California Carbon Offsets and Working Forest Conservation Easements.

• Author: Phelps, Jess R.

INTRODUCTION

Over the past several decades, a consensus has been growing regarding the urgent need to substantially reduce anthropocentric greenhouse gas (GHG) emissions in order to limit the environmental, economic, and social damage associated with climate change and a warming planet. (1) Within the United States, California has taken a leadership role in this area with the 2006 passage of Assembly Bill 32, the Global Warming Solutions Act. (2) This legislation was intended to reduce the state's greenhouse gas emissions to 1990 levels by 2020 (a nearly 30 percent statewide drop). (3) In 2010-11, the California Air Resources Board (ARB) adopted a cap-and-trade program to place an upper bound on GHG emissions in the state and to allow for trading of allowances (4) as well as the use of offsets within this newly created carbon market. (5) Offset projects enable regulated entities to meet a portion of their reduction goals by purchasing environmental credits that have been created to absorb (or offset) this marginal amount of emissions through a variety of market-based environmental mechanisms. (6) The creation of a mandatory carbon market in California provides an ongoing demand for carbon offsets over a sustained period as GHG emitters in the state work to meet ambitious statutory GHG reduction goals. (7) To this end, the California carbon market is laying the critical groundwork for learning what works in using offsets effectively as part of an overall strategy to efficiently meet targeted climate-related objectives.

From California's experience, important lessons can be learned about how to design offsets that work in parallel with other conservation finance tools. In particular, forestry-based California carbon offsets (CCOs), projects designed to sequester carbon on the working landscape, (8) have natural linkages with working forest conservation easements, which are generally structured to protect these lands in perpetuity while ensuring the use of sustainable forestry practices and preventing forest fragmentation. (9) Both tools align well with sustainable timberland investment strategies, which are similarly designed to encourage conservation-minded management of forest resources over a longer-term horizon while providing a return on this investment. (10) Given the scale of many conservation projects, a variety of conservation finance tools are increasingly required to make these larger transactions possible, giving timberland investors a significant role in making the economics of these projects work. (11)

There are, however, barriers that currently limit the opportunities for sustainability-focused timberland investors interested in carrying out forestry-based CCO projects to pursue the conveyance of working forest conservation easements. (12) Some of these barriers are regulatory, such as ensuring additionality (benefit beyond what is provided by the working forest conservation easement), but can complicate efforts to layer these tools. (13) Other challenges are transactional, particularly the considerable cost of quantifying and verifying the carbon sequestered by a working forest. (14) These costs can hopefully be reduced over time as ARB and other participants in the California carbon market learn how to more efficiently and effectively establish and document the benefits associated with forestry-based CCO projects. (15)

For timberland investors pursuing sustainability-related objectives, overcoming the roadblocks related to the integrated use of forestry-based CCOs and working forest conservation easements is important since layering these tools has strong potential to provide both climate-related benefits as well as important landscape protection and conservation benefits. (16) To explore this issue, this Article first provides a working overview of the forestry-based offsets currently allowed within the California carbon market. Second, this Article explores the role of timberland investors in these projects and focuses on several significant barriers preventing working lands conservation easements from working in better tandem with forestry-based CCOs. Ultimately, the efficient creation of forestry-based CCOs on lands secured by working forest conservation easements may provide California with a unique opportunity to develop forestry-based CCOs as part of its overall strategy to achieve its GHG emission reduction goals while also securing the future of the working landscape and forest economy in California and beyond. (17)

1. UNDERSTANDING CCOS

   1. Carbon Offsets and CCOs Generally

      The idea behind offsets in environmental law is to balance public policy objectives (here, the reduction/elimination of GHG emissions) against costs imposed on industrial firms subject to regulation. (18) Requiring an emitter to instantly bring its preexisting operations into compliance with an environmental regulation may be cost prohibitive, but there may be market-driven tools, such as the trading of allowances and offsets, that would allow for substantial reductions to be achieved more quickly at a lower per unit cost. (19) California's cap-and-trade system expressly recognizes these considerations and allows emitters to use offsets to meet a portion of their required reductions in emissions--up to 8 percent of the entity's total compliance goal. (20) This amount, however, has been subsequently reduced to 4 percent of covered emissions from 2021-25, and to 6 percent from 2026-30; half of these offsets must directly provide air and water quality benefits within California (or be state-based projects). (21)

