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Harvesting Carbon Credits

by Sep 30, 2019Alaska Native, Magazine

$370 million in credits registered in Alaska since 2015

There’s money to be made in promising to reduce your company’s environmental footprint by cutting down fewer trees. And Alaska’s largest landowners are getting behind this new type of business in a big way.

Alaska is now the largest producer of forestry carbon offsets for California’s greenhouse gas cap and trade program, despite qualifying to sell the credits years behind the contiguous United States. Thus far, four Alaska Native regional corporations and eight village corporations have received carbon offset credits through the program or have started the process of registering credits.

At current prices of about $13 per offset credit, the carbon offsets registered in Alaska are worth about $370 million. And that’s just the initial carbon credits awarded for these projects. As forests continue to grow, they will produce a smaller number of new credits equal to the value of the carbon dioxide stored in the new growth compared to similar forestland outside the project.

The new market created by California’s greenhouse gas rules opened to Alaska in 2015. It’s scheduled to partially close in 2021, with a new regulatory change that will cut demand for forestry credits produced in Alaska by 75 percent.

Harvesting Timber, Harvesting Credits, or Both

While there’s now significant money in carbon credit offsets, the credits are not nearly as lucrative as traditional logging, says Brian Kleinhenz, former natural resources manager for Sealaska Corporation and now a Juneau-based principal at forestry consulting business Terra Verde.

As a rule of thumb, a piece of a forest’s value if sold as stumpage is about ten times the value of the carbon credit income, he says.

Why agree to the lower payout offered by carbon credits? There are a multitude of factors, Kleinhenz says. One is that a landowner faces significant costs in a timber sale that don’t factor into a carbon offset sale.

“That’s a lot of risk associated with going through the whole process of having big industrial equipment running along the landscape, building roads, and harvesting. And then the resource is gone,” he says.

Selling carbon credits also gives landowners more latitude with regard to what they can do with their forests. The rules for carbon offset credits are significantly less restrictive than for conservation easements, he says.

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The View from Sealaska

At Juneau-based Sealaska Corporation, CEO Anthony Mallott says he’s been talking about carbon offsets as an option for corporate lands for about a decade.

The opportunity created by the California market made it economically feasible for Sealaska, he says. Today the land management part of the business includes income from both logging and carbon credit production.

Sealaska makes about 15 percent of its revenue from its logging business Sealaska Timber Company, a smaller part of the corporation’s overall revenue than it has been historically. Sealaska also operates in the seafood processing and environmental services industries. The corporation owns more than 360,000 acres of surface land in Southeast Alaska, nearly half of which is included in a recently-registered carbon offset project.

Carbon credits were a good fit for the regional Alaska Native corporation in part because the business has mandates to both generate profits for shareholders and be a good environmental steward, says Mallott.

Registering forests for carbon credits doesn’t mean the trees can’t be logged or cut down for other developments. Landowners like Sealaska that register projects in California’s “improved forestry management” category can get credits for storing more carbon in their forests with techniques including waiting more time between harvesting timber, increasing forest productivity by removing dead or diseased trees, or planting more trees.

It’s possible to maximize the number of credits by cutting down fewer trees, but the landowner gets to choose whether to focus on getting revenue from timber harvests or generating a higher number of credits.

Some parts of Sealaska’s carbon credit area may be developed for commercial logging, tourism, and cultural projects such as canoes and totems, Mallott says.

California’s rules require landowners to continue measuring and reporting the amount of carbon dioxide stored in the forest for 100 years. Over the course of that century, different land uses may be appropriate at different times, so there isn’t one overall plan for how to use the land included in the carbon offset project, Mallott says.

“That is up for every generation of Sealaska management to decide, in our view,” he says. “We don’t want to be prescriptive of it. We want to make sure they have options and opportunities.”

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Cap and Trade

The idea of carbon offsets is tied to the concept of capping and trading carbon dioxide emissions. Cap and trade is an economic model for pollution control that was previously used successfully in the 1990s to reduce acid rain. Under this model, a government policy limits the total amount of allowable pollution. That’s the cap part. For acid rain, sulfur dioxide pollution was capped. For global warming it’s greenhouse gases, chief among them carbon dioxide.

