U.S. Climate Legislation & Forestry Offsets

Implications for Forest Landowners, Investors & Regulated Entities

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UPDATE, MAY 17, 2010: Senators Kerry and Lieberman released the American Power Act, an energy and jobs bill that requires greenhouse gas emissions reductions for the sectors that are covered by emission limits, starting in 2013. The New Forests Policy Note below details the role of forestry in the 2009 climate bills, and New Forests will provide a summary review of the 2010 Kerry-Lieberman bill in the coming days.

On September 30, 2009 U.S. Senators John Kerry and Barbara Boxer introduced the Clean Energy Jobs and American Power Act, a comprehensive energy and climate bill that has many similarities to the American Clean Energy and Security Act (the Waxman-Markey bill) that was passed on June 26, 2009 by a margin of 2 votes in the House of Representatives. The Kerry-Boxer bill will be marked up by Senate committees and debated before being brought to a vote. While the health care debate has occupied Congress in recent months, it is uncertain if Kerry-Boxer will reach a floor vote prior the next meeting of Parties to the United Nations Framework Convention on Climate Change in December of 2009. Many hope that the bill’s strong stance on climate change mitigation and design of a cap-and-trade system will lead to U.S. action and strengthen international climate negotiations. If the bill passes, the House and Senate versions (Waxman-Markey and Kerry-Boxer, respectively) would enter the conference process to produce a final bill could be ultimately signed into law. The Senate bill indicates the program would eventually cover 75% of greenhouse gas emissions sources in the U.S., with an aggregate greenhouse gas emissions target of 20% below 2005 levels in 2020 and an ultimate goal of 83% reductions below 2005 levels by 2050. As the domestic legislative process moves forward, this New Forests Policy Note outlines key facets of the possible U.S. cap-and-trade program relevant to forestry offsets, highlighting implications for forest landowners, investors and regulated entities interested in long-term offset supply options.

Cap-and-Trade and the Role of Offsets

Under the Kerry-Boxer cap-and-trade scheme, which is called the Global Warming Pollution Reduction and Investment Program, each covered entity (e.g. some energy companies and manufacturers) must surrender a volume of “allowances” and/or “offset credits” equivalent to its annual greenhouse gas emissions starting in 2013. The total volume of allowances in the system “cap” emissions below business-as-usual activities, and the cap decreases over time. Offsets can be generated from projects that reduce emissions in sectors that are not regulated under the cap. Offsets serve as a cost containment mechanism, allowing entities to achieve system compliance even if reducing emissions on site becomes prohibitively costly. It does not matter atmospherically whether an emission reduction came from a power plant or from avoided deforestation (non-regulated), making it possible to achieve the same climatic benefit at a lower cost.

The Kerry-Boxer bill allows for offsets from domestic and international sources; however, after 2018 international offsets surrendered for compliance are counted at a ratio of 1.25 tons of international emissions reductions to 1 ton of domestic reductions. Prior to 2018, domestic and international offsets are equivalent in terms of compliance accounting. Domestic forestry offsets are explicitly included in the legislation, and REDD (Reduced Emissions from Degradation and Deforestation) in developing countries is a critical component of the bill. In both the House and Senate bills, total allowable offset use is capped at 2 billion tons per annum; Kerry-Boxer would limit the role of international offsets to one quarter of total possible offset demand, whereas Waxman-Markey proposed limiting international offsets to one half of that total. If there is a dearth of available domestic offsets, the EPA will have authority to increase the allowable international offsets by up to 750 million credits to 1.25 billion tons. Based on a study of the House’s Waxman-Markey bill, initial demand for offsets is anticipated to outstrip supply (1). Thus, there is likely to be an early-mover advantage to investors in forestry offset projects and to regulated entities that source forestry offsets in anticipation of their compliance obligations.

International REDD Offsets

International REDD offset credits would be regulated by the EPA, in consultation with Department of State and US Agency for International Development (USAID). The EPA is required to ensure that the rules for generating REDD credits are consistent with requirements established through the United Nations Framework Convention on Climate Change (UNFCCC) processes. UNFCCC negotiations scheduled for December 2009 will specifically address the issue of REDD financing and linkages to market mechanisms, potentially laying the groundwork for a global market for REDD credits (2).

Following enactment of a finalized bill, the EPA has two years to develop regulations stipulating how REDD activities will generate offset credits. The EPA must define this for three activity types: national-level, state/province-level and project-level. Only certain countries – those emitting less than 1% of global GHG emissions and less than 3% of global emissions from land use change and forestry – may generate credits from project activities; other credits will be generated by nations and eligible subnational areas reducing deforestation as measured against a national or regional deforestation baseline. In the latter, it will be the responsibility of host countries to determine how carbon revenue is distributed domestically.

Domestic Forestry Offsets

Regulations for domestic forestry offsets under Kerry-Boxer will be established by the EPA or US Department of Agriculture within one year of the bill’s enactment. Both the House and Senate bills list project types that the implementing agency should consider; forest offsets are included on that list and are almost certain to be eligible offset projects under federal regulations. During the Senate mark up process, vested interests in agricultural and forestry may lead to strengthening of provisions for domestic forestry and agricultural offsets. The potential forestry offset types that must be considered include: afforestation/reforestation; improved forest management, including harvested wood products carbon accounting; avoided forest conversion; and reduced deforestation. Under the early offset provisions of the legislation, offsets issued under certain programs (such as the California Climate Action Reserve (CAR) and the Regional Greenhouse Gas Initiative (RGGI)) after January 1, 2009 would be eligible for compliance offset use for a period of three years after enactment or until federal offset regulations are completed.

Opportunities

Forest landowners should soon begin evaluating how they might benefit from these extensive forestry offset provisions. New Forests is already seeing increased demand for CAR credits based on the early action offset language in the bill, and landowners can now evaluate investment returns from CAR forest project offset activities. New Forests works with investors, regulated entities and landowners to evaluate and develop forest carbon offset projects domestically and internationally. Those evaluating forest carbon investment opportunities should always consider:

• Opportunity costs and per tonne carbon pricing for reduced harvesting regimes, reforestation or conservation
• Cash flows from carbon sales based on future pricing scenarios and expected demand
• Routes to market and hedging policy risk through diversified investment options

For a more detailed discussion or to discuss specific opportunities, please contact:
Marisa Meizlish
Director
New Forests Advisory Inc
+1-415-321-3301
mmeizlish@newforests.com.au

Footnotes

1 Congressional Budget Office (June 5, 2009) “H.R. 2454 American Clean Energy and Security Act of 2009: As ordered reported by the House Committee on Energy and Commerce on May 21, 2009”
2 American Clean Energy and Security Act §743(e)(1)(F)
Note: Commentary is current as of October 2009. Reproduction is permitted with proper referencing to New Forests Advisory Inc, San Francisco, California, USA