Rehabilitative Forestry & Carbon Markets Final 10.1 Forestry & Carbon... · Management Options ... CAR Cash Flow for Initial Recovery Rehabilitation Activity..... 5 Figure 4. ACR

CAN REHABILITATIVE FORESTRY & CARBON MARKETS

BENEFIT DEGRADED FORESTLAND?

A CASE STUDY FROM NORTHEASTERN VERMONT

September 2013

Final Report Prepared for

Vermont Natural Resources Conservation Service

Conservation Innovation Grant # 69-1644-09-02

Laury Saligman, Emily Russell-Roy, William Keeton, PhD,

Cecilia Danks, PhD, John Gunn, PhD, and Ben Machin

This project was funded by a Conservation Innovation Grant from the National Resource

Conservation Service of the United States Department of Agriculture. Additional support was

also provided by Conservation Collaboratives, University of Vermont, and Manomet Center for

Conservation Sciences, and Redstart Forestry.

TABLE OF CONTENTS

Executive Summary ......................................................................................................................... 1

I. Introduction ......................................................................................................................... 8

A. Background & Rationale ...................................................................................................... 8

B. Goals .................................................................................................................................... 9

C. Setting the Context: Carbon Markets & Cap-and-Trade Policy .......................................... 9

II. Project Site ......................................................................................................................... 12

III. Management Options ........................................................................................................ 14

A. Introduction ....................................................................................................................... 14

B. Rehabilitation prescriptions ............................................................................................... 15

C. Growth & yield Modeling ................................................................................................... 16

D. Carbon Offset Calculations & Economic Analysis .............................................................. 18

E. Economic Analysis .............................................................................................................. 20

F. Conclusion .......................................................................................................................... 35

IV. Market Assessment ............................................................................................................ 38

A. Market Size & Customer Identification ............................................................................. 38

B. Observations & Conclusions .............................................................................................. 39

V. Policy Implications ............................................................................................................. 41

A. Introduction ....................................................................................................................... 41

B. Methods ............................................................................................................................. 44

C. Federal and state cost-share programs ............................................................................. 44

D. Conservation easements ................................................................................................... 48

E. Forest Legacy Program ....................................................................................................... 51

F. Property taxes .................................................................................................................... 55

G. Conclusions ........................................................................................................................ 61

List of Figures

Figure 1. Offsets per Acre Generated by Scenarios Eligible for Both Protocols ............................ 3

Figure 2. Comparison of Offset NPV (not including wood products) ............................................ 4

Figure 3. CAR Cash Flow for Initial Recovery Rehabilitation Activity............................................. 5

Figure 4. ACR Cash Flow for Initial Recovery Rehabilitation Activity............................................. 5

Figure 5. Trends in carbon accumulation over a 100-year projection period ............................. 18

Figure 6. Offsets per Acre Generated by Scenarios Eligible for Both Protocols .......................... 20

Figure 7. NPV for CAR, depicting both offsets and forestry. ....................................................... 24

Figure 8. NPV for ACR, depicting both offsets and forestry. ....................................................... 24

Figure 9. Comparison of Offset NPV (does not include forestry) ................................................ 25

Figure 10. Comparison of CAR Offset NPV Different Baseline .................................................... 27

Figure 11. Comparison of Offset NPV between CAR, ................................................................. 28

Figure 12. CAR Cash Flow Initial Clearcut .................................................................................... 31

Figure 13. ACR Cash Flow for Initial Clearcut ............................................................................... 32

Figure 14. CAR Cash Flow for Initial Recovery ............................................................................. 33

Figure 15. ACR Cash Flow for Initial Recovery. ............................................................................ 33

List of Tables Table 1. Descriptions of 13 Management Scenarios Modelled and Analyzed in the Project...... 16

Table 2: Comparison of the ACR and CAR Improved Forest Management protocols. ................. 19

Table 3. Revenue Assumptions ..................................................................................................... 21

Table 4. CAR Cost Assumptions ................................................................................................... 21

Table 5. ACR Cost Assumptions ................................................................................................... 22

Table 6. Ineligible Scenarios for Each Protocol ............................................................................ 22

Table 7. Comparing Viable Scenarios ........................................................................................... 30

Table 8. Marketing Observation Summary .................................................................................. 40

Table 9. NPV including estimated UVA tax differences ............................................................... 58

Table 10: Description of management treatments modeled in FVS. ............................. Appendix A

Appendices Appendix A: Management Treatments Modeled

Appendix B: Adjustments to FVS Model

Page 1

EXECUTIVE SUMMARY

Forests play a critical role in mitigating climate change by absorbing atmospheric carbon

dioxide and storing the carbon in the form biomass. In Vermont, there is the potential to

increase carbon storage as about half the state’s productive timberland is less than fully

stocked. Returning 50 percent of the state’s under-stocked lands to full stocking could store an

additional 19.3 Terragrams1 of carbon in the aboveground biomass. If this process occurred

over 40 years, the additional carbon dioxide sequestered could theoretically offset about 20

percent of the state’s annual greenhouse gas emissions, during that time period.2

Degraded private forest lands are at risk for higher rates of fragmentation and conversion to

agriculture and real estate development because they provide landowners little opportunity for

immediate income from timber and other forest products. Forest-based carbon offsets, which

provide payments to landowners for securing carbon dioxide by planting trees, using improved

forest management techniques, and preventing the conversion of forestland to a non-forest

land use, have the potential to incentivize landowners to leave their forests intact and manage

to improve both carbon storage and productivity. In some cases, these payments can provide a

new income stream that contributes to an economically viable alternative to forest conversion,

high-grading (i.e., the removal of only high quality, merchantable timber), and overharvesting.

Even with so much to gain for landowners and the public good, no forest-based offset projects

have been developed in Vermont. In New England, only one project has been registered and

verified.3 The project team, therefore, set out to assess how private landowners, who own 80

percent of Vermont’s forests, could take advantage of carbon markets to support forest

rehabilitation efforts and to help halt the cycle of degradation and land use conversion, and at

the same time, reduce atmospheric carbon emissions.

The project site included a 1,070 acre private timberland holding in Northeastern Vermont,

which had been high-graded and overharvested. For this site, we identified rehabilitative

1 Hoover, C. and L. Heath, 2011. “Potential gains in storage on productive forestlands in the northeastern United

Sates through stocking management,” Ecological Applications 21(4): 1154-1161. According to this study, 38.5

Terragrams of carbon can be stored in the above ground biomass if low and medium stocked forests were brought

to full stocking. 40 years is the time period. 2 Calculated from Vermont Agency of Natural Resources, Vermont Greenhouse Gas Emissions Inventory Update

1990-2008, September, 2010. Accessed at

http://www.anr.state.vt.us/anr/climatechange/Pubs/Vermont%20GHG%20Emissions%20Inventory%20Update%20

1990-2008%20FINAL_09272010.pdf 3 The Downeast Land Trust announced on September 12, 2012 that it registered a 19,118 acre project. It is

important to note that this landholding is much larger than most private holdings in the region, and not

representative of typical forest parcels in Vermont. https://www.downeastlakes.org/2012/09/downeast-lakes-

land-trust-enters-carbon-market/

Page 2

silvicultural prescriptions that optimize carbon storage and productivity; determined the

number of carbon credits and revenue generated under different forest project protocols;

assessed the market interest in such projects; and analyzed the compatibility of carbon market

participation with federal and state policies, including existing landowner incentive programs.

Restoration Silviculture & Economic Analysis

We evaluated 13 distinct management scenarios that combined different elements of passive

restoration, intermediate treatments (i.e., thinning), and regeneration harvesting to compare

rehabilitation treatments across a spectrum of management intensities. These scenarios are

grounded in silvicultural practices widely used in northern hardwood forests throughout the

U.S. Northeast.

Based on growth and yield modeling, we calculated the amount of carbon offsets generated

using the most relevant and current Improved Forest Management (IFM) protocols accepted by

the Climate Action Reserve (CAR) and the American Carbon Registry (ACR).4 We then calculated

the Net Present Value (NPV) of the eligible management scenarios to determine which options

would be the most profitable. For the most profitable scenarios, we analyzed the cash flow and

break-even points, in present value dollars, so that the landowner would understand when

expenses were incurred and revenues generated; as well as when total expenses would equal

total revenue.

4 For CAR, Forest Project Protocol, Version 3.2; and for ACR, Methodology for non-federal U.S. forestlands, developed by Columbia Carbon LLC.

Full descriptions of the management scenarios, which are abbreviated on the horizontal axis, are listed in the report (Section III, Table 1).

Page 3

Figure 1. Offsets per Acre Generated by Scenarios Eligible for Both Protocols

We found that the ACR protocol generated 15% to 86% more offsets than the CAR protocol for

the same eligible management scenarios. Using the CAR project protocol, five management

scenarios yield a positive NPV, when considering offsets alone. Of these options, an initial

clearcut followed by no harvest produced the highest NPV ($273 per acre) when considering

revenue from both offsets and wood products. Using the ACR protocol, all 11 of the eligible

management scenarios produced a NPV over $300/acre; and 7 of those options generated a

NPV greater than $450/acre during the 100 year project period.

0

20

40

60

80

100

120

140

160

180

MT

CO

2/a

cre

Eligible Management Scenarios

Offsets per Acre Generated by Scenarios Eligible for Both

Protocols CAR (Original

Baseline)

ACR

Page 4

Figure 2. Comparison of Offset NPV (not including wood products) for 100 year project using the CAR and ACR

protocols. Diagonal stripes indicate that the scenario is not eligible under the specified protocol. Descriptions of

the management scenarios, which are abbreviated on the horizontal axis, are in the full report (Section III, Table 1).

Taken together, these results show that the landowner has a range of viable management

scenarios from which to choose. The NPV amounts are more enticing, when both offsets and

wood products are considered. For example, using the ACR protocols, all options that begin

with a clearcut or recovery produce a total NPV greater than $530/acre for a 100 year project

period.

Using the CAR protocol, offsets are not produced for at least 11 years; and a breakeven point in

present value dollars is not reached for at least 32 years. For these scenarios to be

economically viable the upfront project development costs must decrease or the price of

carbon increase. Regardless, the landowner will need to wait more than 11 years for any

financial returns from the carbon project.

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

$700

Off

set

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c)

Scenarios

Comparison of Offset NPV

CAR

ACR

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Figure 3. CAR Cash Flow for Initial Recovery Rehabilitation Activity. In these scenarios, cash flow with and without

forestry is the same, as no harvesting occurs in the years 0-19.

Using the ACR protocol, offsets are generated immediately, thereby making the cash flows

more enticing. With the ACR protocol, all the scenarios beginning with a clearcut reached a

break-even point immediately. Scenarios beginning with a recovery period reached a

breakeven point in 5 years; and the average revenue for the landowner is $12.65/acre in

present value dollars during the first 10 years of the project. The cash flow for these scenarios

is illustrated in the figures below.

Figure 4. ACR Cash Flow for Initial Recovery Rehabilitation Activity. In these scenarios, cash flow with and without forestry is the same as no

harvesting occurs in the years 0-19.

$(100,000.00)

$(80,000.00)

$(60,000.00)

$(40,000.00)

$(20,000.00)

$-

$20,000.00

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Pre

sen

t V

alu

eCAR Cash Flow for Recovery Followed by any Activity

$(80,000.00)

$(60,000.00)

$(40,000.00)

$(20,000.00)

$-

$20,000.00

$40,000.00

$60,000.00

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Pre

sen

t V

alu

e

ACR Cash Flow for Recovery Followed by any Practice

Breakeven Point for Recov_ITS at 32 years

Year

Breakeven Point at 5 years

Page 6

A key difference between the two protocols is the method for calculating the baseline, defined

as what would have happened in absence of the project. CAR relies on the Forest Inventory

and Analysis dataset maintained by the U.S. Forest Service (FIA Mean) to constrain baseline

projections and averages the modeled baseline activity over a 100 year project life. The ACR

protocol used in this report, which was developed specifically for small landowners, relies on

NPV calculations, and models baseline activity over a 20 year crediting period.

Carbon markets are new and evolving; thus our results must be understood within this context.

Most noteworthy is that California’s cap-and-trade program, which allows for the trading of

carbon offsets, came online January 1, 2013, after the completion of our analysis. It is likely

that the carbon offset prices generated by the CAR protocols, which has been adapted with

only slight modifications by California, will be higher than the prices modeled in this report.

Market Assessment

This project component explored the needs and concerns of potential offset buyers in the study

region. We interviewed 10 potential buyers and intermediaries in the tourism sector in

Vermont and New Hampshire to determine if they would provide locally generated carbon

offsets to their guests. In these discussions we found that conserving local forests is a stronger

value proposition for many than reducing carbon emissions. These businesses and

intermediaries also believed that it would be easier to market carbon offsets to their guests if

the projects were local, and the more local the better (e.g., an ideal project would be within

sight of the business promoting it). Concerns focused on the specifics of when, where and how

transactions would occur. Some, but not all, of the businesses were concerned that their

guests would perceive prices to be more expensive than competitors (with an expected 0.5%-

4% of daily expenditures required for offsets).

Policy Implications

The project also considered how government policies, such as tax abatement programs and

cost share programs, might affect the landowner’s ability to participate in voluntary carbon

markets, and vice-versa. In particular, we explored incentive programs, such as the USDA

Natural Resources Conservation Service (NRCS) Environmental Quality Incentives Program

(EQIP) and Wildlife Habitat Incentive Program (WHIP) cost-share programs; conservation

easements and Forest Legacy Program (FLP); and the Use Value Appraisal (UVA) property tax

program for forest land in Vermont. Compatibility was examined from three perspectives:

government program rules, ACR and CAR protocol rules, and the legitimacy of “stacking”

payments, as suggested by several recent studies.

While the programs and protocols considered in this report are for the most part compatible,

the timing of their implementation and the specific management options chosen may affect the

Page 7

ability to participate in both government programs and carbon markets. For example regarding

timing, if a landowner already has a FLP conservation easement on their property, they would

likely be eligible for fewer carbon credits than if they did not. Likewise a property under a long

term carbon contract would likely be a lower conservation priority and would likely receive less

funding if selected for FLP. The best value for landowners could be to place a conservation

easement (whether or not funded by FLP) at the same time as developing the carbon project.

In doing so, the project might be eligible for avoided conversion credit, a reduced buffer,

perhaps a lower baseline for improved forest management, each of which could result in more

offset credits for sale.

Property tax programs are a good example of the potential conflict from management options.

The modeled scenarios that no harvests occur after the initial treatment may not be eligible for

Vermont’s UVA, which emphasizes sustainable timber production. When the difference in

property taxes are included as costs, the NPV of those no harvest management options drops

dramatically. However, even when starting with a degraded forest, the NPV for the carbon

revenue exceeds the difference in taxes should the landowner remove the property from the

UVA Program, when considering a 100-year project period. This finding suggests that for

landowners who are ineligible for UVA because they are seeking to manage their forest as

“forever wild,” carbon may offer a small revenue stream that could potentially compensate for

the higher tax rate. Our calculations depend on many variables, such as the assessed land

value, property tax rate, and upfront project development costs and anticipated price of

carbon.

Forest-based carbon offsets are an emerging opportunity with uncertain future market returns.

As our analysis showed, compatibility and economic viability ultimately depend on the

particulars of the site, project parameters, the landowner objectives, and the evolving rules of

government programs and carbon protocols.

