GLOBAL CARBON MARKETS
by Gary Q. Bull

The global carbon market is growing at an exponential rate and some investment banks and reinsurance companies predict that carbon will be the single largest commodity in the global commodity market. Estimates are that it will grow from over a $60 billion industry in 2008 to a $1 trillion dollar industry by the year 2020.

Currently, forests play a very minor role, less than 1% in either the Clean Development Mechanism or Joint Implementation projects in the Kyoto compliant markets. In 2006, the volume of project-based emissions was nearly 500 MtCO2e.

In the Kyoto alternative market, commonly referred to as the voluntary markets, there are indications of a strong preference for forestry projects, particularly in North America. In 2006, forest projects dominate in North American markets and overall these resulted in 37% of all forestry carbon projects 

Key Issues 
Will the silviculture community, first nations, rural communities, industry and government see any benefit from the carbon stored in the forest? That depends on the answers to a number of key questions that Canadians are currently facing:

Who owns the forest and soil carbon?
In Canada, there is no clearly defined owner of the carbon contained in forests and soils on either public or private land. Claims to ownership have been made by the federal government, the provincial government, some of the First Nations communities, and in the case of private land, by the private landowners themselves.

In order to create an air of certainty, legislation will be required to define ownership and how it relates to other economic and ecological values on the landscape. Other jurisdictions have created legal instruments and in BC, people are certainly accustomed to property rights allocation, such as what is done with various timber tenures. Tenure characteristics such as comprehensiveness, duration (length of contract), benefits conferred, exclusivity, and transferability are all applicable to forest and soil carbon.

Who makes policy decisions? 
In the Canadian landscape, there are a number of lobbyists vying to influence the policy decision. Even carbon scientists are frequently stepping outside of their traditional science role and into policy development. This is a dangerous precedent, since we have seen many notable figures reluctant to admit that they have moved beyond the boundaries of science, with an emphasis on facts, to promoting their values and opinions. 

The other decision stakeholders are predictable and include industry, NGOs, private foundations, politicians, bureaucrats, and analysts. We are already seeing effort to develop policy at the national level with industry and NGOs, while analysts are lost in details and the rest of the stakeholders continue to wrestle for influence.

It is a challenge to develop clear policies for Canada. This should not surprise us given the complex financial implications of climate change policy. But we do need to see tangible steps taken and we do need the sense that political leadership has started. Finally we are seeing small steps being taken both federally and provincially.

Who manages risks?
The normal forest risk factors discussed at the federal level are the losses due to fire, insect, and disease. In the Canadian forest context it is frequently assumed that Canadians will have to absorb all the risk in managing for forest carbon. The conclusion is that since forest carbon is so risky, we cannot manage it! Some have debated that if Canada’s forests are “managed” under Kyoto rules, the federal government has to absorb all the risk. But it does not have to be this way.

There are alternatives, such as working with forest insurance or reinsurance companies that insure against losses, or use some model for managing risk in the agriculture or energy sector such as government-backed insurance schemes.

The point is, there are mechanisms to manage for risk and even if it is at the national scale, the losses from fire, insect and disease are equal to the growth. This does not have to be a constraint on the growth and development of project-based forest carbon projects where risks can be managed, for a price of course.

Where are the institutions?
There continues to be an institutional vacuum in Canada and only now are we seeing jurisdictions such as BC start to fill the gap. Exchange mechanisms such as the Montreal Climate Exchange are emerging but are still fledglings. More energy and effort is required to get the institutional structure underway that will allow for the appropriate mix of taxation and market driven solutions.

How do you make trade-off decisions between carbon, biodiversity, and timber?
Forests have far greater utility than for just timber and carbon; there are a host of other resources and values to be considered. So how does a manager make a trade-off decision between this broad array of values and interests? Currently, the decision support tools for such analysis are very primitive. 
Further, even if we ignore the timber and carbon values, a move currently being contemplated in Canada, there is still much to be done to reach a goal of a sensible forest land management strategy in many parts of the country.

How do you manage transaction costs creep?
If anything can kill a deal, it is the cost of the “middle persons”, who create what economists refer to as a transaction cost, and costs can exceed any potential project benefit. If the carbon markets are constrained to below $10 t CO2e, for example, it is unlikely that the transaction cost of a project will be covered without government largesse. This means any potential carbon project at an unreasonably low price point should not be undertaken.

Inefficient methods for carbon accounting are also a major contributor to the transaction costs. Canada has decision support tools in place, but they either need improvement, need uptake by users or need to readily reflect the reality of multiple land use objectives.

How does BC stay competitive with other countries?
It is clear that other countries, especially those with extensive forest plantation resources, will use the carbon market to partially or wholly finance further plantation establishment and plantation management. Are countries that have natural forests, such as Canada, going to sit idly by and watch our competitors further attack our competitive positions? 

How does the forest sector compete with other resource sectors?
In addition to the competition from traditional forest products industries in other countries, there is competition from other industries, particularly the resource sector. For example, we have active competition from agriculture, which is laying claim to subsidies for the production of biofuels. We have competition from the non-renewable industries such as oil and coal in the development of carbon capture and sequestration (CCS) projects, and we have the nuclear industries looking for government subsidies to expand their facilities in provinces such as Alberta. Even the renewable energy industries such as wind and solar will require considerable government support, at least in the short run. In virtually all cases, the price per tonne of carbon emission reduced or sequestered is significantly higher than the cost of providing a tonne of carbon sequestrated in a forest. Marginal cost curves have been developed at both the local, regional, and global scales and they all demonstrate that forest projects - both afforestation and avoided deforestation projects - are attractive investments as compared to their counterparts.

A carbon constrained future is now widely accepted within the government, industry, and the financial sector. Canadian citizens will have to live in this brave new world. Currently, the forest sector is attempting to position itself as a useful contributor to dialogue on emission reduction, and the logical next step would be to contribute through carbon sequestration projects by growing more and better quality forests.

So what are the next action items? Since we reasonably understand the science of sequestration and have the decision support tools and accounting methodology to undertake the complex assessment of forest carbon balance, the next step is to systematically address all of the questions raised in this article.
For the silviculture community, carbon management does create additional business opportunities since it means we will have to deal with silvicultural slums, with afforesting more area, and with utilizing appropriate silvicultural practices that will enhance the carbon stored without creating negative impacts on other environmental values.

Gary Bull is Associate Professor at UBC in forest management and economics. He has a background in commerce as well as three degrees in forestry. With his research team he is currently focusing on timber supply and carbon/bioenergy economics, international trade in forest products, and the assessment of forest carbon payment schemes. He can be reached gary.bull@ubc.ca or 604-822-1553.