Integrating Carbon Offset Revenuein Acquisition Strategy

LTA Rally 2016Minneapolis Workshop

October 30, 2016

Presenters

• Dick Kempka, Chief Commercial Officer, Memphis, TN

• Mik McKee, Senior Analyst Forestry, Portland, OR

• Zach Barbane, Manager of Domestic Services, ecoPartners

1. Intro to Climate Trust

2. State of Carbon Markets

• Voluntary

• Compliance

3. How to Identify Opportunities for Land Trusts

4. Project Examples

5. ecoPartners and aggregation

6. TCT’s pilot fund

Presentation Outline

Photo Credit: Courtesy of Appalachian Mountain Club

• Non-profit Organization – 1997

• Committed to projects – Nearly $33M

• Land-based Offsets – forestry, grasslands, and livestock methane

• 3.3M tons GHG reduced

• Over 40 projects and 100+ collaborative partnerships

• Compliance and voluntary programs

Mission: The Climate Trust mobilizes conservationfinance to maximize environmental returns

Forest Project Experience• Appalachian Mountain Club (ME) – IFM

• Downeast Lakes Land Trust (ME) – IFM

• City of Astoria (OR) – IFM

• Western Rivers Conservancy/Yurok Tribe (CA) – IFM

• Afognak Island (AK) – IFM

• Middleton Place (SC) – Avoided Conversion

• Pipeline:

• Several Avoided Conversion and Improved Forest Management Projects being considered

• Five or six on east and west coast

• NGOs, TIMOs, private landowners

1 ton carbon = 1 metric tonne of carbon dioxide equivalents 1 acre forest = 1-3/tons/acre/year

Voluntary Market

Voluntary carbon market – an entity (company, individual, or other “emitter”) that volunteers to offset its emissions by purchasing carbon credits that reduce the amount of carbon in the atmosphere

Top voluntary standards include:• Climate Action Reserve (CAR) – CA predecessor to ARB• American Carbon Registry (ACR) – Division of Winrock International• Verified Carbon Standard (VCS) – Non-profit in Washington DC• The Gold Standard – Certification standard globally for carbon

offset projects

Voluntary Market Reports: Ecosystems Marketplace and Carbon Disclosure Project

Voluntary Market

State of the Voluntary Carbon Markets 2016• In 2015 the volume of voluntary offset transactions increased by 10% as buyers

contracted 84.1 MtCO2e

• Total market value fell 7% to $278M due to average price drop of 14% to $3.30 ton

• Buyer preferences for project types, standards, vintage (offset age), and location determine price

• Wind offsets were the most sought after type (12.7M), forestry (REDD+) was second, but retained the high average price at $3.30/ton with an overall value of $37.5M

• In 2015, US buyers purchased the most offsets of any country, nearly equivalent to the combined demand stemming from all European countries combined

• Despite the rapid growth of the California compliance market, voluntary offset demand in North America has grown the last two years; US purchased 15.4 tons in 2015

Compliance Market Compliance carbon market – An international, regional, or state law is passed required designated covered entities to reduce carbon emission in the atmosphere based on a emission reduce cap specified in the law

Examples:

• International – Kyoto Protocol binding emission reduction targets for 170 countries (not USA)

• Regional Greenhouse Gas Initiative (RGGI) – RGGI is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont to cap and reduce CO2 emissions from the power sector

• California - The Global Warming Solutions Act of 2006, or AB32, is a CA State Law that fights global warming by establishing a comprehensive program to reduce GHG emissions from all sources throughout the state

• AB32: Statewide limit on GHG emissions for covered sources

• Set up compliance instruments that can be traded

• Potential to link to other cap& trade programs

• Quebec, Ontario, RGGI

California Cap & Trade

California Cap and Trade Program

Source: Image from Fine, Steve. “The Interaction of Complementary Measures and the Cap & Trade Program under AB-32.” April 16, 2013 presentation at the EPRI-IETA Joint Symposium GHG Offsets Policy Dialogue in San Francisco, CA.

