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Integrating Carbon Offset Revenue
in Acquisition Strategy
LTA Rally 2016
Minneapolis Workshop
October 30, 2016
Presenters
• Dick Kempka, Chief Commercial Officer, Memphis, TN
• Mik McKee, Senior Analyst Forestry, Portland, OR
• Zach ...
1. Intro to Climate Trust
2. State of Carbon Markets
• Voluntary
• Compliance
3. How to Identify Opportunities
for Land Tr...
• Non-profit Organization – 1997
• Committed to projects – Nearly $33M
• Land-based Offsets – forestry,
grasslands, and li...
Forest Project Experience
• Appalachian Mountain Club (ME) – IFM
• Downeast Lakes Land Trust (ME) – IFM
• City of Astoria ...
1 ton carbon = 1 metric tonne of carbon dioxide equivalents
1 acre forest = 1-3/tons/acre/year
Voluntary Market
Voluntary carbon market – an entity (company, individual, or other
“emitter”) that volunteers to offset i...
Voluntary Market
Reports: Ecosystems Marketplace and Carbon Disclosure Project
Voluntary Market
State of the Voluntary Carbon Markets 2016
• In 2015 the volume of voluntary offset transactions increased by 10% as buyer...
Compliance Market
Compliance carbon market – An international, regional, or state law is passed
required designated covere...
• AB32: Statewide limit on GHG emissions
for covered sources
• Set up compliance instruments that can
be traded
• Potentia...
California Cap and Trade Program
Source: Image from Fine, Steve. “The Interaction of Complementary Measures and the Cap & ...
(1) Allowances
• Tradable permits that give one-time permission to emit a metric
ton of GHG
• Issued by state of CA, Quart...
ARB Offset Credits Issued
Project
Type
ODS Livestock U.S. Forest Urban
Forest
MMC Rice
Cultivation
Total
Offsets 12,447,57...
Task Air Resources Board American Carbon Registry Verified Carbon Standard
Minimum project
length
100 years after the last...
• Take a position on climate change (CDP, WRI, DJSI)
• Internal carbon reduction targets and/or scheme (Disney, MS,
eBay)
...
What buyers look for in a Project?
Compliance
• Credible Counterparty (e.g. investment grade, D&B)
• Offsets that simply f...
Market Standard Impacts
• Types of buyers
• Offset price
• Offset volume
(because of differences in baseline/accounting ru...
CA Offset Supply (Shortage)
Source: Stevenson, Sam et al. American Carbon Registry. Compliance Offset Supply Forecast. Apr...
Market Forecast:
Compliance
• Chamber of commerce challenge
• Post 2020 scoping plan
• Adding international offsets and ad...
Anatomy of a Forest Carbon Project
http://www.nrs.fs.fed.us/pubs/inf/nrs-inf-06-08.pdf
Three Main Forest Types
• Reforestation – restoring tree cover on
land that is not at optimal stocking levels
• Improved F...
• Private and public (state, county, municipal) forests
• Commitment to sustainable, natural forest
management
• Most timb...
Forest Ecoregions – Common Practice
1. Multiple co-benefits:
• Habitat conservation
• Endangered species protection
• Protection of culturally significant sit...
Project Steps–Continued
California Program Requirements
1. Feasibility assessment – Determine eligibility
and estimated of...
Project Risks
• Project Feasibility
• Low carbon stocks, intensive management, unnatural species distribution may make a
p...
Anatomy of a Grassland Carbon Project
Avoided Emissions Protocol
• Overtime grasslands sequester
and store carbon
• Disturbance (tilling) results in
a release o...
Cropland expansion outpaces agricultural and biofuel
policies in the United States
Figure 1 and Figure 3 from Cropland exp...
Avoided conversion of grassland to
cropland
• Permanent conservation
• Project area must be grassland for at
least 10 year...
Major Project Inputs
• Feasibility assessment
• Basic cash flow analysis
• Costs and revenues
• Mapping the project area
•...
