By Shawn McMahon
As businesses grapple with the many questions related to environmental legislation, cap and trade systems, and the associated investments, their leaders are searching for the revenue streams that offset those investments. One of the fundamental and most often asked questions then is where does the cash come from in carbon sequestration projects?
The short answer is, there are several different sources of revenue related to CO2 mitigation and carbon sequestration such as direct CO2 sales, tax incentives, carbon credits, and derivative products. In this article we will look specifically at the revenue generated through forest management.
The most common source of money from biological/ecological sequestration is the revenue generated from the sale of carbon credits created through afforestation and managed forest projects. When planting new forests (afforestation) and actively managing those projects using best-practice sustainable management plans, a stand of new forest has the potential to generate revenue for each acre planted according to the table below.1 To generate revenue, carbon being marketed must be “above and beyond” carbon that would have otherwise been stored through actions/management that you are currently conducting. This principle of “additionality” is a critical component of any quality project, since buyers of carbon credits aren’t typically willing to pay for sequestration that would have occurred anyway.
||Metric Tons CO2 per acre per year
||Gross Revenue Per Acre at $2 / Metric Ton
Based on a Southeastern Loblolly-Shortleaf Pine example processed under the Chicago Climate Exchange (CCX), carbon credits on a 5000 acre afforestation project could annually generate $23,670 per year in the first five years, $24,720 per year in years 6 through 10, and $23,030 per year in years 11 through 15. This yields a total of $357,100 in gross revenue from carbon credits over the life of the project.
In this context, it is important to include the potential revenue generated by the harvest of the timber, which could be completed after the 15 year contract is met. For this example we will assume a lifetime average growth rate of 5 tons per acre per year, a 3rd row thinning (1/3 of the volume) at age 18, and the final harvest at age 25. At $7 per ton, the thinning in year 18 would produce approximately $945,000. The final harvest in year 25 would include pulp ($8 per ton) and chip-n-saw ($15 per ton) components, which would yield approximately $5,978,000, for a total overall gross revenue from wood products of $6,923,000.
Now, let’s look at the estimated costs related to generating this revenue to arrive at net revenue for this 5000 acre example on a 25 year project.
The direct costs typically associated with afforestation include site preparation, seedling purchase and planting. For this example we are assuming loblolly pine seedlings at 700 trees per acre. The estimated per acre cost for seedlings, site prep, and planting is $300, resulting in a total upfront cost for 5,000 acres $1,500,000. Additional costs for active management will not be included here as most afforestation protocols limit the active management that can be conducted. Some implicit costs not considered here which may affect project profitability include the purchase of the land, property taxes, insurance, etc.
Additional costs include project development, certification/registration, aggregation fees, and the initial and annual 3rd party verifications. The project development costs would reasonably be in the $15,000 range, excluding verification costs. The initial verification could be anticipated at $6,000, the annual verifications at $2,500 per year, with total verification costs for the 15 year period at $43,500. Aggregation costs, the cost paid for listing carbon credits on the CCX
through an approved aggregator, can be estimated at 15% of gross revenue. To list credits directly on the exchange you must first become an aggregator or purchase a seat on the exchange, which is typically cost prohibitive for a single project. All costs, for the 15 year period can be estimated at $1,558,500.
The table below summarizes the costs and revenues for the project:
As the information above illustrates, there can be profit margins in the neighborhood of 27% for joint afforestation projects when carbon and timber revenues are considered. Though revenues from carbon on afforestation projects comprise only a portion of the revenues derived from wood products, they can provide vital assistance in offsetting property taxes and other costs associated with forest lands, often with very little modification from current forest management practices. Obviously the gross revenue, costs, feasibility, and profitability need to be evaluated for every specific project and these items will be substantially different based on the timber stand, location, age, protocol, management plan, and many other variables. Regardless of the variables, there is a point (typically total acreage) where these projects become profitable. This is where most of the “cash in carbon” is generated.
Along with the revenue and profit associated with a solid afforestation project, there are other valuable considerations project owners should consider. These considerations include:
- Marketing – the monetary and non-monetary value of having a feel good story to tell.
- Public Relations – the ability to engage the public with a positive message about the company and the projects currently in process. This is an extremely valuable position to hold because of the ability to strengthen your brand on a daily basis.
- Early adopter status – Beyond the possible tax credits and additional emission allotments that may be available to early adopters, this is a marketing position that is valuable. The companies that take hold of this position have potential to be known as the pioneers of this arena which is a very strong brand position.
- Potential Tax credits – A somewhat complicated but very important element to consider with all sequestration projects. Depending on the project start and completion dates as well as your geographic location, you may be eligible for valuable tax incentives related to your sequestration projects.
- Depreciation – Another area to explore with your financial team that can yield “hidden profits” by depreciating capital expenses related to sequestration projects.
Some additional items of note for afforestation projects submitted through CCX:
- No sustainable forest management certification is required for afforestation projects
- For afforestation and managed forest protocols, a 20% buffer of carbon credits is held in reserve by CCX to cover any unanticipated changes to total carbon proposed to be sequestered which might be caused through harvesting, natural disaster, or other unforeseen issues. These credits are released to the project owner at the end of the project term if the final verification is in line with the project definition.
- When active management such as a thinning or fertilization is proposed for a project under the afforestation protocol, the project must transition to a sustainable management protocol.
As you and your company explore biological carbon sequestration projects it is important to look at the potential profitability of each specific project. Most every company strives to be good stewards of the land and remain environmentally conscious. The financial and other valuable considerations that accompany these projects make it easier to plan for and implement carbon sequestration projects. In many cases afforestation projects can generate significant profits in addition to the value of the crop, in this case the timber. These sequestration project profits often can make the difference between a break-even operation and profitability.
Please note: The information presented in this article is based on current market prices for carbon credits at the Chicago Climate Exchange as of March 2009. Prices are subject to change based on market conditions. There are other public and private markets that may yield higher gross revenues for the same example acreages. The projected expenses used in the examples within the article are based on industry averages and several different projects in the aggregate. The costs associated with each specific project can only be quoted at the time contracts are presented for a specific project. Please contact Environmental Services Inc., for estimates based on your specific project criteria.
About the author:
Shawn McMahon is a senior manager with Environmental Services Inc., where he specializes in carbon sequestration project development, development/implementation of management plans for enhancement of forest carbon stocks, and development of carbon and environmental asset tracking programs. With ESI he is approved as a third party verifier for forestry carbon offset projects for the Chicago Climate Exchange and the Voluntary Carbon Standard. Mr. McMahon holds a degree in natural resource management from the University Of Florida School Of Forest Resources. He is an ISA certified arborist, holds numerous certifications in wetland and hydrologic studies, and regularly gives presentations and workshops on carbon sequestration projects and markets.