Forest Carbon Markets: Potential and Drawbacks

Congressional research reportMay 24, 2010

Ask Donna

What actually matters in this document.

Text

Forest Carbon Markets: Potential and

Drawbacks

(name redacted)

Specialist in Environmental Policy

May 24, 2010

Congressional Research Service

7-....

www.crs.gov

RL34560

CRS Report for Congress

Prepared for Members and Committees of Congress

Forest Carbon Markets: Potential and Drawbacks

Summary

Forests are major carbon sinks (storehouses), and activities that alter forests can release or

sequester carbon dioxide (CO2), the most common greenhouse gas (GHG). Some carbon markets

have been formed under mandatory GHG reduction regimes, such as the Kyoto Protocol and

various regional and state initiatives in the United States. Other markets have formed for

voluntary efforts to reduce GHG emissions. Offsets, or credits for sequestering carbon or

reducing emissions in unregulated sectors, are typically allowed in both mandatory and voluntary

markets. Forestry activities are among the largest-volume and lowest-cost opportunities for

generating offsets.

Various forestry activities may be feasible for carbon offsets. Afforestation (planting trees on

open sites) and reforestation (planting trees on recently cleared sites) are the activities most

commonly included for offsets. Some propose that the carbon stored in long-term wood products,

such as lumber and plywood, could be credited as carbon offsets, and mill wastes often substitute

for fossil fuels to produce energy; however, short-term products (e.g., paper) and the biomass left

in the woods after timber harvesting release carbon, making the net carbon effects uncertain.

Some forest management practices also might qualify for carbon offsets; certified sustainable

forest practices provide a system of assured, long-term forests, while activities to increase tree

growth face many of the same concerns as long-term wood products. Finally, deforestation is a

major source of GHG emissions, accounting for as much as 17% of anthropogenic emissions.

Thus, avoided deforestation, especially in the tropics, potentially provides an enormous

opportunity to reduce GHG emissions. However, avoided deforestation is particularly prone to

leakage (see below), as well as many of the concerns about forest carbon offsets generally.

Forestry projects may offer considerable market opportunities for carbon offsets, but several

issues have generated concerns and controversy. One concern, especially for compliance markets,

is whether projects are additional to business as usual. An activity that is common practice or

industry standard, or a project that is required under current federal, state, or local laws, cannot be

used as an offset. Functional carbon markets also require cost-effective practices to verify carbon

sequestration. Current measurement and monitoring practices are costly and have several

implementation challenges. Another concern is that, compared to other types of offsets, forestry

projects present substantial risk of leakage. Emission leakage can occur if carbon sequestered in

one location (e.g., by avoided deforestation) leads to carbon release (e.g., from increased

harvesting) in another location. Product leakage could occur if forest carbon sequestration

induces use of more carbon-intensive substitutes (e.g., cement or steel). Forest carbon projects are

expected to generate offsets for decades. Some are concerned that the sequestration will be

negated subsequently by human activity (e.g., change in land use) or a natural occurrence (e.g.,

forest fire or disease). Although there are legal and accounting mechanisms that can address this

concern, implementing these options may present challenges, particularly for projects in

developing nations. Finally, forward crediting to allow early credits for expected sequestration

faces many of the same concerns about not fulfilling expectations.

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

Contents

Forest Carbon Markets..................................................................................................................... 1

Compliance Offset Markets....................................................................................................... 2

Kyoto Protocol .................................................................................................................... 2

European Union’s Emission Trading Scheme ..................................................................... 5

Regional Initiatives in the United States ............................................................................. 5

Mandatory U.S. State Requirements ................................................................................... 6

Proposals in the 111th Congress........................................................................................... 6

Voluntary Offset Markets .......................................................................................................... 6

Retail Offsets....................................................................................................................... 7

Chicago Climate Exchange ................................................................................................. 8

Reporting and Registry Programs.............................................................................................. 8

1605(b) Reporting Program ................................................................................................ 8

California Registry .............................................................................................................. 9

The Climate Registry .......................................................................................................... 9

USDA Guidelines................................................................................................................ 9

Forestry Projects for Offsets .......................................................................................................... 10

Afforestation and Reforestation ........................................................................................ 10

Long-Term Wood Products ............................................................................................... 11

Forest Management ........................................................................................................... 12

Avoided Deforestation....................................................................................................... 14

Potential Drawbacks of Forestry-Related Projects ........................................................................ 14

Additionality............................................................................................................................ 15

Verifiability.............................................................................................................................. 15

Measurement ..................................................................................................................... 15

Monitoring......................................................................................................................... 16

Enforcement ...................................................................................................................... 16

Leakage.................................................................................................................................... 16

Emissions Leakage............................................................................................................ 16

Product Leakage................................................................................................................ 17

Permanence.............................................................................................................................. 17

Forward Crediting ................................................................................................................... 18

Figures

Figure 1. Trading Volume and Market Value of Clean Development Mechanism Projects,

2005-2008..................................................................................................................................... 3

Figure 2. Estimated U.S. GHG Mitigation Totals by Activity: Annualized Averages, 20102110 ............................................................................................................................................ 11

Contacts

Author Contact Information........................................................................................................... 18

Acknowledgments ......................................................................................................................... 18

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

orests are major carbon sinks—repositories of vast amounts of carbon. Activities that alter

forests—create, enhance, modify, or eliminate them—significantly affect the amount of

carbon dioxide (CO2) in the atmosphere. Forests store about 45% of terrestrial carbon, and

were estimated to sequester 2.6 billion metric tons (tonnes) of CO2 per year in the 1990s, about a

third of annual anthropogenic carbon emissions from fossil fuel and land use changes.1

Concerns about global climate change and its impacts on the environment and the economy are

encouraging policy-makers and stakeholders to explore a range of opportunities that would

reduce emissions of CO2 and other greenhouse gases (GHGs).2 Reducing deforestation and

increasing the amount of carbon stored in forests are approaches that have generated considerable

interest for their ability to support climate change mitigation. Congress is considering legislation

that would, among other things, provide financial incentives for parties to reduce GHGs or

sequester (store) CO2.3 The possible use of forests to sequester CO2 is part of this larger debate

over GHGs and climate change.

This report describes current markets for forest carbon sequestration, the potential for using

forests to offset other sources of GHG emissions, and the concerns and drawbacks related to

forest carbon sequestration efforts.

Forest Carbon Markets

The potential economic and environmental impacts of global climate change have led many to

consider regulating GHG emissions from various sources, and to seek ways to ameliorate their

own GHG emissions. Projects that sequester GHGs or reduce GHG emissions from unregulated

economic sectors, such as forestry, can generate offsets, or credits, to sell to regulated entities or

to those who wish to reduce their carbon footprints. In either case—for regulated entities or for

voluntary reductions—forestry activities (e.g., afforestation, reforestation, and avoided

deforestation) typically present opportunities to offset GHG emissions.

