Glossary of Carbon Market Terms

Carbon Offsets

Carbon offsets are any activity that compensates for the emission of greenhouse gases (GHGs). Forestry activities can include forest conservation, reforestation or afforestation, and improving forest management (see eligible activities section below). These activities represent natural climate solutions that may be eligible for carbon credits. Carbon offset projects are issued carbon credits for the amount of carbon dioxide equivalent (CO2e) the project provides. Typically, one carbon credit is issued for one metric ton of CO2e.

Regulatory vs. Voluntary Markets

There are two distinct types of carbon markets; voluntary and regulatory markets.  In the infancy of forest carbon market discussion decades ago it was envisioned that a national regulated marketplace would eventually come into existence that would serve as the go-to for project inclusion.  This never materialized, and an increasingly confusing array of both regulatory and voluntary market options exist for landowners.  Regulatory (aka compliance) markets exist where laws or regulations are enacted that limit or cap the quantity of GHG emissions people and firms can emit.  In the United States, these are limited to the California Cap and Trade Program, and the Regional Greenhouse Gas Initiative (RGGI) which includes a number of states in the east.  There are additional international compliance markets that recognize offsets generated in the United States.

In the place of a solid national regulatory market, there has been significant growth in voluntary markets which are populated by individuals or companies interested in purchasing offsets for their emissions or to demonstrate corporate social responsibility.  Due to being external to any regulated marketplace, voluntary contracts have much more variability in price, conditions, duration, and other aspects.  Increased focus on corporate environmental and social responsibility around climate change will only lead to increased voluntary market opportunities in the future.

Protocols and Standards

Protocols and standards define the “nuts and bolts” of how forest carbon offset projects must be developed in order to be transacted on an exchange. These “rules of the game” help provide consistency and credibility for carbon projects by addressing many of the key requirements listed below.

Registries and Exchanges

Carbon registries and exchanges operate as a marketplace for carbon credits. Before a carbon credit can be registered for sale, an independent third party must verify that an approved protocol was followed to measure the amount of CO2e . Upon successful verification, carbon credits are issued and tracked with a unique serial number to prevent double counting. This ensures that ownership, tenure, and use rights are legally documented and undisputed, and clear ownership of carbon credits is generated.

Project developers and/or carbon exchanges generally require landowners to enter into contracts before transactions can occur. Specifically, these legally binding documents clearly define the delivery of carbon credits, and include protections for both the buyer and seller.  Important considerations include contract duration, credit issuance, requirements for strict adherence to any protocol rules, and penalties for contract violations. Existing markets vary in how they define contract length (1, 15, 20, 100 years), issue credits (annually, specific interval), monitor projects, and penalties for violations.  Contracts will most likely incorporate provisions for all of the other concepts discussed in this section.

Eligible Activities

Different forest carbon markets recognize different activities to be eligible to generate carbon credits.  Project developers, technical assistance providers, and landowners must be aware of which activities are eligible for participation in programs they are exploring.  At a broader level, identifying primary eligible activities in the development of any forest carbon program is essential to generating greater landowner participation and ultimately increased environmental benefits.  Eligible activities could include Afforestation/Reforestation, Forest Management, Avoided Forest Conversion, Urban Forestry, and Harvested Wood Products. Having one’s forests eligible for forest carbon credits is not as simple as locking them away and not touching the land, and in many cases this will not actually generate significant carbon revenue in the long run.  Planting trees on open lands, including urban landscapes, as well as lands that were forested in the past but are not currently forested have been shown to increase carbon stocks in both tree biomass and soils. These methods are widely recognized by many current forest carbon programs. In addition, sustainable forest management can also provide quantifiable increases in carbon stocks through fire and insect/disease risk reduction. Carbon is also sequestered in harvested wood products (HWP), such as dimensional lumber, and as such, can and should be included when determining eligible activities.  Greater utilization of wood products also has the ability to replace more energy intensive building materials, such as steel, plastic, and concrete, leading to less overall greenhouse gas (GHG) emissions.  Markets can also recognize the climate benefit of activities that prevent forestland conversion (ie – keeping forests as forests), which can be incentivized in the development of a proper Business As Usual (BAU) case (see below for more information).

