Carbon Credits

1
Carbon Credits

• Does money really grow on trees?

2
Overview

• A little background
• What is carbon sequestration anyway?
• How is this converted to a carbon credit?
• Putting a value on ecosystem services.
• Just how big will the check be?

3
So where did all this start?

• The United National Framework Convention on
  Climate Change, commonly known as the Earth
  Summit, held in Rio de Janeiro in 1992 was where
  it all started.

4
Climate Change

• Article 2 of the convention directly addressed
  the need to stabilize greenhouse gas emissions
  at a level that would prevent dangerous
  anthropogenic (human caused) interference with
  the climate system.

5
Kyoto Protocols???

• As a part of United National Framework Convention
  on Climate Change the Kyoto Protocol was
  established to create policies and measures to
  reduce greenhouse gas emissions.

6
Greenhouse Gases

• Greenhouse gases, which include water vapor
  (H2O), ozone (O3), carbon dioxide (CO2), methane
  (CH4), and nitrous oxide (N20), are able to
  absorb and re-emit infrared radiation, while not
  blocking visible light.

7
Back to the Kyoto Protocols

• The Kyoto Protocol requires industrialized
  nations to reduce their greenhouse gas emission
  to approximately 95 percent of their 1990 levels
  by 2008-2012.

8
Cap and Trade

• Countries that are unable to achieve this goal
  through direct reduction of emissions are allowed
  to compensate by buying credits from countries
  that have under used their emission allowance, by
  investing in cleaner energy technology abroad
  or by putting money into forestry or soil
  conservation.

9
Why is America the lone holdout?

• Under Kyoto, industrialized countries agreed to
  reduce their collective GHG emissions by 5.2
  compared to the year 1990.
• National limitations range from 8 reductions for
  the European Union and some others to 7 for the
  United States, 6 for Japan, and 0 for Russia.

10
Carbon Sequestration

• One of the main greenhouse gases of concern is
  carbon dioxide.
• The burning of fossil fuels for energy, heating,
  and transportation has led to elevated levels of
  carbon dioxide in the atmosphere.

11
Carbon Sequestration

• Through the process of photosynthesis trees
  remove and use carbon dioxide to create roots,
  branches, trunks and leaves.

12
Forests Store Carbon

• Trees are a potential solution to help slow
  global climate change by removing carbon dioxide
  from the atmosphere and storing (sequestering) it
  as part of the permanent structure of the tree.

13
What does that mean to woodland owners?

• Through market mechanisms woodland owners have
  the opportunity to sell the CO2 that their trees
  sequester to polluters who need/want to offset
  their CO2 emissions.

14
Who is interested in buying these credits from
you?

• Over-the-Counter - unmonitored
• Sale of carbon credits between two parties
• Governor Schwarzenegger
• Al Gore
• Chicago Climate Exchange - monitored
• Green Companies
• Regulated companies under cap and trade offset
  policies (future)

15
Carbon Offset Suppliers (over-the-counter)

• There are many carbon offset suppliers in the
  voluntary markets. These organizations link
  consumers seeking to offset their emissions with
  opportunities provided by different types of
  project.

16
How Carbon Offset Suppliers Work

• Calculate Your Carbon Emissions
• Use a carbon calculator to figure out your carbon
  footprint
• Offset your everyday activities
• Identify a specific activity which you wish to
  offset.
• Wedding
• Trip
• Offset Your Carbon Emissions.
• Based on your calculation you contribute money to
  support carbon-reducing projects such as
  renewable energy, energy efficiency and
  reforestation projects.
• Which one you support is your choice

17
Cap and Trade

• Members agree to reduce the amount of greenhouse
  gases they release into the atmosphere by a
  percentage. That limit is the cap.
• Trading takes place when members release less
  than their limit. That leaves them with a
  surplus of emission credits.