Page 8

I. INTRODUCTION

A. BACKGROUND & RATIONALE

Carbon markets, which offer payments to forest owners to increase the long-term storage of

carbon on their land, have the potential to finance forest restoration and sustainable

management. In Vermont alone, there are more than 2.2 million acres considered by the

Forest Service to be less than fully stocked.5 If 50 percent of these lands were restored to full

stocking, an additional 19.25 Tg carbon could be stored in the above ground biomass. This

translates to the removal of approximately 1.77 MMTCO2 per year.6 To put this annual

sequestration in perspective, Vermont’s total gross emissions of greenhouse gases in 2008 is

estimated to be 8.37 MTCO2e. Therefore, the potential carbon gains from increasing the

stocking of half of Vermont’s poorly and medium stocked forestlands could theoretically offset

approximately 20 percent of the state’s total annual greenhouse gas emissions. 7

Degraded private forest lands are potentially at risk for higher rates of fragmentation and

conversion to agriculture and real estate development because they provide landowners little

opportunity for immediate income from timber and other forest products. Forest based carbon

offsets projects, which provide payments to landowners for securing carbon dioxide by planting

trees, using improved forest management techniques, and avoiding development, can

incentivize landowners to leave their forests intact and manage to improve both carbon storage

and productivity. These payments can provide a new income stream that contributes to an

economically viable alternative to forest conversion, high-grading (i.e., the removal of only high

quality, merchantable timber), and overharvesting.

Even with so much to gain for landowners and the public good, no forest based offset projects

have been developed in Vermont. In the region, only one project has been registered and

verified to date.8 The project team, therefore set out to assess how private landowners, who

own 80 percent of Vermont’s forests, could more easily take advantage of carbon markets to

support rehabilitation efforts and help halt the cycle of degradation and land use conversion.

5 Calculated from Hoover and Heath, 2011. Allowing poorly and medium stocked forests to become fully stocked

has the potential carbon storage gain of 38.5 Tg C, or 141 Tg CO2. The time period for this to occur, as discussed in

the paper is 40 years. Therefore, 3.53TgCO2 /yr – or MMTCO2/yr can be stored in this time period. 6 Assumption of 40 year time period made from Hoover and Heath.

7 Vermont Agency of Natural Resources, Vermont Greenhouse Gas Emissions Inventory Update

1990-2008, September 2010. Accessed at

http://www.anr.state.vt.us/anr/climatechange/Pubs/Vermont%20GHG%20Emissions%20Inventory%20Update%20

1990-2008%20FINAL_09272010.pdf 8 The Downeast Land Trust announced on September 12, 2012 that it registered a 19,118 acre project. It is

important to note that this landholding is much larger than most private holdings in the region, and not

representative of typical forest parcels in Vermont. https://www.downeastlakes.org/2012/09/downeast-lakes-

land-trust-enters-carbon-market/

Page 9

We endeavored to unravel the key technical, market, and policy issues around carbon market

participation for private landowners of high-graded and overharvested lands. We wanted to

understand what forest management options would provide revenue from timber and carbon,

if offset purchasers would be interested in forest based offsets, and how existing policies and

programs interact with carbon market participation.

B. GOALS

The primary goal of this project was to determine how carbon markets could be used to

financially support the rehabilitation of 1,070 acres of privately owned timberland in

Northeastern Vermont; and if feasible, to create the first market-ready forest carbon offset

project in Vermont. Specifically, we:

• Developed a range of rehabilitative silvicultural prescriptions that sought to optimize

carbon storage and forest productivity on high-graded forestland;

• Identified the ability of degraded forests to generate carbon credits under relevant

offset project protocols;

• Assessed local market interest in forest carbon offset projects; and

• Determined the compatibility of carbon market participation with existing landowner

incentive programs.

C. SETTING THE CONTEXT: THE CHANGING LANDSCAPE OF CARBON MARKETS & CAP-

AND-TRADE POLICY

Carbon markets – and opportunities that they may offer to landowners – have been in a

continuous state of flux since the conception of this project. Although the vacillations

described below are most relevant to regulatory markets, they have also been felt throughout

the voluntary carbon markets, as the two are very much intertwined.

This information is not intended to be a comprehensive history of U.S. climate change policy,

but it is meant to set the context for our work and provide a backdrop for the rapidly changing

nature of regulatory carbon markets and the landscape in which this project was conducted.

This analysis presented in the following pages must be taken in context with current market

prices and systems.

Furthermore, from a landowner’s perspective, navigating the ups and downs of changing policy

and their impact on carbon price and sales potential may be overwhelming. As carbon markets

and their project protocols are in their early stages and are continuously being refined, comfort

with the uncertainty and an ability to react to changes and new developments is critical for

successful market participation.

Page 10

cap-and-trade systems have been used to address acid rain – through the regulation of sulfur

dioxide emissions - in the United States since 1990; and more recently for climate change

internationally, through the Kyoto Protocol. In a cap-and-trade system, pollution allowances are

either distributed or sold to emitters, such as utilities and manufacturers. To stay within the

regulated “cap,” emitters may trade their allowances with one another. In the case of carbon

markets, emitters may also purchase offsets generated from projects outside the regulatory cap

such as certain agricultural and forest management projects. The cap is ratcheted down over

time, to reduce net greenhouse gas emissions across the entire economy.

In the 2008 election, both the Democratic and Republican presidential candidates, Senators

Barack Obama and John McCain, supported the idea of climate legislation incorporating a cap-

and-trade system. Furthermore, in 2009, Representatives Henry Waxman and Ed Markey

sponsored the American Clean Energy and Security Act of 2009 (ACES), commonly known as the

Waxman-Markey Climate bill. In June 2009, the U.S. House of Representatives passed the bill,

which was built on a cap-and-trade system.

In September 2009, Senators John Kerry and Barbara Boxer released a discussion draft of the

Clean Energy Jobs and American Power Act (CEJAPA), also focused on a cap-and-trade system,

to lower greenhouse gas emissions. The senate bill, S. 1733, was put forth in 2010 and

permanently stalled.

Leading up to the consideration of these bills, carbon markets were being assessed by large

investors and financial institutions. Financial and intellectual capital was invested in the

creation of standards, registries and capacity for project development.

Just after federal legislative efforts halted, the Chicago Climate Exchange (CCX), a voluntary yet

legally binding greenhouse gas trading system, which began trading in October 2003, was

closed down in July 2010. IntercontinentalExchange, which owned the CCX, cited the stalling of

climate legislation in the Senate and lack of federal climate policy for closing down operations.9

The CCX, viewed by many as a pilot for a national cap-and-trade system, was comprised of

more than 400 members, including corporations such as DuPont and Ford, universities, states,

and municipalities. Forest projects generated some of the offsets traded in the CCX.

In California, the Global Warming Solutions Act of 2006, or AB 32, includes a cap-and-trade

system that went live on January 1, 2013. The legislation has faced litigation by both industry

and environmental justice groups, but has so far continued intact. AB 32 includes forest carbon

offset projects in its mix of solutions.

9 Smith, Aaron Chicago Climate Exchange to Shut Down Emissions Trading. November 17, 2010, CNN Money

http://money.cnn.com/2010/11/17/news/economy/climate_exchange/index.htm. Interview with

IntercontinentalExchange spokeswoman Melanie Shale

Page 11

Furthermore, as carbon markets are rapidly developing, so are the protocols by which projects

are developed. For example, the California Climate Action Registry was superseded by the

Climate Action Reserve (CAR) in December 2010. From September 2009 to November 2012,

four updates or revisions were made to the CAR forest project protocols. Although project

developers are given time to complete projects that were underway, keeping up to speed on

the changing protocols requires a dedicated focus.

Given this history, carbon markets have and likely will continue to serve as a source of

opportunity as well as risk for forest landowners. The potential for carbon offsets to serve as a

tool for rehabilitation hinges on having strong markets for carbon and a willingness on the part

of a landowner to accept a certain amount of uncertainty. While not all landowners will be

comfortable with this uncertainty, conservation-minded landowners, including non-profit

organizations and educational institutions, may be excited by the prospect of promoting a style

of management that combines traditional forest products with new ecosystem services.

Nevertheless, the specific conditions of the forest property, landowner goals and risk tolerance,

as well as policy and market conditions all come into play when determining the feasibility of a

forest carbon project.

Page 12

II. PROJECT SITE

The project site, which is located in the town of

Victory in Northeastern Vermont, includes 1,070

acres of northern hardwood and spruce-fir

forestland. As illustrated by the map, the land is

an in-holding in the 15,000 acre Victory State

Forest, which surrounds the 5,000 acre Victory

Wildlife Management area and is nearly

contiguous with 132,000 acres of conserved

forests known as the former Champion Lands.

Keeping this forestland intact is therefore

important for wildlife as it fills a hole in a large,

protected area, which is home to Black Bear,

Moose, and Snowshoe Hair. Tracks from

Canadian Lynx, endangered in Vermont and a federally listed threatened species, were recently

identified near the project site.

The property is also important for water quality as it contains headwater streams that

eventually flow into the Connecticut River, one of the Nation's 14 American Heritage Rivers.

Rehabilitating the land to minimize erosion and ensuring sustainability of forestry operations is

critical to protect these headwater streams, their water quality, and native aquatic species.

Like many forestlands in Vermont, this property was formerly owned by an industrial timber

company. Victory Lumber Company, which had been operating in this region of Vermont as

early as the late 1800s, sold the property to Coburn Realty, a non-industrial private landowner

who extensively logged the property between the late 1980s and early 2000s. Logging during

this period resulted in erosion, high grading and heavy cutting. In 2008, Coburn Realty sold the

property to Conservation Collaboratives, who initiated the effort to determine how carbon

finance could be used to rehabilitate the land for both timber production and other values such

as carbon sequestration, wildlife habitat, water quality protection and recreation. Conservation

Collaboratives enrolled the property in the Current Use Tax program, which requires a forest

management plan. Similarly, the new owners repaired degraded skidder roads and worked to

improve the early successional habitat, with support from the USDA National Resource

Conservation Services.

The area investigated for a potential carbon project consists of 965 acres of forestland. A small

wetland (1 acre), an early successional habitat clearing (29 acres), and a high elevation spruce-

Page 13

fir forest stand (76 acres) were excluded from the analysis due to different management

priorities for these areas. The soils in the project area are primarily deep to moderately deep,

well-drained Tunbridge-Lyman complex and Monadnock fine sandy loam, both of which are

very rocky. The land is moderately productive, with a site class of II-III and a site index of 50-60

ft for a 50-year old sugar maple (Acer saccharum). In the project area, the dominant species by

basal area are sugar maple (31%), yellow birch, (Betula alleghaniensis; 16%) and American

beech (Fagus grandifolia; 14%). Other species include balsam fir (Abies balsamea; 11%), red

maple, (Acer rubrum; 8%), paper birch (Betula papyrifera; 6%) and red spruce (Picea rubens;

4%).

The majority of trees within the project site are in the sapling or pole size classes, and almost

half of the trees above 4.5 inches are considered to be unacceptable growing stock. The

stocking is variable and patchy, as some areas were not logged in recent years. There is an

average of 52 ft2 ac-1 of basal area and 9.6 Mg ac-1 of aboveground live carbon. These values

are lower than those of similar forests in the region. Typical northern hardwood stands of low

productivity site class in the White Mountain region of eastern Vermont and western New

Hampshire contain an average of 92 ft2 ac-1 basal area and 18.5 Mg ac-1 of aboveground carbon

in live trees.10

10

Climate Action Reserve, 2010. Forest Project Protocol.

http://www.climateactionreserve.org/how/protocols/forest/ (accessed June 29, 2012).

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III . MANAGEMENT OPTIONS

A. INTRODUCTION

The goal of this project component was to determine:

• How different silvicultural practices impact carbon stocking; and

• The costs and benefits of carbon market participation for the Victory property.

Prior to this project, a forest inventory was conducted in 2008 to meet the requirements of

Vermont’s Current Use Value Appraisal program and the standards of the CAR Forest Project

Protocol v. 2.1, which was the current version at the time. Data were collected on the 965-acre

project site from a systematic grid of 157 variable-radius plots using a 10-factor prism. The

plots were stratified across 4 stands, ranging from 73 to 608 acres in size, based on forest

composition and structure. At each plot, data were collected on species, diameter at breast

height (DBH), canopy position and the sawlog potential of each standing live or dead tree

greater than 4.5 inches. For dead trees, a decay stage between 1-9 was assigned following

Sollins et al. (1987).11 Forest type, site class, site index, slope steepness, and aspect were also

recorded at each plot.

As mentioned in the previous section, carbon offsets and the protocols that define their

development are continuously changing. Since the 2008 forest inventory, the CAR Forest

Project Protocol was revised to require the component ratio method for estimating tree

biomass, rather than the national allometric equations developed by Jenkins et al. (2003)

(Climate Action Reserve, 2010). Both of the Improved Forest Management methodologies

approved by the American Carbon Registry (ACR) also recommend the component ratio

method. This method involves using regionally specific equations to calculate biomass in the

bole of the tree, many of which require tree height as an input. As we did not measure tree

height during the 2008 inventory, this change in the project protocols required that we return

to the site for tree height measurements.

We took additional height measurements at 32 plots, which were selected through a stratified

random sample of 20% of the original plots from each stand. We recorded tree species, height

and DBH at each plot in order to create species-specific, height-diameter functions using

nonlinear least squares regression. After testing accuracy of fit and determining the equations

11

Sollins, P., Cline, S.P., Verhoeven, T., Sachs, D., Spycher, G., 1987. Patterns of log decay in old-growth Douglas-fir

forests. Canadian Journal of Forest Research 17, 1585–1595.

Page 15

to be robust, we used these functions to predict tree heights for the rest of the living and

structurally sound dead trees in the 2008 inventory.12

B. REHABILITATION PRESCRIPTIONS

We evaluated 13 distinct management scenarios, which combined different elements of passive

restoration, intermediate treatments (i.e. thinning), and regeneration harvesting, to compare

rehabilitation treatments across a spectrum of management intensities. These scenarios are

grounded in silvicultural practices widely used in northern hardwood forests throughout the

Northeast.13,14,15 However, in our analysis, each practice was tailored to maintain higher than

average stocking, restore desirable species composition, and improve stand structure. Initial

rehabilitation actions consisted of:

1) an immediate silvicultural16 clearcut in 2012 to regenerate the stand;

2) a targeted free thinning in 2022 to improve stand structure and composition; or

3) a period of recovery in which no management occurs.

These initial actions were followed 40 years later by intermediate treatments of either:

1) thinning-from-below the canopy; or

2) no thinning.

These intermediate treatments were followed in another 40 years by one of four regeneration

harvests:

1) a clear-cut;

2) an irregular shelterwood harvest maintaining multi-aged structure;

3) an individual tree selection (ITS) harvest; or

4) no harvest.

Each of these treatments, adapted for the Forest Vegetation Simulator growth and yield model,

is described in Appendices A & B. The resulting 13 management scenarios are summarized in

Table 1.

Table 1 describes the 13 management scenarios modeled and analyzed by the project team.