Companies that produce large amounts of pollution are allowed to buy and sell permits to emit it into the atmosphere. The marketplace for pollution credits is supposed to give people a financial incentive to emit fewer greenhouse gases.

Carbon Allowances and Offsets

A carbon offset is a way to get a carbon credit without buying it from the government or from another company. Instead of buying permits to pollute, companies have the option of compensating for their own carbon pollution by paying for a project that helps reduce greenhouse gases somewhere else in the world.

In California, carbon credits issued by the government are known as allowances. This summer they were selling for between $16 and $17 per credit. Meanwhile, carbon offsets, like those sold in Alaska by Sealaska, generally sell for between 15 to 20 percent less than government-issued allowances, says David Clegern, a spokesman for California’s Air Resources Board in Sacramento.

Why are offsets cheaper than the government-issued allowances?

“The allowances tend to be a little bit higher priced because they’re backed by the word of the State of California,” Clegern says.

A company that buys an offset takes a risk that a verifier will later invalidate the project for not working the way that it promised, Clegern says. If that happens, the company that bought the credits will have to buy new offsets or allowances.

The offsets are sold through three different third-party markets, but must be certified by California.

Under California’s rules, companies can pay for only 8 percent of their emissions from offsets, a percentage that’s scheduled to drop in 2021. The remaining 92 percent must be accounted for through allowances or by reducing the amount of emissions produced.

US forestry projects are the largest sector of the California carbon offset market.

Despite being relatively new to the program, Alaska has quickly become the biggest forestry participant, with more than 26.2 million in forestry offset credits issued from projects here so far. California is second with 23.8 million, followed by Washington with 14.4 million.

Other types of offset projects used for California’s cap and trade system include capturing methane from underground mines and properly disposing of ozone depleting substances such as air conditioners and refrigerators.

Voluntary and Regulatory Markets

There are two primary types of carbon offsets. The voluntary market isn’t tied to greenhouse gas reduction laws like California’s. Credits in this market are purchased by buyers such as corporations seeking to improve their image as a “green” company or airline passengers who are trying to balance out the carbon footprint of their flight.

At Terra Verde, Kleinhenz says he started hearing about voluntary carbon offset projects first in California and then on Alaska’s Kodiak and Afognak islands in the early 2000s.

California’s cap and trade system was the first economy-wide system in the United States. The state’s cap and trade program launched in 2012. California has an enormous economy (if it was an independent nation it would be the fifth largest in the world), and its cap and trade system immediately created a large demand for carbon offsets.

Today about one third of the consulting Kleinhenz does for Terra Verde is for landowners looking for information about developing carbon offsets, with the remainder related to traditional logging operations.

Calculating Credits

To count as a carbon offset project, an agreement must be both verifiable and additional. “Additional” means that the offset credits are for carbon that wouldn’t be kept in trees in the absence of the offset program. Meanwhile the offset credits must be verified by audits that demonstrate the trees remain in the ground.

Like for a timber project, a carbon project begins with measuring and estimating the size and number of trees in an area. Forestland with larger trees like the Sitka spruce and western hemlock found in Southeast Alaska tend to produce more credits per acre than land with the white and black spruce found farther north in Alaska.

The landowner doesn’t get credit for all the carbon stored in trees on their property. The amount of carbon credits depends on the “baseline,” which is an estimate for how much of the forest might be cut down in the absence of the carbon credit certification. Lands that are in parks or have conservation easements can’t be certified for carbon credits, since they’re not at risk of being logged.

The baseline calculation is one of the more controversial aspects of forestry offset programs. Land use history on lands adjacent to the project area are used as a minimum baseline to keep landowners from gaming the system by reporting a baseline featuring major logging activity that isn’t actually physically or economically feasible.