18
Lets see how this works

• One of the more popular carbon calculators out
  there can be found at
• http//www.carbonify.com/carbon-calculator.htm
• Investing in projects
• http//www.carbonfund.org/site/pages/individuals/c
  ategory/Carbon20Calculators/

19
Chicago Climate Exchange

• The Chicago Climate Exchange is the worlds first
  voluntary, legally binding, rules-based
  greenhouse gas emission reduction and trading
  system.
• It is a voluntary system because the United
  States has not ratified the Kyoto Protocols and
  is not bound by them.
• Therefore, there are no legal requirements that
  would force industry to reduce their greenhouse
  gas emissions.

20
Chicago Climate Exchange

• The Chicago Climate Exchange is like a stock
  exchange for pollution.
• It provides a market for businesses to trade on
  the release and capture of carbon dioxide and
  other greenhouse gases.

21
Eligible Offset Projects through CCX

• Agricultural Methane Emission Offsets
• Agricultural Soil Carbon Offsets
• Energy Efficiency and Fuel Switching Emission
  Offsets
• Forestry Carbon Emission Offsets
• Landfill Methane Emission Offsets
• Offsets from Renewable Energy
• Coal Mine Methane Emission Offsets
• Rangeland Soil Carbon Management Offsets
• Ozone Depleting Substance Destruction Emission
  Offsets

22
Where is the greatest potential?

• The activities with the highest potential For
  storing carbon are afforestation, conversion of
  cropland to perennial grasses, and switching from
  conventional tillage to conservation tillage
  (particularly no-till)

23
Basic CCX Specifications for Soil Carbon
Management Offset

• Conservation Tillage
• Minimum five year contractual commitment to
  continuous no-till or striptill conservation
  tillage) on enrolled acres.
• Tillage practice must leave at least two-thirds
  of the soil surface undisturbed and at least
  two-thirds of the residue remaining on the field
  surface.
• CCX CFI contracts are issued for conservation
  tillage at a rate between 0.2 and 0.6 metric tons
  CO2 per acre per year.
• Carbon sequestration projects must be enrolled
  through a CCX registered Offset Aggregator.
• All projects subject to independent verification.

24
Chicago Climate Exchange

• The commodity traded at Chicago Climate Exchange
  is the Carbon Financial Instrument (CFI)
  contract.
• Each contract represents 100 metric tons of CO2
  equivalents.

25
Aggregators

• Most landowners will not have an individual
  project large enough to qualify for direct
  trading on the CCX.
• This is where Offset Aggregators come in to play.
  
• Offset aggregators are entities that serve as the
  administrative representative, on behalf of
  offset project owners, gathering multiple offset
  generating projects into a single Carbon
  Financial Instrument contract.

26
Aggregators

• Offset Aggregators function like a broker.
• They act as a bridge between the landowner with a
  small project and the Chicago Climate Exchange
  serving the needs of both parties.
• Aggregators, as the name implies, work to solicit
  forestry projects that are not large enough to
  qualify for a Carbon Financial Instrument on
  their own and bundle them together with other
  projects.

27
Aggregators

• The offset aggregator is responsible to the
  Chicago Climate Exchange to
• administer the project contract,
• verify that the project information is factual
  and correct,
• insure that the project meets Chicago Climate
  Exchange rules and regulations,
• make payments to the landowners, and
• coordinate with Chicago Climate Exchange
  verifiers.

28
The Carbon Credit Market Process

• Contract
• Worksheets
• Supporting documents

Enrollment
Sale
Certification
Verification
Registration

29
How is owning forest land converted to a Carbon
Credit?

• Three types of forest carbon sequestration offset
  projects.
• Tree planting
• Sustainable forest management practices.
• Long-lived wood products (housing and furniture)

30
Details of Eligible CCX Offsets

• Forestry Offsets (XFOs)
• Afforestation
• Planting trees on land previously used for crops
  or pasture, after January 1, 1990.
• 
  
• Managed Forests
• A stand of trees, several stands, or an entire
  property that is managed sustainably.

31
Afforestation

• Contracts for these types of projects are based
  on Carbon Accumulation Tables provided by the
  Chicago Climate Exchange that landowners use to
  calculate carbon sequestration by their tree
  planting project.