12

Russell-Roy, E.T., 2012. Rehabilitation Forestry and Carbon Market Access on Overharvested Former Industrial

Northern Hardwood Forests. In: Master’s Thesis. University of Vermont, Burlington, VT. 112 p. 13

Leak, W.B., Solomon, D.S., DeBald, P.S., 1987. Silvicultural guide for northern hardwood types in the Northeast

(Revised). Research Paper NE-603. Broomall, PA: U.S. Department of Agriculture, Forest Service, Northeastern

Forest Experiment Station. 36 p. 14

Miller, G.W., Stringer, J.W., Mercker, D.C., 2007. Technical guide to crop tree release in hardwood forests.

Publication PB1774. Knoxville, TN: University of Tennessee Extension. 24 p. (Published with the University of

Kentucky Cooperative Extension and Southern Regional Extension Forestry). 15

Nyland, R.D., 2007. Silviculture: Concepts and Applications, 2nd ed. Waveland Press Inc. 16

We distinguish a silvicultural clearcut from a commercial clearcut in that it is undertaken primarily for the

purpose of improving stand composition and/or stocking, and may or may not generate a profit (e.g., it may occur

before trees reach commercial size or may remove non-commercial species in order to regenerate more valuable

species).

Page 16

Table 1. Descriptions of 13 Management Scenarios Modeled and Analyzed in the Project

Management Scenario Description

Clear_noHarv 1. Immediate silvicultural clearcut in 2012 to regenerate the stand

2. No thinning

3. No harvest

Clear_Thin_noHarv 1. Immediate silvicultural clearcut in 2012 to regenerate the stand

2. Thinning-from-below 40 years later

3. No harvest

Clear_Thin_ITS 1. Immediate silvicultural clearcut in 2012 to regenerate the stand


3. Individual tree selection (ITS) harvest 40 years later

Clear_Thin_Irsh 1. Immediate silvicultural clearcut in 2012 to regenerate the stand


3. Irregular shelterwood harvest 40 years later

Clear_Thin_Clear 1. Immediate silvicultural clearcut in 2012 to regenerate the stand


3. Clear-cut 40 years later

Thin_Thin_noHarv 1. Targeted free thinning in 2022 to improve stand structure and composition


3. No harvest

Thin_Thin_ITS 1. Targeted free thinning in 2022 to improve stand structure and composition


3. Individual tree selection (ITS) harvest 40 years later

Thin_Thin_IrSh 1. Targeted free thinning in 2022 to improve stand structure and composition


3. Irregular shelterwood harvest 40 years later

Thin_Thin_Clr 1. Targeted free thinning in 2022 to improve stand structure and composition


3. Clear-cut 40 years later

Recov_noHarv 1. Period of recovery in which no management occurs

2. No thinning

3. No harvest

Recov_ITS 1. Period of recovery in which no management occurs

2. No thinning

2. Individual tree selection (ITS) harvest 80 years after project start date

Recov_IrSh 1. Period of recovery in which no management occurs

2. No thinning

3. Irregular shelterwood harvest 80 years after project start date

Recov_Clear 1. Period of recovery in which no management occurs

2. No thinning

3. Clear-cut 80 years after project start date

In addition to these 13 rehabilitation scenarios, we also modeled a business as usual scenario of

continued high-grading.

C. GROWTH & YIELD MODELING

We first modeled the growth of existing trees from 2008 to 2012, using the updated forest

inventory with tree height data. We removed 2 plots of the total 157 plots from the analysis

Page 17

because they fell on log landings where trees might not follow expected growth patterns. We

then modeled each of the 13 rehabilitation scenarios for 100 years, from 2012 to 2112, using

the Northeast variant of the Forest Vegetation Simulator (FVS). FVS is an empirical, spatially

independent, individual tree-based growth and yield model developed by the U.S. Forest

Service. The model has been approved for use by both CAR and ACR protocols, and is widely

used in modeling studies that compare future management alternatives.

It was necessary to make a few adjustments to ensure that FVS was compatible to our data and

modeling needs, which are described in Appendix B.

To generate carbon estimates, we utilized the Fire and Fuels Extension (FFE) of FVS. FFE

calculates tree biomass similarly to the component ratio method when regionally specific

equations are selected.17 Carbon was calculated in standing live trees, standing dead trees, and

harvested wood products (both in use and in landfill) because these are the carbon pools

required by CAR and ACR for improved forest management projects. Soil carbon is an optional

pool in the CAR protocol and excluded altogether in the ACR protocol due to issues of

uncertainty and measurement difficulty.18,19,20 All required carbon pools were selected from

among FFE’s fuel reports, carbon reports, and harvested products reports at 10-year time steps,

and exported to Microsoft Excel for further analysis.

1. OBSERVATIONS

We calculated in carbon accumulation over a 100-year projection period for the 13

rehabilitation scenarios plus the “business as usual” high-grading scenario to understand how

carbon stocks will change over time for each of the 13 rehabilitation management scenario

(Figure 5).

17

Russell-Roy, 2012 18

American Carbon Registry, 2011. Improved Forest Management (IFM) Methodology for Non-Federal U.S.

Forestlands. http://americancarbonregistry.org/carbon-accounting/carbon-accounting/ifm-methodology-for-non-

federal-us-forestlands (accessed June 29, 2012). 19

Gershenson, A., Barsimantov, J., 2010. Accounting for carbon in soils. White paper prepared for the Climate

Action Reserve. 46 p. 20

Schwenk, W.S., Donovan, T.M., Keeton, W.S., Nunery, J.S., 2012. Carbon storage, timber production, and

biodiversity: comparing ecosystem services with multi-criteria decision analysis. Ecological Applications 22, 1612–

1627.

Page 18

Figure 5. Trends in carbon accumulation over a 100-year projection period for the 13 rehabilitation scenarios plus

the “business as usual” high-grading scenario

D. CARBON OFFSET CALCULATIONS & ECONOMIC ANALYSIS

Based on this growth and yield modeling, carbon offsets were calculated using the most

relevant and current protocols for Improved Forest Management available at the time. The

CAR protocol, Version 3.2, was developed by a stakeholder workgroup and released in August

2010. The ACR Protocol was developed by Columbia Carbon LLC and released in September

2011. Both protocols require certification through one of three standards: Forest Stewardship

Council (FSC), Sustainable Forestry Initiative (SFI) or American Tree Farm System (ATFS) – or in

the case of CAR, there is an option for landowners to follow an alternative set of criteria,

described in CAR documentation. Key differences in the protocols include the calculation of

baseline, the project length, and how “permanence” is achieved. These differences are

summarized in the table below.

Ca

rbo

n S

toc

ks

(M

g C

/ac

re)

Year

Thin_Thin_noHarv

Thin_Thin_ITS

Thin_Thin_IrSh

Thin_Thin_Clear

Clear_noHarv

Clear_Thin_noHarv

Clear_Thin_ITS

Clear_Thin_IrSh

Clear_Thin_Clear

Recov_noHarv

Recov_ITS

Recov_IrSh

Recov_Clear

Highgrading

Page 19

Table 2: Comparison of the ACR and CAR Improved Forest Management protocols

American Carbon Registry Climate Action Reserve

Protocol/ Methodology Methodology for non-federal U.S.

forestlands, developed by Columbia

Carbon LLC; released September 2011

Version 3.2, developed by CAR workgroup;

released August 2010

Required Carbon Pools Above and below ground standing live

wood, above ground standing dead wood

(unmanaged stands), harvested wood

products

Above and below ground standing live

wood, above and below ground standing

dead wood, harvested wood products

Optional Carbon Pools Above ground standing dead wood

(managed stands), lying dead wood

Lying dead wood, shrubs and herbaceous

understory, litter and duff, soil

Excluded Carbon Pools Belowground standing dead wood,

litter/forest floor, soil

None

Includes Carbon in Wood

Products

Yes Yes

Commercial Timber Harvest

Required

Yes No

Baseline Legal scenario that maximizes NPV of

wood products; annual values used until

20-yr average is reached

Common practice scenario averaged over

100 years relative to the FIA mean for the

project's assessment area

Minimum Project Length 40 years (two 20-year crediting periods) 100 years after the last carbon offset is

registered

Permanence Buffer pool based on risk assessment,

insurance or other approved methods

Legally binding contact (Project

Implementation Agreement) and buffer

pool based on risk assessment

Deductions Leakage, uncertainty, risk of

reversal/impermanence

Leakage, uncertainty, risk of

reversal/impermanence

Field Inventory Every 10 years Every 12 years

Field Verification Every 5 years Every 6 years

2. OBSERVATIONS

Our calculations showed that the ACR protocol generated more offsets that the CAR protocols

for the same management scenarios. The scenario that begins with a clearcut and is followed

by no management (Clear_noHarv) generates the smallest discrepancy in number of offsets

between the two protocols, with ACR producing 15% more offsets than CAR. The scenario that

begins with a clearcut, followed by a thinning and then an irregular shelterwood harvest

(Clear_Thin_IrSh) has the largest discrepancy between the two protocols, with ACR producing

86% more offsets than CAR.

Page 20

Figure 6. When comparing the six scenarios that are eligible in ACR and CAR, ACR generates more offsets than

CAR.

E. ECONOMIC ANALYSIS

The following tables summarize the key revenue and cost assumptions for our economic

analysis. Whenever possible, we used data specific to the Victory project. When that was not

possible, we used vendor quotes, interviews with practitioners, and professional judgment.

With respect to the future selling price of carbon offsets – a difficult variable to estimate – we

assumed that prices per offsets generated by CAR and ACR were the same.21 The following

tables indicate our assumptions.

21

At the time that we conducted the project, the viability of the California market was uncertain. Similarly, it was

not known which project protocols would be accepted. Now, with the benefit of hindsight, we believe that offsets

generated by the CAR protocol will sell at higher price than ACR, because this protocol was adopted for use in

California’s Cap-and-Trade system with only slight modification.

0

20

40

60

80

100

120

140

160

180

MT

CO

2/a

cre

Eligible Management Scenarios

Offsets per Acre Generated by Scenarios Eligible for Both Protocols

CAR (Original

Baseline)

ACR

Page 21

Table 3. Revenue Assumptions

Revenue

Credits22

Time period CAR ACR

2012-2014 $ 10.00 $ 10.00 credit

2015-2020 $ 25.00 $ 25.00 credit

2021-2100 $ 50.00 $ 50.00 credit

Timber

Pulp stumpage 3 $/m3 (when harvest occurs)

Sawlog stumpage 42 $/m3 (when harvest occurs)

Table 4. CAR Cost Assumptions

CAR Costs

Activities23

Frequency Project development $ 50,000 project/once CAR account set up $ 500 project/once

CAR project submittal $ 500 project/once Initial Field Inventory $ 13,000 project/once Initial Field Verification $ 16,000 project/once Sum of Initial Costs $ 80,000 CAR account maintenance $ 500 project/year Desk verification $ 4,000 project/year (when field verification does not occur)

Consultant – project

management

$ 5,000 project/year

Subsequent Field

Inventory

$ 10,400 Every 6 yrs (80% of initial cost)

Subsequent Field

verification

$ 12,800 Every 12 yrs (80% of initial cost)

22

Henderson, Peter, February 2011. The California Carbon Rush Special Report, Thomson Reuters . Our price

assumptions were lower than those predicted by Barclays Capital, which were; $16 for 2012-2014, $40 for 2015-

2017, and $73 for 2018-2020. We wanted to be conservative; and address the issue that our project modeled for

100 years rather than stopping at 2020. We anticipated that the predicted spike in the third attainment period

would settle out over the long-term. 23

Estimates from conversations with Charles Kerchner, Senior Scientist at Spatial Informatics Group, LLC based on

experience in project development in the Northeast; bids from two project verifiers; and a modification of the

actual forest inventory conducted by Redstart Forestry.

Page 22

Brokerage Fee 3% for every credit sold Issuance fee $0.20 per credit Retirement fee None

Table 5. ACR Cost Assumptions

ACR Costs

Activities Frequency Project development $ 50,000 project/once

ACR account set up $ 500 project/once ACR eligibility screening $ 1,000 project/once Initial field Inventory $ 13,000 project/once Initial GHG plan validation $ 4,000 project/once

Initial field verification $ 16,000 project/once

Sum of initial costs $ 84,500

Desk verification $ 4,000 project/year (when field verification does not occur)

Consultant - project

management

$ 5,000 project/year

ACR annual account fee $ 500 project/year

Subsequent field

inventory

$ 10,400 Every 5 years (80% of initial cost)

Subsequent verification $ 12,800 Every 10 years (80% of initial cost)

Subsequent GHG plan

validation

$ 3,200 Every 20 years (80% of initial cost)

Account closing fee $ 150 project/once Brokerage fee 3% for every credit sold

Offset activation fee $0.15 per credit Retirement fee $0.02 per credit

1. OBSERVATIONS

Several management scenarios we modeled violate requirements of the project protocols,

which are listed in the tale below. In subsequent graphs, ineligible scenarios are indicated by

diagonal lines as opposed to solid fill.

Table 6. Ineligible Scenarios for Each Protocol

CAR Reason

Clear_Thin_Clear These scenarios reduce aboveground live carbon stocks below

Page 23

2. NET PRESENT VALUE ANALYSIS

Net Present Value (NPV) measures the projected profitability of an investment, based on

anticipated cash flows and discounted at a stated rate of interest. NPV analysis enables an

investor to determine if a specific investment will be profitable and to quantify the expected

benefits in present value dollars. A positive NPV means that the project (or specific

management scenario) will be profitable under a given set of assumptions. A negative NPV

means that it will not. A landowner can compare financial profitability of various management

scenarios by comparing NPVs – the higher the NPV, the more profitable the management

scenario.

A positive NPV is generated by five management scenarios using the CAR protocols, when

considering only revenues from offsets and not wood products (Figure 7). One scenario,

recovery followed by no harvest, conflicts with the requirements of Vermont’s UVA property

tax abatement program and therefore is not of interest to the landowner. This compatibility

issue and its consequences will be addressed in Section V (Policy; Property Tax). Of the other

options, an initial clearcut followed by no harvest (Clear_noHarv) yields the greatest NPV of

$186 per acre for offsets, plus an additional $88 per acre for wood products (total of $273 per

acre). If a landowner trusted the assumptions and was interested in maximizing profits over a

100 year time period, he would pick this management scenario as all other alternatives produce

a lower NPV.

Clear_Thin_IrSh the baseline, which automatically terminates the project under

CAR Protocol. To become eligible as a project activity, these

harvests would need to be carefully staggered across space

and time so as to mute the severity of reductions in live

aboveground carbon stocks.

Recov_Clear

Recov_IrSh

Thin_Thin_Clear

Thin_Thin_IrSh

ACR

Clear_Thin_Clear Same management activities as the baseline

Recov_NoHarv Active management required under ACR Protocol

Page 24

Figure 7. NPV for CAR, depicting both offsets and forestry. Striped bars indicate that the scenario is not eligible

under the specified protocol.

Figure 8. NPV for ACR, depicting both offsets and forestry. Striped bars indicate that the scenario is not eligible

under the specified protocol.

