land to protect.
Through the survey, it was concluded that the average firm spends between US$100,000US$800,000 on a project and averages approximately $1.50-$2.00 per forest offset credit, with a
median of $1.84. This spread represents each type of firm (TIMO, RET, Investment Firm/Private
Equity, NGO). The costs can include verification, real asset investment costs, listing fees and
advisory and administration fees. Through developing a project, the ultimate goal is to generate
meaningful return to the project developer while sequestering enough carbon to earn a high net
profit. This is to ensure that not only can the firm earn a return on their equity investment, but also
to produce enough capital to cover the transaction costs necessary for the next 100 years of project
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits maintenance. After the meaningful windfall of cash, earned right after verification (roughly 18
months) firms assess their return on equity investment. The spread of IRR, 18%-40%, showed
private investment developers, such as TIMOS and investment firms, earned higher IRR
comparative to NGO developers. Also, higher IRRs occur more frequently with developers that
partner with landowners instead of buying land (real asset investment) to develop the projects on.
This is an assumption based on the idea that the firm wants to attain the highest possible IRR.
Carbon projects are often delivered through a majority-minority stake, awarding the
majority of the offset sales profit to the landowner. The range of landowner returns ranges from
50%-70% of net profit, even though the developer incurs the entire cost of project development. For
many projects, the landowner incurs no cost and receives a majority of carbon offset profit in
exchange for the rights to the carbon sequestered on the land. A few firms noted that they, unlike
majority-minority partnerships, buy the land outright as a real asset investment and thus do not
partner with landowners. These firms tended to have lower IRR.
Through this examination, I have determined that to insure at least a 26% IRR (the average
IRR) through a 40-60 minority share on a minimum investment of $100,000 at a minimum cost of
$1.50 credit and a 16% buffer allowance (or 16% allocation of all carbon sequestered put into a
buffer fund), firms need to identify parcels of land that satisfy one of the following criteria:
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8759.65 acres at the Lower Sequestration Rate Quartile (17.125)
1934.98 acres at the High Sequestration Rate Quartile (77.52)
3279.40 acres at the Mean Sequestration Rate Quartile (45.74)
2778.29 acres at the Median Sequestration Rate Quartile (53.99)
This allows enough returns assuming a steady price of ~$10 per credit (the average
discounted price)21 to create a fund to handle the transaction costs of the next 100 years ($550,000),
21
"Carbon Prices." Http://californiacarbon.info/. N.p., n.d. Web.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits earn a 26% IRR (Mean IRR) for the developer in a 40-60 split and $378,000 return for the
landowner separate from the annual-fee trust. By having land that sequesters less than the marker in
initial analysis, the firm cannot account for any initial error done in nascent projections. i.e. If the
firms have land that if by some error, a second verification comes up somewhat smaller the firm
may still cover the transaction costs. That being said, the tCO2-eq/Acre may in direct relation to
increase of Size of Acreage.
Ancillary Benefits
This study aimed to understand if the environmental assets created under forest offset credit
markets generated significant ancillary benefits by serving as umbrellas for other sustainability
issues such as habitat vulnerability and economic development.
In terms of social involvement and economic development, a few firms mentioned that
they operate under current Forest Steward Council (FSC) standards and others mentioned that
they pay special attention to low-income or tribal communities. The average GDP per capita of
the counties where the projects were located was $22,156 with a range between $12,927.00 to
$28,197.00. The median and average per capita income fell below the national average by
roughly $32,00022. It is important to note the economic baseline of project areas to assess the
benefits of the carbon project infrastructure. Most often, landowners are awarded a majority
stake in the project net profit. This means for 0% equity in project development costs,
economically disadvantaged participants receive a meaningful windfall of cash. Participants, like
22
"Personal Income Per Capita: U.S. Counties." Governing. N.p., n.d. Web. Winter 2016.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits the White Mountain Apache Tribe, received roughly 30 million dollars after 18 months of
development with Encourage Capital, a project developer, footing the bill. By creating a project
infrastructure that favors the landowners, developers have attempted to integrate an economic
benefit to deter pushback and provide additional benefits.
