Carbon Offsets and Forestry – How the Market for Innovation is Shaping up.
In 2019, 15 countries proposed legislation to have net-zero emissions by 2050. In total, 24 out of 28 EU countries and key US states such as California have all made similar commitments towards carbon neutrality. Corporates have also made bold commitments to cut carbon. In January 2020, Microsoft pledged to go retrospectively Carbon Negative (back to its founding in 1975) via seeding new forests alongside soil carbon sequestration, direct air capture and BECCS. These commitments are only possible via carbon offsets as countries and corporations cannot mitigate all emission.
Research from the Global Center on Adaptation in 2019 and the UK Committee on Climate Change in 2018 highlighted the previously underestimated ability of our natural systems to protect us against climate change. As a result, nature-based climate solutions have come increasingly into focus in the last year.
Most corporate offset schemes have appeared to feature forest protection or reforestation projects for offsetting their carbon. Questions remain:
- Are carbon offsets via forestry projects effective?
- Can they scale and how is technology assisting this market?
For high emitters such as airlines and oil & gas companies, hydrocarbons are central to their business models and are difficult to abate. In theory, offset programs can help these companies reduce their net emissions:
- March 2019: Eni SpA committed to eliminating all carbon dioxide emissions from its’ oil and gas exploration and production operations by 2030 by planting forests.
- October 2019: BP invested $5 million in the forest carbon offset firm Finite Carbon.
- October 2019: Shell launched carbon offset scheme for fuel customers using its’ fuel card. Offsets will be purchased via forestry projects across the world including the Cordillera Azul National Park Project in Peru, the Katingan Peatland Restoration and the Conservation Project in Indonesia and GreenTrees Reforestation Project in the USA.
- October 2019: British Airways committed to offset all domestic flights from 2020, this follows a commitment to become carbon neutral by 2050.
The global carbon offset market grew by 34% to $215.1 billion in 2019 after growing
56% in 2018Figure 1 shows an example of a carbon offset lifecycle from Issuance to retirement.
There are two types of carbon offset markets, the Compliance and the Voluntary Carbon Market (VCM). The Compliance market exists for countries and companies which are bound by law to reduce their carbon emissions and is regulated by international carbon reduction schemes, most notably the Clean Development Mechanism regulated by the Kyoto Protocol. The compliance market dwarfs the VCM, In 2016 the VCM was valued at $191 million compared to the $52 billion of the total Carbon Market.
When a project developer is ready to market a carbon offset, they take the issuance to either a broker, retailer or straight to the end buyer. This can be difficult as there is no one marketplace for selling offsets. Offsets can be traded between retailers and brokers. However, once the offsets are purchased by the end buyer who wishes to claim the offset impact, the offset is then retired. When an offset is retired it is recorded on a registry and cannot be resold. This is to avoid double counting of the offsets impact.
Growth of Forestry Projects
The VCM and Afforestation and Reforestation (A/R) offset volume are both growing. In 2018, issuances of A/R offsets transactions rose by 342% and remains the most popular VCM offset. This popularity rise is attributed to media focus on tree-planting offsets and that A/R projects are easier to explain to buyers. Cheaper offset projects exist with the average A/R offset price at $3.2 in 2018, compared to $1.7 for renewable energy projects. However, Forestry has numerous social and environmental co-benefits other than just carbon sequestration e.g. ecosystem and social heritage protection. For corporates, the CSR element is usually the primary reason for investing in Forestry projects, therefore the higher price point isn’t a deterrent.
The rise in consumer demand and new business models are facilitating A/F project issuances and non-formal forest protection. Innovation is being developed to autonomously measure carbon sequestration, optimize tree survival and encourage sustained corporate engagement.
- In October 2019, Finite Carbon raised $5 million in a Series A round with exclusive investment from BP. We spoke to Sean Carney, President of Finite Carbon, who described how the company supplies voluntary and compliance carbon offsets via forestry projects in the US, split 60:40 retrospectively. Customers who buy compliance credits are exclusively oil and gas companies and the VCM customers include Fortune 500 companies and high emitters like airlines and shipping companies. Carney added that Finite Carbon A/F projects are smaller parts of larger portfolios, as forestry credits are expensive, and the A/F market is nascent. With the sharp rise in investment in the VCM and forestry, he warns of a lag between supply and demand as it takes 6-12 months to source long term commitments from landowners.
- Land Life Company develops biodegradable tree incubators and provides carbon offsets via A/F projects. The company also use drones, AI and geospatial data to optimize tree planting and survival. In March 2019, they entered a joint venture with Shell to launch a data-driven reforestation project in Spain, planting and monitoring over 300 hectares of degraded land. We spoke with Jurriaan Ruys, co-founder and CEO of Land Life Company who expressed similar challenges to Finite Carbon with high forestry prices, charging in the range of $16 – $27 per ton of carbon and lag time. However, Land Life re-invests 65% of the money they receive from companies back into the community they are working with. As such, Land Life is maximizing the social co-benefits of the projects they are developing.
- UK based, CLevel. also provide carbon offsets via A/F projects, but act as retailers partnering with project developer CommuniTree. Current customers include the Body Shop, British Gas and Ecover. CLevel have also partnered with Flight search tool SkyScanner to pilot a flight offset program.We spoke to Darren Howarth, CEO of C-Level who said, “Globally, these kinds of projects receive less than 3% of climate funding even though they could deliver a third of the emissions reductions needed to hit the 1.5 degrees Paris targets. One reason is due to a fear that the emission reductions they deliver risk being reversed.” Speaking about the risk of wildfires, Howarth said that forests require on going forestry maintenance and collaboration with local communities to mitigate risks.
Better Place Forests provide tree protection services as an alternative to cemeteries. They also partner with a reforestation project developer One Tree Planted, who boast planting trees for $1, to offer offset for cremation. In June 2019, Better Place Forests raised $12 million in a Series A round from undisclosed investors and will soon be raising a Series B round. They have over 100ha of protected land, over 1000 hectares under control and have planted ~100,000 trees together with One Tree Planted. Unlike the other retailers, Better Place Forests don’t offer certified carbon credits. In criticism of the current carbon credit system CEO, Sandy Gibson said, “Over 70% of the cost of tree planting goes to the legal and monitoring fees to obtain a carbon credit, you could plant 10 times the number of trees we are without the formal credits.” Better Place Forests opt for a mass planting method and plan to develop a VCM accreditation methodology based on the law of averages over exact science. “An obsession with perfect, is costing us good and I believe forestry is pretty good,” Gibson added.
Technology is helping to reduce the cost of monitoring carbon. Cleantech 50 to Watch company Pachama has developed satellite and LiDAR-based carbon storage estimation software. This will enable remote calculations of carbon sequestration and so encourage forest conservation and expansion. In January 2019, Pachama received $150K in seed funding from the Y Combinator, accelerator.
For emitters where carbon is integral to their operations, offsets offer an opportunity to engage in climate action. However, offsets should not act as a free pass for inaction. Corporates may risk green washing if they don’t couple offsets with actions to mitigate emissions as well. Additionally, carbon offsets only account for CO2 emissions ignoring the other harmful greenhouse gases including Methane, Nitrous Oxide and Fluorinated Gases.
For forestry projects, wildfires also present a significant risk, especially with rising temperatures and increasing developments in high risk areas. Stay posted for an insight on wildfires and forestry in the coming months.
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