Carbon offsets are big business with the market expected to grow 30% year-by-year through 2030.
In a Forbes report published last year, private equity is ‘all in’ with the carbon market, proliferated by the surge in net-zero commitments made by multinationals and governments across the globe.
Forest offsets, while only a small piece of the carbon puzzle, have become popular with corporates looking to voluntary offsetting as an easy fix to meet carbon commitments without reducing industrial emissions, consumption, and substituting building materials.
According to Bloomberg, the $2 billion market for carbon offsets is heading for a massive reset as many sovereign governments announce their intention to tax, regulate or restrict trade in credits generated within their borders.
What is forest carbon and what are the different categories for offsets?
Forest carbon is considered a forest product – effectively, forest managers receive credit to manage the forest for carbon sequestration – taking the resource out of the market to produce forest products.
Offsets can be split into three categories – reforestation/afforestation, avoided conversion, and improved forest management. According to the latest Market Watch report, the market for voluntary forest offsets is expected to grow from about $US300 million to more than $US1.12 billion by 2028.
If managed correctly, forests are ‘carbon sinks’ with sustainable forest management a key part of a targeted emission reduction strategy to meet climate commitments. However, a part of this equation is ensuring that the forests remain productive, are not ‘locked away’ permanently, and that policies do not inhibit future investment into plantations.
Governments want to retain emission-reduction credits for national climate goals
In a Bloomberg article published June 7, 2023, governments are pushing to retain more of the benefits of emissions-reduction projects, whether as revenue or as credit toward their own national climate goals.
“If you are a developing country and have the right project opportunities, you’ve got a golden goose,” said Mark Lewis, Head of Climate Research at Andurand Capital Management.
For countries with dense rainforests, mangrove swamps, or other natural carbon sinks, carbon credits are considered as valuable as minerals and metals like gold, lithium, or copper.
“Commodities markets have created the precedent,” said Samuel Gill, President and Co-founder of Sylvera, a carbon research and rating firm.
“It is almost inevitable that nations come to see and treat carbon as any other national resource.”
That wake-up call has been prompted in part by a growing awareness that, as of now, governments and local stakeholders might receive a small slice of the revenues made by foreign project developers, according to Pablo Fernandez, CEO of Ecosecurities, a project developer and investor.
For example, most of the €100 million in proceeds from one of the biggest offset projects, a forest-protection site called Kariba in Zimbabwe, were accrued by the Swiss developer South Pole and its Guernsey partner Carbon Green Investments.
In Mexico, BP paid rural villagers a small fraction of the market value of the credits generated on their forest land, according to a 2022 Bloomberg Green investigation.
Carbon credits have high value in emerging markets
At the same time, carbon credits have renewed value in emerging markets.
Under the 1997 Kyoto Protocol, wealthy countries had emissions targets and could buy credits from projects in developing countries to meet them.
The 2015 Paris Agreement introduced targets for all developing countries, effective from 2020.
This means governments now view the units not just as a source of revenue but as a tool to meet their international obligations.
“The Paris Agreement acknowledges emissions as sovereign liabilities,” said Finn O’Muircheartaigh, Director of Policy and Markets at BeZero Carbon.
“Countries are now recognizing they also have sovereign assets, which are their ability to reduce or sequester carbon.”
The new sovereign trading market is being set up by the United Nations, with an accounting framework that prevents the same credit from being applied to more than one country’s climate goal.
That means countries will have to decide if and when credits produced within their borders will be made available for use by others and when they’ll be used for national goals.
Though the details are still fine-tuned, some countries have already begun to strike deals to ensure supply.
More than three-quarters of countries say they plan to or are considering using the UN carbon market to meet their targets, known as “nationally determined contributions.”
“Adjusting the amount of supply going to NDCs, rather than offset markets, has big implications,” according to BNEF, which predicts the voluntary offset market could reach $1 trillion by 2037.
Forest offsets provide great opportunities, but they do have detractors
Carbon offsets are highly contentious amongst environmentalists.
Earlier this year, the Guardian broke a story exposing Verra, the world’s largest carbon credit certifier, which had allowed emitters to continue polluting while investing in questionable carbon offsetting projects.
The Climate Commission warned the NZ government about its ‘boom and bust’ emissions trading scheme – with a reliance on over planting radiata-pine at the expense of reducing emissions.
The warning comes in the commission’s draft advice for the government’s second emissions reduction plan, which will cover 2026 to 2030 and form part of the roadmap for how the government will meet its net-zero carbon goal by 2050.
“The current pathway we are on seems to reward sequestration in forests above gross emissions reduction,” says commission chair Dr Rob Carr.
“If we are on that pathway, the commission believes we will not meet the target,
“Every time we offset an emission with another hectare of forest, we are committing New Zealanders to maintain that forest cover for a very long time, so we are removing choices, options and opportunities from the future.”
Emission and product leakage – a long-term threat to productive forestry?
Depending on the type of carbon offset, there is a significant risk of emission or product leakage.
Emission leakage occurs when carbon captured in one area, such as through avoided deforestation, leads to carbon release elsewhere due to increased harvesting to meet demand.
On the other hand, product leakage occurs when forest carbon sequestration promotes using more carbon-intensive substitutes, like steel or concrete.
The possibility of carbon-intensive multinational companies buying forests to offset their emissions poses a risk to the future of timber supply.
In theory, emitters could purchase productive forests and use credits to offset steel or concrete production – replacing a low embodied carbon product with a higher embodied carbon alternative. In this case, carbon sequestration would support a substitute product.
To achieve this, it’s important to question if the carbon offset leads to a noticeable reduction in emissions compared to regular business activities; a concept called ‘additionality.’
Wood Central recently spoke with a well-informed source about the trend of cash-rich emitters acquiring land to fulfill their carbon commitments.
The source suggested that major mining or petroleum companies could purchase large-scale forest plantation estates, effectively locking up precious resources for carbon abatement.
In this instance, the economics of managing forests for carbon sequestration could outpace productive forestry.
In recent years, Royal Dutch Shell has acquired extensive forests in Spain and the Netherlands and plans to expand globally.
Shell aims to increase its use of nature-based carbon offsets, including forestation projects, to 120 million tonnes annually by 2030.
According to Reuters, Shell’s CEO, Ben van Beurden, envisions its nature-based offset solution portfolio growing to 300 million tonnes annually. It currently invests around $100 million a year into the sector and is looking to sell Carbon, Capture, and Storage (CCS) technology to other emitters.
The move comes as a growing number of oil companies invest in ways to store carbon dioxide, often called “carbon offset” schemes, because these can offset a company’s inherent emissions.
According to the Financial Times, Italian oil group Eni recently announced it will plant large forests in Africa to help mop up its emissions. At the same time, BP has invested in forest offset schemes in the US and China.
In August 2020, Shell Australia acquired Select Carbon, investing in forests, grasslands, wetlands, and various natural ecosystems worldwide to reduce emissions, capture CO2, and support biodiversity and local communities.
Select Carbon manages a diverse portfolio of over 70 projects, covering approximately 9 million ha of ecosystems and agricultural land, including Australia’s vast rangelands.
The carbon credits generated by Select Carbon’s projects are sold through the Australian government’s Emissions Reduction Fund and other markets, providing an additional revenue source for farmers and landowners.
However, the question remains: do forest carbon offsets pose a long-term threat to the future supply of productive forests?
- Join the discussion and contribute to Wood Central today.
