Carbon Markets

Tue, 11/08/2011 - 09:38 -- cadoughe

What is a Carbon Market?

Historically, regulations to lower air pollution were designed to control specific emissions from designated sources. However, early regulatory programs were
found to be inefficient and did not serve their purpose of improving air quality. Recently the Environmental Protection Agency has listed carbon dioxide as a pollutant. Regulatory programs and market-based options are under consideration in response to calls for emission reduction. Market-based options create a public venue where buyers and sellers come together to exchange goods and services at prevailing prices. Two market-based initiatives exist to reduce pollutants in the atmosphere: a carbon emission tax and a 'cap and trade' program.

Carbon Tax

A carbon tax levies a tax per unit of emissions. The tax can be added as a surtax to existing tax structures which is relatively easy, however, the use and dispersion of the generated funds is often complicated. A tax may significantly increase revenue which can be used to decrease other inefficient taxes or to provide subsidies for more sustainable investments. Applied effectively, a tax would encourage firms to reduce emissions and provide revenue for the government. Several European countries such as Finland, Sweden, Denmark, the Netherlands, and Norway have successfully implemented a carbon emission tax.

'Cap and Trade' System

A 'cap and trade' system sets an aggregate limit or cap on emissions and creates permits for this amount. Permits are issued for free or auctioned off by regulatory agencies to be traded among firms as a part of their strategy to meet emission requirements. Often, companies with high pollution abatement costs purchase permits from those with low costs. A 'cap and trade' system doesn’t put a specific price on emissions; it allows the market to set the price, thus, eliminating the difficulties associated with policymakers attempting to do this. Significant cost savings have been observed under existing 'cap and trade' systems but long term results are not yet known.

'Avoided Deforestation' Carbon Offset Market

Offsets are the result of an action taken to avoid, sequester or displace emissions of carbon. A successful carbon offset program begins with the creation of a market for entities producing atmospheric carbon and those sequestering it. Emission rates are determined for carbon producers, such as regional energy utilities as well as their willingness to buy carbon offsets. Likewise, carbon sequestration rates are calculated for forestland whose owners agree to keep their forests intact. Through third party auditors, the amount of carbon that can be sequestered through 'avoided deforestation' is certified and becomes available for an offset purchase.

Carbon Markets in WNC

Avoided deforestation carbon offset market

'Avoided Deforestation' Carbon Offset Market in WNC

At some point in the future, voluntary guidelines and/or mandatory regulations are expected to be put in place to limit CO2 emissions. The decision to regulate greenhouse gas emissions will undoubtedly have large political and economic ramifications and the time frame for passage of such legislation is unknown. If guidelines are adopted or regulations are issued and a 'cap and trade' system is established, 'avoided deforestation' is an offset option that should be analyzed further. The value of such an offset may rise due to increased demand, which may attract forest landowners to participate.

The establishment of such a market would entail the identification of buyers and sellers as well as the appointment of regulatory oversight responsibilities. A number of monitoring issues must be addressed for any carbon based project. These include natural or man-made events that reduce or increase carbon storage as well as changes in land use patterns in and outside the region.

Sellers of Carbon Offsets

Landowners must certify their forest to participate in the market, but after initial inventory requirements are met, the offset allowance should be straightforward to maintain. Sustainable harvesting should be allowed, even encouraged, as it would increase multiple values and help maintain the health and vitality of a maturing forest. In addition, management practices, such as group selection harvests under an uneven aged management system, would result in increased carbon storage capability and provide early successional habitat for wildlife.

Presently, few financial incentives are available to private forestland owners who want to maintain and manage their forestland. Often, the most profitable action a landowner can take is to harvest their timber resource and develop the land. Market prices do not take into account consequences that may be associated with land use change and/or unsustainable harvesting regimes such as impaired water quality, increased levels of erosion, and reduced biodiversity, for which no compensation is paid. The single largest threat to forestland in the region continues to be fragmented residential and commercial development. The economic returns from development are significant and will be hard to match. Any and all monetary incentives available to forestland owners may help deter them from converting their forestland to non-forestland uses.

Buyers of Carbon Offsets

Several large entities in Western North Carolina, such as the City of Asheville and the University of North Carolina at Asheville have calculated the amount of carbon they are currently emitting. Many others are already in the process of creating emission reduction programs and have expressed interest in a local carbon offset market. There may also be buyers located outside of the region.

Challenges and implications

Western North Carolina forests are no longer experiencing high growth rates and their ability to sequester carbon will continue to diminish as they age. Areas outside the region which have the capability to sequester large amounts of carbon in short rotation forests in more nutrient rich soils may provide a more profitable offset market. In addition, our existing regional timber markets will likely experience growth as demand strengthens for mature high quality hardwood and softwood products. If a viable infrastructure for small diameter wood emerges, a market for wood biomass may also develop.

However, if an 'avoided deforestation' offset market were found to be economically feasible, it would position the region to adopt regional or national regulations in a more cost effective manner and help landowners conserve their forests while providing abundant collateral benefits.

In any case, in order to avoid the detrimental effects of global climate change, it is necessary to begin the hard process of reducing and mitigating the effects of burning fossil fuels. Although the extent of change is yet to be determined, overall welfare is expected to be permanently reduced. A variety of mitigation strategies will be needed, and Western North Carolina policy makers should take a closer look at regional forest and wood product accounting as they relate to carbon flows, as well as working to conserve and manage our existing forests as a valuable carbon pool.