-$300

-$200

-$100

$0

$100

$200

$300

Ne

t P

res

en

t V

alu

e (

$/a

cre

)

Scenarios

CAR NPV Breakdown

NPV Forestry

NPV CAR Offsets

$0

$100

$200

$300

$400

$500

$600

$700

Ne

t P

res

en

t V

alu

e (

$/a

cre

)

Scenarios

ACR NPV Breakdown

NPV Forestry

NPV ACR Offsets

Page 25

Using the ACR project protocol, there are multiple options that produce high NPV from offsets,

and therefore multiple options for the landowner to consider (Figure 8). All options that begin

with a clearcut or recovery produce a NPV greater than $460/acre when considering offsets

alone – or greater than $530/acre when revenue from forestry is added to the equation. The

scenarios that begin with a thinning also produce a positive net present value, but one which is

much less ($313- $370/acre when considering just offsets, and between $314- $358/acre when

including forestry). Overall, there are many more options for generating substantial positive

NPV from carbon offsets and traditional wood products using the ACR project protocols than

there are using the CAR project protocols, based on our assumptions and analysis (Table 5).

Figure 9. Comparison of Offset NPV (does not include forestry), after 100 years using the CAR and ACR protocols.

Striped bars indicate that the scenario is not eligible under the specified protocol.

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

$700

Off

set

NP

V (

$/a

c)

Scenarios

Comparison of Offset NPVCAR ACR

Page 26

3. BASELINES & BASELINE SENSITIVITY

Baselines Calculations

For Improved Forest Management projects to generate credits, they must store more carbon

over the long-term than would have been stored in absence of a project. A “baseline” is used

as a reference point, to represent what the forest conditions would have been without the

project. Credits are only issued for long-term carbon storage above the defined baseline. A

lower baseline results in relatively more credits than a higher one. Therefore, baseline

determination is one of the most important considerations in carbon offset calculations. Each

protocol has strict guidelines for selecting a baseline to ensure that the reference condition it

describes and the offsets generated are legitimate.

For CAR, a scenario of ongoing high-grading was selected as the “original” baseline because it:

1) is a continuation of past management practices, 2) is legal under current laws and

regulations, and 3) is still widely practiced across the region.24

This baseline of ongoing high-grading could not be used for ACR, however, because of

additional requirements that baselines: 1) maximize the net present value of harvested wood

products over 100 years at a 5% annual discount rate, and 2) consist of practices that are

recommended by state or federal agencies in order to perpetuate timber species and fully

utilize growing space.25 Since a high-grading scenario does not meet these criteria, the scenario

involving an initial clearcut, followed by a thinning-from-below, followed by a regeneration

clearcut on a 100-year rotation (Clear_Thin_Clear) was selected as the baseline for ACR because

it maximizes NPV and involves a commercial, even-aged silvicultural system.

After completing the analysis, we were interested in understanding how our results would

change if we chose the lowest possible legitimate baseline for CAR, rather than one based on

our best professional judgment, as described previously. 26 We were interested if more

management scenarios would become economically viable.

24

Climate Action Reserve, 2010.

25 American Carbon Registry, 2011. Improved Forest Management (IFM) Methodology for Non-Federal U.S.

Forestlands. http://americancarbonregistry.org/carbon-accounting/carbon-accounting/ifm-methodology-for-non-

federal-us-forestlands (accessed June 29, 2012).

26 More work is necessary to ensure that this baseline would pass the requirements of CAR.

Page 27

Figure 10. Comparison of CAR Offset NPV after 100 years under Different Baseline Assumptions. Striped bars

indicate that the scenario is not eligible under the specified protocol.

When a lower baseline is used as the reference point for CAR, the project has the potential to

generate more offsets (Figure 11). We found that the same five scenarios generated a positive

NPV from offsets, with each one generating higher NPV than with the original baseline. The

most pronounced increases occur when management scenarios begin with a recovery period in

which composition and stocking improve without immediate rehabilitation treatment.

Interestingly, the change in baseline does not make any new scenarios profitable under the CAR

protocol. Even considering the lower baseline, ACR generates about two to five times the

offsets than CAR, for scenarios that are eligible for both protocols (Figure 11).

In our model, the price per offset was the same for both protocols. It can be argued that the

price for offsets using the CAR protocol could be higher than ACR as the CAR protocols have

been adapted by the California marketplace with only slight modifications. As of February

-$300

-$200

-$100

$0

$100

$200

$300

Off

set

+ T

imb

er

NP

V (

$/a

c)

Scenarios

Comparison of Offset NPV under Different CAR

Baseline Assumptions

Original Baseline

Baseline at

Starting Stocks

Page 28

2013, offsets on the California market are selling at $13.62 MTCO2e.27 Some analysts predicted

that offsets in this marketplace could reach upward of $70 MTCO2e during the period, 2018-

2022.28

Figure 11. Comparison of Offset NPV between CAR, when the baseline is the same as the starting stocks, and ACR.

Even with a lower baseline, the CAR protocol does not generate as much revenue as ACR. Striped bars indicate

that the scenario is not eligible under the specified protocol.

4. TIME REQUIRED TO GENERATE OFFSETS

The previous NPV analysis provides a bird’s eye view on project profitability over 100 years. A

landowner, however, needs more detailed analysis. To drill down from the big picture, we

categorized the viable management scenarios by the time it takes to start generating offsets

27

http://www.economist.com/news/finance-and-economics/21576388-failure-reform-europes-carbon-market-

will-reverberate-round-world-ets 28

Henderson, Peter, February 2011. The California Carbon Rush Special Report, Thomson Reuters . Our price

assumptions were lower than those predicted by Barclays Capital, which were; $16 for 2012-2014, $40 for 2015-

2017, and $73 for 2018-2020. We wanted to be conservative; and address the issue that our project modeled for

100 years rather than stopping at 2020. We anticipated that the predicted spike in the third attainment period

would settle out over the long-term.

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

$700

Off

set

NP

V (

$/a

c)

Scenarios

Comparison of Offset NPV

CAR (starting

stocks as

baseline)

ACR

Page 29

and revenue from sales (Table 7). The scenarios with the highest total NPV (at least $185/acre)

are highlighted in yellow.

Using the CAR protocol, the earliest offsets can be generated is after 11 years.29 Using the ACR

protocol, offsets can be generated immediately. This discrepancy between the two protocols is

largely due to differences in how the baseline is calculated. As described earlier, the choice of

baseline has a substantial impact on the timing and quantity of offset generation. Another

important factor in determining offset credit generation is the quantity of deductions that must

be made to account for uncertainty, leakage, and the risk of reversals (i.e. impermanence). If

these deductions exceed the number of offsets generated in a given year, then the project may

generate zero credits for that year, as is the case under the CAR protocols for the initial years of

the project. Since revenues that occur in the short-term are valued more highly in NPV

calculations than revenues that occur over the long-term, the lack of immediate offset credit

generate under the CAR protocols is a substantial disadvantage in terms of NPV.

It is important to point out, when using the ACR protocols, there are 11 options that generate

total NPV over $300/acre; and 7 of those options generate a NPV greater than $450/acre. As

landowners have multiple management objectives, having a menu of viable management

scenarios from which to choose is very useful.

29

This assumes that we could model a defensible baseline that produces a 100-year average that is equivalent to

the starting stock value.

Page 30

Table 7. Comparing Viable Scenarios

Time to generate offsets

CAR (original baseline) CAR (starting stock baseline) ACR

31 years

Clear_noHarv

Clear_Thin_Clear

Clear_Thin_ITS

Clear_Thin_noHarv

Clear_Thin_IrSh

31 years

Clear_noHarv

Clear_Thin_Clear

Clear_Thin_ITS

Clear_Thin_noHarv

Clear_Thin_IrSh

Immediate

Clear_noHarv

Clear_Thin_Clear

Clear_Thin_ITS

Clear_Thin_noHarv

Clear_Thin_IrSh

21 years

Recov_Clr

Recov_ITS

Recov_noHarv

Recov_IrSh

11 years

Recov_Clr

Recov_ITS

Recov_noHarv*

Recov_IrSh

Immediate

Recov_Clr

Recov_ITS

Recov_noHarv

Recov_IrSh

31 years

Thin_Thin_Clear

Thin_Thin_ITS

Thin_Thin_noHarv

Thin_Thin_IrSh

31 years

Thin_Thin_Clear

Thin_Thin_ITS

Thin_Thin_noHarv

Thin_Thin_IrSh

Immediate

Thin_Thin_Clear

Thin_Thin_ITS

Thin_Thin_noHarv

Thin_Thin_IrSh

Note:

-Scenarios are categorized by initial rehabilitation strategy (i.e., clearcut, recovery, or thinning).

- Years indicate the time it takes for credits to start being generated.

- Scenarios in gray are either ineligible for specified protocol, have negative NPV for the offsets, or conflict

with Current Use

- Scenarios in in bold black are eligible and have a positive NPV for offsets

- Scenarios highlighted in yellow have the highest NPV (at least $185/acre) of eligible scenarios

*Recovery followed by no harvest conflicts with the Vermont Current Use Tax Program and therefore has

been rejected by the landowner.

5. CASH FLOW ANALYSIS

This previous analysis provides an overview of viable management scenarios, their NPV, and the

time it takes them to start generating offsets. From the perspective of a forestland owner or

investor, knowing when cash flows occur is very important. For some landowners, generating

income in the near-term is critical and for others it is not. A 60 year-old landowner will likely be

more excited to receive a small income over the next 20 years as opposed to waiting until his

91st birthday to receive his first payment from offsets. The following cash flow analysis

addresses these issues.

A) SCENARIOS BEGINNING WITH AN INITIAL CLEARCUT

Using our original CAR baseline, the most promising

harvest –takes 43 years for the expenditures to match income (breakeven point) even when

revenue from forestry is considered. When the starting stocks are used as the baseline, the

breakeven point is 39 years (Figure 8)

enough revenue to counteract the carbon project development costs. However, from year 2

until year 30, there is a net annual loss. From year 31 onward, there is a net annual profit

generated from this scenario. Although 39

term environmental goals, it exceeds the time horizon for most private landowners and

investors.

Figure 12. CAR Cash Flow Initial Clearcut

Looking at the same scenario using the ACR Protocol, we see a breakeven point is reached

immediately (Figure 9). Although costs outweigh revenues in years 1,

exceed costs for the most part in the first 2

during the first 10 years of the project, the average net revenue for the project

present value dollars; during the first 20 years of the project, the average net revenue for the

project is $5.50/ acre.

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

0 1 2 3 4

Pre

sen

t V

alu

e

CAR Cash Flow for Initial Clearcut Scenarios with Starting Stock Baseline

Page 31

Using our original CAR baseline, the most promising scenario – an initial clearcut

takes 43 years for the expenditures to match income (breakeven point) even when


(Figure 8). It is interesting to note that the initial clearcut generates



. Although 39 - or even 43 years - is not a long time to meet long


CAR Cash Flow Initial Clearcut


. Although costs outweigh revenues in years 1, 2, and 5, revenues

exceed costs for the most part in the first 20 years and beyond. To give a reference point,

the first 10 years of the project, the average net revenue for the project

he first 20 years of the project, the average net revenue for the

5 6 7 8 9 10 11 12 13 14 15 16

Year


(including forestry)

Breakeven point 39 years

an initial clearcut followed by no

takes 43 years for the expenditures to match income (breakeven point) even when


to note that the initial clearcut generates



is not a long time to meet long-



2, and 5, revenues

0 years and beyond. To give a reference point,

the first 10 years of the project, the average net revenue for the project is $2.80/ acre in

he first 20 years of the project, the average net revenue for the

17 18 19


Breakeven point 39 years

Figure 13. ACR Cash Flow for Initial Clearcut

B) SCENARIOS BEGINNING

The other set of scenarios that warranted a deeper investigation begin with an initial

period, in which no timber is harvested

as a baseline, the scenario recovery followed by individual tree selection (Recov_ITS) produces

a relatively high NPV. In this scenario, a breakeven point is reached after 32 years. As

discussed previously, 32 years is not a long time to wait to achieve the public goods associated

with forest restoration and carbon restoration. However, 32 years is too long to wait for most

private landowners, especially when considering the

projects.

-5,000

0

5,000

10,000

15,000

0 1 2 3 4

Pre

sen

t V

alu

e D

oll

ars

ACR Cash Flow for Initial Clearcut Scenarios

Page 32

ACR Cash Flow for Initial Clearcut

SCENARIOS BEGINNING WITH AN INITIAL RECOVERY

The other set of scenarios that warranted a deeper investigation begin with an initial

r is harvested (Figure 10). Using the CAR protocol and starting stocks



ears is not a long time to wait to achieve the public goods associated


when considering the uncertainty and risk of carbon offset

4 5 6 7 8 9 10 11 12 13 14 15

Year

ACR Cash Flow for Initial Clearcut Scenarios (including forestry)

Breakeven immediately

The other set of scenarios that warranted a deeper investigation begin with an initial recovery

Using the CAR protocol and starting stocks



ears is not a long time to wait to achieve the public goods associated


uncertainty and risk of carbon offset

15 16 17 18

(including forestry)

Breakeven immediately

Page 33

Figure 14. CAR Cash Flow for Initial Recovery. In these scenarios, cash flow with and without forestry is the

same, as no harvesting occurs in the years 0-19.

Using the ACR protocol, 3 scenarios (Recov_Clr, Recov_ITS, Recov_IrSh) produce relatively high

NPV and are highlighted in table 7. The following cash flow analysis provides a more detailed

understanding of these options (Figure 11).

Figure 15. ACR Cash Flow for Initial Recovery. In these scenarios, cash flow with and without forestry is the same

as no harvesting occurs in the years 0-19.

-90,000

-80,000

-70,000

-60,000

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Pre

sen

t V

alu

eCAR Cash Flow for Recovery Followed by any Activity

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Pre

sen

t V

alu

e

ACR Cash Flow for Recovery Followed by any Practice

Breakeven Point for Recov_ITS at 32

years

Year

Breakeven Point of 5 years

Page 34

Interestingly, all of the practices beginning with a recovery period (Recov) using the ACR

protocol reach a breakeven point after only 5 years. During the first 10 years, the average

revenue for the landowner is $12.65/acre in present value dollars.

Page 35

F. CONCLUSIONS FOR MANAGEMENT OPTIONS

Differences in the ACR and CAR protocols

The ACR protocol generated 15% to 86% more carbon offsets than the CAR protocol for the

same eligible management scenarios. The key question for the landowner is: which protocol

and marketplace is appropriate for their property and goals?

Although a systematic investigation of the differences in the two protocols is beyond the scope

of the project, there are a few key observations to note. First, CAR and ACR use very different

approaches to calculating the baseline. CAR relies on the Forest Inventory and Analysis dataset

from the U.S. Forest Service (FIA Mean) to constrain baseline projections, and averages

modeled baseline activity over the 100 year crediting period.

The ACR protocol uses a Net Present Value (NPV) calculation and models baseline activity over

a 20 year crediting period. The ACR protocol was developed specifically for small landowners,

based on the belief that the FIA mean is most useful for understanding forest trends at a large

or regional scale, but is not appropriate when considering individual parcels of 200 acres.30 The

protocol developers were concerned that a landowner with 200 acres might be dealing with a

situation very different from FIA mean in a region and therefore NPV is a better reflection of his

reality and decision options.31 The downside to using the site-specific conditions of the

landowner is the potential for subjectivity in the analysis and project development.

