Emerging markets for ecosystem services

Outline

• Ecosystem services & emerging markets

• State of carbon cap and trade markets

• What’s the deal with forest carbon?

• Ecotrust Forests: an example of a forest carbon strategy

• Parting thoughts

Ecosystem service markets in forests

• Carbon sequestration/storage• Habitat banking for forest-dependent species

and habitats (Pacific salmon, spotted owl, oak woodland, floodplain forest)

• Wetland banking (forested wetlands)• Flood control/water storage• Water quality: temperature reduction• Scenic vistas • Passive and active recreational opportunities• Moderate temperature and rainfall• Wild mushroom and plant harvesting…• while providing for timber, pulp, fuel, and

other commercial harvest opportunities, and jobs, management and ownership opportunities for millions

Integrated production of commodities and ecosystem services, Australia

Source: David Brand, New Forests

The early markets

Transferable fishing quotas SOx and NOx trading Mitigation banking

Carbon market: cap & trade components

Enabling legislation Kyoto Protocol & national counterparts

Cap or floor (baseline) 1990 Greenhouse Gas emissions +/-

Regulated entity (buyer) Utilities & others

Supplying entity (seller) Clean energy, efficiency, sequestration

Distribution of allowance Free distribution to capped sectors, moving towards auctions

Service area Global

Unit of trade One metric ton of carbon dioxide equivalent (CO2e)

Trading platform European Union Environmental Trading System, for example

Enforcing agency Designated national agencies, international accord

Market shapers Secondary markets, futures, options, verifiers, appraisers, insurers

Size of global carbon market

EU market projected to be dwarfed by U.S. market, estimated to reach $1 trillion by 2020

Largest distribution of property rights since settlement of West!

Projected growth of carbon market

Regional & state efforts proliferating

WCI at a glance

Timeline Launch January 1, 2012

Goal Reduce emissions 15% below 2005 levels by 2020

Size 1 billion tons when fully implemented ($20–40 billion)

Scope electricity sector, large stationary sources, fossil fuel producers, transportation (50–80% of emissions)

Allocation 10–25% minimum auction

Registry The Climate Registry

Compliance 3 years

Offsets Maximum of 49% of reductions shall come from offsets

Preference for offsets generated within WCI

Initial project types: forestry (affor/refor; forest management, avoided defor;) livestock manure management; methane; soil carbon

Role of forests in WCI• Forests iconic, and carbon rich

• Limited opportunities for afforestation and reforestation

• All desire carbon to help forestry stay in forests, but must solve leakage issues

• Most relevant role is in forest management projects: enhancing carbon through changes such as longer rotations.

• Sweet spot is finding carbon project locations that maximize delivery of co-benefits and minimize opportunity costs: steep slopes, for example.

• No guarantee of significant role for forest carbon in regional and federal trading system unless we find quality solutions together.

What’s the deal with forest carbon?

Forest carbon is very attractive: • Very important: deforestation/forest degradation responsible for

25% of global emissions (same as US, world’s largest polluter).• Rich co-benefits• Easy to understand the connection

But also very challenging:• Baseline (sequestration/emissions that would have occurred without

carbon project may be hard to determine)• Forests can burn or decline, leading to loss of carbon (permanence)• Forest conservation/reduction in logging can just shift activities

elsewhere (leakage)• For these reasons, forest carbon very controversial, but global

importance of forest carbon demands a resolution.

Policy Rationale for Offsets

• Quality reductions: IF DONE RIGHT, equally effective in reducing atmospheric GHG levels as on-site mitigation

• Lower cost: Offsets are only used if lower cost– Lowers climate change mitigation cost to society

– More money for everything else:

• Food, shelter, health, security, recreation

• Technology bridge: Allows reductions now while new low-carbon technology is developed

Rationale against offsets

• Need to create pressure for reductions from primary emitters

• Need to fundamentally change our behavior, not pay others to clean up our messes (especially people with few economic options)

• Offsets have quality issues

• Moral objection to creating license to pollute

Case study: Ecotrust Forests LLCCurrent status

• Raise capital into open, perpetual fund (currently $30 million under management)

• Acquire and manage forestland

• Manage forests for longer rotations, structural complexity & diversity

• Generate competitive returns for investors through full range of forest products and services: timber, non-timber, ecosystem services, recreation

• Make strategic acquisitions in high-conservation value watersheds, and restore health and productivity

• Generate jobs and wealth for local residents

Carbon Stockby Forest Type and Stand Age

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

0 5 15 25 35 45 55 65 75 85 95 105 115 125

Years After Clearcut

Me

tric

To

ns

CO

2e

pe

r A

cre

Douglas-fir, Pacific NW W side

Hemlock-Sitka Spruce, Pacific NW W side

Douglas-fir, Northern Rockies

Lodgepole Pine, Northern Rockies

Maple-Beech-Birch, Lakes States

Maple-Beech-Birch, Northeast

Loblolly-Shortleaf Pine, Southeast

Oak-Hickory, Southcentral

Data from 2006 accounting guidelines, 1605(b) program Graph by EcoFor 2006

Long rotation forestry results in 2.5x more standing volume

Additional carbon value per acre on PNW westside forests

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

60 70 80

Rotation Age in Years

$/acre $5/ton

$10/ton

$25/ton

Ecosystem services are key

Source: Binkley, Beebe, New & von Hagen, 2006

Ecotrust Forests carbon transaction

• Methodology under review by Voluntary Carbon Standard

• Sources of additional carbon above baseline:– extended rotations

– expanded riparian reserves

– carbon reserves on steep and unstable slopes above salmon streams

• Evaluating financial and tax implications of carbon credit sales for different classes of investors (exempt and non-exempt)

Parting thoughts

• New conversation: more than a zero sum game

• Market solutions demand more rigor in delivering clear quantifiable benefits

• Early ecosystem service markets messy and full of drama, but that goes with the territory

• Not a panacea, but a powerful and occasionally wonderful new tool

• Creation of new class of entrepreneurs is a powerful co-benefit