Cooperatives
• Multiple projects managed by a single cooperative
developer (no limit on # of participants)
• Not necessari...
Project Suitability
• Greater than 75% in LCC
I-IV
• Soil texture (fine,
medium, coarse)
Wabassus Lake (Voluntary)
• Partner organization: Downeast Lake Land Trust.
• Mission: Long-term economic and environmenta...
Oregon Grasslands (Voluntary)
• Partner organization: TNC – Oregon
• Protocol: CAR’s avoided conversion of grasslands
• Pr...
Forest Carbon Offset Projects
Zach Barbane
Manager, Domestic Services
About ecoPartners
North America
• Compliance and voluntary markets
International
• REDD+
Forest Carbon Works
Basic Concepts
Trees sequester carbon
Forests can be managed to store more carbon
Forests that store more carbon than “bus...
Improved Forest Management
Compare carbon stocks in forest to similar private
forests in region
• Forest type and site cla...
Improved Forest Management
CarbonStocks(tCO2e/ac)
Time
Project Carbon Stocks
Above Baseline
CreditGeneration
(tCO2e/acre)
Year
Annual Credit Generati...
Below Baseline
CarbonStocks(tCO2e/ac)
Time
Project Carbon StocksCreditGeneration
(tCO2e/acre)
Time
Annual Credit Generation
Harvesting Cycle
CreditGeneration
(tCO2e/acre)
Time
Annual Credit Generation
CarbonStocks(tCO2e/ac)
Time
Project Carbon St...
Path to credits
Forest
Inventory
Project
Development
Third-Party
Verification
Traditional Development
Up-front and ongoing costs
• Inventory
• Development
• Verification
• Additional fees
Feasibility ...
New Technology
Innovative sampling design
Fast and accurate measurements
• Inventories can be completed in as little as a weekend
• Resul...
Forest Carbon Works
Rapid inventory
Automated development
Pseudo-Aggregation
• Each landowner is their own project
• Group...
Forest Carbon Works
ForestCarbonWorks.org
Process:
• Create account
• Apply
• Measure
• Receive offer
• Enroll
New Carbon Fund – Launched January 2016
The Problem: Carbon projects need funding to develop
required offsets and unleash full market potential
• Traditional fund...
Our offer: Upfront financing to early stage projects
Investment
•The Climate Trust invests in a ten year stream of
carbon ...
Example: Improved Forest Management project
200,000
* $5.00
= $1,000,000
Credits available from the project over ten years...
Our offer: Upfront financing to early stage projects
• Available funds: We will deploy $5.5M in 2016, with
the potential o...
Q & AQ & A
Zach Barbane, Manager Domestic Services
zbarbane@ecopartnersllc.com
415-634-4650
Dick Kempka, Chief Commercial ...
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Integrating Carbon Offset Revenue in Acquisition Strategy

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Presentation from Mik McKee of The Climate Trust and Zach Barbane of ecoParnters from the 2016 Land Trust Alliance Road Rally. Information on the state of the carbon markets, how to identify opportunities for land trusts, project examples, and The Climate Trust's pilot carbon investment fund.

