Give Us a Little Credit


By Tom Phip

Let's set the record straight about carbon trading. It is not something akin to two neighbours agreeing to swap a used lawn mower for two bushels of garden tomatoes. Captured carbon emissions (otherwise known as sequestered greenhouse gases) are not readily deliverable like machinery or vegetables. When governments, corporations, and private landowners "trade" carbon, more specifically they are trading something called carbon "credits."

This is the short, simple version of how a carbon credit system works: a company (A) operating in one country emits greenhouse gases (GHGs) in excess of that country's maximum allowable tonnage for that company's business sector. A second company (B), located in another country, emits relatively few GHGs from its operations, has initiated an "offset project" that recognizes its GHG production is less than its country's allowable maximum, and receives carbon credits for the unused emission balance. Company A can then purchase carbon credits from company B to offset its excess carbon emissions. The Chicago Climate Exchange (CCX), self-described as "the world's first and North America's only active voluntary, legally binding integrated trading system to reduce emissions of all six major greenhouse gases with offset projects worldwide," is the acknowledged world leader in managing carbon trading. CCX says forestry offset projects fall into four principal categories:

  • Maintaining or increasing forest area: reducing deforestation and degradation
  • Maintaining or increasing forest area: afforestation / reforestation
  • Forest management to increase stand- and landscape-level carbon density
  • Increasing off-site carbon stocks in wood products and enhancing product and fuel substitution

Which practice works best for the industry? Well, it depends on which expert you ask.

"All standards are workable depending upon your views of the market," says Chuck Anderson, vice-president of Ecomarket Development for Image Tree Corporation.Ê"In a voluntary market, it is really the choice of the buyer that determines which standard has the most value.ÊSome buyers are looking for credits that have 'gourmet' or 'enhanced' value such as extra considerations for biodiversity or the impact upon the local communities from which the carbon is generated.Ê Other standards recognize the value of managed forests and treat a portion of the timber generated during harvest activity as 'long-lived' wood products."

Anderson says carbon credits generated from forests will require an origination point or baseline carbon stock from which to measure change year-over-year. That "control" forest and its carbon stock would then require ongoing monitoring, and a verification that these tools and monitoring methods are reliable and repeatable.

"Whether the system is voluntary or instituted via a national 'cap and trade' regulated mechanism, the process of establishing a reliable and scalable baseline, monitoring, and verification system is essential to the fungibility (mutual substitution) of credits within the North American forestry industry context," he says.

Dr. Christine Schuh, the Climate Change Services Leader for PricewaterhouseCoopers, LLP Canada, believes multiple measures will have to be taken in the forestry industry to help stabilize global carbon emissions below 450 ppm (the point beyond which climate experts agree earth was once largely ice-free and sea levels were about 70 meters higher).

"Most systems have a combination 'carrot and stick' approach where there are various incentives to reduce greenhouse gas emissions [including both] innovative technologies to reduce carbon in our atmosphere and disincentives to emit greenhouse gases," Dr. Schuh says. "Cap and trade systems are currently favoured because they allow for the efficient allocation of resources to achieve reductions."

"The benefits and costs are dependent on the design of the systems and the strength of each measure," she says.

A variety of policy tools, from regulations to market mechanisms, can and must be brought to this effort to reduce GHGs, says Canadian federal Member of Parliament and Liberal party environment critic Ken Dryden.

"Any government that attempts to implement a carbon credit system will have to work with stakeholders to determine what system can best reduce emissions while benefiting the forestry industry, or other critically important industries," Dryden says. "But in the long run, the important thing is not what form an emissions credit system takes, but that the government ensures that carbon is effectively and appropriately priced."

Dryden says creating an effective cap and trade system or carbon tax requires several key elements: a) the price must be set high enough to ensure that it is cheaper to reduce greenhouse gas emissions than to pay the price of a credit; b) the system must be fully integrated into the international UN-based trading mechanisms; c) the system must ensure that credits are given out only for verifiable reductions in greenhouse gas emissions, rather than "intensity targets" or "business-as-usual cases," and d) carbon credit systems cannot be so complicated and "laden with red tape and loopholes" that they become a hindrance to industry.

Avrim Lazar, president and CEO of the Forest Products Association of Canada says both carbon tax and cap and trade systems for effecting positive climate change can work well if they are thoughtfully designed, but that they are likely to be "very dysfunctional" if poorly designed.

"Either system will reduce Canada's carbon footprint if it sufficiently prices or caps emissions and if it avoids creating incentives for other countries to pollute," Lazar says. "Either system will allow us to have a competitive economy if it takes the global nature of both climate change and of our export-oriented economy fully into account."

Lazar says Canada's pulp and paper sector has cut its emissions by 44 percent since 1990, promptly regenerates working forests, and is more than half-way towards a goal of relying only on renewable energy for its mills. However, if a carbon credit system significantly raises Canada's costs, the resulting void in production will be filled by countries that have no emission control regimes, illegal logging, and rampant deforestation. Canada would pay an economic penalty for being environmentally and socially responsible.

"None of the policy proposals put forward by governments to date have internalized a mechanism to raise emissions prices over time without imperiling trade exposed industries," he says.

Lazar believes there is merit in the "carbon added tax" recommended recently by Queen's University professor Thomas Courchene, which would be rebated on exports and levied on imports at the border; and in a proposal by economists Jack Mintz (University of Calgary) and Nancy Olewiler (Simon Fraser University) to adjust carbon charges on imported and exported products to protect Canadian exports while encouraging trading partners to minimize their carbon footprint.

"Canada is the largest exporter of forest products in the world and the forest products industry understands better than most the potential for border measures to be abused by protectionist trade interests," Lazar says. "There is no doubt that broad international cooperation on carbon pricing is far preferable to border measures, and that Canada should do all it can to help bring such an agreement about."

Chuck Anderson says sorting out the various standards for forestry, such as CCX, California Climate Action Registry, and Voluntary Carbon Standard will be challenging, but he points to a new initiative driven by the American Forest & Paper Association (AFPA) called the Forest Carbon Standards Committee.

"This committee has a goal of developing a bi-national standard for forest carbon," Anderson says. "Because these standards have unique attributes that can be considered either good or bad depending on your perspective, the ability to build broad support for a single standard will be challenging." n