What Should I Think About Before Signing a Forest Carbon Contract?

A key part of enrolling in a carbon program is signing a contract which spells out landowner responsibilities and administrative details.

Finding a Good Fit

Many owners are interested in enrolling in a carbon program to help support the costs of forest ownership. However, owners should also consider how involvement in a carbon program aligns with their broader management objectives, since many contracts constrain which management actions can be taken and some require long commitments. To help navigate this decision, it is important for owners to work with a professional forester. Professional foresters are able to point out the long-term implications of certain management actions on a property and can help make recommendations that support the owner's long-term management objectives.

Enrolling in a program is also more than a financial opportunity, but an implied collaboration with the project developer and the organizations buying the carbon offsets. Since many carbon programs are new and looking to scale up, landowner enrollment in the program is essential to their success. Forest owners may want to consider if their own values and ethics are reflected in the transactions and who they sell the carbon to. Owners can learn more about an organization by talking to their representatives, other landowners, conservation professionals, and reviewing the company's website.

Taking part in a new market will involve some up-front time commitment on the owner's part. This is because owners should learn and consider all the program options available in the area, have discussions with trusted advisors, and work with the representatives of the carbon program to determine if their forest may qualify. If their forest does qualify, then setting up a contract may also take some time since the carbon being sold needs to be verified, and negotiations should be made with the advice of forestry and legal professionals. In some cases, delaying enrollment may be the best option until certain concerns are resolved, or new options become available.

Management Obligations

Management is the most important part of a carbon payments program, as management activities done (or not done) impact the forest, surrounding ecosystems, and climate for decades. Carbon programs pay forest owners to change their management practices so that the forest sequesters more carbon than it would have otherwise. This "additional carbon" storage is the product being sold to buyers who want to offset their carbon footprint.

Carbon offset project developers typically have criteria for selecting which forests and participants are more likely to provide additional carbon storage. This is why a carbon broker has likely reached out to you with a phone call or flyer. Forest owners also have an ethical obligation to determine if their own forest is a good fit for climate change mitigation. They can do this by asking themselves two important questions:

1. Are the requested management activities a real change from the management activities I already planned to do?
2. Are the requested management activities still in alignment with my broader management objectives?

The answer to the first question points to whether or not the change in carbon storage was intentional. The answer to the second question points to whether or not changes in management will be sustained into the future.

It is highly unlikely that management obligations will be the same from program to program, or even contract to contract. This is because project managers are constantly updating protocols and procedures for managing and measuring carbon in forests. Some programs may also make customized management recommendations for your forest. Most carbon programs prefer to use protocols that are easy to scale up and provide an expected return on investment for their organization. This means that some options may not work for the needs and conditions of some forest owners. If the opportunities available now are not a good fit, it is reasonable to expect that new options may come up in the future as programs evolve.

Carbon registries are responsible for approving carbon offset project protocols, and they also track the selling and buying of carbon. Some of the more well-known forest carbon registries are Verra and the American Carbon Registry*. Registries determine the types of forest management practices that are well suited for sequestering additional carbon. The practices with the highest assurance of additional carbon storage typically involve creating new forests in places where forests have been removed or are unlikely to occur.

In places where forests already exist, "improved forest management" (IFM) practices are commonly recommended. The goal is to extend the life of the forest, help the forest grow more quickly, and/or manage at higher stand densities. Specific activities may include extending harvest rotations, placing limitations on how much wood may be removed from the stand, and managing for invasive species. Other climate-smart forest practices include actions that reduce risk of wildfire, pests and disease and improve natural regeneration (i.e., successful growth of younger trees). Carbon payment programs are generally focused on incentivizing a few select practices, depending on the original condition of the forest.

Carbon program representatives will often initiate discussions by describing the types of management practices generally required in their programs. However, the activities outlined in the contract will likely be specific to the owner's property. To review specific activities, look for a section in the contract titled "Responsibilities". Owners should verify that the obligation in the contract reflects prior discussions and what they have come to understand during the negotiation process. It is also important that owners verify that they are only selling the carbon that will be stored on their land, or their "Carbon Rights", and not any other non-agreed upon rights like timber or mineral rights. If the owner finds something new or confusing when reviewing with the contract, they should not sign it. Owners should ask the program representative for clarification and solicit advice from other professionals.

Time Commitments

Specific time commitments are also generally found in the "Responsibilities" section. Like management obligations, time commitments can also vary from program to program and even contract to contract. Programs that require very long contracts are usually constrained by the protocols that they follow.

The protocols advanced by the California Air Resources Board (CARB) requires payments to landowners for around 25 years and then an additional 100-year monitoring period in which there is no payment. Projects that use CARB supported protocols are generally able to sell carbon on the California-Quebec Carbon Market, which is a regulated market. Regulated markets are controlled so that prices increase as new caps are put on carbon dioxide emissions. The average price of a carbon credit sold on a regulated market is typically higher compared to credits sold on an unregulated market.