Offsets are commonly project-based initiatives involving specific projects or activities whose

primary purpose is to reduce, avoid, or sequester GHG emissions.4 Parties can develop offsets

from a wide variety of activities, such as methane capture and agricultural soil projects,5 but

forestry-related projects offer significant potential, in the volume of GHGs that can be avoided or

sequestered.6

Gordon B. Bonan, “Forests and Climate Change: Forcings, Feedbacks, and the Climate Benefits of Forests,” Science,

v. 320 (2008): 1444-1449.

Other greenhouse gases include methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons

(PFCs), and sulfur hexafluoride (SF6). In general, emissions of these gases are measured in carbon-equivalents or CO2equivalents.

See CRS Report RL34436, The Role of Offsets in a Greenhouse Gas Emissions Cap-and-Trade Program:

Potential Benefits and Concerns, by (name redacted).

Because offset projects can involve various GHGs, they are quantified and described with a standard form of measure,

usually metric tons (tonnes) of CO2-equivalents (mtCO2-e).

See CRS Report RL34436, The Role of Offsets in a Greenhouse Gas Emissions Cap-and-Trade Program:

Potential Benefits and Concerns, by (name redacted).

See CRS Report R40236, Estimates of Carbon Mitigation Potential from Agricultural and Forestry Activities, by

(name redacted), (name redacted), and (name redacted).

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

Offsets, or credits earned by an offset project, would likely be the currency of most forest carbon

markets. Offsets are the measurable avoidance, reduction, or sequestration of CO2 or other GHG

emissions. Forestry projects as offsets raise a number of concerns. To be credible, the emissions

reduced, avoided, or sequestered must be additional to business as usual (i.e., what would have

happened anyway), verifiable, and permanent. These concepts, and the problems that arise in

assuring credible forestry, are discussed later in this report.

One concern for offset markets, in addition to the drawbacks discussed below, is the potential for

double-counting the offsets—that is, that sellers might try to sell the same offset to multiple

buyers. Thus, compliance markets, and some voluntary markets, require some type of reporting

and registration for offsets. This has led to incentives for independent reporting and registry

programs, as discussed below.

Compliance Offset Markets

A mandatory GHG reduction program, such as a cap-and-trade system, could allow covered

entities (e.g., power plants) to use offsets to comply with their GHG emissions cap. For example,

a regulated entity could purchase offsets, rather than reducing direct, onsite emissions, and might

choose to do so if the offsets were less expensive. Assuming that the amount of CO2 reduced,

avoided, or sequestered through an offset project equals the amount reduced at a regulated source,

the objective to reduce GHG emissions would be met. For global climate change, it does not

matter where or from what source the reduction or sequestration occurs; the effect on the

atmospheric concentration of GHGs would be the same.

Although forestry-related projects are eligible as offsets in several existing or developing

compliance markets, forest projects have, to date, played a negligible role. If the recent cap-andtrade proposals (discussed below) are an indication, however, interest in allowing forestry offsets

in a compliance regime is growing.

Kyoto Protocol7

The United Nations Framework Convention on Climate Change (UNFCCC) is the primary

international agreement to mitigate climate change by reducing GHG emissions. The Kyoto

Protocol established a framework for Annex I countries (developed countries, including the

United States) for “reducing their overall emissions of such gases [GHGs] by at least 5% below

1990 levels in the commitment period 2008 to 2012.” Although the United States originally

signed the Kyoto Protocol, it later rejected participation, and thus is not bound by its goals.

To provide flexibility to countries in meeting their GHG reduction targets, the protocol included

two mechanisms—the Clean Development Mechanism (CDM) and Joint Implementation (JI)—

that allow certain forestry activities to generate offsets.

See CRS Report RL33826, Climate Change: The Kyoto Protocol, Bali “Action Plan,” and International Actions, by

(name redacted).

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

Clean Development Mechanism

The CDM is a project-based mechanism that permits Annex I countries under the Kyoto Protocol

to earn credits for use in achieving their emission targets. It is the only mechanism that allows

Annex I countries to earn credits for actions in non-Annex I countries (developing countries such

as India or China). For forestry projects, the CDM includes only afforestation (planting trees

where none were previously growing) and reforestation (replanting trees on recently cleared

forest sites).8 Further, project developers can only earn credits for additional projects—those that

would not otherwise have occurred (if reforestation is required by a country’s laws, for example,

the reforestation project cannot earn credits under the CDM).

Figure 1. Trading Volume and Market Value of

Clean Development Mechanism Projects, 2005-2008

8000

600

7000

500

6000

400

5000

4000

300

3000

200

2000

100

1000

2005

2006

CDM-Primary Volume

2007

2008

CDM-Primary Value

Source: Prepared by the Congressional Research Service with data from Karan Capoor and Philippe Ambrosi,

State and Trends of the Carbon Market 2009, The World Bank, Washington, DC, May 2009,

http://wbcarbonfinance.org/docs/State___Trends_of_the_Carbon_Market_2009-FINAL_26_May09.pdf.

The CDM is a large and growing compliance offset market. Both the trading volume and market

value of CDM projects have grown substantially in recent years, although the global recession

caused a drop in 2008. (See Figure 1.) Forestry-sector projects were initially expected to play a

significant role in the CDM, but that has not been the case. An IPCC report stated that although

the forestry sector can make a “very significant contribution to a low-cost mitigation portfolio ...

this opportunity is being lost in the current institutional context and lack of political will to

implement and has resulted in only a small portion of this potential being realized at present.”9

Indeed, of the offsets in the pipeline under the CDM to date, afforestation and reforestation have

accounted for 1.1% of the projects (55 of 5,122 CDM projects) and only 0.7% of the offsets (4.7

million tonnes of certified emission reductions—CERs—out of 709.7 million tonnes of CERs for

See UNFCCC, Conference of the Parties, Seventh Session—“the Marrakesh Accords”—2001, Decision 11.

Intergovernmental Panel on Climate Change, Climate Change 2007: Mitigation. Contribution of Working Group III

to the Fourth Assessment Report (2007), p. 543.

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

all CDM projects).10 Also, to date, no afforestation or reforestation projects have had CERs

issues.

Joint Implementation

JI is also a project-based approach for countries to earn credits toward their emission targets

under the Kyoto Protocol. JI projects are conducted jointly between two Annex I countries. A

broader array of forestry activities can earn credits than under CDM; in addition to afforestation

and reforestation, avoided deforestation and forest management that enhances carbon

sequestration can qualify as JI projects. As with CDM projects, credits are only earned on projects

that otherwise would not have occurred. JI has a much smaller market than CDM—about 86

million tonnes of emission reduction units (ERUs) compared to 709 million tonnes of CERs for

CDM).11 One JI project (with 82,000 tonnes of ERUs) is a forestry project.

Ongoing Kyoto Developments

The concerns about tropical deforestation and Third World contributions to GHG emissions were

among the issues discussed at the 13th Conference of the Parties to the UNFCCC (COP-13) and

the Third Meeting of the Parties to the Kyoto Protocol (MOP-3) held in Bali, Indonesia,

December 3-14,2007.12 The United States participated in discussion at Bali, as a party to the

UNFCCC and as an observer to the Kyoto Protocol. Among the outcomes of the Bali negotiations

was an Action Plan that included:13

Policy approaches and positive incentives ... [for] reducing emissions from deforestation and

forest degradation [REDD] in developing countries; and [identifying] the role of

conservation, sustainable management of forests and enhancement of forest carbon stocks in

developing countries ...

