Forest carbon markets are quickly evolving as the importance of forests in tackling climate change is increasingly recognized and rewarded – something we are pleased to see and are very excited about.
Almost 25% of global carbon dioxide emissions are now covered by pricing mechanisms, with market value of more than USD 80 billion in 2021. Nature-based credits, such as forestry projects, often sell at a significant premium. In the rapidly growing market for voluntary offsets, forestry projects represent 50% of all credits issued in Q1 2022, with an expected value of almost USD 1 billion in 2022. This is the first of a series of blogs about forest carbon markets as we try to understand what is happening, and how it can impact global forest product markets. The focus of this blog is the role of forests in addressing climate change, and how that reflects the types of projects providing forest carbon credits.
The climate change challenge
During most of the last 800,000 years, atmospheric carbon dioxide levels never exceeded 300 parts per million (ppm). Starting with the industrial revolution in the mid-1700s, these levels started to rise exponentially. In 2021, the reached 415 ppm. By the end of this century, without interventions, they might exceed 800 ppm.
To curb emissions, and the global warming they cause, in 2015 the Paris Agreement was signed by 192 countries and the European Union. They agreed to reduce global greenhouse gas emissions to limit the global temperature increase in this century to 2°C while pursuing efforts to limit the increase even further to 1.5°C, review their commitments every five years, and provide financing to developing countries to mitigate climate change, strengthen resilience and enhance abilities to adapt to climate impacts.
Current climate pledges and policies are still not enough. The Climate Action Tracker (CAT) is an independent scientific analysis that tracks government climate action and measures it against the Paris Agreement. It quantifies the impact of those actions, aggregates to the global level, and predicts likely temperature changes. The current CAT predicts global warming of 2.0-3.6°C based on current policies and actions – still far from the 1.5°C target.
Increasingly, it is recognized that in addition to reducing emissions, removing carbon dioxide from the atmosphere will also be necessary to meet climate targets. Many 2050 targets set by countries and companies are net emissions targets, that is, emissions minus removals. Here, forestry can play a large role through sequestration, the biological uptake and storage of carbon in trees as they grow.
Forests: A powerful lever in climate change
Forestry plays a very large role in climate change, both in a positive and negative sense. Total global CO2 emissions are currently around 35 billion tonnes, and 50 billion tonnes (CO2 equivalent) of all greenhouse gases. A recent paper in Nature (Harris et al, 2021) found that forestry is responsible for CO2 emissions of 8 billion tonnes through deforestation annually. But this is more than offset by sequestration of 16 billion tonnes per year, providing a net annual sink of 8 billion tonnes (see Figure 1).
Figure 1: Global forest carbon emissions and sequestration
Forests therefore offer an important (and vital) way to reduce net global emissions. Forests also offer important ecological and social benefits, and relatively cost-effective way to fight climate change. There are many different levers at our disposal to reduce global emissions of carbon dioxide and other greenhouse gases. Each lever has different costs associated and have varying degrees of impact. In 2007, McKinsey & Company developed a now-famous analysis and policy tool, the GHG abatement cost curve. It shows that some interventions, such as improved energy efficiency, actually have negative cost – they save money. Others, such as carbon capture and storage, are relatively high cost with current technology. Interventions involving forestry are mostly mid-range, with estimated costs of 5-10 USD/t for reduced deforestation, 10-20 USD/t for reforestation, and 20-30 USD/t for reduced conversion to intensive agriculture.
Other research suggests that natural climate solutions (NCS, including forestry and agriculture) can provide up to 37% of climate mitigation needed by 2030 but receive less than 3% mitigation funding.
Types of forest carbon projects
There are three main ways forests can be used to reduce net global emissions, which also reflect the types of projects that provide forest carbon credits:
- Reduced emissions from deforestation and forest degradation (REDD); The focus is mainly on tropical forests in developing countries, including Africa, Latin America and Southeast Asia, where most deforestation currently occurs.
- Afforestation and reforestation (A/R): Here the approach is to establish forests on land with relatively low carbon stock, ecological and economic value (e.g., scrubland). Often, it is land that was previously forested but was cleared by human activity.
- Forest management (FM): Established forests can be managed differently to increase their carbon stock, e.g., through increased growth, longer rotations, and reduced damage from fire, pests and diseases.
The balance of forest emissions and sequestration vary by region, which also shapes the suitability of the levers to increase forest carbon stocks, i.e. the net sink (see Figure 2). Tropical regions are the source of about 65% of all emissions, mainly from deforestation. Addressing deforestation is a clear priority in those regions. In subtropical, temperate and boreal forests, sequestration is much larger than emissions, and the net sink can best be increased through afforestation/reforestation and improved forest management.
Figure 2: Global forest carbon emissions and sequestration by region
This is the first blog in a series about the emergence of forest carbon markets. Our next blogs will discuss the growth in carbon pricing instruments globally, examples of voluntary and compliance markets for forest carbon credits, and implications for wood supply.
Glen has worked with forest industries for 20+ years, from family forestry in New Zealand, to management consulting with McKinsey & Company in Sweden. Glen holds a MSc Forestry Economics, BSc Forestry Science and BSc Commerce from Canterbury University, New Zealand.