Carbon Projects and Working Forest Conservation in California

• Publication year: 2020
• Author: Jess R. Phelps and David P. Hoffer

Carbon Projects and Working Forest Conservation in California

Jess R. Phelps and David P. Hoffer

Jess Phelps is Associate General Counsel for the Lyme Timber Company. Prior to joining Lyme, Jess worked at a leading Vermont law firm in its real estate and environmental practice groups and as an attorney for the USDA's Office of General Counsel, Natural Resources and Environment Division in Washington D.C.*

David Hoffer is General Counsel and President of Lyme Timber Company, manages Lyme Timber's legal affairs, and oversees the company's ecosystem services and conservation investment strategies. Before joining Lyme in 2011, he served as an investment banker, a technology executive, a practicing lawyer, and an entrepreneur. He holds a JD, MBA, and AB from Harvard University.*

I. INTRODUCTION

In 2006, California passed Assembly Bill 32, the Global Warming Solutions Act, which set ambitious goals for the state to reduce carbon emissions with the aim of dramatically curtailing the levels and impacts of anthropocentric-driven climate change.¹ In 2011, the state added a cap-and-trade component to its efforts to reduce carbon emissions, which placed an upper bound on emissions in California, and required regulated emitters to comply with these reduction mandates.²

As part of this cap-and-trade structure, California's system allows regulated emitters to purchase a limited number of offsets to meet a portion of their overall reduction requirements.³ Although there are a number of protocols for creating various types of offsets, forestry-based California carbon offsets ("forestry-based CCOs") have accounted for the majority of offsets produced.⁴ Generally speaking, forestry-based CCOs require a forest landowner to restrict harvesting to sequester carbon.⁵ These harvest restrictions can have additional environmental benefits beyond the targeted carbon sequestration goals, such as preventing forest fragmentation and reducing the development threat to carbon-encumbered properties.⁶ As a result, many conservationists view forestry-based CCOs as an increasingly important source of funding for securing the protection of working lands.⁷

This article provides a working summary of how forestry-based CCOs, and a similar and complementary conservation tool, working forest conservation easements ("WFCE"), operate. This article then briefly examines how these tools might work in concert to maximize both carbon and conservation gains in California and beyond.⁸

II. WHAT IS A FORESTRY-BASED CCO?

A forestry-based CCO is essentially a long-term commitment by a forest landowner to forego timber harvesting, at least in part, and to instead sequester carbon.⁹ In exchange for the owner's commitment (typically one hundred years in California's regulated market and forty years in the voluntary market), the forest owner will receive a number of forestry-based CCOs commensurate with the volume of carbon sequestered, which the owner can sell to third parties who wish to offset their carbon impacts.¹⁰ Currently, there are two ways that forestry-based CCOs are generated and sold by forest landowners: through the voluntary market or through regulatory/compliance markets.¹¹

A. The Voluntary Market

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The voluntary market functions where there are no legal requirements for the purchaser who is offsetting emissions to do so.¹² An example of this is the Vermont Land Trust's recent facilitation of the sale of carbon offsets from aggregated forest landowners in northern Vermont to Amazon, to meet a portion of the company's voluntary climate and sustainability-related goals.¹³ Other efforts by individuals and industry to use the voluntary market to offset their carbon impacts include buying carbon credits to offset the negative climate effects of air travel.¹⁴ While the voluntary market is becoming an important source of funding for climate mitigation efforts, particularly in light of increasing corporate sustainability goals, this article will focus on the regulated market in California.¹⁵

B. The California Regulatory/Compliance Market

The regulatory or compliance markets are designed to fulfill a legal obligation, and involve the selling of carbon offsets to regulated emitters.¹⁶ An example of this is the regulatory market created by California's cap-and-trade system.¹⁷ California's regulatory market generally imposes more stringent requirements than the voluntary market, which have historically resulted in higher prices per compliance offset created than in the voluntary market.¹⁸ In the California market, an emitter is currently allowed to use offsets to meet 8 percent of its total emission reduction requirements.¹⁹ This percentage will change in 2021 (for the period from 2021—2025) and allow emitters to use offsets to account for 4 percent of their emissions; these percentages will then go back up to 6 percent for the period from 2026-2030.²⁰ Legislative changes to the cap-and-trade program in 2017 now require that half of an emitter's offsets must be sourced from projects that have a direct California environmental benefit.²¹ This increasing focus on California-specific environmental benefits is likely to create an additional premium for projects determined to have a direct environmental benefit to the state versus other forestry-based CCOs, such as protecting a forest in Maine.

Though there are a variety of different protocols for creating California offsets, ranging from urban forestry initiatives to agricultural methane capture and destruction projects, this article focuses on forestry-based CCOs.²² In California, there are currently three ways to create a forestry-based CCO: (1) afforestation/reforestation projects (restoring forest cover); (2) avoided conversion projects (preventing forested land from being transitioned to a more intensive land use); and (3) improved forest management ("IFM") projects (increasing carbon sequestration on an existing forest by restricting harvest levels above a region's common practice).²³ IFM projects are the most prevalent to date as many forest landowners have been willing to comply with harvest limitations to generate incremental revenue from carbon sequestration.²⁴ Rather than explain the mechanics of creating a carbon project through the ultimate issuance of offsets from the California Air Resources Board ("ARB"), this article focuses on the environmental attributes of such projects. It is also worth briefly mentioning that, to date, the transaction costs associated with developing a regulatory carbon project tend to shift the market's focus towards larger projects (typically requiring over 5,000 acres to be considered viable).²⁵

C. Attributes of a Forestry-Based CCO

There are three primary components of a forestry-based CCO project: (a) maintaining or increasing carbon stocks during the lifecycle of the carbon project; (b) ensuring sustainable harvesting of the property; and (c) monitoring and verifying ongoing compliance with ARB's requirements.

1. Maintaining the Carbon Stocks/Benefits

In maintaining the sequestered carbon, the primary objective is ensuring the durability of the carbon emission reductions secured by a carbon offset, which is secured in a few ways.²⁶ California carbon projects have a one hundred-year duration.²⁷ Not surprisingly, ARB has a strong commitment to ensuring that the carbon benefits are actually secured for this period.²⁸ One of the primary ways that ARB seeks to ensure project permanence is through the creation of a buffer pool.²⁹ When a new carbon project is approved by ARB and the offsets are issued, the project proponent is required to contribute a certain percentage of its offsets to the buffer pool, typically 10 percent to 20 percent of the total offsets.³⁰ This buffer pool is designed to account for the unintentional loss of carbon sequestration benefits, such as loss due to wildfire, or to account for the loss of forest carbon benefits through no fault of the project proponent.³¹ As the risk of such losses in a carbon project declines, credits in the buffer pool are released and sold.³² Similarly, there is also a mechanism for dealing with intentional reversals, where the project proponent takes intentional action that causes loss of carbon sequestration benefits or sells the underlying land to a new owner who does not wish to continue with the project. These actions result in penalties, requiring the owner to replace the carbon offsets that have been lost.³³

2. Ensuring and Monitoring Sustainable Harvesting

A forestry-based CCO, for projects where commercial logging will continue, specifically requires a forest management plan that meets certain criteria, including certification under SFI^®, ATFS^®, or FSC^® third-party standards, or meeting other similar requirements, and which limits, for certain forests, even-aged harvests to fewer than forty contiguous acres on the protected forestland.³⁴ These harvesting restrictions dovetail with the...