The negotiations also led to a decision on forests and deforestation.14 The decision encourages

various efforts, including demonstration projects, to reduce GHG emissions from deforestation

and forest degradation, financial and technical support for those efforts, and improved

measurement and reporting of GHG reductions that result from such efforts. Some argue that the

most important result of the Bali negotiations, however, is that avoided tropical deforestation will

be included in any agreement on post-Kyoto (after 2012) actions on global climate change.

COP-15 and MOP-5 were held in Copenhagen, Denmark, December 7-18, 2009. Deliberations

considered multiple proposed texts, but could not reach agreement among all parties. Hence, the

Copenhagen Accord set forth numerous key action points for future negotiations. One of those

points is to establish a mechanism to mobilize international finance for REDD+ (reduced carbon

United Nations Environment Programme, UNEP Risoe CDM/JI Pipeline Analysis and Database, May 1, 2010,

http://cdmpipeline.org/.

United Nations Environment Programme, UNEP Risoe CDM/JI Pipeline Analysis and Database, May 1, 2010,

http://cdmpipeline.org/.

See CRS Report RS22806, The Bali Agreements and Forests, by (name redacted) and (name redacted).

UNFCCC, Decision -/CP.13—Bali Action Plan, at http://unfccc.int/files/meetings/cop_13/application/pdf/

cp_bali_action.pdf.

UNFCCC, Decision -/CP.13—Reducing Emissions From Deforestation in Developing Countries: Approaches to

Stimulate Action, at http://unfccc.int/files/meetings/cop_13/application/pdf/cp_redd.pdf.

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

emissions from deforestation and forest degradation plus enhanced forest carbon sequestration).

However, the nature and timing of such financial tools remains to be developed.

European Union’s Emission Trading Scheme

Members of the European Union (EU) are implementing the requirements of the Kyoto Protocol

through the EU’s Emission Trading Scheme (ETS).15 Private parties subject to the ETS cap

cannot purchase forestry offsets. However, EU governments can purchase eligible forestry

offsets, from afforestation or reforestation projects, to meet their Kyoto Protocol commitments,

up to 1% annually of their country’s base year (1990) emissions.16 The World Bank has reported

that global transactions of land use, land use change, and forestry offsets have only accounted for

6% of this allowable limit (i.e., 0.06% of EU carbon emission reductions).

Regional Initiatives in the United States

Even though the United States is not a signatory to the Kyoto Protocol, many states are

participating in regional initiatives for mandatory reduction of GHG emissions. Twenty-three

states (and four Canadian provinces) have joined one of three regional partnerships that would

require CO2 (or GHG) emission reductions. Another nine states (plus two Canadian provinces and

six Mexican states) are observers to the partnerships.

The first regional initiative to take effect is the Regional Greenhouse Gas Initiative (RGGI), a

partnership of 10 northeastern and mid-Atlantic states that creates a cap-and-trade system aimed

at limiting carbon dioxide emissions from power plants.17 RGGI allows for five types of offset

projects to generate emission credits, including afforestation.18 RGGI participants agreed to

continue to develop other offset projects, “including other types of forestry projects, and

grassland revegetation projects.”19

Two other regional initiatives have been developed, but have yet to be implemented. One is the

Western Climate Initiative (WCI), a partnership of seven western states (and four Canadian

provinces), with six additional states (plus two Canadian provinces and six Mexican states) as

observers. 20 This partnership has agreed to a regional economy-wide GHG emissions target of

15% below 2005 levels by 2020. Although the WCI logistics are in the early stages, “in each of

See CRS Report RL34150, Climate Change and the EU Emissions Trading Scheme (ETS): Kyoto and Beyond, by

(name redacted).

See European Union Directive 2004/101/EC (October 27, 2004); Kyoto Protocol, Decision 17/CP.7 (November

2001).

The 10 states are Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York,

Pennsylvania, Rhode Island, and Vermont. Also participating are the District of Columbia, the Canadian province of

New Brunswick, and “Eastern Canadian Provinces.” See http://www.rggi.org/home.

http://www.rggi.org/offsets.

http://rggi.org/docs/mou_final_12_20_05.pdf.

Participants are the states of Arizona, California, Montana, New Mexico, Oregon, Utah, and Washington, and the

Canadian provinces of British Columbia, Manitoba, Ontario, and Quebec. Observers include the states of Alaska,

Colorado, Idaho, Kansas, Nevada, and Wyoming, the Canadian provinces of Saskatchewan and Yukon Territory, and

the Mexican border states of Baja California, Chihuahua, Coahuila, Nuevo León, Sonora, and Tamaulipas. For the text

of the agreement, see http://www.westernclimateinitiative.org/.

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

the opportunities for stakeholder engagement on the design of a cap-and-trade system for the

Western Climate Initiative, there has been strong support for including an offset program.”21

The other regional initiative in development is the Midwestern Greenhouse Gas Reduction

Accord, signed by six states (and one Canadian province), with three additional states (and one

Canadian province) as observers. 22 This accord would establish a regional multi-sector GHG capand-trade program. As with the WCI, this program is still in the early development stages.

Mandatory U.S. State Requirements23

Several U.S. states have individual programs that currently or will soon mandate reductions in

CO2 or GHG emissions. For example, the California Global Warming Solutions Act of 2006 (AB

32) established a process, with target emission reductions and implementation dates, for reducing

GHG emissions within the state. However, the 2008-2009 recession and controversies over

various aspects of implementation, including forest offset project protocols, have raised questions

about the program’s future. Hawaii and New Jersey have also passed legislation to establish

mandatory statewide GHG reduction programs, but these programs are still in development.

Other states have addressed the issue in a more limited fashion—for example, through restrictions

on new power plants (e.g., Oregon and Washington), on existing power plants (e.g.,

Massachusetts and New Hampshire), and on motor vehicles.

Proposals in the 111th Congress

Members have introduced several legislative proposals that would establish a GHG emissions

reduction program, such as a cap-and-trade system. Two particular bills—the American Clean

Energy and Security Act of 2009 (H.R. 2454), commonly known as Waxman-Markey, and the

Clean Energy Jobs and American Power Act (S. 1733), commonly known as Kerry-Boxer—have

attracted most of the attention, but other bills addressing various aspects of GHG emissions

reduction and climate change have also been introduced or discussed as possible vehicles.24 The

cap-and-trade programs generally would allow the use of offsets to varying degrees, thus creating

a compliance offset market.25 Many of the proposals that allow offsets would include forestryrelated activities as eligible offset projects.

Voluntary Offset Markets

Voluntary markets are exchanges of offsets by entities not subject to emissions caps. In contrast to

compliance markets, forestry-related and other land use projects have played a much larger role in

Western Climate Initiative, Design Recommendations (Sept. 23, 2008), http://www.westernclimateinitiative.org/thewci-cap-and-trade-program/design-recommendations.