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Integrating Carbon Offset Revenue in Acquisition Strategy

  1. 1. Integrating Carbon Offset Revenue in Acquisition Strategy LTA Rally 2016 Minneapolis Workshop October 30, 2016
  2. 2. Presenters • Dick Kempka, Chief Commercial Officer, Memphis, TN • Mik McKee, Senior Analyst Forestry, Portland, OR • Zach Barbane, Manager of Domestic Services, ecoPartners
  3. 3. 1. Intro to Climate Trust 2. State of Carbon Markets • Voluntary • Compliance 3. How to Identify Opportunities for Land Trusts 4. Project Examples 5. ecoPartners and aggregation 6. TCT’s pilot fund Presentation Outline Photo Credit: Courtesy of Appalachian Mountain Club
  4. 4. • Non-profit Organization – 1997 • Committed to projects – Nearly $33M • Land-based Offsets – forestry, grasslands, and livestock methane • 3.3M tons GHG reduced • Over 40 projects and 100+ collaborative partnerships • Compliance and voluntary programs Mission: The Climate Trust mobilizes conservation finance to maximize environmental returns
  5. 5. Forest Project Experience • Appalachian Mountain Club (ME) – IFM • Downeast Lakes Land Trust (ME) – IFM • City of Astoria (OR) – IFM • Western Rivers Conservancy/Yurok Tribe (CA) – IFM • Afognak Island (AK) – IFM • Middleton Place (SC) – Avoided Conversion • Pipeline: • Several Avoided Conversion and Improved Forest Management Projects being considered • Five or six on east and west coast • NGOs, TIMOs, private landowners
  6. 6. 1 ton carbon = 1 metric tonne of carbon dioxide equivalents 1 acre forest = 1-3/tons/acre/year
  7. 7. Voluntary Market Voluntary carbon market – an entity (company, individual, or other “emitter”) that volunteers to offset its emissions by purchasing carbon credits that reduce the amount of carbon in the atmosphere Top voluntary standards include: • Climate Action Reserve (CAR) – CA predecessor to ARB • American Carbon Registry (ACR) – Division of Winrock International • Verified Carbon Standard (VCS) – Non-profit in Washington DC • The Gold Standard – Certification standard globally for carbon offset projects
  8. 8. Voluntary Market Reports: Ecosystems Marketplace and Carbon Disclosure Project
  9. 9. Voluntary Market
  10. 10. State of the Voluntary Carbon Markets 2016 • In 2015 the volume of voluntary offset transactions increased by 10% as buyers contracted 84.1 MtCO2e • Total market value fell 7% to $278M due to average price drop of 14% to $3.30 ton • Buyer preferences for project types, standards, vintage (offset age), and location determine price • Wind offsets were the most sought after type (12.7M), forestry (REDD+) was second, but retained the high average price at $3.30/ton with an overall value of $37.5M • In 2015, US buyers purchased the most offsets of any country, nearly equivalent to the combined demand stemming from all European countries combined • Despite the rapid growth of the California compliance market, voluntary offset demand in North America has grown the last two years; US purchased 15.4 tons in 2015
  11. 11. Compliance Market Compliance carbon market – An international, regional, or state law is passed required designated covered entities to reduce carbon emission in the atmosphere based on a emission reduce cap specified in the law Examples: • International – Kyoto Protocol binding emission reduction targets for 170 countries (not USA) • Regional Greenhouse Gas Initiative (RGGI) – RGGI is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont to cap and reduce CO2 emissions from the power sector • California - The Global Warming Solutions Act of 2006, or AB32, is a CA State Law that fights global warming by establishing a comprehensive program to reduce GHG emissions from all sources throughout the state
  12. 12. • AB32: Statewide limit on GHG emissions for covered sources • Set up compliance instruments that can be traded • Potential to link to other cap & trade programs • Quebec, Ontario, RGGI California Cap & Trade
  13. 13. California Cap and Trade Program Source: Image from Fine, Steve. “The Interaction of Complementary Measures and the Cap & Trade Program under AB-32.” April 16, 2013 presentation at the EPRI-IETA Joint Symposium GHG Offsets Policy Dialogue in San Francisco, CA.