CAR uses standardized methodologies and performance standards whenever possible, so as to

reduce subjectivity and uncertainty.32 FIA was chosen as the basis for developing performance

standards for improved forest management projects because it reflects the general condition of

privately owned forestland in the same geographic region, and with the same forest type and

site productivity as the project site. Nevertheless, in the CAR protocol, the FIA Mean is

primarily used as a benchmark for projects, and does not replace a project-level baseline

determination, which must still take project-level considerations into account, such as legal,

performance and financial conditions.

The ACR protocol is a good option for the Victory landowners as there are multiple

management scenarios that create a profitable project, with a breakeven point of less than ten

years. That said, for the project financials to work, future carbon prices need to be similar to

those modeled. With the volatility in the regulatory and voluntary carbon markets, as

30

David Ford, Columbia Carbon, LLC and contact person for the ACR protocol used in this project, personal

communication, January 3, 2013.

32

CAR Program Manual, http://www.climateactionreserve.org/how/program/program-manual/

Page 36

described earlier in this report, it is very difficult to confidently predict the price of carbon in

five years, let alone 40 years into the future.

Another important factor influencing the results presented in this report is the condition of the

project area, with its history of high-grading and overharvesting. A well-stocked forest could

yield very different results in terms of total offsets, NPV, cash flow and break-even

points. Therefore, each forest must be evaluated independently, taking into consideration its

unique condition, location, land use history, and management objectives.

Although the CAR protocol does not create offsets immediately, the offsets may be priced

much higher than modeled in this analysis. The CAR protocol, which has been adopted for use

in the California cap-and-trade market with only slight modifications, will most likely have

potential customers, higher credibility, and a higher price in the future. Our analysis pre-dates

these changes, and the landscape for carbon offsets and the most economically viable protocol

will likely be very different in the future.

Landowner’s Response & Challenges for Carbon Market Participation

Although the ACR and CAR protocols showed a positive NPV, the landowner will wait before

pursuing a carbon project. The issues below contributed to the decision. As these issues are

addressed through changes in the market (section IV) and policy (section V), the landowner will

reassess the potential for carbon market participation.

1. Market & Price Uncertainty – Our analysis assumed reasonable yet conservative future price

estimates. There is the possibility that prices could be much lower than predicted.33 There is

also the possibility that prices will increase and the revenue generated from market

participation will be much higher than anticipated. The problem is that predictability is very

difficult in this emerging marketplace, which is driven largely by government and corporate

decisions in the near and distant future.

2. Lack of infrastructure and service professionals– At present, there is not sufficient scale of

forest carbon markets to enable efficient transactions and cost competitive services. For

example, the estimates for verification services were highly variable. This is largely because

there are only a few verifiers and they are spread across the country. As carbon markets scale-

up, the number of verifiers will increase, each will gain experience, and costs should decrease.

Similarly, the verification process may be improved such that it becomes more efficient and less

expensive, such as through aggregation of smaller projects and through the use of emerging

technologies, such as remote sensing.

33

In the case of a market breakdown (i.e., if prices dropped to $0.50/MTCO2e, a landowner could by his or her way

out of the program so there is a safety valve.

Page 37

3. Complexity – As discussed, carbon markets are in their infancy and the political context that

influences and determines them has been in a state of flux since this project began.

Unexpected challenges, changes to the protocols, and changes to related policies increase the

uncertainty and complexity of decision making.

4. Future Opportunities & California Market – After some delays, California’s greenhouse gas

cap-and-trade program came online in January 2013. Some experts are anticipating that prices

will climb above $70/MTCO2e in 2018. Current rules state that the market will function until

2022. It is possible that ARB will allow for multiple forestry projects to be aggregated together

to reduce transaction costs. Such a framework would be helpful for the Victory project.

Page 38

IV. MARKET ASSESSMENT

Even the most scientifically sound forest carbon project is not viable without a customer who is

willing and able to purchase the offset at a given price. The goal of this project component was

to understand the needs and concerns of potential offset buyers in the study region. With so

much uncertainty surrounding the regulatory markets, our assessment focused on voluntary

buyers of carbon offsets.

In 2011, the purely voluntary market in the US, not including pre-compliance transactions, was

19 MMTCO2e, with prices widely variable, ranging from $0.1 to over $120 /MTCO2e.34 Buyers in

this marketplace include corporations, organizations, and individuals interested in reducing

their carbon footprint.

Businesses in the tourism sector were particularly interesting because they can be both direct

purchasers of offsets and serve as intermediaries by offering carbon offsets to their guests.

A. MARKET SIZE & CUSTOMER IDENTIFICATION

Potential carbon offset customers include all individuals and businesses that emit carbon

dioxide and would be willing to pay for offsets to reduce their climate impact. To narrow down

the pool of potential customers and relevant emission sectors, we looked at the Vermont

Greenhouse Gas Emissions Inventory Update 1990 – 2008, which describes greenhouse gas

emission sources from across the state.35 In 2008, 8.37 MMTCO2e were emitted. The most

significant sources of emissions are transportation (47%), residential, commercial and industrial

fuel use (31%), and agriculture (11%). With respect to transportation, 77% of emissions - 3.04

MMtCO2e - came from gasoline powered vehicles. This means 36% of all emissions in Vermont,

in 2008, came from gasoline powered vehicles. It is assumed that large trucks and buses are

mostly diesel powered while cars driving in the state are mostly gas powered.36

As it is not possible to reach out to every driver, we looked for intermediaries or aggregators of

drivers, such as ski resorts, conferences, hotels, and other facilities that people drove to. Our

proposed strategy is to work with these businesses to offer forest based carbon offsets to their

customers. An important benefit of this approach is that tourism in Vermont relies on the

healthy environment that forest based carbon offsets provide.

34

Peters-Stanley, Molly and Hamilton, Katherine, Developing Dimensions: State of the Voluntary Carbon Markets

Ecosystem Marketplace & Bloomberg New Energy Finance May 31, 2012 35

Vermont Agency of Natural Resources, Vermont Greenhouse Gas Emissions Inventory Update 1990 – 2008,

September 2010 36

http://www.bcairquality.ca/topics/vehicle-emissions-faqs.html, retrieved February 1, 2012

Page 39

We conducted ten face-to-face interviews with personnel at four ski areas, the Vermont Ski

Area Association, Vermont Chamber of Commerce, Vermont Tourism Department, and one

conference center. All the feedback that we received was positive and most of the businesses

were interested in discussing the next steps to move the sale of forest based carbon offsets

forward. Although responses differed based on the perceptions of the specific individual

interviewed and the needs of their organizations, we noticed many commonalities. We did not

tease out issues pertaining to restorative silviculture in our discussions as it was challenging just

to introduce people to the concept of forest based carbon offsets and supporting private

landowners to protect the public good.

B. OBSERVATIONS & CONCLUSIONS

In summary, there was a strong interest among the individuals interviewed for locally

generated forest based carbon offsets. Businesses believe that it is easier to market carbon

offsets to their guests if the projects are local, and the more local the better (e.g., an ideal

project would be within sight of the business promoting it).

Interviewees believed that forest conservation rather than climate change created a more

enticing value proposition for end customers. We were told that that some other carbon

offsets programs were difficult to explain to guests because they were too far removed from

the customer and activity. One example mentioned was a carbon offset project in which

money from Vermont skiers was used to support the construction of wind farms in the Dakotas.

The connection was not clear.

Most of the concerns focused on the sales mechanism. Ski areas didn’t want to irritate

customers by selling carbon offsets at the ticket window. The extra time that it would take to

explain the item would increase the lift ticket lines and annoy visitors. As creating a positive

experience for visitors is a primary goal of the tourism industry, such an approach was viewed

as unacceptable.

There was also a concern by all the facilities about imposing an additional cost. They would

either have to raise prices or create an opt-in program so that customers could voluntarily add

the offset cost to their purchase price. Some but not all of the businesses were concerned that

their guests would perceive prices to be more expensive than competitors’ (with an expected

0.5%-4% increase in daily expenditures required to purchase the offsets)

The following table summarizes our conversations:

Page 40

Table 8. Marketing Observation Summary

What they like

• Local (the more local the better)

• Tangible

• Specific geographic area

• Link to consumer

• Simple story – bring them an opportunity to invest

• Story about why a forest needs to be restored, managed, or conserved

• Opportunity for clientele to learn

• Vermont forests

• Positive environmental message

• Reinforce and strengthen the management of forests

• In-line with 2nd home owners strong environmental values

Considerations & Challenges

• Price competitiveness with others in the industry

• Developing a sales channel.

• Visually identifying the land (truly making it tangible)

• How to tell the story and educate skiers/visitors

• Getting buy-in from the accountants

• Would like to connect offsets to what they are doing onsite

• Would rather just fund onsite activities

• Making the sale in a convenient way that doesn’t interfere with visitor experience

• Parcelization is a little arcane and difficult to explain

• What are they actually funding?

Page 41

V. POLICY IMPLICATIONS

A. INTRODUCTION

Owning and managing forest land can be expensive for family forest owners, especially if the

goal is to restore a previously degraded forest – as in the case of the Victory property. While

most non-industrial private forest (NIPF) landowners are not seeking to earn substantial income

from their forest land, many would welcome help in covering costs. There are already a

number of incentive programs funded by state and federal government that provide technical

and financial assistance to help private owners protect, restore and sustainability manage their

forest lands. For degraded forest lands that need additional investment in restoration, the

ability to cover expenses through some combination of cost-share programs, property tax

relief, and revenue from ecosystem services markets may be especially important. But can the

same parcel participate in more than one program? Under what conditions is that permissible

and effective in achieving conservation goals? This section explores the issues of compatibility

between several common forest incentive programs and carbon market participation.

Three concepts – additionality, baseline and stackability – are important to understanding

whether programs might conflict or be complementary. CAR defines additionality as “a

criterion for Forest Project eligibility.”37 The CAR protocol further states that “A Forest Project

is “additional” if it would not have been implemented without incentives provided by the

carbon offset market.” ACR describes additionality as follows: “GHG emission reductions and

removal enhancements are additional if they exceed those that would have occurred in the

absence of the project activity and under a business-as-usual scenario.”38 A project’s baseline,

which is the expected carbon emissions or removals for the business-as usual scenario, is

calculated somewhat differently by different standards. In addition to performance (which is

discussed previously in this report), both ACR and CAR consider “legally binding mandates” that

apply to a given parcel when setting a project’s baseline. Such mandates include national

environmental laws, state forestry laws, local zoning, and deed restrictions that might constrain

management options or conversion of the property to non-forest uses. ACR calls this aspect of

additionality the “regulatory surplus test”39, and CAR calls it the “legal requirement test” 40.

Stackability refers generally to the ability to combine payments for different ecosystem services

markets for the management of a given parcel. Forests produce a great variety of critically

important public and private goods – only a fraction of which are compensated for in the

marketplace or incentivized by government programs. If ecosystem services markets are to

37

Climate Action Reserve Forest Carbon Protocol v. 3.2, p. 93. 38

The American Carbon Registry® Forest Carbon Project Standard, v. 2.1, p. 50 39

The American Carbon Registry® Forest Carbon Project Standard, v. 2.1, p. 25 40

Climate Action Reserve Forest Carbon Protocol v. 3.2, p. 13

Page 42

serve as effective incentives for sustaining a broad range of values, it is reasonable to expect

that several of these revenue streams could contribute part of the gross revenue needed to

manage a property and return a reasonable profit to the landowner. The challenge to

legitimate stacking is to show how the revenue generated by a given service provides additional

benefit above that provided by other market commitments. The ability to combine such funds

can be especially important for restoring degraded forests, which have little revenue from

markets (either timber or carbon) in the early years.

The conditions under which stacking leads to positive benefits and when it is “double-dipping”

are still being examined by both academics and practitioners.41 As one working paper from

Duke University noted, “research and policy guidance on stacking is limited.”42 Such analyses

typically list the potential benefits, such as stronger incentives to manage for multiple benefits,

as well as the dangers of potentially overpaying for services. A recent white paper exploring

these issues concluded that, under the right conditions, allowing landowners to stack payments

from different markets can enhance environmental outcomes by creating access to broader

sources of funding to invest in ecosystem health. 43 A national survey of over 300 practitioners

and researchers in the field of ecosystem markets generally concurred with this conclusion;

84% of respondents felt that stacking offered positive ecological benefits (almost half) or that it

could depending on the credit stacking scenario (about a third). 44 That survey also found that

“stacked credits for multiple markets using one conservation action is not itself controversial;

rather, it is the resulting transactions – the sale or transfer of the stacked credits – that can be

contentious.”45 Other concerns focus on the effect of stacking on the ability to meet

environmental targets in markets based on regulations that require mitigation, such as in

wetlands development.46 These analyses commonly suggested that clear policies for

additionality – both of the actions and funding – can help reduce the likelihood of overpayment

and underachievement of conservation goals.

In general, Payments for Ecosystem Services (PES) can be divided into two categories:

mitigation credits, that offset environmental impacts elsewhere, and incentives, which

encourage ecologically beneficial management. Mitigation credits can further be divided into

41

For example, Woodward, 2011. Double-dipping in environmental markets, J. of Environmental Economics and

Management 61:153-169, and Kinney, A. 2009. When is credit-stacking a double dip? Ecosystem Marketplace,

http://www.ecosystemmarketplace.com/pages/dynamic/article.page.php?page_id=7147&section=home 42

Cooley, D and L. Olander. 2011. Stacking ecosystems services payments: risks and solutions. Nicholas Institute

Working Paper NI WP 11-04, Nicholas Institute for Environmental Policy Solutions, Duke University. 43

Gillwater, M. 2012. What is additionality? Part 3: Implications for stacking and unbundling. Discussion Paper

No. 3. GHG Management Institute. 44

Fox, J., Gardner, R.C., and Maki, T. 2011. Stacking opportunities and risks in the environmental credit markets.

Environmental Law Reporter 41:10121-10125, 45

Fox et al. 2011. p. 10121 46

Cooley and Olander. 2011.

Page 43

voluntary activities and those required by law. In a review of the emerging literature, opinions

as to what constitutes legitimate and potentially beneficial credit stacking vary in part by these

categories. The greatest concern for potential overpayment or underachievement of

conservation goals is with mandated mitigation markets, the least with voluntary incentive

programs. Stacking of incentive payments alone, (“payment stacking”) is considered

noncontroversial by some because they are not offsetting impacts elsewhere.47 The Fox et al.

(2011) survey also found that only 1% of respondents felt that the term “mitigation credit

stacking” applied to generating credits from a practice that previously received government

incentive funding (e.g., selling carbon credits from a riparian planting funded in part through a

cost share program).

All of these concerns and potential solutions about stacking focus on payments for different

ecosystem services from a spatially overlapping area. “Horizontal stacking,” credits or incentive

payments for non-overlapping parts of a single property, is not considered problematic and

usually not even considered stacking.48 It is clear that double payment, the payment for the

same ecosystem service twice – should not be permissible. While this may seem be self-

evident, especially with single service payments in which per unit fees are usually calculated, it

is not always clear when services are “bundled.” In bundling, the provision of multiple

ecosystem services are covered by a single payment, and “generally no attempt is made to add

up the individual values of the ecosystem service to determine the payment level.”49

Stackability may become questionable, if incentive program objectives explicitly include storing

carbon, because it might be interpreted that a landowner has already been paid for providing

that service. However, both carbon protocols and government programs will likely look at the

time period and reversibility of such a commitment when examining potential conflicts.50

Absent an agreed upon methodology for evaluating stackability, we developed three key

questions for this analysis based on the current debate: 1) Is the same ecosystem service, in

this case carbon, paid for more than once?, 2) Are the programs to be stacked providing offsets

for a regulated compliance market?, 3) How is additionality evaluated? These questions, in

addition to government program and carbon protocol guidelines themselves, were used in

evaluating compatibility regarding the four program areas discussed below.