Participants are the states of Illinois, Iowa, Kansas, Michigan, Minnesota, and Wisconsin, and the Canadian province

of Manitoba. Observers include Indiana, Ohio, and South Dakota, and the Canadian province of Ontario (which is also

a participant in the WCI). The text of the accord is available at http://www.midwesterngovernors.org/publications.htm.

For more information see CRS Report RL33812, Climate Change: Action by States to Address Greenhouse Gas

Emissions, by (name redacted).

For relevant CRS reports on these bills and issues, visit the CRS website.

See CRS Report RL34436, The Role of Offsets in a Greenhouse Gas Emissions Cap-and-Trade Program:

Potential Benefits and Concerns, by (name redacted).

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

voluntary markets. A 2007 study found that, of the different offset categories in the voluntary

market, forest sequestration accounted for the largest percentage (36%) of transaction volume.26

The primary components of the voluntary market are “retail” offsets (also called the over-thecounter, or OTC, market) and offsets generated through the Chicago Climate Exchange (CCX),

both of which include forestry projects.27

In the United States and elsewhere, a growing number of organizations and individuals not

subject to mandatory emission caps are buying or selling offsets. These exchanges are voluntary,

because there is no requirement for these parties to curtail their GHG emissions.28 Buyers may be

interested in offsetting some or all of their GHG emissions from various activities, reducing their

“carbon footprint,” or becoming “carbon neutral.” Buyers might also be preparing for future

mandatory federal GHG emission reductions, getting into the market while prices are relatively

low with the expectation that today’s carbon offsets will be usable to achieve future federal

emission ceilings or caps. Sellers are interested in receiving income for various activities, which,

without the voluntary market, would likely not occur.

There is currently no registry or tracking system that follows all exchanges in the voluntary

market. For this reason, the precise size or value of the voluntary offset market is unknown.

However, a series of World Bank reports provides estimates for recent years indicating that the

size of the market has increased substantially since 2005. In 2008, the CCX market was 69

million tonnes of CO2, with a market value of $309 million, and the rest of the voluntary market

was 54 million tonnes of CO2, with a market value of $397 million.29 To put these figures in

context, U.S. GHG emissions were 6,957 million tonnes of CO2 in 2008.30

Retail Offsets

In general, the voluntary offset market refers to retail or “over-the-counter” offsets that may be

purchased by anyone. Purchasing a retail offset is as simple as online shopping. Hundreds of

organizations—private and nonprofit entities—develop, provide, or sell retail offsets to

businesses and individuals in the voluntary market.31 The quality of the retail offsets in the

voluntary market varies considerably, largely because there are no commonly accepted standards;

one source reports 21 different standards in use.32 Some sellers offer offsets that comply with

standards generally regarded as quite rigorous, such as the CDM or the Gold Standard. Other

Katherine Hamilton, Ricardo Bayon, Guy Turner, and Douglas Higgins, State of the Voluntary Carbon Markets

2007: Picking Up Steam (Washington, DC: Ecosystem Marketplace and New Carbon Finance, 2007).

Katherine Hamilton, Milo Sjardin, and Alison Shapiro, and Thomas Marcello, Fortifying the Foundation: State of

the Voluntary Carbon Markets 2009, Ecosystem Marketplace and New Carbon Finance, May 20, 2009,

http://www.forest-trends.org/documents/files/doc_2343.pdf.

See CRS Report RL34241, Voluntary Carbon Offsets: Overview and Assessment, by (name redacted).

Karan Capoor and Philippe Ambrosi, State and Trends of the Carbon Market 2009, The World Bank, Washington,

DC, May 2009, http://wbcarbonfinance.org/docs/State___Trends_of_the_Carbon_Market_2009FINAL_26_May09.pdf.

U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2008, U.S.

EPA # 430-R-10-006, Washington, DC, April 2010, http://epa.gov/climatechange/emissions/usinventoryreport.html.

Haymarket Publications, ENDS Carbon Offsets: The Independent Guide to the Voluntary Carbon Market, 2010,

http://www.endscarbonoffsets.com/.

ENDS Carbon Offsets.

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

sellers offer offsets that meet the seller’s self-established guidelines, which may not be publicly

available. These self-established protocols can vary considerably, raising questions of integrity.33

Chicago Climate Exchange

The Chicago Climate Exchange (CCX) was established in 2003 as a trading system for buyers

and sellers of offset projects to reduce GHG emissions.34 Buyers (i.e., GHG emitters) make

voluntary but legally binding commitments to meet GHG emission reduction targets; those who

emit more than their targets comply by purchasing CCX Carbon Financial Instrument (CFI)

contracts, which can be generated by qualifying carbon offset projects (from sellers). CCX has

standardized rules for CFI contracts, including forestry projects, and requires third-party

verification for projects. Eligible forestry projects include afforestation, reforestation, reduced

deforestation and forest degradation, forest management to increase stand-level and landscapelevel carbon density, and long-term carbon storage in wood products. CCX has guidelines and

rules for determining eligible projects and their resulting carbon offsets. However, studies have

also criticized the quality of the offsets generated by the CCX.35

Reporting and Registry Programs

In general, GHG reporting and registry programs allow facilities to submit and officially record

emissions data. The primary incentive appears to be the opportunity for participants to create an

official record of reduced or sequestered emissions, which the parties hope will count as

emissions credits in future mandatory reduction programs. At a minimum, participants typically

receive some public recognition for their efforts, which may help promote an organization’s

environmental stewardship profile.

1605(b) Reporting Program

Section 1605(b) of the Energy Policy Act of 1992 (P.L. 102-486; 42 U.S.C. §§ 13201, et seq.)

created a program of voluntary reporting of GHG emissions, reductions, and sequestration. The

U.S. Department of Energy, with assistance from other departments, established guidelines for

reporting estimated emissions, reductions, and sequestration; the guidelines were revised and

updated in 2006.

The program has been criticized, because facilities need only report reductions and/or

sequestration, instead of reporting all emissions.36 In other words, a company can submit a record

of tons sequestered at one location, but continue to increase emissions at other sites. This may

Studies have analyzed offset sellers and provided recommendations; see, for example, Anja Kollmuss, Helge Zink,

and Clifford Polycarp, Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards,

WWF Germany (Stockholm Environment Institute and Tricorona, March 2008), http://www.globalcarbonproject.org/

global/pdf/WWF_2008_A%20comparison%20of%20C%20offset%20Standards.pdf; and Clean Air-Cool Planet, A

Consumer’s Guide to Retail Carbon Offset Providers (December 2006), prepared by Trexler Climate + Energy

Services, http://www.aceee.org/consumerguide/CleanCool_06Report.pdf.

See http://www.chicagoclimatex.com/content.jsf?id=821.

See, for example, Kollmuss, Zink, and Polycarp, Making Sense of the Voluntary Carbon Market.

See Pew Center on Climate Change, Greenhouse Gas Reporting and Disclosure: Key Elements of a Prospective U.S.

Program, In Brief (Number 3), at http://www.pewclimate.org/docUploads/policy_inbrief_ghg.pdf.

