Basically, the carbon credits program takes money paid by large corporations which create and release carbon dioxide and uses this money to pay landowners to keep their land in non-production and natural ecological state to help lower the carbon dioxide level. Of course, this process is not as simple as it might sound- there are always steps which must be followed, paperwork which must be done, and monitoring activities, but for some landowners, carbon credits might be something to examine.
Carbon credits are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gasses (GHGs). One credit permits the emission of one ton of carbon dioxide or the equivalent of other greenhouse gasses. Carbon credits are also known as carbon offsets.
Max Nova of Natural Capital Exchange, a company which advises and guides landowners through the Carbon Credit process, says, “Carbon credits are becoming a viable income stream for landowners across America. Driven by corporate climate pledges, demand for carbon credits has created a new opportunity for landowners. In a typical carbon project, a landowner receives payments for increasing the amount of carbon on their land by planting trees, protecting mature forests, improving soil health, etc. Landowners get a new source of revenue, the amount of carbon in the atmosphere decreases, and companies can make good on their climate pledges.”
How Carbon Credits Work
We asked Max Nova how the whole carbon credits process works, and who actually pays the money. “Those payments come from companies like Microsoft and Salesforce that want to count those carbon credits against the carbon they emit in their normal course of business (things like driving trucks, flying planes, using electricity, etc.),” says Nova.
Carbon trading markets like NCX.com are the places where these carbon credits are bought and sold, and these market locations are sources of information for landowners who are interested in learning more about the process.
Max Nova tells us, “It’s not as simple as just putting a tree in the ground. There’s a lot of bureaucracy and paperwork that happens in between planting a tree and getting a carbon credit. The property has to get enrolled in a “carbon project” which then has to go through several audits, follow a particular “methodology”, have ongoing monitoring by yet another third party, and finally get credits issued through a certification body.”
Nova further explains, “Because this process is so complex and painful, most landowners end up working with a “project developer” who will handle the whole process and make sure all the rules are followed. The project developers do charge a fee (or take a percentage of the credits generated), but it’s often worth it, especially for landowners with less than 5,000 acres.”
Nova develops this thought further, “However, there are multiple different project developers and several carbon methodologies to choose from. The economics for landowners can be significantly different. NCX (the Natural Capital Exchange) pulls all the options together, makes it easy to compare tradeoffs, and helps landowners find the right partner for them and their land.”
What are the Different Types of Carbon Credits?
We asked Max Nova to explain the different types of carbon credits a landowner might consider. He listed for us the following:
- Verified Emission Reductions (VERs)
- Certified Emission Reductions (CERs)
- Renewable Energy Certificates (RECs)
There are a number of different approaches to Carbon Credit Projects that a landowner might consider. Nova says, “Tree planting projects – as trees grow, they pull carbon out of the air and turn it into wood. This is a very popular type of carbon project with buyers because it is easy to understand and very tangible. However, landowners should carefully consider the economics of tree planting projects because it takes a long time for the trees to begin storing a lot of carbon and in the meantime all of the carrying costs (property taxes, initial tree planting costs, etc.) have to be paid.”
“Forest protection projects – mature trees store a lot of carbon. Cutting those trees down to sell them for timber can release a lot of carbon into the atmosphere. In these types of projects, landowners agree to maintain the carbon in their mature forests for a long period of time. The number of carbon credits that get issued for the project depends on both the amount of carbon in the forest and the likelihood that the landowner would have harvested the timber,” explains Nova.
Nova says, “Soil carbon projects – You might be surprised to learn that there is often more carbon in soil than there is in the trees. There are many practices (like no-till, rotational grazing, etc.) that landowners can adopt to improve the carbon storage in their soil to generate carbon credits.”
What Are the Benefits of Carbon Credits?
And when we asked Max Nova to list some of the benefits of carbon credits, he provided the following:
- Environmental benefits
- Economic incentives
- Compliance and corporate social responsibility
- Landowner Benefits
Carbon Credit Criticisms and Challenges
No program that is as new as the carbon credits operates without problems and even controversy. Nova listed the points of contention of the program as follows:
- Market fluctuations and volatility
- Verification and transparency issues
- Effectiveness in reducing emissions
“Carbon markets are fairly new and are still evolving. Unlike conventional markets like timber, there is no physical delivery of the carbon credit to the buyer. When a timber mill buys logs, they weigh them on a scale and the buyer and seller can both agree on the quantity of timber being transacted. But carbon credits are being created out in fields and forests where it’s much less straightforward to measure exactly what is being delivered,” says Nova.
He adds that this is made even more complicated by the fact that the number of carbon credits issued doesn’t just depend on the amount of carbon in the trees or in the soil. The quantity of carbon credits generated also depends on an estimated “baseline” from a hypothetical “business as usual” scenario. Only quantities of carbon above the baseline get to be counted as carbon credits.
If you’ve read news articles about controversies in carbon markets, chances are that the underlying issue is about whether or not there was a good “baseline” for the carbon project. Was the landowner actually going to cut down those trees? Would the landowner have planted trees anyways in their normal course of operations? Were they double-dipping with conservation easements or other government programs? Unfortunately, experts don’t currently agree on what a “good” baseline is and until that happens, there will continue to be a lot of volatility and uncertainty in carbon markets.
For landowners, this uncertainty and volatility increase the risk of participating in carbon markets. How many credits will the project yield? What price can I expect? These are far from settled questions right now and landowners should be clear-eyed about both the rewards AND the risks of participating in carbon markets explains Nova.
Final Thoughts
Carbon markets are an emerging option for landowners. Prices are volatile and there are significant risks, including the risk that a carbon project might generate far fewer credits than expected. Due to recent controversies in the industry, demand has softened over the last 6 months, but there are increasing calls to reform carbon markets to increase their integrity and reduce volatility. In the meantime, landowners can explore currently available options at NCX and see if there are any programs with the right risk/reward profile for them.