  14. 14. (1) Allowances • Tradable permits that give one-time permission to emit a metric ton of GHG • Issued by state of CA, Quarterly Auctions (2) Offsets • A credit for a verified emission reduction from a source outside the C&T program • Used by covered entities to meet C&T obligations instead of allowances or reducing on-site emissions • Limited to only 8% of a covered entities compliance obligation CA Compliance Instruments
  15. 15. ARB Offset Credits Issued Project Type ODS Livestock U.S. Forest Urban Forest MMC Rice Cultivation Total Offsets 12,447,578 2,676,569 29,355,957 0 3,573,844 0 48M % of Total 25.7% 5.6% 61.3% 7.4% 100% Product Bid/Ask (Oct 11, 2016) California Carbon Offset (CCO) $9.70/$10.10 Average transaction price $9.90/ton Price Current Value based on offsets issued = $475M
  16. 16. Task Air Resources Board American Carbon Registry Verified Carbon Standard Minimum project length 100 years after the last carbon offset is issued 40 years from start date Depends on methodology. 20 years to 100 years, equal to crediting period. Inventory and sampling Permanent or temporary plots; stratification not required; inventory data no older than 12 years Permanent or temporary plots; stratification required if area is heterogeneous; inventory data no older than 10 years Depends on methodology. Stratification usually required Crediting period Renewable 25-year term from project start date IFM (except stop-logging ): 20 years; Stop-logging IFM and REDD: 10 years. Renewable. 20 to 100 years, depending on methodology Start date After January 1, 2007 January 1, 2000, document GHG mitigation was an objective at start date if delayed listing. After January 1, 2002 Reporting requirements Annual reporting required, full verification at least every 6 years. Annual attestation; full verification every 5 years. Depends on methodology. Generally, full verification every 5 years. Aggregation Not permitted Commitment between ACR and Project Proponent. Flexible for individual landowners. Aggregation treats aggregated areas as a single area. Voluntary and Compliance Market Comparison
  17. 17. • Take a position on climate change (CDP, WRI, DJSI) • Internal carbon reduction targets and/or scheme (Disney, MS, eBay) • Charismatic credits that offer ‘co-benefits’ • Local/backyard appeal • Marketing appeal • Peer pressure Overall Corporate Socially Responsibe Buyer Motivation
  18. 18. What buyers look for in a Project? Compliance • Credible Counterparty (e.g. investment grade, D&B) • Offsets that simply fit the regulation • Best price • Note: Contracts have more strings Voluntary • No legacy environmental or negative PR issues • Sustainable practices (e.g. FSC status, no clear-cutting) • Projects located near or important to company operations • Good Story: Co-benefits wildlife habitat, water quality benefits, and social benefits
  19. 19. Market Standard Impacts • Types of buyers • Offset price • Offset volume (because of differences in baseline/accounting rules) • Inventory requirements
  20. 20. CA Offset Supply (Shortage) Source: Stevenson, Sam et al. American Carbon Registry. Compliance Offset Supply Forecast. April 2014 • Over the California market's three compliance periods, total cumulative offset use 208 MT • Could be 50-70% or 64 - 102MT short through 2020
  21. 21. Market Forecast: Compliance • Chamber of commerce challenge • Post 2020 scoping plan • Adding international offsets and additional sectors Voluntary • Increasingly common for corporations to internally price carbon • New protocol development (peat land, wetland restoration, avoided fire emissions) • Charismatic projects can fetch higher prices • Growing recognition of the co-benefits offset projects provide
  22. 22. Anatomy of a Forest Carbon Project
  23. 23. http://www.nrs.fs.fed.us/pubs/inf/nrs-inf-06-08.pdf
  24. 24. Three Main Forest Types • Reforestation – restoring tree cover on land that is not at optimal stocking levels • Improved Forest Management – activities that maintain or increase carbon stocks on forested land • Avoided Conversion – preventing the conversion of forestland to a non-forest land use
  25. 25. • Private and public (state, county, municipal) forests • Commitment to sustainable, natural forest management • Most timber rights intact – too many encumbrances can be tricky • AC projects require a qualified conservation easement • Demonstrate financial incentive to convert to residential, agriculture, or mining use (140 – 180% higher value) • Properties being targeted for a conservation easement – easements held by federal agencies are also tricky • Financially viable for the project owner Eligibility Criteria
  26. 26. Forest Ecoregions – Common Practice
  27. 27. 1. Multiple co-benefits: • Habitat conservation • Endangered species protection • Protection of culturally significant sites • Preservation of traditional hunting and fishing rights • Sustainable (less than annual growth) timber harvest • Estate planning 2. Additional revenue – supplement existing sources of income with sale of carbon offsets 3. Ensure project development proceeds smoothly and as efficiently as possible through the select carbon protocol Other Important Considerations
  28. 28. Project Steps–Continued California Program Requirements 1. Feasibility assessment – Determine eligibility and estimated offset volume 2. Project Listing on approved offset registry – Prove project eligibility and estimated ICS 3. Project Development – Forest inventory, modeling, Offset Project Data Report (OPDR) 4. Verification – Third party audit 5. Registry and ARB review – issuance 6. Review and Agree on Sales Bids– Secure and select best offer with consideration to price, volume, and ease of contracting.
