Forestry Offsets In Canada
February 03, 2021
Introduction
Investors are putting increased pressure on corporations to set GHG emission reduction goals under the Task Force on Climate-related Financial Disclosures (TCFD) and align their underlying business practices to incorporate climate change risk [1]. Companies looking to lower their carbon footprints can reduce their emissions directly; develop new products and services that are less GHG intensive; or, they can purchase offset credits. A carbon offset credit represents a claim that a project has reduced or removed a recognized greenhouse gas (GHG) from the atmosphere. One offset credit represents one metric tonne of carbon dioxide equivalent, or tCO2e. The emissions reduction claim can be commoditized as a carbon offset through one of two pathways: regulatory carbon markets or voluntary carbon markets.
One of the most common types of offset credits are those that originate from forestry-related activities. Forestry-related offset credits are popular given their secondary environmental benefits (e.g. improved biodiversity in addition to carbon removals). However, carbon offsets are not a heterogeneous product and not all carbon offsets are created equal. There are several factors that differentiate offset credits. These factors include type of emissions reduction technology or practice, location, standard, and vintage year. These factors are used by market participants to determine the quality of the emissions reduction claim and the market price. All other factors being equal, high quality forest carbon offsets typically trade at a premium to other types of offset project types.
Previously we discussed the basic criteria for offset project eligibility [2] and how these relate to the unique characteristics for forest carbon offsets [3]. In this newsletter, we discuss some of the primary issues associated with developing carbon offsets on public lands in Canada. Canada’s vast public lands offer massive carbon sequestration potential, but the regulatory regimes governing carbon sequestration benefits in Canada can be vexing. Offset project developers and corporate purchasers should be aware of the principle risks associated with forest carbon offset development in Canada.
Offset projects on Canadian public lands
Offset purchasers must consider the differences between credits generated in regulatory markets versus credits that are generated strictly for voluntary offsetting. Regulatory markets are created by mandatory national, regional, or international carbon reduction regimes. Voluntary offsets recognize emission reduction projects that are not undertaken to meet compliance requirements under a regulatory carbon reduction regime. Market demand is created by organizations that have set carbon management commitments or targets. Whether offsets are created for regulatory or voluntary purposes, all offset projects that occur on Canadian public lands must contend with three primary issues:
- Establishing ownership
- Ensuring project additionality
- Ensuring permanence
Ownership
The first primary issued we will discuss is the issue of offset ownership. While issues such as additionality, permanence, measurement, leakage, and crediting can be addressed at the protocol level or by the offsets program administrator, ownership issues must be reconciled outside the offsets program. As such, a legal framework for establishing ownership over the ability to claim an emission reduction or removal is needed. For privately owned forests, establishing ownership is relatively straight forward. In Canada, private forests include First Nations reserves, metis settlements, as well as municipal and community forests. For public lands, competing land use claims complicate the matter of establishing ownership. In the absence of legal agreements, disputes over ownership may arise when projects are implemented on Crown land; by the lessee and not the landowner; and on lands subject to Aboriginal claims [4]. The majority of all lands in Canada are held by governments. About 89% of Canada's land area is Crown land, which may either be federal (41%) or provincial (48%). The remaining 11% is privately owned [5].
Additionality
The second primary issue associated with the development of forest carbon offsets on public lands is ensuring project additionality. Carbon sequestration activities on forested lands must go beyond what is considered business-as-usual activity in order to generate an offset credit. On provincial Crown lands, forestry harvest practices are dictated by the province. Therefore, the ability to generate an offset credit requires the project proponent to make additional efforts beyond prescribed forest management practices to avoid releases of carbon to atmosphere or enhance forest carbon sequestration. Given that management and harvest practices in Canada are dictated by the provincial government and are fairly prescriptive, there is often little room for the project proponent to reduce or remove incremental forest carbon above the baseline condition.
Permanence
The third primary issue associated with the development of forest carbon offsets on public lands is ensuring permanence. Long-term carbon sequestration does not necessarily align with other government interests. The timeline for land-use contracts on public land is not equal to the timespan necessary to complete a forestry offset credit generating project. While most land-use contracts are 20 to 30 years, depending on the jurisdiction, a forest carbon offset project can take up to 100 years. To address the nature of mismatched land tenure contracts and offset accreditation periods, the two need to be aligned.
Conclusion
The cost of developing a forestry carbon offset project on Canadian public lands may be higher in some regions of Canada given the low rate of bio-carbon sequestration rates at northern latitudes. If companies are seeking the benefit of GHG reductions and local community benefits they should look at developing projects that are proximate to corporate headquarters or company operations. For companies that have global operations, they need not be restricted to offset projects in Canada. In these cases, companies should consider projects on private lands and/or outside of Canada where biocarbon sequestration rates are significantly higher. We should note that there is no requirement that companies develop projects that are proximate to corporate headquarters or company operations. However, we believe this offers companies outsized reputational benefit if they can communicate both and environmental and social benefit.
No matter the location of the forest carbon offset project, companies should ensure there is a rigorous approach to establishing ownership, additionality, and permanence. Companies that source projects that adhere to best practices can avoid exposure to reputational risk that can surface if a company does not purchase high-quality offset credits. Perhaps more importantly, companies can avoid incurring the cost of replacement credits in the case that low-quality credits are revoked or deemed to be not credible. Avoid these pitfalls by ensuring you have the right expertise to source high-quality forest carbon offsets. With the right expertise in place, offset credits offer a low-cost pathway to reducing climate-related financial risk.
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References
[1] https://mailchi.mp/daf7e0a1514b/sustainability-in-the-spotlight-the-tcfd-has-arrived
[4] Smith, S.A., Madras, M.L. & Clarke, D.W. (Eds). (2009). Forest offset credits: A cornerstone of sustainable development on Aboriginal lands. Gowlings. Retrieved from: www.lexology.com/library/detail.aspx?g=0d0b8a3e-a871-4e3f-8507-e628c719441a
[5] https://www.ictinc.ca/blog/forestry-and-reconciliation-focus-on-bc