      California has developed protocols that must be followed for the various forms of CCOs. (22) To date, ARB has adopted six offset protocols: (1) ozone depleting substances; (2) agricultural methane gas destruction; (3) urban forestry; (4) mine methane capture; (5) rice cultivation; and (6) forestry-based projects. (23) As of March 2019, ARB has issued over 150 million offset credits under these protocols. (24) The U.S. forestry-based protocol has been the most frequently utilized, accounting for nearly 120 million of the 150 million total CCOs created as of March 2019. (25)

   2. Forestry-Based CCOs

      Within California's U.S. forestry-based subcategory, there are three distinct paths for qualifying a CCO: (1) afforestation/reforestation (restoring forests to denuded land); (2) avoided conversion (preventing land from being developed or converted away from forest use); and (3) improved forest management (projects designed to maintain or increase carbon stocks relative to the land's baseline upon enrollment) (IFM projects). (26) Each recognizes the role that forests can play in providing ecosystem services as a form of carbon sink. (27) To establish an offset project under the Forestry-Based Protocol, which allows for the sale of CCOs, "projects must be on forests that occur naturally in a region, have forest management above the standards required by law, and create climate gains that endure for at least 100 years." (28) All forest offset projects are effectively longterm carbon supply agreements between the forest owner, offset buyer, and the state of California to (1) maintain or increase project carbon stocking levels present at the time of project commencement, (2) demonstrate sustainable forestry products as defined by California's compliance offset protocol for U.S. forests, and (3) monitor and independently audit project compliance with all requirements. (29)

      For forestry-based CCO projects, the first step is generally to conduct a timber inventory, which can be labor-intensive and costly, but critical for modeling and establishing a forest's carbon baseline. (30) Based on this field work and modeling, a project plan will need to be developed, approved by ARB, and submitted to an approved carbon registry. (31) It is estimated that at 2019 prices for CCOs, a minimum of 5,000 acres is needed to make a project cost-effective from an investment standpoint, given the substantial project and compliance costs. (32) One offset credit is created for every metric ton of atmospheric CO2 that is sequestered, which can then be directly sold to an emitter to meet its compliance obligations. (33)

      One of ARB's primary objectives is ensuring that offset projects have lasting impacts, and a few key concepts help to explain how ARB achieves this goal. First, the Forestry-Based Protocol require that the GHG emission reductions be permanent, which is defined as lasting at least one hundred years. (34) Relatedly, forestry-based projects have a defined project life of one hundred years during which the forestry-based project must continue to monitor, report, and verify offset data. (35) There are three potential exceptions to this minimum time commitment: (1) the project terminates due to an unintentional reversal (causing the carbon stocks to fall below the baseline carbon levels); (2) the project is sold to an entity that does not take over the project's responsibilities and commitments (which will result in credits being retired and trigger a replacement obligation); and (3) the project is voluntarily terminated (which also results in retired credits). (36) Overall, these three concepts (permanence, project life, and minimum time commitment) collectively work to ensure longlasting carbon reduction goals are achieved while preserving some flexibility to address future uncertainty.

      As far as working-forest conservation easements are concerned, for avoided conversion projects, ARB requires the landowner to enter a qualified conservation easement that provides ARB with the right to enforce the easement against the landowner if the carbon goals are not met. (37) For IFM or afforestation projects, recording a qualified conservation easement may help reduce project risk and, in turn, the level of required contribution to the buffer/reserve pool. (38) To ensure that the required levels of GHG reductions are met over time, a...