32
Sustainable Forest Management Projects

• You have to show what steps you have taken to
  increase the growth of your trees (aboveground,
  woody biomass) achieved through the practice of
  sustainable forest management that would not have
  occurred anyway by simply letting nature takes
  its course.

33
Managed Forestry credits are earned on the annual
projected net carbon accumulation
CO2 sequestered harvest long-lived wood
product credit
CO2


-
34
Long-lived Wood Products

• Production of long-lived wood products (flooring,
  windows, furniture, etc.)
• Based on expected percent of the product in use
  or in landfills at the end of 100 years
• Details forthcoming

35
CCX and Forestry Offset Projects

• Afforestation
• Trees planted after January 1, 1990 on land
  formerly (10 years) not in forest.
• Land protected for long-term forest management
  (conservation easement or contract)
• Demonstrate Sustainable Forest Management
• FSC, SFI, American Tree Farm System
• No harvesting (including thinning).
• Plantations that have been thinned must be
  enrolled as a Forest Management project.
• Carbon credits for above- and below-ground
  biomass Credits available for 2003-2010
• Projects need verification by CCX-approved
  verifier

36
All types of forest carbon credits require

• Forest land certification
• FSC, SFI or Tree Farm

37
Documents Needed for XFO Enrollment

• Forestry Offset Contract (XFO contract)
• Forestry Offset Enrollment Worksheet(s)
• FSA, Forest Service or NRCS maps of enrolled
  areas
• Copies of supporting documents (i.e., Planting
  records, CRP contracts, forestry management plan,
  etc.)
• Evidence of ownership document (e.g., copy of
  deed)
• Supporting documents for direct measurement
  calculations (if applicable)
• Signed Letter of Intent to maintain forest carbon
  stock beyond 2010
• A voided check from your checking account so that
  we can set up electronic transfer of funds

38
Just how big will the check be???

• The following example is based on a 40 acre red
  pine plantation planted in 1995.
• The estimated metric tons (mT) of carbon dioxide
  sequestered per acre per year are from the
  Chicago Climate Exchanges Reforestation Carbon
  Accumulation Tables for dense plantings (gt250
  stems per acre) of red pine in the Lake States.
• This calculation is based on a contract that is
  enrolled in 2008 through the Chicago Climate
  Exchanges guaranteed contract period ending in
  2010.

39
Carbon Accumulation Table

• Regional Estimates of Tree Annual Carbon
  Accumulation in Live trees and Soil Organic
  Carbon for Afforestation (Metric tons CO2/ acre/
  age of tree)

40
Step one

• Calculate how many metric tons of carbon will be
  sequestered by your plantation each year.
• The Chicago Climate Exchanges Reforestation
  Carbon Accumulation Tables estimates that 11 to
  15 year-old red pine trees planted at a density
  of at least 250 trees per acre will sequester
  approximately 2.56 metric tons of CO2 per acre
  per year.
• 40 acres x 2.56 mT/acre 102.4 mT

41
Step two

• Subtract the total that will go into the reserve
  pool.
• 102.4 mT less 20 percent for the reserve pool
  20.5 mT/year goes to the Reserve Pool
• 81.9 mT/year are available for annual payments

42
Reserve Pool???

• The Chicago Climate Exchange reserves 20 percent
  of carbon sequestration offsets as an insurance
  policy against unexpected losses of carbon from
  your property.
• a drought, insect or disease outbreaks, or a
  natural disaster like a fire, flood, or windstorm
  could damage or destroy your woodlands and
  release the carbon stored in your trees.
• If this should happen then the Exchange deducts
  credits from the Reserve Pool to compensate for
  these losses.
• If your losses exhaust what you have set aside in
  the reserve pool then you may not receive any
  additional payments until your forest grows to
  the point where the carbon sequestered is equal
  to that when you enrolled.

43
Step three

• Multiply the total carbon sequestered available
  by the market rate for carbon credits. Carbon
  credits were trading for 2.45 per metric ton in
  January 2008.
• 81.9 mT/year x 2.45/mT 200.66/year
• (So far this year carbon prices have fluctuated
  between the current value of 1.20 per metric ton
  to as high as 7.40 in June)

44
Step four

• Subtract the Chicago Climate Exchange and
  Aggregator fees.
• 200.66 less the Aggregator fee of 10 percent
  180.59/year
• 180.59 less the CCX trading fee of 0.20 per
  metric ton (81.9 mT x 0.20/mT) 164.21/year
• 164.21 is your annual payment.