  29. 29. Project Risks • Project Feasibility • Low carbon stocks, intensive management, unnatural species distribution may make a project ineligible • Carbon Market Fluctuation • Price could go up or down depending on supply, demand, policy, decision, etc. • Long Term Forest Carbon and Timber Management Commitment • Annual reporting • Full verification every 6 years • Update forest inventory data no less than every 12 years • Maintain initial carbon stocks • Unintentional Reversal–Unintentional depletion of carbon stocks through fire or pest outbreak is covered by the project contribution to the buffer pool. • Intentional Reversal–Intentional depletion of carbon stocks
  30. 30. Anatomy of a Grassland Carbon Project
  31. 31. Avoided Emissions Protocol • Overtime grasslands sequester and store carbon • Disturbance (tilling) results in a release of CO2 (oxidization) • Depending on management, grasslands can have a net negative or net positive on climate • Climate Action Reserve developed Grassland Project Protocol (July, 2015) • V2.0 due out in January
  32. 32. Cropland expansion outpaces agricultural and biofuel policies in the United States Figure 1 and Figure 3 from Cropland expansion outpaces agricultural and biofuel policies in the United States Tyler J Lark et al 2015 Environ. Res. Lett. 10 044003
  33. 33. Avoided conversion of grassland to cropland • Permanent conservation • Project area must be grassland for at least 10 years prior to project • Land must be suitable for cultivation • Landowner must face financial pressure to convert • No legal barriers to conversion, such as a prior easement Determining Project Eligibility
  34. 34. Major Project Inputs • Feasibility assessment • Basic cash flow analysis • Costs and revenues • Mapping the project area • Major Land Resource Areas • Soil Texture • Land Capability Classification • Reporting period data • Animal grazing days • Fuel consumed • Area burned
  35. 35. Cooperatives • Multiple projects managed by a single cooperative developer (no limit on # of participants) • Not necessarily a legal entity • Common monitoring, reporting, and verification • Single verification report • May have different start dates • Projects may enter and leave cooperatives over time • Achieve economy of scale
  36. 36. Project Suitability • Greater than 75% in LCC I-IV • Soil texture (fine, medium, coarse)
  37. 37. Wabassus Lake (Voluntary) • Partner organization: Downeast Lake Land Trust. • Mission: Long-term economic and environmental well- being of the Downeast Lakes region through the conservation and exemplary management of its forests and waters. • Location: Eastern Maine • Purpose: Non-profit organization interested in adding revenue from sustainable timber management. • Voluntary Protocol: American Carbon Registry Improved Forest Management. • Status: Conducted site visit and feasibility assessment in 2016 • Summary: Project appears feasible – forest will be managed for increased carbon sequestration
  38. 38. Oregon Grasslands (Voluntary) • Partner organization: TNC – Oregon • Protocol: CAR’s avoided conversion of grasslands • Project: Protection of intact grasslands in eastern Oregon • Impact: TCT will pre-purchase 50% of the carbon offsets generated over the first 10-years to the project. Pre-purchase funds will be used as non- federal match for NRCS ALE program • Summary: Great partnership opportunity and good source of matching funds
  39. 39. Forest Carbon Offset Projects Zach Barbane Manager, Domestic Services
  40. 40. About ecoPartners North America • Compliance and voluntary markets International • REDD+ Forest Carbon Works
  41. 41. Basic Concepts Trees sequester carbon Forests can be managed to store more carbon Forests that store more carbon than “business-as-usual” can generate carbon offset credits Credits can be sold to entities to cover emissions