This case study of the Victory property tests opportunities to participate primarily in the

voluntary carbon market using the ACR and CAR Improved Forest Management standards. The

47

Cooley and Olander. 2011. Op cit., p. 17 48

Cooley and Olander. 2011. Op. cit., p. 17 49

Cooley and Olander. 2011. P.12. 50

For example, Mark Havel of CAR and Neal Bungard of USFS Forest Legacy Program both indicated that the length

of time and reversibility of other commitments were considered. For CAR, it could affect additionality; for FLP it

could affect appraisal values.

Page 44

property was enrolled in other incentive programs that NIPF landowners typically utilize – cost

share programs for specific objectives and current use value appraisal for property taxes.

Moreover the Victory landowners are interested in a working forest easement through the

Forest Legacy Program. This section on policy implications focuses on these two protocols and

the government programs most relevant to Victory, but also asks more generally, how will the

participation in one program or market affect a parcel’s eligibility, additionality and baseline for

any others? What recommendations can be made to landowners or policymakers? The

answers to such questions are still evolving as ecosystem services markets themselves evolve.

Below are current answers (as of late 2012) as to how conservation easements, property taxes

programs, and several federal and state forest incentive programs would interact with the ACR

and CAR forest carbon protocols.

B. METHODS

Compatibility issues were explored from three perspectives: 1) the concerns the carbon

markets might have with federal and state programs, 2) concerns the federal and state

programs might have with carbon projects, and 3) a basic evaluation of an ability to stack these

programs, as discussed above. Print and web documents consulted include both primary (e.g.,

protocols, programs documents and laws themselves) and secondary sources (studies, white

papers or other analyses done by a third party). Because these issues are emergent and there

is relatively little published on the topic, a number of experts were also consulted. Such “key

informants” include government agency personnel, carbon standard professionals and

knowledgeable private parties. Ken Brown, UVM graduate student who is researching

conservation easements and carbon markets, also contributed his expertise. Sources are cited

in footnotes. To the extent possible, the summaries presented here were reviewed by the

expert informants. These findings are then discussed for the case of Victory in particular, and

general recommendations for landowners and policymakers are offered. Conclusions and

recommendations were developed by the section author and the project team based on input

from a combination of published and expert sources. The author is, of course, responsible for

any errors or misinterpretations and welcomes feedback.

C. FEDERAL AND STATE COST-SHARE PROGRAMS

1. BACKGROUND AND ANALYSIS

There are a number of voluntary government programs that use a combination of federal and

state funds to help forest landowners cover a portion of the cost of management activities to

enhance the environmental health and public benefits of their forests. Depending on the

program, the government typically pays 25-75% of the anticipated costs for approved activities,

and landowners cover the balance in cash or in-kind contribution. Such funds can be critical to

Page 45

restoring the health of degraded forests, which cannot rely on revenue from timber harvests or

early carbon credits to provide initial investment capital. Some studies51 include these

programs as a form of public payments for ecosystem services (PES) whereas others distinguish

them from mitigation credits or offsets52. While they may be considered a form of PES in the

broadest sense, they may be best understood as incentive programs that help lower the

financial barriers and opportunity costs of managing for public goods, like clean water and

wildlife. Participating landowners still incur net costs when implementing these activities.

Two of the principal cost-share programs used by Vermont forest landowners are the Natural

Resources Conservation Service’s Environmental Quality Improvement Program (EQIP) and

Wildlife Habitat Incentive Program (WHIP). EQIP provides up to 75% cost-share for practices to

address water quality and soil erosion, including invasive species control, forest stand

improvement, erosion control on forest trails and roads. It can also help to improve wildlife

habitat for priority species in conjunction with forestry practices.53 WHIP likewise provides

partial support for a diversity of practices that help fish and wildlife including early successional

habitat management and riparian plantings for stream bank protection.54 Both programs are

voluntary, focused, fairly short-term commitments, and therefore are likely do little to affect

the legal baseline for the property as a whole from the perspective of carbon standards. As

always, it depends on the specific project and property.

Neither EQIP nor WHIP mention climate or carbon objectives and therefore should not be

interpreted as having paid for carbon benefits. This omission of carbon as a goal contributes to

stackability, as discussed above. In fact, EQIP regulations specifically permit credit stacking:

NRCS recognizes that environmental benefits will be achieved by implementing

conservation practices funded through EQIP, and environmental credits may be gained

as a result of implementing activities compatible with the purposes of an EQIP contract.

NRCS asserts no direct or indirect interest on these credits. However, NRCS retains the

authority to ensure that operation and maintenance (O&M) requirements for EQIP-

funded improvements are met, consistent with §§ 1466.21 and 1466.22. Where

activities may impact the land under an EQIP contract, participants are highly

encouraged to request an O&M compatibility determination from NRCS prior to

entering into any credit agreements.

7 C.F.R. §1466.36 51

For example. Mercer D.E. et al. 2011. Taking Stock: Payments for Forest Ecosystem Services in the United

States. Forest Trends. http://www.forest-trends.org/documents/files/doc_2673.pdf 52

For example, Cooley and Olander. 2011. 53

Natural Resources Conservation Service. N.d. Vermont 2013 EQIP Information.

http://www.vt.nrcs.usda.gov/programs/EQIP/Index.html, on Dec. 28, 2012. 54

Natural Resources Conservation Service. N.d.Wildlife Habitat Incentive Program.

http://www.vt.nrcs.usda.gov/programs/WHIP/Index.html.

Page 46

This regulation represents one growing federal approach to the compatibility of ecosystem

services credits and incentive program: permitting credits while asserting the need to meet

program expectations and to provide disclosure to the agency. (See more in Forest Legacy

below.) The Conservation Reserve Program, the largest federal conservation incentive

program, which focuses on agricultural lands, has a similar provision.55 An overall federal policy

on stacking is still absent. In fact, there is some contradiction between agencies regarding

wetlands mitigation programs and credits. (The USDA permits credit stacking on top of

incentive programs; the EPA and Army Corp of Engineers prohibit it.56) The USDA established

the Office of Environmental Markets in 2008 to seek clarification on such issues with an overall

goal of facilitating market-based approaches to conservation on private agricultural, forest, and

range lands. Even after the economic crisis, in 2010 the Secretary of Agriculture announced a

continued commitment “to carry out USDA's climate and rural revitalization goals by supporting

the development of emerging markets for carbon, water quality, wetlands and biodiversity.”57

While it may be acceptable to stack voluntary carbon offsets with government cost share

programs, (because they are permitted by law and considered less controversial and low risk by

our stacking criteria), the specific management practices they fund might not be compatible.

For example, management commitments made to a government cost-share program might not

contribute as strongly to carbon sequestration goals as other management options. In the case

of the Victory property, the owners chose to enhance wildlife habitat on 20 acres of their

property through creating and maintaining early successional habitat beginning in 2009 through

the WHIP cost share program. When carbon management scenarios for this project were run,

those 20 acres were excluded because those acres were already dedicated to early successional

habitat and not to restoring a degraded forest and storing carbon. The owners chose to forgo

the potential carbon revenue on those acres to retain the wildlife habitat. In general, as long as

federal and state incentive programs do not specify that they are paying the landowner for

carbon storage, and it is not expressly prohibited by government regulations, participation in

voluntary cost-share programs to enhance forest quality may be considered compatible with

participation in carbon markets. From a pure stackability perspective, the programs discussed

meet the three threshold questions introduced above. The same service is not being paid for

twice, only one offset market is being accessed, and the CAR and ACR carbon protocols have 55

Under permissive uses for the Conservation Reserve Program, “(c) The following activities may be permitted, as

determined by CCC, on CRP enrolled land insofar as they are consistent with the conservation purposes of the

program including timing, frequency, and duration as provided in an approved CRP conservation plan that

identifies appropriate vegetative management requirements: …(8) “The sale of carbon, water quality, or other

environmental credits, as determined appropriate by CCC.” 7. C.F.R. §1410.63(c)(8) Note: CCC is the Commodity

Credit Corporation, a government –owned corporation established to stabilize farm prices. 56

Fox et al. 2011. 57

USDA Office of Communications News Release 0115.10 Secretary Vilsack announces details and objectives of

USDA's Office of Environmental Markets,

http://www.usda.gov/wps/portal/usda/usdahome?contentidonly=true&contentid=2010/03/0115.xml

Page 47

robust additionality requirements that take into account the legal baseline. Moreover, the

USDA is generally encouraging private landowner participation in such markets as a way to

provide greater environmental outcomes and to revitalize rural communities.

It should be noted that there is at least one state cost-share program that does specify carbon

storage as an objective and in which the government, not the landowner, retains ownership of

the carbon. In Oregon, the Forest Resource Trust is a state-run program, which offers a long-

term, low cost loan to landowners to plant trees with carbon mitigation funds. The state of

Oregon retains the carbon credits generated and immediately retires them to offset a state

licensed power plant. 58 Therefore, landowners enrolled in this program may not be issued

carbon credits for these forest parcels.

2. RECOMMENDATIONS REGARDING FEDERAL AND STATE INCENTIVE PROGRAMS

For both landowners and the government, federal and state incentive programs can be a good

deal for implementing specific practices to improve environmental health and associated public

goods. Such funding is especially important for promoting practices – like wildlife enhancement

or erosion control – that are unlikely to produce revenue. They may provide important sources

of funds to help restore an overharvested forest such as Victory. While each case must be

considered individually, prior enrollment in an incentive program like EQIP or WHIP appears

unlikely to preclude participation in carbon markets.59 In practice, however, such programs

may not be entirely compatible because they may support activities that do not produce much

carbon. Landowners may, as was done in Victory, devote portion of their property to a cost-

share funded activity and a separate area to carbon and/or timber production. Given that: 1)

carbon prices are uncertain at present, 2) cost-share programs produce tangible financial

benefits and environmentally beneficial practices in the short term, and 3) participating in cost

share benefits now will likely have little impact of carbon market participation in the future,

landowners should not hesitate to participate in such incentive programs if they meet

landowner objectives.

Several states have sought to assist forest landowners in participating in carbon markets, and

the US Forest Service maintains a website that provides information about how to access such

markets.60 If state and federal agencies want to encourage forest landowners to participate in

carbon markets (perhaps as a way to achieve conservation goals without incurring government

expense), then they should be careful about the wording used in contracts for their regular 58

Wright, J. , R. Beddoe, and C. Danks. 2009. Oregon’s Forest Trust Forest Establishment Program. Forest Carbon

and Communities Case Study available at

http://www.uvm.edu/~cfcm/casestudies/FRT%20case%20study_v4_111709.pdf 59

Under some circumstances, prior commitments could affect additionality but not necessarily rule out

participation in carbon markets. 60

USDA Forest Service, n.d. Carbon Market Opportunities for Private Forest Landowners

http://www.na.fs.fed.us/ecosystemservices/carbon/index.shtm

Page 48

incentive programs. Unless they intend to purchase carbon rights from landowners, state and

federal programs should avoid listing carbon storage or climate benefits as goals of the

incentivized activities in order to preserve stackability. There are plenty of reasons to plant

riparian buffers or reduce soil erosion without invoking carbon storage. Better still, provisions

that clarify that carbon ownership is retained by the landowner, such as those found in EQIP

regulations, will reduce ambiguity about management expectations and future market options

for the landowners. If future cost share programs do want to provide explicit incentives for

carbon management and retain ownership of the carbon, we recommend that they quantify

the carbon benefits and pay (or co-pay) for them on a per unit basis over a designated time

period so that it is clear what the landowner has or has not sold. (Oregon’s Forest Resource

Trust may be a good model for that.)

D. CONSERVATION EASEMENTS


A conservation easement is a legally binding agreement that transfers a negotiated set of

property rights from a landowner to a land trust or government entity, thus placing perpetual

limits on the uses of land in order to protect its conservation values.61 While many easements

are negotiated privately, some are part of state or federal conservation programs, and

therefore are discussed briefly in this report. The landowner may donate or sell the

development rights of their property to an easement holder (usually a land trust, sometimes a

government agency) to ensure that their parcel cannot be developed in the future. Because

conservation funding is limited, most landowners donate rather than sell conservation

easements.62 Additional costs of establishing easements include the professional fees to set up

the easement (especially legal and appraisal costs) and an endowment to cover long term

stewardship and enforcement. These costs do not include the value of the easement itself.

Funds must be raised, or donated, to cover these upfront costs and to endow the stewardship

of the easement itself. Landowners who donate easements to a nonprofit often pay these

costs themselves. The donation may provide an income tax deduction, which can defray some

of those expenses.

Conservation easements can interact in several ways with the carbon projects and protocols.

They typically create a legally binding commitment to keep forests from being converted, which

can affect the legal baseline for carbon projects. For example, a parcel with a preexisting

61

A melding of definitions from the Land Trust Alliance

(https://www.landtrustalliance.org/conservation/landowners/conservation-easements) and the USDA Forest

Service Forest legacy Program (http://www.fs.fed.us/spf/coop/programs/loa/aboutflp.shtml). 62

Jones, J. et al. 2009. Common questions on conservation easements. Center for Collaborative Conservation,

Colorado State University, Fort Collins, CO.

Page 49

conservation easement is usually not eligible for avoided conversion credits because the forest

is already protected from development. However, easements can help assure permanence for

a forest carbon project. If a conservation easement is initiated as part of the development of

an avoided conversion project, the parcel may be eligible for avoided deforestation. In fact,

CAR requires a qualified conservation easement or deed restriction for avoided conversion

projects.63 For improved forest management or reforestation projects, conservation easements

are not required, but they are an accepted way to reduce the risk of loss through conversion for

both CAR64 and ACR65. In those cases, placing as easement as part of a project reduces the

amount of carbon that needs to be held as a buffer, or insurance against loss, and can result in

increased credits that can be sold.

Conservation easements may not only restrict development, but may also specify how a forest

is to be managed. Easements that are paid for by a land trust, government program or other

third party are more likely to specify management direction than ones donated by the

landowner. Many working forest easements allow a wide range of silvicultural practices, but

some conservation easements can be quite prescriptive and may even preclude all commercial

harvesting. The forest management provisions in conservation easements can thus affect the

legal baseline for improved forest management and afforestation/reforestation carbon

projects. The least restrictive easement generally allows for the most options for generating

carbon credits in the future.

In theory, carbon credits can potentially help pay or lower the costs of a conservation

easement. A well stocked stand that can earn credits up front could provide funding early on to

help defray the cost of establishing an easement. A degraded forest that creates credits

decades later can produce a revenue stream to cover the long term stewardship costs of an

easement. As carbon markets mature and their prices become more stable, future carbon

revenue can be allocated towards the cost of maintaining and monitoring an easement, which -

if predictable - could reduce the stewardship endowment needed to establish an easement.

However the transaction costs of establishing a carbon project are likely to be much higher than

those of establishing a conservation easement, so carbon is no panacea. Carbon credits may be

best thought of as one of several funding sources or income streams for a conserved property.