As of 2017, 88% of forestry projects were in geographically prioritized conservation zones
as determined by Pimm, Jenkins, Houtan and Sexton. Roughly ¼ of these projects were given
scores between 3-6, while ¼ was given a score between 6-9. The projects were found in 29 separate
counties with 6 projects having participating forestland in multiple counties. A hotspot for forestry
projects, Humboldt and Mendocino County, with 8 projects or 32% of total projects, are home to
Redwood National Parks and Mendocino National Parks.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits When the findings of high correlation between protectionism and carbon project location were
conveyed to one firm, it was noted that this circumstance was merely a “happy accident.”23 This
phenomenon of high correlation with conservation priorities may or may not have been intentional, and
further research can be done, but can in no way be conclusive within the study. Instead, I wish to focus
that there is indeed is a high correlation with prioritized areas in line with Jenkins, Pimm, Houton and
Sexton. The high overlap of conservation zones and forestry projects could have myriad causes,
although the stipulations for eligibility under the U.S. Forestry Protocol under California A.B. 32 that
require a “95% of live carbon stock must be native species,” may have the greatest influence.
(Appendix II) By stipulating the native species clause, the project eligibility requirements create a
perfect storm for biodiversity protectionism: aged, uninterrupted biomass. Invasive species and evenaged harvesting, a problem for many ecosystems, can disrupt the natural order of ecosystem health and
can have dire circumstances in some cases. Invasive species are particularly harmful in young forests
and recently cleared land. By stipulating a native species clause in concurrence with the harvesting
clause, the age and health of the forest are intrinsically considered. Unlike the USDA proposition of
increased wooden projects as a replacement for forestry offsets, California AB 32 has created a project
that innately provides ancillary benefits in terms of ecosystem services and habitat protection.
Conclusion
This study highlights the variability of carbon offset projects total sequestration
determined by biomass and their ancillary benefits. In terms of ancillary benefits, the Forestry
Protocol does a good job of including biodiversity measures and developers have provided
23
Jason Scott, Managing Partner Encourage Capital, personal communication, February 2017
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits capital to needier communities. Unlike the U.S. Department of Agriculture single faceted
strategy, California A.B. 32 2015 (1) Eligibility Protocol Native Species Clause passively
assures that the asset is part of a larger multi-faceted sustainable system, which not only
considers emissivity, but also biodiversity issues and (2) Eligibility Protocol 3.1.3 ensures that
the leakage, an issue purported by the USDA, is covered and that each credit provides additional
sequestration. In terms of business practices, developers have taken upon themselves to create
products that actively engage and benefit low-income landholders. By creating trusts to ensure
the cost of transactions are covered for the next 100 years and taking a minority stake,
meaningful windfalls of capital are available for needier communities. The program does have
tremendous externalities and showcases itself to be a worthwhile asset to develop.
Future Viability
By assessing business practices (Page 26) that lead to profitability or, at least, cost coverage,
models and ranges of acceptability helped build a range for small and large landowner viability.
Large landowners, such as Weyerhaeuser, would have little difficulty finding appropriate land in
their portfolio, but face difficult harvesting eligibility protocols that deter offset project
development. Small landowners (66 acres), at even the highest tCO2-eq/Acre Sequestration Rates,
would find difficulty acquiring land or developing reliable consortiums to ensure project success.
Given the current projects as examples of tCO2-eq/Acre Sequestration Rates and Size by
Acreage, it would take a vast number of average land-size owners acting as a consortium to
establish a carbon project. More specifically, it would take roughly 49 landowners in a singular area
sequestering approximately the median tCO2-eq/Acre rate, to earn a return and create a stow-away
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits fund for future transaction costs. The above situation, is more than likely fantasy and highlights a
somewhat taboo issue; that the transaction costs are too high and the regulations are too strict for
there to be small player market access. When posed this issue of 156,020,000 acres of potential and
willing forest land and owners the ARB noted in a phone interview that to make “Small landholders
access [the]market easier, [The ARB is] continually evolving the protocol, creating templates and
mechanisms and verifications [that] can decrease costs by increasing technology [efficiency].” To
maintain the protectionist regulations and close loopholes, it will be necessary for technology to
evolve to bypass the need-based stringency currently integrated into the protocol. When radar,
mapping and satellite technology allows transactions costs to decrease, the financial reasonability
for small landowner’s barriers to entry will decrease. This will decrease verification costs,
transaction costs and ideally would coincide with ARB programs specifically tasked to address
small landowner consortium or individual projects. Once these programs are developed, it will be
imperative for the private sector to create risk mitigation products (insurance, fallbacks) to sort
consortium risk. As noted by Barbara Bamberger when proposed the question, “a small landowner
depending on their neighbor to hold up a deal for 100 years is too risky without a tool to insure
compliance.” As the small landowner, or set of landowners, would be left on in the cold if one
member opted out within the 100-year span. Mrs. Bamberger also noted “not only would they be
left to pick up the pieces, but also the Californian Government would have to pursue damages.” It is
here that insurance tools could help diminish risk and widen the breadth of participating landowners
and increase the development of forestry carbon offsets. Understandably, the small-landowner
project is, at this point, merely a future goal.