(1) Allowances

• Tradable permits that give one-time permission to emit a metric ton of GHG

• Issued by state of CA, Quarterly Auctions

(2) Offsets

• A credit for a verified emission reduction from a source outside the C&T program

• Used by covered entities to meet C&T obligations instead of allowances or reducing on-site emissions

• Limited to only 8% of a covered entities compliance obligation

CA Compliance Instruments

ARB Offset Credits Issued Project

TypeODS Livestock U.S. Forest Urban

ForestMMC Rice

CultivationTotal

Offsets 12,447,578 2,676,569 29,355,957 0 3,573,844 0 48M

% of Total 25.7% 5.6% 61.3% 7.4% 100%

Product Bid/Ask (Oct 11, 2016)

California Carbon Offset (CCO) $9.70/$10.10

Average transaction price $9.90/ton

Price

Current Value based on offsets issued = $475M

Task Air Resources Board American Carbon Registry Verified Carbon Standard

Minimum project length

100 years after the last carbon offset is issued 40 years from start dateDepends on methodology. 20 years to 100 years, equal to crediting period.

Inventory and sampling

Permanent or temporary plots; stratification not required; inventory data no older than 12

years

Permanent or temporary plots; stratification required if area is

heterogeneous; inventory data no older than 10 years

Depends on methodology. Stratification usually required

Crediting period Renewable 25-year term from project start date

IFM (except stop-logging ): 20 years; Stop-logging IFM and REDD: 10 years.

Renewable.

20 to 100 years, depending on methodology

Start date After January 1, 2007 January 1, 2000, document GHG

mitigation was an objective at start date if delayed listing.

After January 1, 2002

Reporting requirements

Annual reporting required, full verification at least every 6 years.

Annual attestation; full verification every 5 years.

Depends on methodology. Generally, full verification every 5 years.

AggregationNot permitted

Commitment between ACR and Project Proponent. Flexible for

individual landowners.

Aggregation treats aggregated areas as a single area.

Voluntary and Compliance Market Comparison

• Take a position on climate change (CDP, WRI, DJSI)

• Internal carbon reduction targets and/or scheme (Disney, MS, eBay)

• Charismatic credits that offer ‘co-benefits’

• Local/backyard appeal

• Marketing appeal

• Peer pressure

Overall Corporate Socially Responsibe Buyer Motivation

What buyers look for in a Project?

Compliance• Credible Counterparty (e.g. investment grade, D&B)

• Offsets that simply fit the regulation

• Best price

• Note: Contracts have more strings

Voluntary• No legacy environmental or negative PR issues

• Sustainable practices (e.g. FSC status, no clear-cutting)

• Projects located near or important to company operations

• Good Story: Co-benefits wildlife habitat, water quality benefits, and social benefits

Market Standard Impacts

• Types of buyers

• Offset price

• Offset volume(because of differences in baseline/accounting rules)

• Inventory requirements

CA Offset Supply (Shortage)

Source: Stevenson, Sam et al. American Carbon Registry. Compliance Offset Supply Forecast. April 2014

• Over the California market's three compliance periods, total cumulative offset use 208 MT

• Could be 50-70% or 64 - 102MT short through 2020

Market Forecast: Compliance• Chamber of commerce challenge• Post 2020 scoping plan • Adding international offsets and additional sectors

Voluntary• Increasingly common for corporations to internally

price carbon • New protocol development (peat land, wetland

restoration, avoided fire emissions) • Charismatic projects can fetch higher prices• Growing recognition of the co-benefits offset

projects provide

Anatomy of a Forest Carbon Project

http://www.nrs.fs.fed.us/pubs/inf/nrs-inf-06-08.pdf

Three Main Forest Types

• Reforestation – restoring tree cover on land that is not at optimal stocking levels

• Improved Forest Management –activities that maintain or increase carbon stocks on forested land

• Avoided Conversion – preventing the conversion of forestland to a non-forest land use

