Carbon finance can, in theory, help small landowners around the world improve the way they manage their forests by providing that little bit of extra income that can make sustainable forest management pay. In practice,l high transaction costs and low carbon prices have limited uptake – but that’s changing, thanks to new technologies and finance strategies.
18 October 2019 | The Wong family of Peru amassed a fortune building up a chain of supermarkets, but much of their wealth today is in real estate – including the 220,000-hectare (543,400-acre) Madeacre forestry concession that family’s late patriarch, Erasmo Wong, cobbled together in the province of Tahuamanu.
He purchased the land with the aim of managing it sustainably, and his family has honored that objective: The entire estate is managed in accordance with the rules of the Forest Stewardship Council (FSC). Among other things, that means the company practices reduced-impact logging (RIL), which involves carefully harvesting only mature trees that can be chopped down without damaging those around it.
It’s an ecological success story, but the massive Madeacre and the smaller concessions around it are also a microcosm of the challenges to scaling up environmental markets around the world – a key focus of this month’s Environmental Markets and Finance Summit, which takes place in Washington, DC from the 29th through the 31st of October.
The Challenge of Scaling Up
“Some of our neighboring concessions are just 5,000 hectares,” says Nelson Kroll, Madeacre’s forestry manager. “They’d be operating at a loss under FSC, so they don’t do it.”
The problem is partly scale. RIL is a tedious and labor-intensive approach, while FSC certification adds in an equally tedious layer of documentation. This drives the cost of production up by about 35 percent, Kroll says, while the premium the company gets for FSC-certified wood is just 5 percent.
“We do FSC because the Wongs have all the money they need, and they’re not hoarders,” he says. “Plus, it’s a massive concession, so we have the scale to actually make a profit, even with the added costs.”
From a purely business perspective, FSC doesn’t pay, even for Madeacre, and certainly not for the smaller concessions around it – despite the fact that FSC issued a streamlined but still daunting Small and Low-Intensity Managed Forests (SLIMF) methodology more than a decade ago. SLIMF reduces some of the burden for smaller landowners, but uptake has been disappointing.
In theory, this is where carbon finance could play a role. After all, if those small concessionaires could afford to practice RIC, they’d be avoiding the collateral destruction of trees, which means they’d be reducing their greenhouse gas emissions – and by as much as 50 percent, according to The Nature Conservancy (TNC). If the only way they can afford to avoid the collateral destruction of trees is to get paid for the avoided emissions, they meet the “additionality” requirement of carbon markets.
The Verified Carbon Standard has recognized offsets generated under RIL for almost five years, but Kroll says today’s carbon prices are just too low, and the cost of carbon accounting too high, to make the practice viable.
Finance and Technology
The problem is a global one, but several companies and NGOs are experimenting with ways of scaling up financing mechanisms that support sustainable practices, in both developing countries like Peru and developed countries like the United States.
One company active in the United States is the Forestland Group, which has been experimenting with carbon finance for nearly a decade. It recently participated in a massive experiment spearheaded by the Dogwood Alliance to see if it was possible to make FSC viable by generating RIL offsets under California’s cap-and-trade program. The conclusion: yes, carbon finance can cover the cost of FSC certification, but only for landowners whose forests are at least 2,600 acres in size, and only if the carbon price is $11.50 or higher.
That’s roughly twice the average price identified in Ecosystem Marketplace’s last State of Voluntary Carbon Markets report, but Forestland has, nonetheless, embarked on a plan to expand its carbon finance area from 9,700 acres to 240,000 acres in the Southern Appalachians. Roughly 8 percent of private forestlands are registered in California’s cap-and-trade program, and forest offsets have delivered more than 75 percent of the mitigation offsets to-date.
Australia-based New Forests has also been working with US landowners through its Forest Carbon Partners program, which channels investment into a developing a portfolio of carbon projects on third-party land. They’ve worked with 18 landowners to date, covering an area about the same size as the Madeacre concession.
By working with multiple landowners, both companies aim to bring efficiencies to carbon project development, enabling landowners of varying sizes to access the market and bringing down the costs of developing and verifying carbon projects.
“Essentially, a challenge for smaller forests for carbon has been the same as accessing FSC markets for small forest owners – they lack the economies of scale,” says MaryKate Bullen, who is Director of Sustainability and Communications for New Forests. “We’ve brought these efficiencies about through operating an aggregated portfolio of carbon projects, enabling streamlined processes and development of expertise and skills in the procedures of project management for carbon over time.”
She also sees costs dropping as remote sensing technologies finally deliver on their potential. Although no technologies can yet replace on-the-ground sampling, for example, Silvia Terra’s CruiseBoost uses remote sensing data to determine the exact number of samples needed to generate reliable carbon accounting in a given terrain. In some cases, the number of samples is reduced by half, and the cost drops accordingly.
Ultimately, however, the cost of carbon must simply rise higher than it is now. A recent paper in Nature Climate Change concluded that forests would remove 5.7 billion additional tons of carbon dioxide from the atmosphere by 2050 at a carbon price of $20 per ton, and an additional 15.1 billion tons at a price of $50 per ton prices that are still far below the $75 per ton figure that the International Monetary Fund says we need by 2030 if we’re to meet the targets set out in the Paris Agreement, and that pale in the comparison to the cost of doing nothing.
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