45
Step five

• Now multiply this by two to calculate your income
  for the two years of the contract.
• 164.21/year for 2 years 328.43

46
Finally

• At the end of the contract, you are eligible to
  recover any unused pool credits.
• In this example, 2 years of pool credits equals
  41 mT x 2.45 100.45
• Less fees of 18.25
• Final payment 82.20

47
What does it all add up to?

• The total value of a contract for a 40-acre red
  pine plantation in the Lake States signed for two
  years, assuming that nothing changes, would be
  worth a total of 410.63 or 5.13 per acre per
  year.

48
CCX and Forestry Offset Projects

• Sustainable Forest Management
• Needs to be based on CCX-approved forest
  inventory done the year of project initiation or
  registration.
• Each project must be CCX-verified, at project
  cost.
• Includes entire forest management area.
• Forest must be certified sustainable by ATFS
  group certification, SFI, FSC, or other
  recognized system.
• Owner grants reasonable access for audits,
  verification, etc.
• Protocol for harvested wood products under
  development. Should be ready soon.

49
What about Sustainable Forest Management Projects

• This is a far more complex process.
• First, you will need to hire a consulting
  forester who understand how to perform a forest
  inventory and use growth and yield models to
  estimate forest productivity
• Next, you need to have a timber inventory
  completed for your property.
• Finally, the consulting will have to determine
  the total amount of carbon sequestered through
  management as opposed to what would have occurred
  naturally (business as usual)
• Once you know this number then the process is the
  same as described before.

50
AgraGate Forest Service Provider Agreement

• Wisconsin land owners who meet the requirements
  outlined below and who complete enrollment in the
  AgraGate XFO Sustainably Managed Forest program
  and sign an XFO contract prior to December 15,
  2008 will not be required to pay for their
  baseline cruise until their first XFO payment.
   The cost of the initial baseline cruise will be
  deducted from their first net proceeds payment.
• The land owner will need to have a sustainable
  management plan certified by a CCX-approved
  entity (i.e., ATFS, SFI, FSC), have applied for a
  certified management plan, or be enrolled in the
  Wisconsin MFL program.
• The program will only apply to land in Wisconsin.
  
• Enrolled stands of forest land must be 80 acres
  or more.
• AgraGate will pay the Forest Service Provider
  (FSP) per sampled plot.
• AgraGate will pay the FSP within 30 days of
  AgraGate receiving all the required documentation
  for the XFO contract including cruise data,
  applicants completed enrollment forms and signed
  contract, and all other required documents.
  AgraGate will not pay for travel costs associated
  with cruises.

51
AgraGate contract overviewEligibility for
Managed Forestry

• A baseline cruise will be done at the beginning
  of the contract by an approved Forest Service
  Provider (FSP).
• A thinning / harvesting cruise midway through the
  contract and a true up cruise will be conducted
  at the end of the contract.
• Contract holders will be paid based upon their
  projected net credit contribution to the
  respective forestry pool over the life of the
  contract.
• Projected net credit contribution over the life
  of the contract will be determined by
• Growth and yield model annual carbon
  sequestration projections.
• Land owner estimate of thinning/harvesting during
  life of contract.
• Projected disposition of harvest timber

52
Eligibility for Managed Forestry

• Participants will need to indicate their
  projected thinning/harvesting events during the
  course of the contract as well as timber
  disposition expected based of baseline cruise.
• Payments to participants will follow carbon
  sequestration patterns of the pool and not of the
  individual participants project.
• Net Change in Carbon Stocks must involve a
  model-based accounting approach. (FVS model)
• A managed forest carbon contract may not work for
  those who plan to clear-cut during the contract
  period

53
Total payment based on net CO2 Sequestration
Thinning/Harvest
Payment based on projected net CO2 sequestration
Long-lived credit
Baseline inventory
54
Not everyone agrees.