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

present a concern in subsequent years, if these companies are allowed to receive credit for these

reductions or sequestration, and apply the credit towards compliance with an emissions cap.

California Registry

The California Climate Action Registry is a private, nonprofit organization for voluntary

reporting of GHG emissions and reductions, initially formed by the State of California in 2001.

Registry members (currently more than 300 corporations, government agencies, and other

organizations) voluntarily measure, verify, and report emissions using registry standards and

tools. The Climate Action Reserve is a division of the registry to establish standards for voluntary

carbon reductions. The registry and reserve include forestry protocols for the forest sector (for

organizations and landowners to account for entity-wide forest carbon stocks and emissions), for

forest projects (for carbon sequestration projects by landowners), and for certification (for thirdparty verifiers to assess reported GHG data).37

The Climate Registry

The Climate Registry was launched on May 8, 2007. As of February, 2009, 41 states,38 all

Canadian provinces and territories (except Nunavut), and the six northernmost Mexican states

have joined the registry to support both voluntary and mandatory reporting schemes. The Climate

Registry is modeled on the California Climate Action Registry, with a goal of providing “an

accurate, complete, consistent, transparent and verified set of greenhouse gas emissions data

supported by a robust reporting and verification infrastructure.”39 Neither the California Registry

nor the Climate Registry directly facilitate market transactions, but the information provided

could provide a consistent basis for calculating carbon offsets.

USDA Guidelines40

The 2008 farm bill (the Food, Conservation, and Energy Act of 2008, P.L. 110-246) contains a

new conservation provision to facilitate the development of markets in environmental services. It

directs the U.S. Department of Agriculture to develop technical guidelines for measuring

environmental services from farms and forests. The provision specifically includes carbon in

environmental services, in recognition of the need for uniform standards and consistent measures

of emissions reduction and carbon sequestration in the agricultural and forestry sectors. These

technical guidelines could provide a consistent basis for carbon reporting and for offset projects

in both voluntary and compliance markets.

See http://www.climateregistry.org/tools/protocols/project-protocols/forests.html.

The nine states that are not members are Alaska, Arkansas, Indiana, Louisiana, Mississippi, Nebraska, North Dakota,

South Dakota, and Texas.

See http://www.theclimateregistry.org/principles.html.

See CRS Report RL34042, Provisions Supporting Ecosystem Services Markets in U.S. Farm Bill Legislation, by

(name redacted).

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

Forestry Projects for Offsets

Several types of forestry projects might qualify as offsets for compliance or voluntary carbon

markets. The capacity of forestry projects to provide offsets is substantial, with higher carbon

prices increasing the number of economically feasible projects. One study estimated that U.S.

forestry projects could sequester more than 100 million tonnes of CO2 at a carbon price of $5 per

tonne or as much as 1,200 million tonnes at $50, as shown in Figure 2.41 Subsequent changes in

law and policy, as well as changes in energy, carbon, and forestry markets and different

assumptions, would likely lead to different conclusions. Still, this potential is significant when

compared to the 6,957 million tonnes of U.S. CO2 emissions in 2008.42

The inclusion of projects in other countries would affect the quantity and price of offsets. This is

particularly significant for forestry, since tropical deforestation and forest degradation have been

estimated to cause as much as 17% of anthropogenic carbon emissions.43 Whether to include

international projects in compliance schemes has been subject of extensive debate. (See “Avoided

Deforestation,” below.) In addition, international forestry projects may face more significant

problems than domestic projects, as discussed below.

Afforestation and Reforestation

Establishing stands of trees is one of the most basic objectives of forestry. Afforestation is

planting tree seedlings or preparing an area for tree seeding on sites that have been without trees

for several years (generally a decade or more), such as pastures or recently abandoned or retired

cropland. Reforestation is similar, but applies to sites recently cleared of trees, due to timber

harvesting or a natural disaster.

Afforestation and reforestation are common forestry activities included in trading schemes for

forest carbon sequestration offsets. Successful projects must result in established stands to qualify

as an offset. Planting failures sometimes occur due to diseases or adverse conditions (e.g.,

drought). Forest stands generally sequester more carbon than sites without forest cover.44 Forest

biomes store as much as 10 times more carbon in their vegetation than do non-forest biomes,

usually at least for decades, and for centuries in some ecosystems. Afforestation will generally

sequester more carbon than reforestation because of the carbon release from the site clearing prior

to reforestation. (See “Long-Term Wood Products,” below.) Afforestation can provide a broad

array of other environmental benefits (e.g., improved water quality and habitat for native animal

species), especially if the newly established tree stands restore a historically native mix of

species. Plantations, including plantations of exotic species, probably provide less carbon storage

than natural mixed forests, but can still be beneficial, especially if fast-growing species are used

for products to displace harvests of natural forests (reducing deforestation).

U.S. Environmental Protection Agency, Office of Atmospheric Programs, Greenhouse Gas Mitigation Potential in

U.S. Forestry and Agriculture, EPA 430-R-05-006 (Washington, DC: November 2005), p. 4-21.

EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2008.

Intergovernmental Panel on Climate Change, “Summary for Policymakers,” Climate Change 2007: The Physical

Science Basis—Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on

Climate Change, p. 3, http://www.ipcc-wg1.unibe.ch/publications/wg1-ar4/wg1-ar4.html.

Intergovernmental Panel on Climate Change, “Table 1: Global Carbon Stocks in Vegetation and Carbon Pools Down

to a Depth of 1 m [meter],” IPCC Special Report on Land Use, Land-Use Change and Forestry: Summary for

Policymakers (2000), http://www.ipcc.ch/ipccreports/sres/land_use/003.htm.

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

Figure 2. Estimated U.S. GHG Mitigation Totals by Activity: Annualized Averages,

2010-2110

900.0

800.0

Million Metric Tons

700.0

600.0

500.0

400.0

300.0

200.0

100.0

0.0

Afforestation

$15

$30

$50

Forest management

Source: Prepared by Congressional Research Service with data from U.S. Environmental Protection Agency,

Office of Atmospheric Programs, Greenhouse Gas Mitigation Potential in U.S. Forestry and Agriculture, EPA 430-R-05006 (Washington, DC: November 2005), pp. 4-21.

The opportunities for afforestation are best in areas with long histories of land clearing for

agriculture and other uses—Europe, North America, China, India, and the like. Some countries or

regions with substantial open land may have limited opportunities for afforestation because of

their arid conditions (e.g., central Asia, north Africa). In other areas (such as the United States),

strong demand for corn and other agricultural products (e.g., soybeans, oil palms, or switchgrass)

to produce ethanol or biodiesel may also limit afforestation opportunities.

Long-Term Wood Products

Some have suggested that harvesting timber for long-term wood products should be included as

possible carbon offsets. Lumber, plywood, and other solid wood products can store carbon for

many years, ranging from 10 years for shipping pallets to 100 years or more for buildings.45

Sawmill wastes are almost entirely used for paper or energy (burned as a substitute for fossil

fuels). Paper products have a relatively brief duration, often releasing their carbon in less than a

year, but paper is commonly recycled, reducing the carbon release as well as reducing the demand

for wood from the forest.46

Kenneth E. Skog and Geraldine A. Nicholson, “Carbon Sequestration in Wood and Paper Products,” in The Impact of

Climate Change on America’s Forests: A Technical Document Supporting the 2001 USDA Forest Service RPA

Assessment (Linda Joyce and Richard Birdsey, tech. eds.), Gen. Tech. Rept. RMRS-GTR-59 (Ft. Collins, CO: USDA

Forest Service, 2000), pp. 79-88.

