Carbon finance is helping conserve an area larger than all the forests of the Democratic Republic of Congo, but all that progress could disappear if no one steps up to buy the offsets being generated. In this series, Ecosystem Marketplace digs into the demand side of forest carbon. Who are the buyers? What motivates them? How do they go about investing in forests?
2 December 2013 | It might not be immediately apparent why insurance giant Allianz, retailer Marks & Spencer, energy company Eneco, airline Qantas or Brazilian cosmetics producer Natura Cosméticos would invest their money in forest carbon offsets – sometimes from projects on the other side of the world – but they do.
Our most recent State of the Forest Carbon Markets Report tracked 19.7 million tonnes of forest carbon offsets that companies had purchased voluntarily. These companies are not required by law to reduce carbon emissions, yet they purchase enough offsets to cancel out the annual emissions of a small country like Honduras or Niger.
Their motivations are myriad, but the common denominator, according to the report, is that on some level these companies connect with the idea that forest ecosystems are some of the last remaining large-scale carbon sinks, and investing in those sinks is essential to efforts to mitigate climate change.
“People have a lot of faith that forests are a viable part of the solution,” says Jena Thompson Meredith, Director of Corporate Partnerships at The Conservation Fund. “It’s a holistic vision when we’re starting to think about all of climate change.”
That vision may be holistic, but it’s not universal: the same report found that tens of millions of forest carbon offsets went unsold last year, and it warned that scores of projects underway now may be forced to scale back if demand doesn’t materialize. To solve this problem, we must understand demand.
Introducing the case studies
In an attempt to pull back the curtain on what inspires private companies to invest in forest carbon projects, we caught up with four companies that have taken a leadership role in their respective sectors. Here’s a taste of what’s to come:
- Macmillan: Low-Carbon Courage How a publisher rejects greenwashing and goes on to slash emissions along its entire supply chain, and then offset only the ‘last tonne.
- Interface: Making Carpets Cool How an early-mover in the carbon marketplace has used offsetting on the way toward a ‘closed loop’ carpet manufacturing process, and how sustainability gives them a marketing edge.
- National Geographic: Investing in Critical Canopies How a conservation-focused non-profit uses offsetting to reinvest in critical landscapes, tying carbon sequestration with protection of habitat for threatened flora and fauna.
- DHL: Shipping Neutral How an international logistics company engages customers around valuing emissions-free shipping – and why they’ve come around to forestry.
While not a scientifically representative sample of forest carbon buyers, these four case studies tell stories of corporate offsetting that resonate with boardrooms and sustainability teams all over the world. They are stories about grappling with big questions – questions like what are our annual emissions? that appear innocuous but are iceberg-like in their hidden complexity. And they are stories about connections – unlikely links between carpets and trees, CEOs and smallholders – that are being forged for the first time.
Voluntary buyers paid an average price of $7.7/tonne for forest carbon offsets last year – a $1.8/tonne price premium on average transaction prices across all project types. Why are companies willing to pay more for emissions reductions that come from forests versus, for instance, landfill methane capture or destruction of ozone-depleting substances?
There are as many answers to this question as there are offset transactions, but oftentimes it has to do with the many benefits forest projects offer beyond carbon sequestration – from providing new or alternative livelihoods to a local community to maintaining water quality for downstream drinkers to conserving habitat for spider monkeys. Those co-benefits have both inherent and market value. In 2012, offsets certified as both Verified Carbon Standard (VCS) and Climate, Community, and Biodiversity Standards transacted at 30 cents more per tonne than those that earned only VCS. A full 61% of transacted forest carbon offsets were certified not just for carbon sequestration, but also other environmental and social gains.
The price premium may also have to do with the fact that forestry projects are relatively easy to explain to the un-indoctrinated. For retailers that want to communicate climate benefits to companies, and for companies that want to relay the importance of offset purchases to customers, tangibility is key. People like to be able to imagine their dollars making a difference on a specific landscape, and forest projects are ‘photogenic’ in that way.
“Forestry is the most intuitive of all offset categories: you plant a tree and you sequester carbon. [Conceptually], it’s pretty straightforward,” explains Mark LaCroix, a Senior Sustainability Officer at The Carbon Neutral Company. “But there’s a lot of complexity with ensuring that. Lots of corporate entities are making very specific claims regarding carbon reductions based on these offsets, so we need to make sure an offset we sell today is still an offset tomorrow.”
For many companies, forest carbon offsets are part of a ‘portfolio’ approach to offsetting that includes both lower-priced ‘commodity’ offsets – such as those from wind energy projects – as well as ‘boutique’ offsets from forestry. This gives companies the ability to support some higher-impact (and therefore higher-priced) projects while still purchasing the volume of offsets they need to meet their emissions reduction target, and staying within budget.
But another important reason companies invest in forests over other offset types is because though offset purchases are voluntary, they are not necessarily altruistic. As climate change impacts hit companies’ supply chains and operations, investments in natural infrastructure and carbon sequestration begin to make business sense. The top buyer sectors other than the carbon market itself – energy, agriculture & forestry, transportation, and food & beverages – have something in common: these sectors in particular depend on place-specific natural resources and forest-based ecosystem services (e.g. clean water) to do what they do.
Offsetting in Context
Our State of reports survey the project developers and retailers that transact offsets to buyers. These sellers are constantly taking the pulse of buyers, so they have a good sense of their motivations – and reservations – about investing in forest projects. But talking to the buyers themselves offers a higher-res picture. For most corporations offsetting their emissions voluntarily, the offsets they purchase are just one piece of a larger sustainability strategy.
In most cases, a forest offset transaction is the result of a complex decision-making process that involves quantifying emissions, setting reduction targets, and then figuring out how to meet those goals – through energy efficiency measures; switches to renewable energy or less carbon-intensive fuel; streamlining production processes or supply chains; rethinking product design; engaging employees around energy use and travel; and/or offset purchases. Even the offset purchase itself is the final chapter of a choose-your-own-adventure story full of decision points about standards, project types, contract terms, volume and value. For many companies, creating a sustainability strategy requires a hard look in the mirror for the first time.
“The real challenge for industry is to radically change how they perceive the environment and climate change and then to take courageous action to correct what they can about their processes that improves their situation,” said Bill Barry, a sustainability consultant for publisher Macmillan, which has a goal of reducing its emissions 65% by 2019.
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