Carbon Pools

Central to any forest carbon marketing program is identifying the various carbon pools associated with the forestry offset project. For landowners to profitably participate in carbon markets it will be very important to identify the appropriate carbon pools required by the market and the inventory costs associated with each pool. The upfront inventory costs to enter the market are a major consideration.  Dividing the project into various pools is important because of the need to utilize various inventory processes that are pool-specific. Also, this method of carbon accounting facilitates the elimination of de minimis pools for certain project types, optional pool reporting, and utilizing cost-effective inventory processes that are pool specific.  Carbon pools generally include aboveground live biomass, belowground live biomass, dead biomass, soils, litter, and Harvested Wood Products.  Deciding on which carbon pool to account for depends on the nature of the forestry offset project being implemented. As a rule, carbon pools that are expected to significantly change over the life of the project should be quantified and reported. Generally, it is optional to measure/report carbon pools that are not expected to change over the life of the project. For example, a managed forest project may elect not to account for the soil carbon pool since that pool may not be expected to change significantly over the life of the project. This would avoid unnecessary costs associated with inventory, reporting, and verification.

Measurement and Monitoring

The method used to quantify forest carbon offsets is of critical importance. Any quantification method employed should balance precision and accuracy with cost effectiveness, so landowner participation is not deterred. Questions regarding the procedures to quantify forest carbon stocks, including statistical design, frequency of inventories, use of growth and yield models and reference tables should be addressed.  Forest carbon markets have employed different methods for quantifying forest carbon offset projects over time. These methods include reference tables, such as the Energy Information Administration’s 1605(b) guidelines, direct measurement, and growth and yield models.  Forest inventories, based on statistically sound designs can be used to accurately measure the amount of carbon stocks in a forest. Measuring all trees on a stand is simply not practical and cost effective, and would severely limit landowner participation. Establishing re-measurable plots is necessary in order to ensure repeatable measurements by qualified auditors and to reduce variance between periodic measurements. Using approved growth and yield models can also predict this change with accuracy, as long as conservative results are produced and reasonable true-up intervals are utilized. Accounting for the carbon in Harvested Wood Products, either through monitoring or modeling, is important for a full picture of the carbon benefits of a landowner’s management regime.

Baselines and Additionality

The concept of additionality with respect to forest carbon projects means that in order to generate marketable GHG emissions reductions, a project must sequester carbon that is in addition to what would have occurred in the absence of the project.  Historically nearly all markets for certified forest carbon offsets have required some documentation of additionality.  However, recent discussions on involving agriculture and forest land owners as a potential climate solution have discussed how to recognize “early adopters” for the carbon-beneficial activities they may have been performing without them being previously monetized for carbon.

For current market opportunities, establishing additionality is a critical step in determining the validity of a project, since credible carbon (i.e., carbon eligible for offset markets) is utilized to offset emissions generated elsewhere. Determining project additionality is often a difficult and controversial issue, due to the inherent subjectivity of establishing baselines.

Protocols for establishing forest project baselines utilize one of two general approaches. The first baseline approach is referred to as business-as-usual (BAU) in which actual increases in forest carbon stocks are compared to a reference case that represents carbon stocks in the absence of the project activities. The reference case is projected into the future in order to measure actual forest carbon sequestered over time. The BAU baseline constitutes a performance standard that projects must exceed in order to generate credible carbon. A BAU baseline may be either project-specific (i.e., a reference case is formulated for a particular tract of forestland) or ecosystem-specific, in which project carbon stocks are compared to regional estimates of carbon sequestration for particular ownerships, age classes, and species composition.

An important issue to keep under considering is that BAU baselines, when applied to forest projects on private lands, are confounded by several important ecological, political, and socio-economic factors unique to land-use. In order to establish carbon sequestration that “would have happened anyway”, a landowner must establish a projection of carbon stocks many years (often decades) into the future; incorporating a myriad of assumptions about future impacts, market demand for forest outputs, forest laws, tax policy, and payments for other ecosystem services. Developing a baseline that successfully integrates these factors is a dubious exercise that will result in uncertainty in the baseline.  Most notably, non-industrial private forests in the United States are under increasing threat of conversion and development.  How to incorporate the effects of land use pressures into development of BAU baselines is a difficult and subjective process to consider.

The second type of baseline is the “base-year” approach, which compares project-specific measurements of carbon stocks from one period to the next. The year in which the initial measurement of carbon is made provides the basis from which future carbon stocks are compared. Increases in carbon storage above the base-year inventory are considered additional and credible carbon sequestration.  The base-year approach to baseline establishment does not rely upon complex assumptions about landowner intentions, market forces, or policy. Instead, only one assumption is made: all forest carbon stock changes (both increases and decreases) are the result of management actions undertaken by the landowner. Carbon stocks are measured at one point in time, then again at another point in time using the same methodology. Increases in carbon stocks are awarded as credible carbon, while decreases must be compensated for in accordance with contractual obligations.