Skog and Nicholson, “Carbon Sequestration in Wood and Paper Products.”

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

The wood left on the site after harvesting timber for wood products is more problematic. Some

carbon may be added to the soil through decomposition, but much of the carbon left on the site

returns to the atmosphere over time—a few minutes if the slash (tree tops and limbs) is burned;

weeks, months, or even years if the slash rots.

Wood product harvests from natural tropical forests generally release more carbon than do

harvests from plantations and temperate and boreal forests. Native tropical forests have much

greater tree species diversity, and thus generally have a greater percentage of the biomass on a

site remaining after a timber harvest. Reduced impact logging (RIL) is a collection of practices

and techniques intended to reduce the environmental damage of logging, especially in the tropics,

that can ameliorate the carbon release from tropical logging.47 One source reported that RIL

reduces wood waste by more than 60% and soil disturbance in roads, landings, and skid trails by

almost 50%.48 However, one barrier to increased use of RIL is illegal logging in the tropics.49

The net carbon consequences of timber harvesting for wood products have been debated

extensively, with little resolution. Some argue that harvesting increases carbon sequestration by

storing carbon in long-term products and sequestering large amounts of carbon in reforestation.50

Others have determined that the carbon released in harvesting operations substantially exceeds

the additional carbon sequestered by reforestation.51 Both conclusions may be valid in certain

circumstances; the consequences probably depend on many factors, such as the products made

and the amount and treatment of the carbon left on the site. Thus, whether timber harvesting for

wood products could be a carbon offset is uncertain.

Forest Management

Forest management includes a variety of practices. Some are aimed at enhancing growth of the

commercially desirable trees. Other plants compete for space, light, water, and nutrients. The

undesirable vegetation can be killed chemically (with herbicides), mechanically (with machines

or tools), or sometimes by fire (with prescribed burning). The net result, regardless of the tool, is

that the carbon from the dead vegetation is released by burning or decomposition. One study

found that mechanical thinning increased total carbon storage in dense, young stands, where

competition had significantly reduced growth rates; elsewhere, it released carbon by reducing

canopy cover and disturbing soils.52 This is significant because many forest carbon models

See Dennis P. Dykstra, Reduced Impact Logging: Concepts and Issues, FAO Corporate Document Repository, at

http://www.fao.org/docrep/005/ac805e/ac805e04.htm.

Tropical Forest Foundation, “Reduced Impact Logging,” at http://www.tropicalforestfoundation.org/ril.html.

See CRS Report RL33932, Illegal Logging: Background and Issues, by (name redacted). See also Patrick B. Durst

and Thomas Enters, “Illegal Logging and the Adoption of Reduced Impact Logging,” paper presented at Forest Law

Enforcement and Governance: East Asia Regional Ministerial Conference (Denpasar, Indonesia: September 11-13,

2001), at http://wbla0018.worldbank.org/eap/eap.naf/Attachments/FLEG_S6-5/$File/6+5+Durst+FAO.pdf.

John Perez-Garcia, Chadwick D. Oliver, and Bruce R. Lippke, “How Forests Can Help Reduce Carbon Dioxide

Emissions to the Atmosphere,” in U.S. House Resources Subcommittee on Forests and Forest Health, Hearing on

H.Con.Res. 151, September 18, 1997 (Washington, DC: GPO, 1998), Serial No. 105-61, pp. 46-68.

Mark E. Harmon, William K. Ferrell, and Jerry F. Franklin, “Effects on Carbon Storage of Conversion of OldGrowth Forests to Young Forests,” Science, v. 247 (Feb. 9, 1990): 699-702; and Peter M. Vitousek, “Can Planted

Forests Counteract Increasing Atmospheric Carbon Dioxide?” Journal of Environmental Quality, v. 20 (Apr.-June

1991): pp. 348-354.

Paul Schroeder, “Can Intensive Management Increase Carbon Storage in Forests?” Environmental Management, v.

15, no. 4 (1991): pp. 475-481.

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

project carbon sequestration as a fixed percentage of commercial timber volume, not of total

biomass on the site. In contrast, using fertilizers can enhance total vegetative growth without

disturbing the soil, although many fertilizers are derived from fossil fuels and thus might not

result in total net carbon storage. In sum, forestry practices to enhance growth apparently increase

carbon sequestration in some circumstances, but not in others. This limits generalizations about

potential of forestry practices to offset GHG emissions and raises questions about including

growth enhancement for carbon offset projects.

One particular forest management practice that can enhance carbon sequestration is delayed

timber harvesting. As noted above, whether harvests for long-term wood products represent a net

storage or release of carbon is disputed. However, few dispute that allowing trees to continue to

grow will continue to sequester additional carbon. Many of the estimates of the potential carbon

benefits from forest management are based on the relatively low cost to induce landowners to

delay the harvest of their timber to sequester additional carbon in the short run. However, the lack

of harvest planning for many landowners raises questions about additionality from delayed

harvesting, as discussed below.

Another significant practice is certified sustainable forestry. The sustainability of forests has long

been an issue of environmental concern. In 1994, the Working Group on Criteria and Indicators

for the Conservation and Sustainable Management of Temperate and Boreal Forests was formed

to develop internationally accepted measures of sustainable forestry.53 The 12 member countries,

representing 90% of the world’s temperate and boreal forests, agreed in 1995 on a set of criteria

and indicators to measure forest conservation and sustainable management; these are presented in

the Santiago Declaration.54

Several systems have been developed to certify that forests are being managed sustainably,

consistent with the criteria and indicators developed through the Montreal Process and similar

processes for other forested regions. The systems include programs from the Forest Stewardship

Council (FSC), the Sustainable Forestry Initiative (SFI), and the Programme for the Endorsement

of Forest Certification (PEFC). Although the programs differ in many details, they have many

elements in common, such as using RIL, reforesting after harvests, protecting water quality,

maintaining habitats for rare species, and preserving native peoples’ rights. Furthermore, most

require long-term planning for forested areas and independent, third-party monitoring to assure

that implementation is consistent with the system’s requirements. Most systems also require

chain-of-custody reporting to assure that wood products claiming to be from sustainable forests

actually come from certified forest lands.

Forest certification clearly provides a legally enforceable standard for forest management that

could establish a permanent contract for sustainable production. It clearly produces environmental

benefits and provides carbon sequestration when compared to unregulated timber harvesting.

However, quantification of the carbon offsets that might result from forest certification, reflecting

the variation in forest types and traditional forestry practices, poses a challenge.

See http://www.rinya.maff.go.jp/mpci/.

See http://www.rinya.maff.go.jp/mpci/rep-pub/1995/santiago_e.html. The Montreal Process excludes the forests of

Europe (except for the Russian Federation), which have been addressed separately, under the Helsinki or Pan-European

Process.