63

CAR Forest Project Protocol, v 3.2, p. 12. 64

For CAR, “Reforestation Projects and Improved Forest Management Projects that choose to employ Qualified

Conservation Easements or Qualified Deed Restrictions have reduced obligations to the Reserve’s CRT Buffer Pool,

as described in Section 7 and Appendix D.” Forest Project Protocol, v 3.2, p. 12. 65

For ACR, “Agreements between Project Proponent and landowner that “run with the land” and are recorded,

including easements or other legal restrictions, may be deemed a lower reversal risk and require an accordingly

smaller buffer contribution. However ACR does not prescribe a particular mechanism such as an easement or other

legal restriction but leaves this decision to the Project Proponent and landowners.” The American Carbon Registry®

Forest Carbon Project Standard, V. 2.1 (2010) pg 47.

Page 50

With a few exceptions, easements to date have been silent on who owns forest carbon. It has

generally been assumed that the landowners retain ownership in the carbon sequestered in

their forests because they principally sold or donated the development rights – not the rights to

forest products. From a legal perspective, clauses restricting forestry practices may be

murkier. If the landowner intends to transfer rights to carbon or other ecosystem services to

the easement holder, ideally those rights should be specified in the easement and their value

calculated and clearly compensated for in supporting documentation. Such clarity will help in

determining who is entitled to any carbon payments and whether stacking of other credits or

payments is an option for the landowner in the future. CAR now requests such clarity, as

specified in a 2012 policy update:

An Easement or Agreement must make explicit that the Forest Owner has the right to

be issued any and all carbon credits that may flow from the forest project. 66

Carbon credits are typically issued to the landowner (or project developer) for carbon produced

above the baseline, which is set (in part) by the easement restrictions. A conservation

easement holder or purchaser is typically not awarded credits for carbon sequestered (or

emissions avoided) as a result of restrictions in the easement unless rights to carbon have been

legally transferred to the easement holder.

2. RECOMMENDATIONS REGARDING CONSERVATION EASEMENTS

For a parcel like Victory, which does not already have a conservation easement or a carbon

contract the owners should consider establishing an easement together with the development

of a carbon project – if it is consistent with their long term goals for the land. In doing so, they

should make sure the wording of the easement complies with the chosen protocol’s

requirements for a “qualified” conservation easement. By combining the easement and the

project, the property could potentially then be eligible for both avoided conversion and

improve forest management credits with a reduced buffer pool. Although the Victory property

does have recognized conservation value as described earlier, conservation funds are limited,

and it may be difficult to sell an easement. If the owners want to protect their forest from

development in perpetuity, they might have to pay the costs of establishing the easement

themselves, making carbon revenues look attractive as a funding source. The scenarios

modeled in this report suggest that it could be a number of years before accruing credits,

depending on the harvesting scenario and protocol. While ACR may produce immediate

benefits, CAR scenarios did not generate credits for at least 11 or 31 years, depending on the

modeling assumptions. Therefore, if pursuing a CAR project, the upfront costs of both the

project and the easement would likely be borne by the landowners (or project developers).

66

CAR, 2012. Forest Projects with Easements and Other Encumbrances That Impact the Forest Carbon, Policy

Memorandum, Nov. 15, 2012. http://www.climateactionreserve.org/how/program/program-manual/ .

Page 51

Estimates of future carbon revenues might help reduce the initial easement stewardship

endowment, a decision that would have to be negotiated with the easement holder.

When establishing new forest conservation easements not associated with a carbon project,

both landowners and easement holders should consider carefully how the written provisions

might affect the ability to participate in ecosystem services markets in the future. To allow

future access to carbon markets, easements should probably avoid mentioning carbon or

climate change as objectives so that it is clear that the landowners have not already been paid

for those services. For greater clarity, landowners may even want to specify that carbon rights

remain with the landowner, as specified in the CAR protocol.

If one goal is to maximize the potential for carbon credits from improved forest management,

new conservation easements should place few restrictions on silvicultural practices and forest

harvests. However if future ownership is uncertain or there is concern that future owners

would engage in destructive logging practices, then more restrictive easements, i.e., those that

set strict standards for forestry practices, might still be appropriate. In the end, the details and

timing of the easements should depend on the goals of the landowner and the easement

holder, and the role they expect future carbon payments to play in maintaining the forest and

easement obligations.

E. FOREST LEGACY PROGRAM


The Forest Legacy Program (FLP) is a voluntary federal program to help prevent the conversion

of important private forests to non-forest uses. While keeping forests in private hands, it

protects environmentally sensitive forest areas by encouraging and supporting (up to 75%) the

purchase of property or partial interests in property (e.g., conservation easements or other

deed restrictions). States set local conservation priorities and are responsible for how the 25%

nonfederal match is met. At the federal level, funds are limited and selection is highly

competitive. Federal FLP legislation and guidelines currently do not specify carbon

sequestration as a goal,67 and carbon is not measured or compensated for on a per unit basis.

Therefore forests protected with the financial assistance of the FLP may still be eligible for

participation in the carbon market from a pure stackability perspective. However the issue is

more complex from both the perspectives of the carbon standards and the FLP, as discussed

below.

67

USDA Forest Service. 2011. Final Amended Forest Legacy Program Implementation Guidelines. Available at:

http://www.na.fs.fed.us/legacy/resources/pdf/FLP_Guidelines-Final_6-30-03_as_Amended_51812.pdf . Note: The

FLP goals for specific states may vary. For example, Oregon lists “stores of carbon” as an FLP goal. In such a case,

the appraisal and easement wording might have to be examined to determine if a landowner transferred carbon

rights.

Page 52

Compatibility from the perspective of the carbon standards

Because the Forest Legacy Program protects forest land from conversion permanently through

conservation easements (or other legally binding agreements), FLP agreements can constitute a

legal baseline that precludes previously protected properties from avoided deforestation

credits. From the perspective of the carbon standards, the timing of the easement, rather than

the source of funds, is at issue. If a conservation easement is put in place as part of a new

carbon project (as discussed above), that new easement may be funded through the FLP from

the perspective of the protocols; ACR and CAR are silent on the source of funds for establishing

conservation easements. In addition, both new and old properties protected by Forest Legacy

funds may be eligible for improved forest management or afforestation/reforestation credits.

How many credits such a project can earn will depend on how restrictive the forest

management guidelines are in the FLP legal agreement. If an FLP protected forest is managed

for any purpose, it is required to follow a forest stewardship plan (or a multi-resource

management plan), which specifies sustainable management practices on the specific property.

Such a plan will likely set a fairly high management baseline and thus reduce the potential

revenue generated through sale of carbon credits.

Compatibility from the perspective of the Forest Legacy Program

Conversely, participation in the carbon market might affect the ability of a property to be

protected with the assistance of FLP funding. Each state ranks properties for the limited FLP

funds. The threat of conversion to non-forest uses for a parcel could rank lower if the land is

already committed to a 40 or 100 year carbon contract. Moreover, the appraised value of the

property could possibly be affected by any long term business contracts related to the parcel,

such as the income stream from carbon credits.68 Therefore, while a pre-existing carbon

contract might not make a parcel ineligible for FLP, it has the possibility to reduce the likelihood

of selection and the amount paid for an easement.

The FLP has had some experience with landowners seeking to combine Forest Legacy funding

and future participation in ecosystem services markets on their forest land. In part as a result

of that experience, the USDA Forest Service is currently developing a policy to clarify the

conditions under which Forest Legacy funding can or cannot be combined with payments for

ecosystem services, such as carbon markets. While this policy is still in draft form and has not

yet undergone internal legal review, USFS personnel shared some of their currently thinking on

the issue.69 In broad terms, the policy currently being drafted would not prohibit payments for

ecosystem services (PES) for a parcel protected with an FLP easement. It would, however,

68

Neal Bungard, Northeastern Area Forest Legacy Specialist, U.S. Forest Service, New Hampshire. 69

Maya Solomon, Forest Legacy Program, U.S. Forest Service, Washington Office, and Neal Bungard, Northeastern

Area Forest Legacy Specialist, U.S. Forest Service, New Hampshire.

Page 53

require the landowner to disclose such participation to the regional FLP officer, and the

landowner would not be permitted to enter into any agreement that violates the terms of the

Forest Legacy easement. It remains the landowner's responsibility to show additionality (above

what is required by FLP) needed to participate in the ecosystem services market. Although the

current FLP implementation guidelines do not mention carbon or mitigation credits, the

proposed policy may be similar to what is already included in the guidelines regarding long term

contracts.70

Until the new FLP policy has been approved, the Office of General Council has indicated that

conservation easements should remain silent on the issue, i.e. not specifying if landowners can

or cannot participate in ecosystem services markets.71 This recommended silence may not be

compatible with requirements of a CAR qualified easement, which specifies that the “the Forest

Owner has the right to be issued any and all carbon credits.”72 Therefore, it is currently

uncertain if an FLP easement could be adapted to serve as a conservation easement which

qualifies the property for a reduced buffer pool or an avoided conversion project.

A few additional issues regarding FLP compatibility with carbon offsets are relevant to the

Victory property and modeled management scenarios. While FLP itself does not require active

forest management, some conservation easements supported by FLP contain language

suggesting that the purpose of the easement is to provide forest products to local economies

and jobs for people working on the land. Such language may be suggested by the state partner.

A property with a working forest easement that specifies the provision of economic benefits

(whether funded through the FLP or not) may not be compatible with the no harvest recovery

scenario, because it is contrary to one of the expressed purposes of the easement73 Another

concern raised is that current appraisal methods to assess the value of an easement look at the

income from the “highest and best use” compared to the income stream from forest use only.

While this assessment typically included timber value in forest use (whether or not there is a

70

USDA Forest Service. 2011. Final Amended Forest Legacy Program Implementation Guidelines. Appendix M, p.

62 http://www.na.fs.fed.us/legacy/resources/pdf/FLP_Guidelines-Final_6-30-03_as_Amended_51812.pdf

Conservation easements should include terms that limit additional easements, long-term leases or

contracts. Any subsequent easement or agreement should be subject to approval by Grantee. Grantee

shall ensure that additional long-term or permanent agreements do not negatively impact the protected

conservation values or the purposes of the FLP or would limit the allowed uses of the land; especially if

the limitation would be contrary to the reasons the land was entered into the FLP. Such approval may be

conditional, denied or granted at the sole discretion of the Grantee. 71

Neal Bungard, U.S. Forest Service 72

CAR, 2012. Forest Projects with Easements and Other Encumbrances That Impact the Forest Carbon, Policy

memorandum, Nov. 15, 2012. http://www.climateactionreserve.org/how/program/program-manual/ 73

Neal Bungard U.S. Forest Service, and USDA Forest Service. 2011. Final Amended Forest Legacy Program

Implementation Guidelines. Appendix M, p. 62.:

An example of an additional non-compliant easement would be a strict preservation easement that allows

no timber management when a purpose of the conservation easement is to support the local timber

economy.

Page 54

timber contract), to date it has not included potential income streams from carbon or other

ecosystem services. As these markets develop, if such values were included in appraisals, it

would act to increase the income stream from the protected forest, thereby decreasing the

value of the easement. Such a change would reduce the amount paid to landowners, but

presumably make federal conservation dollars stretch further.

2. RECOMMENDATIONS REGARDING THE FOREST LEGACY PROGRAM

While the Forest Legacy Program can contribute a valuable 75% of the cost of a conservation

easement, the remaining 25% must still be provided by state or local sources, as determined by

the states. Can carbon revenue help bridge the gap? The ability of a landowner to benefit

from either the FLP or the carbon market is likely diminished by participating in either one

before the other. The FLP staff recommends putting the easement in place first, and later

layering any carbon benefits on top of that.74 This strategy would make sense today for

landowners given the immediate benefits of an FLP purchase versus the upfront costs and

uncertainty of carbon revenues. But carbon protocols do offer benefits if easements are put in

place as part of the carbon project implementation. (As discussed above, they are required for

avoided conversion and can reduce the required buffer for improved forest management.)

Therefore the option of placing an FLP easement in conjunction with a carbon contract (rather

than before or after) might generate the most funds for conservation and therefore be a good

value for both the public and the landowner. If the forest is well stocked, the initial carbon

revenue might help pay for the easement. However, if the forest is poorly stocked (as in the

case of Victory), then carbon revenue generated in future years might only help pay for

management of the parcel.

In the case of the Victory property, which has no easement, the Forest Legacy Program could

potentially provide the funds to help create and/or buy a conservation easement -- if protecting

that property were a priority of the state and competitive at the national level. The Victory

landowners are interested in placing an easement on the land and did explore the Forest

Legacy Program. The property is well situated to connect with other protected areas and has

several attributes contributing to its high conservation value. However, the FLP has limited

funds, and Victory was not competitive at the national level.

Attempting an FLP/carbon project combination may not be appropriate for the smaller NIPF

landowner due to the complexity, fixed costs and timing required by each type of program. The

story may be different, however, for large, high-priority conservation projects, which are often

complex deals that require a number of players and funding sources. It is conceivable that a

combination of funds -- private donations, carbon revenue, state funds and Forest Legacy

74

Maya Solomon, Forest Legacy Program, U.S. Forest Service, Washington Office.

Page 55

Program – might together pay not only for the initial legal protection of a parcel, but also

investments in restoration and long term management. That said, the implementation –

especially timing -- of such a complex deal is challenging. The potential value of carbon credits

could not count as a match; only the cash revenue generated by sale of carbon credits.75 The

matching funds would likely be needed up front before the credits would be ready to sell.

Because it is awarded competitively, FLP funding is uncertain and the funding cycle may not

match the carbon project development schedule. Moreover, the FLP has not yet fully

considered the policy implications of purchasing an easement in conjunction with a forest

carbon project. 76

One recommendation to state and federal policy makers is to further explore the possibilities

for combining the sale of an ecosystem service like carbon with the establishment of an FLP

easement. There may be long term conservation value to allowing the wording of FLP

easements to be compatible with the requirements of a rigorous carbon protocol to clarify

ownership of forest carbon. There are many creative funding mechanisms to cover upfront

costs of carbon projects that might work for an FLP project. Such a combination may free up

more funding for conservation – which can be valuable when FLP funds are so limited relative

to need. We also recommended that the FLP reach out broadly during the public comment

period for its new policy on ecosystem services markets. Land trusts, researchers, landowners

and carbon market professionals may have insights into on how to combine such programs in

ways that enhance conservation benefits.

F. PROPERTY TAXES


In recognition of the public values of forests and the relatively low revenue stream for

sustainably managed forests (relative to conversion and development), all US states have some

kind of program to reduce the property taxes on forest land in order to encourage sustainable

use and maintenance of forests.77 Such programs vary significantly from state to state and

many are combined with programs to help protect agricultural land from conversion.

In Vermont, the Use Value Appraisal (UVA) Program, also known as “Current Use,” allows forest

properties to be taxed at the forest value, rather than full market value, the latter of which

includes development potential. Over 1.7 million acres of forest land are enrolled in Vermont’s

75

Maya Solomon, Forest Legacy Program, U.S. Forest Service, Washington Office. 76

Neal Bungard, Northeastern Area Forest Legacy Specialist, U.S. Forest Service, New Hampshire. 77

Southern Research Station, USDA Forest Service. Forest Incentive Programs Available from State Sources.