• There is enormous disagreement about managed
  forest projects.
• The environmental community does not believe that
  woodland owners should receive any payment since
  their trees do this anyway.
• A middle road thinks that only the additional
  growth achieved via management should be used for
  carbon offsets
• Known as the Business As Usual model
• Some think that all growth is fair game

55
Cost and Responsibility of Landowner (Client)
working with AgraGate

• AgraGate will front the cost of the baseline
  timber cruise. The landowner will be responsible
  for the formulation of forest management plan,
  and providing map or aerial photo.
• Provide any maps or aerial photos, deed, survey,
  etc. that may help or speed up process.
• Sign 15-year carbon offset agreement.
• Abide by prescriptions of forest management plan
  and perform procedures at the time scheduled.
• Reimburse AgraGate for all payments if does not
  abide by forest management plan, the 15-year
  agreement, or exits program before end of
  agreement.

56
Example of Carbon Stored in a natural Hardwood
Stand

• 40-year old hardwood natural stand
• No treatment for 15 year agreement
• Approx. 1.4 tons carbon on site index of 90
  approx. 5.90 per acre per year _at_ 5.00/ton of
  carbon
• Example where landowner costs deducted.
• Site indexes are on a 50-year basis, not 25.
• Example assumes carbon prices at 5.00 per ton.
• The above tonnage rates are approximate rates
  change with different stand factors.

57
Participants are paid on the net proceeds from
the sale of their carbon credits

• Sustainably Managed Forest example
• Assume forest stand averages 1.4 credits
  (conservative number) per acre per year
• Gross revenue-
• 1.4 credits/acre/year x 5.00/credit
  7.00/acre/year
• Costs-
• Aggregator fee 10 x 7.000.70/acre/year
• CCX costs 0.20/credit x 1.4
  credits/acre/year 0.28/acre/year
• Verifying costs (estimate) 0.20/credit x 1.4
  credits/acre/year 0.28/acre/year
• Forest Service Provider costs 10 x
  (7.00-0.70-0.28-0.28) 0.57/acre/year
• Net Proceeds-
• 7.00 Gross revenue (0.70 - 0.28 - 0.28 -
  0.57) Costs 5.17/acre/year to
  landowner (client)

58
Summary of Wisconsin Cruises (Natural stands)

• Mixed stand of white ash, sugar maple, red maple
  and eastern hemlock (Site Index- RM 65) 2.95 MT/
  acre per year
• Mixed stand predominate quaking aspen (Site Index
  QA 80) 2.66 MT/acre per year
• Mixed stand of sugar maple, quaking aspen, white
  ash, red maple and red oak (Site Index- SM 61)
  4.27 MT/ acre per year (young stand with high
  trees per acre)
• Mixed stand of red oak, white oak, basswood,
  quaking aspen, (Site Index- RO 65) 2.25 MT/ acre
  per year
• Mixed stand of white ash, basswood, sugar maple,
  and elms (Site Index- 69) 3.03 MT/ acre per year

59
Carbon MarketsWhat does the future hold???

• US has a voluntary market with low prices
  (1.00 -7.50/mt of C)
• European markets are more robust (22/mt of C)
• WHY?

60
Things may soon be changing

• President-elect Obama has said that he will
  ratify the Kyoto Accords.
• If that happens then U.S. Market will no longer
  be voluntary but mandatory like the European
  Market and prices should rise

61
Credit where credit is due

• The material for this presentation was gathered
  from the Chicago Climate Exchange website located
  online at http//www.chicagoclimatex.com/
• AgraGate Climate Credit Corporation online at
  http//www.agragate.com/
• and from the Center for Integrated Natural
  Resources and Agricultural Managements
  publication A Landowners Guide to Carbon
  Sequestration Credits. WWW document. URL
  http//www.cinram.umn.edu/publications/landowners_
  guide1.5-1.pdf

62
Questions

• Make sure you have finished speaking before your
  audience has finished listening.
• Dorothy Sarnoff