• Private and public (state, county, municipal) forests

• Commitment to sustainable, natural forest management

• Most timber rights intact – too many encumbrances can be tricky

• AC projects require a qualified conservation easement

• Demonstrate financial incentive to convert to residential, agriculture, or mining use (140 – 180% higher value)

• Properties being targeted for a conservation easement– easements held by federal agencies are also tricky

• Financially viable for the project owner

Eligibility Criteria

Forest Ecoregions – Common Practice

1. Multiple co-benefits:

• Habitat conservation

• Endangered species protection

• Protection of culturally significant sites

• Preservation of traditional hunting and fishing rights

• Sustainable (less than annual growth) timber harvest

• Estate planning

2. Additional revenue – supplement existing sources of income with sale of carbon offsets

3. Ensure project development proceeds smoothly and as efficiently as possible through the select carbon protocol

Other Important Considerations

Project Steps–Continued

California Program Requirements

1. Feasibility assessment – Determine eligibility and estimated offset volume

2. Project Listing on approved offset registry –Prove project eligibility and estimated ICS

3. Project Development – Forest inventory, modeling, Offset Project Data Report (OPDR)

4. Verification – Third party audit

5. Registry and ARB review – issuance

6. Review and Agree on Sales Bids– Secure and select best offer with consideration to price, volume, and ease of contracting.

Project Risks • Project Feasibility

• Low carbon stocks, intensive management, unnatural species distribution may make a project ineligible

• Carbon Market Fluctuation

• Price could go up or down depending on supply, demand, policy, decision, etc.

• Long Term Forest Carbon and Timber Management Commitment

• Annual reporting

• Full verification every 6 years

• Update forest inventory data no less than every 12 years

• Maintain initial carbon stocks

• Unintentional Reversal–Unintentional depletion of carbon stocks through fire or pest outbreak is covered by the project contribution to the buffer pool.

• Intentional Reversal–Intentional depletion of carbon stocks

Anatomy of a Grassland Carbon Project

Avoided Emissions Protocol

• Overtime grasslands sequester and store carbon

• Disturbance (tilling) results in a release of CO2 (oxidization)

• Depending on management, grasslands can have a net negative or net positive on climate

• Climate Action Reserve developed Grassland Project Protocol (July, 2015)

• V2.0 due out in January

Cropland expansion outpaces agricultural and biofuel policies in the United States

Figure 1 and Figure 3 from Cropland expansion outpaces agricultural and biofuel policies in the United StatesTyler J Lark et al 2015 Environ. Res. Lett. 10 044003

Avoided conversion of grassland to cropland

• Permanent conservation• Project area must be grassland for at

least 10 years prior to project• Land must be suitable for cultivation• Landowner must face financial

pressure to convert• No legal barriers to conversion, such

as a prior easement

Determining Project Eligibility

Major Project Inputs

• Feasibility assessment

• Basic cash flow analysis

• Costs and revenues

• Mapping the project area

• Major Land Resource Areas

• Soil Texture

• Land Capability Classification

• Reporting period data

• Animal grazing days

• Fuel consumed

• Area burned

Cooperatives

• Multiple projects managed by a single cooperative developer (no limit on # of participants)

• Not necessarily a legal entity

• Common monitoring, reporting, and verification

• Single verification report

• May have different start dates

• Projects may enter and leave cooperatives over time

• Achieve economy of scale

Project Suitability

• Greater than 75% in LCC I-IV

• Soil texture (fine, medium, coarse)

Wabassus Lake (Voluntary)

• Partner organization: Downeast Lake Land Trust. • Mission: Long-term economic and environmental well-

being of the Downeast Lakes region through the conservation and exemplary management of its forests and waters.

