Carbon Market

Fall 2009


There is keen forest landowner interest in the subject of carbon trading and sequestration. In fact, this topic has almost eclipsed the terrible log market as the most common conversation theme among forest owners!

This is a confusing subject, which is further complicated by the wide range of organizations and evolving standards determining the future of this commodity. To better understand how the carbon trading world relates to forest owners, let’s answer a few common questions:

What is forest carbon trading?

In a nutshell, trees take carbon (carbon dioxide) out of the air and store it as wood fiber, while factories and other entities, put carbon into the air during manufacturing processes. Next, carbon producers are pressured by the government and a heightened public consciousness to reduce emissions by either lowering discharges at the factory or, in lieu of that, paying forest owners to keep carbon stored (sequestered) in trees. The end result is that producers purchase carbon credits from forest owners because it is cheaper than making the required factory improvements to reduce emissions. To encourage this effort, the government is considering cap and trade legislation to establish incentives for this market-driven system.

What’s required for a landowner to get involved with carbon trading?

Other requirements also apply, but the key elements are: 1) A property must have a forest management plan in place and be certified for sustainable forest management by a group such as the American Tree Farm System. 2) A thorough baseline inventory (wood volume, growth projection, etc.) must be conducted to determine the amount of carbon stored within the forest now and into the future. 3) Landowners must be willing to maintain a certified forest for a set period of time. Fifteen years is fairly common, but the time frame may vary up to 100 years.

How is the value of carbon determined and traded?

Currently there is only one formal trading platform in the U.S., the Chicago Climate Exchange (CCX), which conducts transactions in metric tons. There are also informal “Over the Counter” trading opportunities. Like other commodities, the value of a ton of carbon is determined by supply and demand. And since cap and trade legislation would greatly increase demand, it is assumed the value of carbon would correspondingly rise if Congress were to pass such legislation.

What are carbon credits worth?

Within the last few years carbon traded at a high of more than $7/metric ton, but the value of carbon traded on the CCX has dropped dramatically to its current level of just $.25/metric ton. That huge fall makes the plunge in sawlog prices look minor in comparison! Also, the current trading system allows carbon traders to accumulate credits which, like stocks or bonds, can be held and sold in the future, hopefully at a higher rate.

How much money can a landowner make?

That’s the wild card! Again, like the stock market, a host of variables influence the net return to landowners. With present CCX prices, selling on the exchange makes no sense and “over-the-counter” sales have their own special challenges. But let’s speculate on a possible Inland Northwest carbon sale scenario. Say a landowner sells 2 ton/acre of carbon sequestration valued at $2/metric ton (net return). The landowner would then receive $4/acre ($2 times 2 ton) per year.

Until this muddy subject has been clarified—numerous organizations are involved in determining standards (some have likened it to a “tug-of-war”), everybody is waiting to see what happens with proposed cap and trade legislation, and carbon values are very shaky—it appears premature to jump into the carbon market now.

Editor’s note: This is a brief overview of a very complex subject. IFM will continue to monitor this situation and keep you informed. If the time is right for you to actively pursue carbon trading opportunities, we will be here to serve your needs.
— M. Wolcott

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