Before the landowner receives credits, other deductions must be made. One is for “leakage,” an estimate for the logging activity that will “spill” onto neighboring lands as the presence of the carbon offset project encourages the rise of timber prices under the laws of supply and demand. Other credits (15 to 20 percent of each project) get put into a system wide risk pool. It’s a kind of insurance policy. If a forest fire or insect epidemic destroys a forest, the landowner isn’t responsible. The environment gets “paid back” from the credits set aside in the pool.

Offsets Opening to Alaska

It wasn’t an accident that California’s Air Resources Board began to accept Alaska forestry offset projects in 2015. It took years of lobbying work in Sacramento, says Josie Hickel, Chugach Alaska Corporation’s executive vice president for land and resources.

Initially Alaska and Hawaii weren’t included because the US Forest Service didn’t provide data on forests outside the contiguous United States. But even after that data became available, the 49th State was excluded, Hickel says.

“Following several years of lobbying efforts by Chugach, the California Air Resources Board revised its Improved Forest Protocol in November 2015, which lifted the exclusion of certain parts of Alaska from the program,” she says. “We’re proud to have played a part in creating this groundbreaking opportunity both for Chugach and our fellow Alaska Native corporations.”

Today lands in Southcentral and Southeast qualify for California’s cap and trade offset program, but not the northern part of the state.

Offset Projects Ramp Up

The first California carbon project in Alaska came not from Chugach (whose project is still being certified) but from its neighbor to the north.

Last year, Glennallen-based Ahtna was awarded 14.8 million carbon credits. In addition to being the first California forestry offset project in Alaska, it’s the largest offset project so far in the California cap and trade system by number of credits issued.

The Ahtna project is also the largest forestry project based on how much land it involves. Ahtna owns 1.5 million acres of land in the Copper River Valley and south of the Alaska Range along the Denali Highway. The corporation selected about a third of its lands for its carbon credit project.

Sealaska followed Ahtna with an 11.4 million-credit project. Village corporation Port Graham Corporation has also registered a 2 million-credit project on the Southern Kenai Peninsula.

Once a project has been certified as a carbon offset, the landowner can sell the credits to a California company that needs them or hold on to the credits to sell in the future.

Some of the Ahtna and Sealaska offsets were purchased by BP, according to the company. BP is no longer involved in the oil refining business in California, but the company is a major fuel importer to the state and must account for the emissions produced by the fuel it sells.

California’s cap and trade rules are especially hard on transportation fuel importers like BP. Other industries receive a certain number of emission allowances at no cost from the government. But fuel importers don’t get any free allowances. For BP, in 2017 that meant buying allowances or offsets for the 7.3 million tonnes of carbon-dioxide equivalent greenhouse gases.

A Closing Window?

Demand for carbon offsets generated in Alaska for the California market is expected to abruptly drop off by 75 percent in 2021.

That’s the year the state cap and trade system drops the percentage of a company’s emission responsibilities that can be covered by offsets from 8 to 4 percent. Additionally, under the new rules, only 2 percent of offsets can come from projects beyond California’s boundaries.

Clegern—at California’s Air Resource’s Board—describes the rules as a political backlash against funding out of state carbon projects.

“It was the idea that you’re using state resources to work on things in other states when you should be working on things here,” he says.

In Alaska, the immediate effect of the 2021 deadline is a flurry of activity to get carbon credits approved while companies can still buy a larger number of credits from out-of-state projects.

Upcoming Alaska carbon projects proposed on the carbon registry are in the works from regional corporations CIRI and Chugach. Proposals have also been filed from village corporations Kootznoowoo Incorporated, Haida Corporation, Huna Totem Corporation, Tyonek Native Corporation, Goldbelt, Seldovia Native Association, and English Bay Corporation.

At Sealaska, Mallott sees the change happening in 2021 as a temporary blip in the carbon market. For now, the regional corporation is helping some of the village corporations get their projects set up before the deadline.

But he believes there’s potential for an expanded market for Alaska-grown carbon offsets in the five to twenty year timeframe. Even if California continues to limit the sale of non-California offsets, new demand growth could come from other states starting cap and trade programs.

“We’re definitely optimistic that future programs will be initiated,” Mallott says.

Alaska Business Magazine October 2019

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