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

Avoided Deforestation55

As noted above, tropical deforestation is estimated to account for about 17% of global

anthropogenic GHG emissions. Thus, avoiding tropical deforestation has great potential to reduce

GHG emissions. Since tropical deforestation is currently external to carbon compliance

requirements, it could be a substantial source of forest carbon offsets. At the project level,

preventing deforestation is a relatively simple, straightforward action—contracts, easements, and

other legal instruments can be created to assure that a site is not cleared of its timber. However,

avoiding deforestation is particularly prone to leakage—deforestation of another site to provide

the desired products or outcomes. This issue is discussed below.

Some of the leakage problem can be addressed by determining offsets for avoided deforestation at

the national or regional level; this approach is used for some CDM and JI offsets. Proponents of

including aggregate national total for avoided deforestation argue that (a) it lowers compliance

costs, since avoiding deforestation can be substantially less expensive than active forestry or other

emission reduction or sequestration efforts; and (b) it provides compensation to developing

tropical Third World nations. Opponents argue that (a) it would be a disincentive to, and would

raise eventual costs for, developing countries to participate in global GHG emission reduction

efforts; (b) it would benefit the political elite of developing nations, while their indigenous

peoples would be further disenfranchised; and (c) it would delay technological development and

implementation to reduce GHG emissions in the industries that cause the emissions.56

Potential Drawbacks of Forestry-Related Projects

Although forestry-related projects may offer considerable opportunities to mitigate climate

change, several issues with offsets generally and with forestry projects in particular have

generated controversy. The primary concern is the integrity and credibility of offsets generated by

forestry activities. To be credible, a forestry offset should provide a net CO2 reduction or

sequestration equal to an emission reduction from a direct emission source, such as a smokestack

or exhaust pipe. This issue is critical, particularly if the offsets are to be used in an emissions

trading program.

Implementing this objective imposes challenges for all offset types, but forest offsets generally

present more hurdles than other projects. To generate credible offsets, projects must be additional

to what would have occurred without the incentive supplied by the carbon market; they must be

verifiable (i.e., measurable and enforceable); they must control or adjust for leakage; and they

must address the issue of permanence. Forward crediting is proposed by some to accommodate

the long period of carbon accumulation in forests, but others are concerned about assuring

payments only for actual carbon sequestration. These issues are discussed below.

See CRS Report R41144, Deforestation and Climate Change, by (name redacted) and (name redacted).

See CRS Report RL34436, The Role of Offsets in a Greenhouse Gas Emissions Cap-and-Trade Program:

Potential Benefits and Concerns, by (name redacted).

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

Additionality

Additionality is a significant factor in determining offset integrity. Indeed, if a project is not

additional, it cannot qualify as an offset in a compliance market. Additionality means that the

offset project is an activity beyond what would have occurred under a business-as-usual scenario.

In other words, in the case of a forestry project, would the sequestration have happened anyway?

A test of additionality would examine whether the offset project would have gone forward in the

absence of the forest carbon market. For instance, does the activity represent a common practice

or conform to an industry standard? Is the forestry project required under other federal, state, or

local laws? Would the sequestration project generate financial gain (i.e., be profitable) due to

revenues from outside the offset market?57 For example, in the United States and Canada,

reforestation following a timber harvest would generally not qualify as an offset, because most

states and provinces require reforestation. Similarly, disposal of sawmill waste by burning to

produce energy, and displace the use of fossil fuel, would not qualify as an offset, because all

U.S. sawmills burn their waste (except for what is sold for paper production) for energy.

Additionality is at the crux of an offset’s integrity, but applying the additionality criterion may

present practical challenges. Assessing a project’s additionality may involve some degree of

subjectivity, which may lead to inconsistent additionality determinations. For instance, it may be

impossible to accurately determine “what would have happened anyway” for some projects. Data

on historic deforestation are sketchy, at best, making it difficult to assess whether an avoided

deforestation program would be additional. In addition, offsets from forest management via

delayed timber harvests might be difficult to document as additional, since many landowners do

not have explicit plans for the exact timing of future harvests.

Verifiability

The forest carbon sequestration must be real and measurable. That is, the forestry project—

afforestation, avoided deforestation, etc.—must actually occur and have a quantifiable amount of

carbon sequestered. Meeting these objectives requires measurement, monitoring, and

enforcement.58

Measurement

Measuring forest carbon sequestration can be problematic. Various approaches have been taken,

including tables, models, and protocols for estimating carbon sequestration by various practices in

different locales. A common limitation is that many estimators use commercial timber volume as

the basis for carbon stored, but the relationship between commercial volume and carbon

sequestered might not be linear. For example, thinning is a forestry practice intended to increase

commercial volume by concentrating the same total growth on fewer commercial stems.59 Total

See World Resources Institute, The Greenhouse Gas Protocol for Project Accounting (December 2005), at

http://www.ghgprotocol.org.

See CRS Report RS22964, Measuring and Monitoring Carbon in the Agricultural and Forestry Sectors, by (name re

dacted) and (name redacted).

See David M. Smith, Bruce C. Larson, Matthew J. Kelty, and P. Mark S. Ashton, The Practice of Silviculture:

Applied Forest Ecology, 9th ed. (New York, NY: John Wiley & Sons, Inc., 1997).

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

growth also varies widely from site to site, depending on a host of localized physical and

environmental factors. Thus, many observers recommend, and some existing carbon markets

require, field measurements to adjust the estimated carbon storage to on-the-ground reality.60 One

problem is that field measurements are expensive and subject to sampling error.

Monitoring

To verify that sequestration projects are meeting their stated level of sequestration, some level of

monitoring is required. For enforceable contracts, periodic monitoring is essential to assure that

the contract is fulfilled. For agreements larger than projects, such as avoided deforestation for an

entire landholding or country, periodic monitoring becomes more important and more difficult.

Remote sensing (e.g., satellite imagery) and field sampling are common practices for monitoring

large-scale changes, but both are expensive and both are subject to sampling and other possible

errors. The two practices are commonly used together, with field sampling to assure the on-theground accuracy of remotely sensed data.

Enforcement

Often, the reality of a project is assured through an enforceable contract, such as an easement

attached to the forested property to require continued forest cover. Many existing forest carbon

markets require third-party verification for forest carbon credits. For some markets and practices,

assurance of sustainable forest management can be obtained through forest certification. A

number of organizations, such as the Forest Stewardship Council (FSC), the Programme for the

Endorsement of Forest Certification (PEFC), and the Sustainable Forestry Initiative (SFI), have

set standards and rely on independent third parties for certification of sustainable forest

management.

Leakage

Leakage “occurs when economic activity is shifted as a result of the emission control regulation

and, as a result, emission abatement achieved in one location that is subject to emission control

regulation is [diminished] by increased emissions in unregulated locations.”61 In the context of

forestry-related offsets, the opportunity for leakage exists on two fronts: emissions leakage and

product leakage.