Permanence

Permanence addresses the degree to which sequestered carbon is “permanently” removed from the atmosphere. In this context, “permanently” can be recognized as the duration of the contract entered into by a landowner and a buyer.  Considerations of permanence, like additionality, are central to the carbon offset debate as it relates to forestry offset projects.  Two elements need to be addressed: long term atmospheric carbon removals and accumulated carbon storage reversals that can be caused by natural disasters such as wildfire, hurricanes, or insect and disease, or even by allowing a stand to over-mature and begin senescence. Some insurance or risk-pooling mechanism is almost always put in place to offset these losses should they occur, including the following methods:

  • Buffer pools—projects hedge against risk by placing a percentage of issued credits into a savings account.
  • Insurance—indemnification against loses, where the insurer promises to issue payment to the landowner in order to compensate the credit purchaser.
  • Like-kind pools—forestland managed for carbon sequestration that serves as a replacement reserve for projects that generate and sell carbon credits.
  • Biological risk management—forest management activities that reduce the risk of wildfire, pests, and disease.

To encourage the typical private forest landowner’s participation in any carbon market, balancing concerns over carbon sequestration permanence with logistically and economic feasibility is key – short term contracts will likely be more enticing to private landowners entering this market space.  Requiring long term contracts or conservation easements will deter many landowners from entering the market.

Leakage

In a carbon market context, leakage occurs when a carbon sequestration project causes unintended increases or decreases in GHG emissions elsewhere. Leakage may have impacts at a regional, national or international level, making the quantification of this secondary effect difficult or impossible.  First, an explanation of leakage types:

  • Internal leakage occurs when activities undertaken on a portion of a forest ownership result in changes in GHG emissions on a different portion of the same ownership (e.g., reduce harvesting in one area while increasing harvesting in another area).
  • External leakage occurs when one forest owner’s carbon sequestration activities result in changes in other landowner’s behavior in a manner that increases GHG emissions.
  • Market leakage is a type of external leakage that occurs when a forest project reduces the availability of a good, thereby transferring market demand to other forests
  • Activity-shifting leakage occurs when a project does not replace a land-use activity, but merely displaces that activity to another location.
  • Positive leakage occurs when one landowner’s activities have a positive impact on carbon sequestration in other forests.

There is general agreement in forest carbon programs that internal leakage should be addressed through entity-wide reporting that accounts for all harvests, plantings, mortality, and growth in order to estimate net changes in carbon stocks; however, this approach may be difficult to implement practically. Landowners may own forestland in multiple counties or states, under a variety of legal classifications. Ensuring that all forestland is accounted for may provide some logistical challenges. A clearly-defined attestation by the landowner may be adequate to remedy this issue.

The task of determining the direct impacts of one landowner’s decisions on other landowners, or broader market impacts, is exceedingly complex. As a result, some programs choose to ignore external sources of leakage. Those programs that have adopted methodologies for estimating leakage are not consistent with one another, or rely on limited data sets.

Verification

Verification is critical to determining the validity of forest-based offset projects. This aspect provides additional protection to the buyer and seller to ensure that any carbon credit transacted follows all rules, protocols, and standards.  Qualifications of the verifying organization, methods used, and frequency in which verification takes place must be documented to enhance the legitimacy and public acceptance of these projects. There are a number of options on how verification can be conducted in terms of methods and frequency, but the importance of independent, third party organizations in providing this service is universal. Methods generally used include field and desk verification at the time of project origination and completion, as well as during specified intervals throughout the project.

Aggregation

A concept that has emerged with in the forest carbon market policy space is that of aggregation.  It is widely recognized that the transaction costs of entering a carbon market are very high, and as such are a financial barrier to smaller landowner participation – literature suggests approximately 5,000 acres as a break point below which carbon projects are not economically feasible.   In the aggregation model, an entity with sufficient up-front capital acts as the go-between for multiple individual landowners and a buyer, and aggregates them into one contract.  Thus, the transaction costs are reduced to any one individual landowner and greater landscape-scale benefits can be realized.  Despite the obvious benefits to landowner participation, the inclusion of an aggregator in the business model for carbon project development adds time and complexity.

Co-benefits, Stacking, Bundling

The activities associated with increasing carbon stocks frequently have co-benefits such as protecting water quality or quantity, and enhancing biodiversity. In limited circumstances additional payments may be available to a landowner through stacking (or bundling) the total suite of environmental services being provided.