Carbon traders bet on California redwoods

Peter Henderson, Reuters 21 Aug 09;

GARCIA RIVER FOREST, California (Reuters) - A stand of young redwoods, survivors in what was once a magnificent forest of towering giants, could play a small part of the battle to slow global warming -- and forms part of an emerging market.

The trees, which trap quantities of the carbon dioxide that is warming the planet, are sold as living carbon traps or "sinks" rather than cut for timber, a model that could go global. But the prospect of a worldwide market could also attract hustlers eager to make a quick buck without making a difference to the planet.

"It's easy to game it," said forest owner Chris Kelly of the developing forest carbon market. "We just have to figure out how to do it right."

Deforestation accounts for a fifth of greenhouse gas emissions that are heating up the earth so slowing its pace is a relatively cheap way to limit global warming. That's why preserving forests is a top agenda item of international climate change talks scheduled for December.

But devising a fair way to reward those who own and control forests for their true contribution to the atmosphere has proved difficult and complicated.

The United States, which has lagged in addressing global warming, leads the world in developing a market for forests that soak up carbon dioxide emissions. The Garcia forest presents a test case of how the system could work -- or fail.

"When we talk about deforestation, we've already done it here," said Louis Blumberg of the Nature Conservancy, which helped plan carbon sales at the Garcia project. Some 95 percent of old-growth redwoods are already gone in California, and the state must better manage what has grown back.

"We moved carbon out of the ground and the trees into the air. We need to hit the reset button," said Blumberg, who directs the environmental group's California Climate Change project.

With its towering redwoods and gurgling streams, the Garcia forest looks wild and healthy -- but it's a shadow of what it once was. Six-foot-(2-meter) wide stumps hint at its former grandeur a century or two ago.

Ninety percent of the wood it once held is already gone. If managed like most commercial forests, it would probably stay at roughly its current size. However, the non-profit owners have sharply reduced timber harvesting and are making some of their profits by selling carbon credits, so the forest may recover, at least partially.

Climate change can be slowed in two ways:

-- cutting emissions from industry, automobiles, airplanes and other tools of industrial society, or

-- soaking up more emissions once they are in the air.

For forest projects to succeed, the world must find a way to stop emerging economies like Brazil and Indonesia from cutting down tropical jungles. U.S.-based projects, which focus on growing bigger trees and holding more carbon, could help a little but cannot in themselves solve the problem.

But the U.S. plan could offer a direction and an example for others to follow.

VOLUNTARY MARKET IS THE START

Under a cap-and-trade system, the main global mechanism for addressing climate change, polluters face limits on how much they can emit. To meet those limits, they can manage their own emissions, buy credits from companies who emit less than their cap, or buy offsets.

Forests are not part of the biggest regulated carbon market, in Europe, but California's law to open a regulated market for carbon pollution in 2012 includes them, and so does a federal plan being debated in the U.S. Congress.

A voluntary market has sprung up in the meantime.

"These projects take time. It's not the kind of thing that you can turn a switch and you've got millions of acres of forests sequestering CO2," said Eron Bloomgarden, president of environmental markets at Equator LLC, a for-profit venture creating forest carbon projects.

California forest projects fetch $5 to $12 a CO2 ton, more than in other parts of the world and other types of sequestration, because they meet California's developing rules, the closest thing yet to regulations for an official forest market, said Lenny Hochschild, a managing director at environmental brokerage Evolution Markets.

For-profit forest owners increasingly are being tempted to sell carbon, joining non-profits pioneers, he said.

"If you incentivize folks to clean up the environment, they'll clean up the environment," he said.

Voluntary deals and trade on platforms like the Chicago Climate Exchange doubled last year to more than $700 million, according to Ecosystem Marketplace and New Carbon Finance.

Forest credits were a fraction of that. But a U.S. Environmental Protection Agency analysis of a draft national plan projects more than 100 million tons of forest offsets in 2015, rising to well over 400 million in 2050.

Nations gathering in December in Copenhagen to negotiate a follow-up to the Kyoto climate change treaty could introduce forest credit trade to cut developing nation deforestation.

THE GARCIA EXAMPLE

Timber and carbon prices both have plummeted since the Conservation Fund bought Garcia with grant money and a low interest loan, but the carbon credit sales have been enough to pay interest on the loan.

The largest tree in the world by volume, a California redwood, is nearly 275 feet high with a diameter of more than 17 feet, testimony to what might grow on Garcia -- in 1,000 years. But the danger to the Garcia project, and investors, is vivid: charred trunks of trees destroyed in a fire last year. Very little wood was lost because redwoods are flame resistant and ridges acted as fire breaks. The experience was enough to make Kelly wary of projects in regions with less hearty trees.

The Conservation Fund keeps a reserve of credits in case of disaster, and the state is debating whether to create a pool of credits that could be doled out in emergencies. Something like that will be needed for a fool-proof, disaster-proof system.

At some point coal plants may be buying forest offsets by the millions of tons, Kelly said. "You want to make sure that if they lose half that forest, there is some makeup of the balance," he said.

(Reporting by Peter Henderson, Editing by Alan Elsner)

FACTBOX: How forest carbon offsets work
Reuters 21 Aug 09;

(Reuters) - The United States lags in efforts to curb greenhouse gas emissions but is a world leader in developing standards to give credits to forest owners who manage their trees to maximize carbon storage.

Here is how forests could be included in a California, U.S. or international system for trading pollution credits:

* Globally, forest credits are seen as a way to save threatened tropical forests, but in California, where 95 percent of old growth redwoods are gone, the goal is growing back what's been lost and managing young forests.

* Debate over the mechanics of trading forest carbon has obstructed creation of a global system.

California voluntary trade in forest credits is spurred by plans to start a regulated carbon trade market in 2012, which would include forest credits. Constantly developing rules for the voluntary market are expected to apply to the regulated one.

* Generally forests could be a tradable type of "offset" to greenhouse gas emissions, since they suck up carbon dioxide. Under a cap-and-trade system, polluters face limits on how much they can emit. To meet those limits they can manage their own emissions, buy credits from companies who emit less than their cap, and buy offsets.

* Creating a reliable forest offset is complex. The carbon saved must be additional to what would otherwise be, quantifiable, permanent, verifiable and enforceable. Enforceability over decades is fraught in a world where many nations have fuzzy rules of forest ownership, governments rise and fall, and legal systems vary in strength.

In California there is a debate about who is responsible when a forest goes up in smoke, for instance -- the forest owner or the credit holder. Consensus is forming around requiring forest owners to keep reserves that collectively form an insurance pool for any forest which is devastated.

(Reporting by Peter Henderson, Editing by Alan Elsner)