Emissions Leakage

Compared to other offset types, forestry projects, particularly those that sequester carbon by

curbing logging, likely present the greatest risk of leakage.62 For example, if large landowners or

countries agree to preserve their forests, wood processors might simply shift their harvests to

See, for example, The Wilderness Society, Ecology and Economics Research Department, Measuring Forest

Carbon: Strengths and Weaknesses of Available Tools, Science & Policy Brief, No. 1 (Washington, DC: April 2008).

U.S. Environmental Protection Agency, Office of Air and Radiation, Tools of the Trade: A Guide To Designing and

Operating a Cap and Trade Program For Pollution Control, EPA430-B-03-002 (June 2003), Glossary.

Nicholas Institute for Environmental Policy Solutions, Harnessing Farms and Forests in the Low-Carbon Economy:

How to Create, Measure, and Verify Greenhouse Gas Offsets, Zach Wiley and Bill Chameides, eds. (Durham, ND:

Duke Univ. Press, 2007), pp. 18-19.

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

neighboring landowners or countries. As a result, the total harvest (total deforestation) might be

unchanged, even though particular landowners or countries might have avoided deforestation of

their forests. The only recognized solution is for a majority of landowners or countries to agree to

participate in a program to reduce deforestation.63

Product Leakage

Forest products face another type of leakage: product leakage. Producing long-term wood

products, such as lumber and plywood, uses much less energy—and thus emits fewer GHGs—

than comparable quantities of alternative products used to build homes and other structures, such

as concrete and masonry walls and steel and aluminum framing.64 Thus, avoided deforestation

might lead builders to replace wood with other more energy-intensive, GHG-emitting products.

The net carbon consequences of such a shift are unclear.

Permanence

For forestry projects, one concern is that the projected sequestration will be halted or reversed.

Forest offset projects are typically expected to generate offsets (via sequestration) for decades.

Some are concerned that the emission offsets will be subsequently negated by human activity

(e.g., change in land use) or a natural occurrence (e.g., forest fire, disease, or pestilence).

Permanence is especially problematic for forests, because forests are composed of living

organisms—they are born (seeds germinate), they grow, and eventually they die. This life cycle

varies widely, depending on the tree species; for example, aspen and Southern yellow pines rarely

grow older than 200 years, while Douglas-fir and many live oak species commonly grow for

more than 1,000 years, and bristlecone pines can live for more than 4,000 years. Nevertheless,

trees die eventually, and their carbon is converted to wood products, contributed to the soil, or

sent into the atmosphere.

Permanence can be achieved for forest projects by providing for mitigation or a buffer against

natural losses. An analysis of four particular carbon offset market standards found that one

required a 10% buffer (i.e., only 90% of the estimated carbon offset could be sold); another

required a 30% buffer, while the other two used variable buffers (from 5% to 60%) depending on

an assessment of the risk of the project.65 For landowners or countries, carbon sequestration

permanence can be achieved through sustainable forestry practices, with reforestation following

any and all carbon removals to assure stable or increasing carbon storage.

An alternative for achieving permanence is to use regional or national accounting, such that a

reversal on one project or site is balanced by additional sequestration from other projects or sites.

Brian Murray and Lydia Olander, A Core Participation Requirement for Creation of a REDD Market, Nicholas

Institute for Environmental Policy Solutions, Short Policy Brief (Durham, NC: Duke Univ. Press, May 2008).

Jim Bowyer, Steve Bratkovich, Alison Lindberg, and Kathryn Fernholz, Wood Products and Carbon Protocols:

Carbon Storage and Low Energy Intensity Should Be Considered (Dovetail Partners, Inc., April 28, 2008).

Eduard Merger and Alwyn Williams, Comparison of Carbon Offset Standards for Climate Forestation Projects

Participating in the Voluntary Carbon Market: A Comparison of Climate, Community & Biodiversity Standard

(CCBS), CarbonFix Standard (CFS), Plan Vivo Systems and Standard, and AFOLU Voluntary Carbon Standard (VCS)

(Christchurch, New Zealand: Univ. of Canterbury, May 2008).

Congressional Research Service

Forest Carbon Markets: Potential and Drawbacks

This relies on accurate measurement and monitoring to assure that payments are for net carbon

sequestration.

Forward Crediting

Many biological sequestration projects, such as afforestation or reforestation, present a unique

challenge because of the significant time gap between the initial project activity (e.g., planting

trees) and the actual carbon sequestration. Although the project may generate considerable offsets

in aggregate, the offsets are produced gradually, over the course of many years or decades. Tree

growth patterns follow a traditional S-shape, with slow growth in the early years, accelerating for

many years to decades, before tapering off to an eventual maximum. The age at which growth has

reached its maximum varies widely among species—as short as 100 years for short-lived species

(e.g., aspen and Southern pines), and more than 1,000 years for long-lived species (e.g., western

hemlock and Douglas-fir). However, even old-growth forests that have little or no additional tree

growth apparently continue to sequester carbon in the soils.66

This aspect of sequestration projects raises the question of how sequestration offsets should be

distributed. Should they be allotted as they are produced—on an annual basis—or should they be

allotted up front in an aggregate sum, based on expected future sequestration? The latter option is

referred to as forward crediting.

Forward crediting entails risk, because there is some uncertainty about whether the offsets will

actually be realized. This risk can be addressed through discounting, much as the permanence risk

is addressed through buffers: by retaining a percentage of the offsets that are expected over the

course of the project to accommodate unexpected events (e.g., slower vegetative growth than

anticipated). Whether such discounting is necessary for forest carbon offsets, and if so how much

the discount should be, are as yet undetermined.

Author Contact Information

(name redacted)

Specialist in Environmental Policy

[redacted]@crs.loc.gov, 7-....

Acknowledgments

Ross Gorte, retired CRS Specialist in Natural Resources Policy, made important contributions to this

report.

See, for example, Mark E. Harmon, William K. Ferrell, and Jerry F. Franklin, “Effects on Carbon Storage of

Conversion of Old-Growth Forests to Young Forests,” Science, v. 247 (February 9, 1990): pp. 699-702.

Congressional Research Service

EveryCRSReport.com

The Congressional Research Service (CRS) is a federal legislative branch agency, housed inside the

Library of Congress, charged with providing the United States Congress non-partisan advice on

issues that may come before Congress.

EveryCRSReport.com republishes CRS reports that are available to all Congressional staff. The

reports are not classified, and Members of Congress routinely make individual reports available to

the public.

Prior to our republication, we redacted names, phone numbers and email addresses of analysts

who produced the reports. We also added this page to the report. We have not intentionally made

any other changes to any report published on EveryCRSReport.com.

CRS reports, as a work of the United States government, are not subject to copyright protection in

the United States. Any CRS report may be reproduced and distributed in its entirety without

permission from CRS. However, as a CRS report may include copyrighted images or material from a

third party, you may need to obtain permission of the copyright holder if you wish to copy or

otherwise use copyrighted material.

Information in a CRS report should not be relied upon for purposes other than public

understanding of information that has been provided by CRS to members of Congress in

connection with CRS' institutional role.

EveryCRSReport.com is not a government website and is not affiliated with CRS. We do not claim

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.