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Exclusive Feature: Offset supply boosted by Encourage Capital’s record breaking issuance of forestry credits

May 25, 2017 by Billy Hamshaw

(CaliforniaCarbon.info, May 25, 2017) The California Air Resources Board has issued 4.5 million new offset credits to the Wyoming IFM project making it one of the largest single issuances under the cap-and-trade program.

The property, called Wyoming, spans ninety-seven thousand acres across the Cumberland Mountain range in south Western Virginia. The first reporting period of the Wyoming IFM project has generated 3.6 million credits for a market in need of fresh supply. Just under 1.0 million credits generated from this project are being held in the registry’s buffer pool for insurance purposes.

Wyoming is owned by The Forestland Group (TFG), now responsible for over 33% of all CCOs approved by the ARB. By working with Encourage Capital, an impact investing firm based out of New York, and other partners on a whole portfolio of carbon projects, TFG has begun revolutionising the way the forestry industry regards carbon assets – a major advancement in forestry conservation across the U.S.

Encourage Capital has been an influential participant in the WCI offset market and a key driving force behind two of the market’s largest projects: Wyoming (ACR 249) and the White Mountain Apache Tribe Forest Project (ACR 211). As the financier of offset projects, Encourage Capital helps catalyse project development by working with major landowners to recognise the potential of carbon on forested lands while coordinating with consultants, verifiers, regulators and carbon credit registries to successfully manage, develop and commercialize offset projects.

 

A glance at the market forces

While the California market is oversupplied with carbon allowances (CCAs), the inverse is true for offsets. With a market high in demand and low in supply, large landowners have been increasingly participating in the offset market. Carbon offsets typically trade at a discount of 15%-20% of CCA prices. Still, substantial carbon revenues stand to be realized from projects spanning large acreages which can sequester high volumes of carbon emissions.

Despite uncertainty over cap-and-trade’s future over recent times, yesterday’s auction results have brought with them a renewed sense of confidence in ARB’s current program. While a complete overhaul of the program, proposed by Senator Wieckowski, seems unlikely, much discussion over program elements, such as offset usages, promises to entail. CC.info has estimated that under the current 8% offset usage a maximum demand of over 600 million CCOs exist between 2015 and 2030. While environmental groups have advocated for decreased quotas, many in California as well as linking partners Quebec and Ontario support a higher quota, pointing to the benefits offsets have delivered to the program as well as wider the wider socio-economic impacts of the program.

To date, only 10% (62 million CCOs) of that demand has been issued by ARB. The most recent compliance records showed a staggering 9.6% offset usage under this year’s compliance obligations, providing further grounds for confidence in the strong demand for future offsets in the near-term.

 

From sequestration to CCO

As with any large scale project, a number of factors must be weighed against opportunity costs before deciding to undertake a project. For forestry projects, the high upfront costs coupled with the high risk of project failure remain the most significant of these considerations. Professional project developers can be useful in this regard. By providing the initial capital for inventory evaluations and pooling the expertise of biometricians, verifiers and forestry experts, professional project developers and financiers can take on the bulk of the risk during the early developmental stages. “By working with the right partners and teams on a project level, and by diversifying our investments across multiple projects on a portfolio level, we are able to manage that risk” said Utkarsh Agarwal of Encourage Capital. As a seasoned project developer, he is focused on ensuring that problems which “come up all the time” are solved in a timely and cost-efficient manner.

Technical consultants, verifiers and registry offices play a subsequent role in facilitating the smooth transition of the project from the development stages to commercialisation.

From the initiation of the Wyoming project, ecoPartners have acted as the technical consultants involved in providing estimates of carbon stocks as well as designing and implementing the carbon inventory. “A minimum 6-month reporting period, beginning in March 2015, was chosen for the Wyoming project,” explained Zach Barbane of ecoPartners. Verification took place in the Fall. “With Wyoming, we settled on 6 months for the reporting period because we wanted to get on to verification early and have the project completed by next Spring,” said Zach, speaking by phone.

“Planning the reporting periods and timings of verifications is an important aspect of good project management,” explained Janice McMahon of ESI Carbon— the verifier of the Wyoming project. Failing to pass verification is an enormous risk to developers as additional site visits and time delays due to changing seasonal conditions can have costly repercussions. Ensuring thorough project inventories are maintained and managed is important as well. Most importantly, a good working relationship between the verifiers and the Offset Project Operator (OPO) is essential in ensuring project success.

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Breakdown of ARB approved CCOs

 

2015’s Registry Blitz 

The Wyoming project was listed on the American Carbon Registry (ACR) before the blitz of projects which were listed in August 2015 in order to get grandfathered under the 2014 forestry protocol. A number of these projects have come to fruition over the past months. “What we’re seeing now is a lot of those projects listed during that period moving forward,” said Jessica Orrego of the ACR. “We expect to see a lot more ROCs coming into the market because of the lightning blitz of activity which has been very good for the market.”

Since the protocol change over a year ago, however, there has been a significant backlog of forestry projects listed among the registries, with 8 projects listed since the change in regulations. As anticipated, the changes to the common practice values under the 2015 protocol have lowered the potential yields of offsets and decreased overall development appetite in the forest carbon community. The ill-favoured policy amendments made in 2015 now significantly restrain the development of new forestry projects.

 

Preserving forestry conservation in North America

While large landowners like TFG have made significant contributions to forestry conservation efforts since the initiation of California’s cap-and-trade program, engaging smaller landowners could be key for unlocking the supply of forestry credits that the market requires to reach equilibrium. “Large areas of forestry are lost as landowners struggle to finance their maintenance,” said Janice McMahon (ESI). Traditionally, projects smaller than 4,000 acres have been deemed economically infeasible due to high upfront development and verification costs.

EcoPartners has been actively exploring this area through the Forest Carbon Works program, which provides a framework to pool resources of small landowners and allows for an aggregated project to be economically viable for the carbon markets.

Alaska boasts vast landscapes of high quality forest land, and it has recently become eligible for offset project development under the new 2015 protocol. This new frontier is becoming an exciting locus of activity in the forest carbon community. Finite Carbon and New Forests (through its Forest Carbon Works program) have both listed projects under the new protocol. Blue Source and Encourage Capital are also actively pursuing projects. The adaptation of forestry protocols for Ontario and Quebec as well as news that Nova Scotia will implement a cap-and-trade program by 2018 provides grounds for additional optimism going forward.

  

Billy Hamshaw – billy@californiacarbon.info

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