In general, the ARB faces an issue when it comes to large and small landowners: to
require immense reporting deters TIMOs and large landowner companies, while having such
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits high transaction costs deters small land-owners from engaging in climate change mitigation
tactic
Appendix I
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"2020 California Baseline Emissions Forecast." CaliforniaCarboninfo. N.p., n.d. Web. Feb. 2017.
ARB Offset Credits Issued (n.d.): n. pag. Web.
Agency, California Environmental Protection. Compliance Offset Protocol U.S. Forest
Projects (n.d.): n.
pag.Https://www.arb.ca.gov/cc/capandtrade/protocols/usforest/forestprotocol2015.pdf. Web.
Barbara Bamberger, ARB Forestry spokesperson, personal communication March, 2017
"Carbon Prices." Http://californiacarbon.info/. N.p., n.d. Web.
Board, California Air Resources. "Compliance Offset Protocol U.S. Forest Offset
Projects." California Environmental Protection Agency Air Resources Board. N.p., n.d. Web. 17
Jan. 2017.
"CARB Considers Alternatives to Cap-and-Trade." Streetsblog California. N.p., 16 Feb. 2017.
Web.
Climate Change Economics, Vol. 1, No. 2 (2010) 9. DOI: 10.1142/S2010007810000091
EXPLAINING THE PRICE OF VOLUNTARY CARBON OFFSETS (n.d.): n. pag. Web.
Goulder, Lawrence H. “Markets for Pollution Allowances: What Are the (New) Lessons?” The
Journal of Economic Perspectives, vol. 27, no. 1, 2013, pp. 87–102.
www.jstor.org/stable/41825463.
Jason Scott, Managing Partner Encourage Capital, personal communication, February 2017
Jenkinsa1, Clinton N., Kyle S. Van Houtanbc, and And Stuart L. Pimmc. "Clinton N.
Jenkins." Proceedings of the National Academy of Sciences. National Acad Sciences, n.d. Web.
27 Feb. 2017.
Lydia Olander, Nicholas Institute, personal communication, January, 2017
Schwartz, Alexis. “IFM Carbon Study Survey.” Survey Monkey. November 2016
Service, U.s. Forest. Who Owns America’s Trees, Woods, and Forests? (n.d.): n. pag. Web.
Stephen Shelby, ARB CCO spokesperson, personal communication, December, 2016
United States Department of Agriculture Forest Service, Rt Issue: 155. "DO CARBON OFFSETS
WORK? THE ROLE OF FOREST MANAGEMENT IN GREENHOUSE GAS
MITIGAT." PNW (n.d.): n. pag. Pacific NorthWest Research Station. Science Findings. Web.
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits 
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"U.S. Energy Information Administration - EIA - Independent Statistics and
Analysis."Environment - U.S. Energy Information Administration (EIA) - U.S. Energy
Information Administration (EIA). Department of Energy, n.d. Web. 17Jan. 2017.
US Department of Commerce, BEA, Bureau of Economic Analysis. "Bureau of Economic
Analysis." U.S. Bureau of Economic Analysis (BEA). N.p., n.d. Web. 17 Mar. 2017.
"Workshop Comments Log." California Environmental Protection Agency Air Resources Board.
N.p., 2013. Web. 17 Jan. 2017.
Appendix II
Native Species Clause:
Project consists of at least 95% native species based on the sum of carbon in standing live tree carbon
stocks. The assessment must be conducted using estimates of stems per acre for reforestation projects and
basal area per acre for improved forest management and avoided conversion projects. Native species are
identified under the heading “Associated Species” in the Assessment Area Data File (May 20, 2015,
incorporated by reference) associated with this protocol version available on the Forest Offset Protocol
Resources section of ARB’s website.
Harvesting Clause
The forest owner(s) must employ uneven-aged silvicultural practices (if harvesting occurs) on all of the
forest owner’s landholdings within the assessment area containing the project and maintain canopy cover
averaging at least 40 percent across all of the forest owner’s landholdings within the assessment area
containing the project as measured on contiguous 20 acre areas 20 within the forest owner’s landholdings
found in any of these assessment areas, including land within and outside of the project area (areas
impacted by significant disturbance may be excluded from this test).
Projects Used:
. Forestry Carbon Assets under California AB 32
. Current Business Practices, Future Viability and Ancillary Benefits