• Location: Eastern Maine • Purpose: Non-profit organization interested in adding

revenue from sustainable timber management. • Voluntary Protocol: American Carbon Registry Improved

Forest Management. • Status: Conducted site visit and feasibility assessment in

2016• Summary: Project appears feasible – forest will be managed

for increased carbon sequestration

Oregon Grasslands (Voluntary)

• Partner organization: TNC – Oregon

• Protocol: CAR’s avoided conversion of grasslands

• Project: Protection of intact grasslands in eastern Oregon

• Impact: TCT will pre-purchase 50% of the carbon offsets generated over the first 10-years to the project. Pre-purchase funds will be used as non-federal match for NRCS ALE program

• Summary: Great partnership opportunity and good source of matching funds

Forest Carbon Offset Projects

Zach Barbane

Manager, Domestic Services

About ecoPartners

North America

• Compliance and voluntary markets

International

• REDD+

Forest Carbon Works

Basic Concepts

Trees sequester carbon

Forests can be managed to store more carbon

Forests that store more carbon than “business-as-usual” can generate carbon offset credits

Credits can be sold to entities to cover emissions

Improved Forest Management

Compare carbon stocks in forest to similar private forests in region

• Forest type and site class

• Legal constraints (additionality)

• Financial constraints

Emissions reductions/removals (credits) based on difference between “project” and “baseline”

Improved Forest Management

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Harvesting CycleC

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Project Carbon Stocks

Path to credits

Forest Inventory

Project Development

Third-Party Verification

Traditional Development

Up-front and ongoing costs

• Inventory

• Development

• Verification

• Additional fees

Feasibility threshold ~3,000 acres

• Industrial, TIMO, tribes, large land trusts

New Technology

Innovative sampling design

Fast and accurate measurements

• Inventories can be completed in as little as a weekend

• Results can be processed very quickly

Simple process

• Can be completed by anyone after brief training

• Internalize or minimize inventory costs

Forest Carbon Works

Rapid inventory

Automated development

Pseudo-Aggregation

• Each landowner is their own project

• Group landowners to reduce costs

Simplified access and annual payments

Forest Carbon Works

ForestCarbonWorks.org

Process:

• Create account

• Apply

• Measure

• Receive offer

• Enroll

New Carbon Fund – Launched January 2016

The Problem: Carbon projects need funding to develop required offsets and unleash full market potential

• Traditional funding not available - Lenders perceive carbon markets to be risky, and therefore heavily or completely discount future revenues from carbon offset sales.

• Key Risks:

Execution Risk – Will projects generate credits as anticipated?

Market Risk – If so, what will those credits be worth?

• SOLUTION: The Climate Trust will finance projects that will depend upon revenues from carbon markets, through an upfront investment

Our offer: Upfront financing to early stage projects

Investment• The Climate Trust invests in a ten year stream of

carbon offsets from a project.

• Capital is made available upfront for new projects.

Active management

• The Climate Trust will work with a project to develop a carbon monitoring plan and commercialize credits.

Revenue share

• After carbon sales have repaid the principal investment, The Climate Trust and project owners share additional revenue (usually 50/50).

Benefits:• Guaranteed minimum

carbon value• Revenue share

rewards project owners as carbon prices increase

Example: Improved Forest Management project

200,000* $5.00

= $1,000,000

Credits available from the project over ten years (20,000 credits per year *10)One half of current market price of carbon in CA ($10.00 used as an example)Total size of upfront investment from The Climate Trust

Pre-credit sale:

Post-credit sale:

$12.00* 200,000

=$2,400,000

Sale price of credits (Example)Total credits to be soldTotal income from project

$2,400,000-$1,000,000

= $1,400,000

Total incomeUpfront investmentNet income

50/50 split gives $700,000 to project owner

Our offer: Upfront financing to early stage projects

• Available funds: We will deploy $5.5M in 2016, with the potential of an additional $25M in 2017 and 2018. Each project will receive between $250K-$2M.

• Financing can be used for: Expenses related to project implementation such as down payment on land purchase, easement payments, loan repayment, operation, etc.

• Scaling up: This $5.5M fund is a pilot; success unlocks additional funding.

Q & AQ & A

Zach Barbane, Manager Domestic Services

zbarbane@ecopartnersllc.com

415-634-4650

Dick Kempka, Chief Commercial Officerrkempka@climatetrust.org901-755-8705Mik McKee, Senior Project Analystmmckee@climatetrust.org503-238-1915