Programs that do not work with CARB supported protocols are very often selling into the voluntary carbon market. The voluntary market is unregulated and uses third-party verification procedures to support claims that a carbon project meets a set of standards for generating a legitimate carbon unit that can be sold. Programs that sell carbon on the voluntary market are able to use protocols that allow for shorter contract periods, ranging from 1 year to 100 years, but many have terms of 20 to 40 years.

Carbon Units

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. The Verra registry recently determined an HDC provides about 1% of the climate mitigation benefits compared to a verified carbon credit.

The open nature of the voluntary carbon market is why project developers are starting to work with more diverse categories of landowners and offer shorter contracts. However, the use of voluntary oversight also means that the buying and selling of carbon can still occur even if carbon storage activities are sometimes not additional. In this "wild west" scenario it is important that forest owners understand the carbon projects they are part of, trust the organizations that they work with, and if possible, help support the development of new high-quality programs and projects.

Payments

The payment schedule generally has its own section in the contract. Each carbon program differs in the allocation of payments for carbon credits. Some programs provide payment based on the types of management practices implemented and are similar to a cost-share arrangement (e.g., dollars/acre/year), other programs provide payment based on how many metric tons of emissions have been offset within a designated time frame.

The shorter the contract, the more likely the payment will arrive at the end of the contract, after verification procedures are done. For longer contracts and for some management practices, payments are arranged in a variety of ways so that upfront costs are covered, but future payments may also be expected.

In some contracts, owners may be offered a percentage of the credit sale each year (e.g., revenue sharing). This percentage can be spread evenly throughout the contract or weighted heavier at certain periods (e.g., the beginning or the end). Owners should verify if a percentage of credit sale allows them to benefit from changes in carbon prices.

Sometimes the program will allow the owner to negotiate a price and possibly respond to market conditions. However, this may be a challenge for some owners since the market price of carbon credits can be different from project to project, and the opportunity costs for family forest owners are not well understood by many landowners. It may be helpful to consider what other forest owners think is fair compensation for forgoing certain land uses.

Project developers, managers, and other project partners (e.g., consultants) receive a commission for organizing the project. The commission rate and how they are allocated are generally not disclosed in a contract with forest owners. If this information is important to the owner, they should ask the program representative. Keep in mind that sometimes commissions can be based on thresholds in landowner enrollment.

In general, most landowners prefer to receive more money upfront. Having money upfront allows them to buy seedlings, perform needed management activities, and acknowledges the uncertainty related to future conditions. Most carbon programs, however, prefer to weight payments towards the end of the contract to ensure that landowners will comply with the program. It is important for owners to decide which payment arrangements are acceptable before entering negotiations, otherwise the owner may end up with “less” money than expected because some payments are only available in the future. To address this concern, some programs will offer an advance or down payment to encourage entry into the program and then a regular schedule of payments for the remainder of the contract.

Time Value of Money

Understanding the value of money in the future is critical for making economically efficient decisions about forest investments. Given the slow nature of how trees grow, it can take 1-125 years for a carbon contract to be completed. While this may be a short time for trees it is a long time for people. The financial impact of changing management activities can be very different under different payment structures. Money made available today is generally more valuable compared to money that is made in the future. If a person is asked to wait for payment, they should be compensated for that delay. Interest rates help with this by calculating the value of a dollar earned today compared to a dollar earned next year.

Let's look at an example of how the time value of money can impact decision-making if the carbon program requires a delay in harvest. The forest today is ready to be harvested and will likely net $1,000, but the forest owner has been approached about enrolling in a harvest deferral program. The owner is offered a total of $200 that will be paid out after 5 years of not harvesting. To decide if the contract is worth enrolling in, calculate the future value of the money from a harvest today (at a 4% interest rate), and compare it to the sum of the carbon payment ($200) and the revenue from a harvest 5 years in the future. To calculate the first part, or the future value of $1,000 invested for 5 years at 4% interest, use this equation: 

Value of harvest money invested for five years = $1,000 x (1 + .04)5 = $1,216.

If the funds received from the harvest today were invested, they could provide the landowner $1,216 in five years. Compare that with $1,450, which is what would have been made by accepting in five years the $200 carbon payment and $1,250 from the harvest (the trees will grow during the five years producing more revenue). In this example, the landowner would be better off entering the contract and receiving the payment plus the harvest revenue ($1,450 > $1,216).

The ability to acquire wealth is dependent on making accurate comparisons between alternative outcomes. In this case, the $200 gained from enrolling in the carbon program was not intuitively understood until it was compared with another investment option. There are also some other considerations that need to be made when payments occur in the future, such as predicting what may happen in the meantime. Delaying harvest can come with some risks. For example, at year three a hurricane could blow down the forest, which would kill the trees and make a future harvest impossible or much less valuable. In this case, the interest rate should be adjusted to reflect the owner's own feelings of risk. What is important to understand is that delaying payments (either of harvest or choosing between two different payment schedules) makes a difference.