Accessed at http://www.srs.fs.usda.gov/econ/data/forestincentives/state.htm on Dec. 27, 2012,

Page 56

UVA program78, making it the most common government forestry program in which VT forest

landowners participate. Goals of the program include conserving Vermont's agricultural and

forestland for productive use, slowing the conversion of these lands, and achieving greater

equity in property taxation on undeveloped land.79 Carbon sequestration or storage is not

mentioned in the authorizing statute. As specified in the UVA manual, for all parcels enrolled in

UVA, the “production of high quality forest products on a sustainable basis shall be the primary

focus of management efforts…,” and “managed actively for timber by existing USFS silvicultural

guides.” 80 Other goals are permitted as long as they are compatible with the primary timber

goal. Special sites within a property, such as areas of significant wildlife habitat, watershed or

recreational value may be “managed actively for timber but with latitude to be managed by

guidelines other than USFS silvicultural guides.” 81 An unlimited amount of unproductive (site

IV) forest may be included in UVA without active management. In 2010, the rules were

amended to allow Ecologically Significant Treatment Areas (ESTAs), which may be managed for

values other than timber. ESTAs are limited to 20 percent of the enrolled productive forest

acreage. In all cases, at least 20 acres must be under active forest management for a parcel to

qualify for UVA. If a landowner chooses not to manage for timber according to approved

federal guidelines – either because he or she harvested too intensively or chooses not to

harvest at all – then the parcel would not be eligible for the UVA program.

UVA tax savings can be significant. In a sample case offered in a UVA brochure82, an enrolled

forest parcel assessed as a fair market value of $1,000 per acre would be taxed on the forest

value of $123 per acre in 2012. For a 100-acre parcel with a tax rate of approximately 2.5%, this

results in tax savings of $2,192.50 per year. If the property were more than a mile from the

nearest road, the savings would be even greater. The forest value is based on the net annual

stumpage value per acre at the state level. These values have fluctuated between $103 and

$136 over the past ten years depending on market conditions.83 During 2010-2011, the forest

value was $122 per acre. If the landowners chose to leave the program, they may have to pay a

Land Use Change Tax, which is “20% of the fair market value for lands enrolled 10 tax years or

less and 10% for lands enrolled continuously for more than 10 tax years.”84 Not harvesting

78

VT Dept of Taxes. 2012. 2012 Annual Report, Division of Property Valuation and Review, p. 16. 79

Condensed from Title 32: Taxation and Finance, Chapter 124: Agricultural and Forest Lands § 3751. Statement of

Purpose as found in Dept. of Forests, Parks and Recreation, VT Agency of Natural Resources (VT FPR). 2010. Use

Value Appraisal Program Manual, p. 8. 80

VT FPR. 2010. Use Value Appraisal Program Manual p. 24 and p. 28 81

VT FPR. 2010. Use Value Appraisal Program Manual, p. 28 82

Dept. of Forests, Parks and Recreation, VT Agency of Natural Resources (VT FPR). 2012. Use Value Appraisal of

Forest Land in Vermont, p.3,

http://www.vtfpr.org/resource/documents/UVA/FPR%20Information%20Brochure.pdf. 83

Dept. of Forests, Parks and Recreation, VT Agency of Natural resources, 2010 Use Value Appraisal Program

Manual p.6, and VT Dept of Taxes. 2012. 2012 Annual Report, Division of Property Valuation and Review, p. 15. 84

VT FPR 2012, p. 3.

Page 57

according to the approved management plan can also result in having to pay the Land Use

Change Tax.85

From the perspective of carbon protocols, participation in property tax programs like Vermont’s

UVA does little to affect eligibility for carbon markets. A CAR representative who reviewed

Vermont’s UVA program for this project indicated that it would not count as a legal baseline for

the CAR protocol.86 Participants already enrolled would not have to withdraw to satisfy CAR’s

additionality tests (performance standard and legal requirement). Even though Vermont

describes enrollment in UVA as placing a “permanent lien” on the property, participation is

voluntary and reversible, and so it does not meet the intent of the “legally binding mandate”

baseline. In an email response, Mark Havel of CAR wrote:

As I understand it, the requirements [for forest management] are so general that

plausible baseline and project harvest scenarios would be possible within the Vermont

program guidelines. In other words, a landowner could manage the timber with a

“business as usual” FMP and then decide to start an Improved Forest Management

(IFM) project without having to withdraw from the current use program. It might be a

bit trickier to undertake an Avoided Conversion project, however, as the difference in

property taxes would need to be factored into the appraisal. Still, I think it would be

possible.

While VT’s UVA program does not preclude carbon market participation, some of the scenarios

modeled in this project may not meet its requirements. A recovery-no harvest scenario, with

no silvicultural treatments for 100+ years, would likely not meet the UVA criteria of being

“managed actively for timber by existing USFS silvicultural guides.” Moreover, the clearcut-no

harvest scenario might also be ineligible, because after the initial clearcut there are no

silvicultural treatments scheduled for 100 years. If the difference in property taxes were

included in the calculations for the modeled scenarios, the relative financial attractiveness of

the scenarios would change significantly.

85

VT FPR 2012, p. 3.

Owners of enrolled forest land that is harvested contrary to the management plan or the silvicultural standards may

be subject to the Land Use Change Tax on the acres cut contrary. The lien is removed from only that portion.

Additionally, the entire forest parcel becomes ineligible for UVA for a period of five tax years. The property may be re-

enrolled after five tax years with a plan that addresses the current forest conditions. The parcel may lose its eligibility

if the landowner fails to follow his/her forest management plan or other ongoing program responsibilities listed

above including required updates.

86 Mark Havel, Program Associate, Climate Action Reserve. He wrote in an October 2012 email:

After discussing the “current use” program with the team, we have come to the conclusion that enrollment in the

program would not be considered a legally binding mandate under the forest protocol because participation is

voluntary. It seems as though the program’s rules are fairly loosely defined in terms of constraining silvicultural

practices, so it’s unlikely that participation would affect a project’s eligibility or baseline in the first place.

Page 58

The Victory property is currently enrolled in UVA, and although tax savings are not as high as in

the example given above, they are still considerable. The fair market assessed value of the

forest land in Victory is $515 per acre. In 2011, the current use value for forest land was $122

per acre and the combined tax rate was about 1.36 percent. Therefore participation in the

current use program reduced taxes on forest land in that part of Vermont from $7.03 to $1.66

per acre in 2011. If these annual savings of $5.37 per acre were projected into the future for

the 965 acres modeled in this project, (recognizing that both the tax rates and UVA value

change from year to year), the NPV for the tax savings over 100 years is about $108,000. If the

landowners chose to leave the UVA program, they may have to pay the 20 percent Land Use

Change Tax, about $99,400 for the 965 acres modeled, as well as forgo the tax savings. If the

landowners wait until the property has been in UVA for 10 years before removing it, then the

Land Use Change Tax would be $49,700. In either case, paying the tax would remove the lien

from the property.

For the Victory management scenarios compatible with UVA, there is no need to include the tax

savings from participation in the UVA program because the program is already enrolled. If the

landowners chose to implement one of the scenarios likely to be ineligible for UVA, the

difference in property tax and the payment of the Land Use Change Tax should be considered

costs for those scenarios. Even with the additional costs of withdrawing from the UVA

program, the net present value (NPV) is positive for both CAR and ACR, as shown in Table 9.

Table 9. NPV including property tax differences for management scenarios likely to be

incompatible with Vermont’s Use Value Appraisal Program.

Clear_noHarv Recov_noHarv

CAR

NPV from Offsets $258,364.72 $229,352.63

NPV from Forest Products $84,518.34 $0.00

NPV Property Tax Difference -$107,995.51 -$107,995.51

Land Use Change Tax (paid yr 0) -$99,395.00 -$99,395.00

NPV Total $135,492.56 $21,962.12

NPV/acre $140.41 $22.76

NPV/acre/yr $1.40 $.22

ACR

NPV from Offsets $506,150.73

Page 59

NPV from Forest Products $84,518.34

NPV Property Tax Difference -$107,995.51

Land Use Change Tax (paid yr 0) -$99,395.00

NPV Total $383,278.56

NPV/acre $397.18

NPV/acre/yr $3.97

Note: the Recovery-No harvest scenario is not eligible to generate credits under ACR.

Note that the figures in Table 9 are conservative regarding the Land Use Change Tax. It

assumes that the Land Use Change Tax is paid in full upfront and that the property was in the

program less than 10 years. If the property had been in UVA for more than 10 years, the Land

Use Change Tax would be half of that figure. If the property had not been in UVA at all, there

would be no need to pay the change tax and the NPV of the difference in property taxes would

be just -$108,000.

2. RECOMMENDATIONS REGARDING PROPERTY TAXES

Participation in a state program to reduce property taxes on forest land by assessing it at the

forest use value, such as Vermont’s Use Value Appraisal program, is allowed by carbon

standards. Moreover, such programs generally allow landowners to participate in carbon

markets. The potential for conflict is not in the rules of either programs, but in the

management scenarios chosen. Strict protection of forests with little if any active management

may not be eligible for property tax incentive programs that require active management. 87

Landowners should consider the tax implications of different carbon management scenarios,

because they can be significant.

Even when the tax savings of UVA are forgone, the calculations for Victory suggest that

revenues from carbon offsets have the potential to provide net positive revenue over the long

term – even for a degraded forest. If carbon markets were stable and the long-term prices

predictable, this finding would mean that a landowner who did not want to actively manage his

or her forest for timber, might be able use carbon credits to compensate for the higher

property taxes, which could result from his or her land being ineligible for the UVA program. Of

course, such calculations depend on many variables, such as the assessed value, property tax

87

While we have not carefully reviewed the tax programs of all 50 states, in a cursory review of a selection of

programs outside of Vermont we found none that precluded carbon market participation and most required some

form of active management with an emphasis on timber production. Landowners in states other than Vermont

should review their own program guidelines carefully. Tax reductions, eligibility requirements and penalties for

withdrawal varied greatly between programs reviewed.

Page 60

rate, and anticipated price of carbon. If a landowner has to pay the Land Use Change Tax to

withdraw from the UVA program to pursue a chosen carbon management scenario, this tax will

significantly increase the upfront costs for the carbon project. Such cash flow issues, rather

than NPV calculated over 100 years, may be more important to a landowner.

Page 61

G. CONCLUSIONS FOR POLICY IMPLICATIONS

While neither government program rules nor carbon protocols expressly forbid participation in

the other programs, they did, in some cases, include provisions that affected the benefits to

enrolled landowners. For example, if landowners have a Forest Legacy conservation easement

on their property, they would likely earn for fewer carbon credits than if they did not. Likewise

a property under a long term carbon contract would likely be a lower conservation priority and

would likely receive less FLP funding if selected. The best value for landowners would be to

place a conservation easement at the same time as developing the carbon project. In doing so,

the project would be eligible for avoided conversion credit, a reduced buffer, perhaps a lower

baseline for improved forest management, and maybe even a lower stewardship endowment if

carbon revenues are predictable.

Other than the case of conservation easements, it is generally the management practices

chosen, rather than the rules of eligibility, that may be incompatible. A no-harvest scenario

that might produce many carbon credits might also be ineligible for timber-oriented

management required of property tax reduction programs like Vermont’s UVA program. The

immediate and reliable benefits of maintaining this tax reduction will likely influence the choice

of carbon management scenarios. Perhaps the most unexpected finding of this analysis is that

the net present value of carbon revenues from a no harvest scenario may exceed the property

tax savings from UVA. For landowners who are ineligible for UVA because they are seeking to

manage their forest as “forever wild,” carbon may offer a small revenue stream that could

compensate for the higher tax rate. Of course, such calculations depend on many variables,

such as the assessed value, property tax rate, upfront costs incurred and anticipated price of

carbon.

APPENDIX A: MANAGEMENT TREATMENTS MODELED

Table 10: Description of management treatments modeled in the Forest Vegetation Simulator

(FVS).

Treatment Treatment

Free Thin Thin-from-below

Goal Stand improvement Stand improvement

Schedule Early treatment Intermediate treatment

10 years after start date 40 years after free thin

Parameters Remove trees between 5 – 30.5 cm Remove smallest trees first to BA of 18 m2 ha

-1

Target species to cut: Target species to leave:

Populus tremuloides Acer saccharum

Populus grandidentata Betula alleghaniensis

Betula papyrifera Prunus serotina

Fagus grandifolia Picea rubens

Acer pensylvanicum Picea glauca

Prunus pensylvanica Pinus strobus

Clearcut Irregular Shelterwood

Goal Even-aged regeneration Even-aged regeneration

Schedule 100-year rotation 100-year rotation

Parameters All trees removed down to 5 cm Residual BA of 11.5 m2 ha

-1

Slash removed from site Smallest DBH removed: 10 cm

Removal cut 10 years later

Smallest DBH removed: 15 cm

Number of permanently retained trees ha-1

: 25

Slash retained on site

Individual Tree Selection High-grading (i.e. Thin-from-above)

Goal Uneven-aged regeneration Remove largest trees first

Schedule 30-year cutting cycle Whenever BA exceeds 20.7 m2 ha

-1

Parameters Q-factor: 1.3 Residual BA of 9 m2 ha

-1

Residual BA of 19 m2 ha

-1 No diameter range

Min DBH class: 5 cm Slash retained

Max DBH class: 61 cm

DBH class width: 5 cm

Number of legacy trees ha-1

: 12

Average DBH of legacy tree: 41 cm

Slash retained on site

APPENDIX B: ADJUSTMENTS TO FVS MODEL

It was necessary to make a few adjustments to ensure that FVS was compatible to our data and

modeling needs. First, because FVS is distance-independent, it cannot fully implement a

spatially explicit silvicultural treatment such as a crop tree release (CTR), which requires that

trees be removed based on their proximity to the crop trees.88 Since CTR is one method that

has been proposed to restore high-graded stands in the Northeast,89 we simulated a

comparable type of improvement cut within FVS by targeting short-lived and non-commercial

species for removal within the 2.0 – 12.0 inches diameter range.

Second, unlike some other regional variants, the Northeast variant of FVS does not contain a

natural seed-based regeneration submodel. Therefore, we used an approach developed by

Kerchner and Keeton (in prep) to develop regeneration inputs based on the species

composition of the property, the shade tolerance of each species, and the intensity of the

management scenario applied. Since FVS has been shown to be sensitive to small changes in

regeneration inputs, the choice of parameters can have a significant effect on model results all

model outputs were carefully checked to confirm that predicted growth rates were within

published ranges for northern hardwood forests.

88

Miller, Gary W.; Stringer, Jeffrey W.; Mercker, David C. 2007. Technical guide to crop tree release

in hardwood forests. Publication PB1774. Knoxville, TN: University of Tennessee Extension. 24 p.

[Published with the University of Kentucky Cooperative Extension and Southern Regional Extension

Forestry]; and Kenefic, L.S in prep,

89

Kenefic, L.S, Nyland, R.D., 2005. Diameter-limit Cutting and Silviculture in Northeastern Forests: a

Primer for Landowners, Practitioners,and Policymakers. United States Deparment of Agriculture, Forest

Service, Northeastern Area State and Private Forestry.

Documents

Rehabilitative Forestry & Carbon Markets Final 10.1 Forestry & Carbon... · Management Options ... CAR Cash Flow for Initial Recovery Rehabilitation Activity..... 5 Figure 4. ACR