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Carbon Markets 101

This article provides an introduction to how forest carbon programs and markets work.

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Updated:

June 26, 2023

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A deer in a small forest opening (Photo credit: Calvin Norman)

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Carbon Offsets

How much compensation is directed to forest owners is a function of how much carbon dioxide (CO₂) emissions are offset by their forest. Carbon credits represent metric tons of CO₂ emissions avoided. Forest carbon is in a solid form until disturbed by decomposition or combustion. When oxygen is added the carbon transforms into CO₂, which acts as a greenhouse gas in the atmosphere. One unit of forest carbon stored equals 3.6667 units of CO₂ avoided.

The voluntary carbon offset market is where most family forest offsets are currently sold. In 2022, sales for nature-based carbon offset projects ranged anywhere from $3 to $7 per metric ton of CO₂e (carbon dioxide and greenhouse gas equivalents). The California-Quebec Carbon Market is a compliance market and had CO₂ sales approaching $28 per metric ton in November 2021, but the offset projects sold on this market don't typically involve family forest owners. The wide range in market prices are due to variation in the types of assurances associated with the carbon project and the protocols used to guarantee that a carbon offset has been produced.

The carbon units sold vary in how they are formulated, which can be confusing for some forest owners. The reason for developing different carbon accounting approaches is to attract different kinds of carbon offset buyers. For example, the protocols approved by Verra are used to issue "Verified Carbon Units." The protocols approved by the American Carbon Registry are used to issue "Emission Reduction Tons." In both of these cases, the unit being traded guarantees that one ton of CO₂e emissions (carbon dioxide and equivalent greenhouse gases) will be offset for 100 years.

Innovations in carbon accounting has led to new classifications of carbon units being sold. Harvest Deferral Credits (HDC) are a guarantee made by the forest owner that a certain amount of CO₂e emissions will be prevented from entering the atmosphere for a short period of time (e.g., one year) by delaying harvest. How much CO₂e is based on the characteristics of the forest enrolled in the program (e.g., tree species, stand age, and density) and the likelihood that the trees would be harvested. The project developer converts the HDCs into metric tons of CO₂e which buyers purchase to offset their carbon footprint for at least 100 years.

Where do Forests Fit in?

Forestry is a popular style of creating carbon offsets for many reasons: trees already exist and are storing massive amounts of carbon—unlike many other carbon capture technologies—they reproduce themselves, support many other lifeforms, and they can pull carbon from the air. Sustainably managed forest can improve the lives of people surrounding them by providing jobs, recreation, and food. Finally, forestry is already a well-established science with many trained practitioners (foresters) and several large industries. This means that guidelines for sustainably managed forests are already established, equations about tree growth already exist, and management tools do not need to be invented.

There are some risks to using forests as carbon storage sites. They can catch fire, pests (insects, bacteria, viruses, and fungi) kill millions of trees each year, and they can be converted to other uses (e.g., development). Poorly planned projects can also cause additional damage to ecosystems due to planting non-native species or using unsustainable harvesting practices. Overall, forestry projects are excellent for offsetting greenhouse gas emissions, but—like everything—care must be taken in implementing the project and there are some risks.

Who is Buying Carbon?

An increasing number of corporations are looking to raise their environmental, social, and corporate governance (ESG) ratings. Investing in carbon offsets and setting net zero carbon emission goals is a useful way of attracting new investors and increasing profits. Non-governmental organizations (NGOs) like the Nature Conservancy and World Wildlife Foundation also view these reductions as a way to advance their mission. Private companies often partner with NGOs to expand opportunities and fund new projects. These partnerships have resulted in an increase in both the number and variety of carbon projects.

Kinds of Programs

Forests sequester carbon in many different ways and not all forests are the same. The complexity of the carbon cycle above and below ground makes it very difficult to measure all the carbon that is sequestered. As a result, most projects are limited to measuring (and selling) carbon stored only in trees, where sequestration rates are better understood. There are two main types of projects used to sell carbon: captured-based or practice-based.

Captured-based projects are the traditional carbon offset, where the volume of carbon stored is measured over time and sold. This type of project requires an annual or bi-annual survey to see how much carbon has been stored. Measurements can be taken in the field or using remote sensing technology. Carbon accounting techniques are used to show when additional carbon has been stored and can be sold as a carbon credit. Capture-based projects often use delay in harvest methods to store additional carbon.

A practice-based project pays landowners to conduct forest management practices that are known to enhance carbon storage by enhancing forest health and productivity. This can involve invasive species management to support regeneration of native tree species, or managing forests to grow to a larger size. These programs could allow for some timber harvesting within certain guidelines (e.g., they are sustainable, or forests are not high-graded).

Are Carbon Projects Right for You?

While carbon offsets may be appealing as a new stream of revenues, it's important that landowners evaluate projects and decide whether these programs are right for them and if the programs align with their goals for owning a forest. Most projects require long contracts (20–100 years depending on the project) and landownership may change over the length of these contracts. Different programs handle transitions in landownership in very different manners, some programs are tied to the deed and the new owner must continue to follow the contract. In other programs it is up to the new owner to decide whether or not to stay in the program; generally, if the new landowner opts out, the landowner that started in the carbon deal will have to pay back any money they got from the carbon program along with interest and fees. Besides just considering landownership, it is important to think about the condition of the forest. Most contracts set some restrictions around how landowners manage their forests, like a yearly maximum harvest or allowing only certain types of harvesting strategies. Make sure these restrictions align with the best management of the forest and the goals of the landowner. These carbon contracts can be flexible and tend to be negotiated with individual landowners to help fit with their needs and objectives. Carbon sales may provide a source of income while forests are growing or for landowners who are hesitant to harvest timber, but it is important for landowners to think about what is the best future for their forest and consult with professionals (both legal and forestry) before signing up.

This article was produced by the Forest Owner Carbon and Climate Education (FOCCE) program.