Clauses/exemptions/violations

As with all contracts, it is very important for landowners to thoroughly read and understand what is expected when things go to plan, and what can be expected when things do not go to plan. Landowners need to read all of the clauses in the contract, as they provide a legal and binding definition of important points, such as how to handle land transition and what may cause the contract to be terminated. Many carbon programs also have specific ways for how property heirs are designated or specific reporting requirements for land management actions.

Many contracts contain "exclusion clauses" which describes how a party to the contract may be eliminated with no fault (e.g., a flood wipes out a forest). The "limitation clauses" describe limits to compensation for certain unexpected damages. Landowners also need to understand what the contract defines as "an act of God" what was intentional, and how disputes are resolved.

In most cases, activities such as collecting firewood and recreation are allowable. Other legal arrangements such as hunting leases and conservation easements may also be allowable under certain circumstances. Prescribed fire may could be an allowable management practice as long as it is recognized as an approved management practice in the standards and protocols used by the project developers.

An accidental release is when a natural disturbance (e.g., wildfire, hurricane, pests) causes a large number of unexpected tree deaths, which increases carbon emissions from the forest via conditions that are deemed "unavoidable".  Carbon programs that use approved protocols often have a carbon pool or buffer that they use to cover any accidental release. Owners need to understand if they may benefit from these types of insurance protocols wrapped into a project.

An intentional release is when more harvesting occurs than is allowable by the legal forest carbon contract within the designated area and during a given period of time. This action increases the expected carbon emissions from the forest via activities that are deemed "avoidable".

When landowners sign a carbon contract, they are fully responsible for ensuring that the management laid out in contract is carried out, so it is critical for them to understand the management obligations that they have agreed to. For some owners, certain management obligations may not be feasible or overly burdensome. Owners should try to negotiate what they think are overly challenging parts of the contract with the help of a legal professional. If negotiations fail, they should not hesitate to walk away —there are other programs available and violating a contract may end up costing more than the contract is worth. Keep in mind that it is much easier to address questions or disagreements about the contract or clauses prior to signing.

New carbon programs are coming online quickly and are looking to grow. Many are in the early stages of implementation. The contracts they create will likely evolve as they gain more experience working with landowners. In the meantime, don't expect that carbon programs will be able to fully account for the owner's interests when designing a contract. Carbon programs have legal representatives who give them advice about how to protect their investments, and owners should give the same consideration when it comes to their own assets. It is good practice to work with legal and forestry professionals before signing a contract to check for unreasonable risk and alignment with landowner objectives. Keep in mind that since carbon markets are relatively new it may be difficult to find professionals who work specifically with carbon markets, but some expert advice is better than none.

Accountability & Oversight 

The buyers of carbon credits often want to know that the offsets they are buying are in fact real. Many carbon programs include assurances that participating landowners are complying with the contract. As such, owners should expect that buyers and third-party verifiers may want to access their property throughout the duration of the contract, and possibly a short time after completion of the contract. While on the property, the verifiers or the carbon contract holder may conduct measurements to assess carbon sequestration and examine forest management activities. At the end of the contract period, additional verification will also likely occur before final payments for the contract can be issued.

Contract Renewal

Once a contract is completed, owners may consider renewing their carbon contract. To help with this decision, owners should take occasional notes about their experience in the program to help remember things like disputes and how they were resolved, if there were opportunities missed, or what good outcomes came from being enrolled. Forest owners also need to consider that over the length of the contract their forest will change–trees age, forest pests attack, and weather events happen. As the end of the contract approaches, forest owners should work with a professional forester to assess the condition of their forest to determine (1) if their forest can still qualify, and (2) if re-enrollment in the program still aligns with the landowner's broader management objectives. If the property is inherited with a carbon contract, a renewal should only be considered if the objectives of the new owner are still in alignment with the program's requirements. Forest owners should always thoroughly read the contract and work with legal and forestry professionals before renewing a contract.

If the owner is considering enrollment in two different programs, one right after the other, it is important to consider if the second program has a conflict with this approach. Carbon projects differ in the types of protocols they use to quantify carbon. Project developers also have to make some assumptions about landowners' "business as usual" behaviors, which indicates how much carbon they have available to sell and how to avoid double counting the carbon. Be sure to talk to carbon program representatives to find out if back to back enrollment is allowed or if a time delay in between programs is required.

*The organizations mentioned in this article are examples and not necessarily endorsed by the authors.

This article was produced by the Forest Owner Carbon and Climate Education Program. What do you think? Please take this short survey.

Related FOCCE Articles and Resources

• Case Study 1: Two Landowner’s Experiences with Carbon Payment Programs
• Case Study 2: Three Landowner's Experiences with Climate-Smart Forest Programs
• How Much Should I be Paid to Manage Forest Carbon?
• How to Manage Forests for Carbon
• The Economic Value of Private Forests and Climate Change Mitigation

Article Information Sources

• Andres Susaeta and Chris Demers Determining the Net Present Value of Timber Investments and Comparing Investments of Different Rotations. University of Florida IFAS Extension (FOR 352).
• Verra Ton commitment letter.