  42. 42. Improved Forest Management Compare carbon stocks in forest to similar private forests in region • Forest type and site class • Legal constraints (additionality) • Financial constraints Emissions reductions/removals (credits) based on difference between “project” and “baseline”
  43. 43. Improved Forest Management
  44. 44. CarbonStocks(tCO2e/ac) Time Project Carbon Stocks Above Baseline CreditGeneration (tCO2e/acre) Year Annual Credit Generation
  45. 45. Below Baseline CarbonStocks(tCO2e/ac) Time Project Carbon StocksCreditGeneration (tCO2e/acre) Time Annual Credit Generation
  46. 46. Harvesting Cycle CreditGeneration (tCO2e/acre) Time Annual Credit Generation CarbonStocks(tCO2e/ac) Time Project Carbon Stocks
  47. 47. Path to credits Forest Inventory Project Development Third-Party Verification
  48. 48. Traditional Development Up-front and ongoing costs • Inventory • Development • Verification • Additional fees Feasibility threshold ~3,000 acres • Industrial, TIMO, tribes, large land trusts
  49. 49. New Technology
  50. 50. Innovative sampling design Fast and accurate measurements • Inventories can be completed in as little as a weekend • Results can be processed very quickly Simple process • Can be completed by anyone after brief training • Internalize or minimize inventory costs
  51. 51. Forest Carbon Works Rapid inventory Automated development Pseudo-Aggregation • Each landowner is their own project • Group landowners to reduce costs Simplified access and annual payments
  52. 52. Forest Carbon Works ForestCarbonWorks.org Process: • Create account • Apply • Measure • Receive offer • Enroll
  53. 53. New Carbon Fund – Launched January 2016
  54. 54. The Problem: Carbon projects need funding to develop required offsets and unleash full market potential • Traditional funding not available - Lenders perceive carbon markets to be risky, and therefore heavily or completely discount future revenues from carbon offset sales. • Key Risks:  Execution Risk – Will projects generate credits as anticipated?  Market Risk – If so, what will those credits be worth? • SOLUTION: The Climate Trust will finance projects that will depend upon revenues from carbon markets, through an upfront investment
  55. 55. Our offer: Upfront financing to early stage projects Investment •The Climate Trust invests in a ten year stream of carbon offsets from a project. •Capital is made available upfront for new projects. Active management •The Climate Trust will work with a project to develop a carbon monitoring plan and commercialize credits. Revenue share •After carbon sales have repaid the principal investment, The Climate Trust and project owners share additional revenue (usually 50/50). Benefits: • Guaranteed minimum carbon value • Revenue share rewards project owners as carbon prices increase
  56. 56. Example: Improved Forest Management project 200,000 * $5.00 = $1,000,000 Credits available from the project over ten years (20,000 credits per year *10) One half of current market price of carbon in CA ($10.00 used as an example) Total size of upfront investment from The Climate Trust Pre-credit sale: Post-credit sale: $12.00 * 200,000 =$2,400,000 Sale price of credits (Example) Total credits to be sold Total income from project $2,400,000 -$1,000,000 = $1,400,000 Total income Upfront investment Net income 50/50 split gives $700,000 to project owner
  57. 57. Our offer: Upfront financing to early stage projects • Available funds: We will deploy $5.5M in 2016, with the potential of an additional $25M in 2017 and 2018. Each project will receive between $250K-$2M. • Financing can be used for: Expenses related to project implementation such as down payment on land purchase, easement payments, loan repayment, operation, etc. • Scaling up: This $5.5M fund is a pilot; success unlocks additional funding.
  58. 58. Q & AQ & A Zach Barbane, Manager Domestic Services zbarbane@ecopartnersllc.com 415-634-4650 Dick Kempka, Chief Commercial Officer rkempka@climatetrust.org 901-755-8705 Mik McKee, Senior Project Analyst mmckee@climatetrust.org 503-238-1915

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