Carbon Partnership: Breaking New Ground

Misc Image
By Kelley Hamrick

Although New Zealand’s Emissions Trading Scheme was the first in the world to accept forestry offsets, many local forestry projects are ineligible for the program, forcing them to turn to the voluntary carbon markets where demand for offsets is limited. Consultancy Carbon Partnership explains the challenges facing Kiwi forest carbon projects within the context of its Rarakau project.

9 June 2014 | Consultancy Carbon Partnership has finished designing and developing a new methodology for New Zealand forests – specifically, for its Rarakau project. While this first project covers only 1,000 hectares, it is part of a larger program that applies to indigenous forests nationally. Since these forests existed before 1990, they didn’t qualify for New Zealand’s compliance markets. Instead, Director Sean Weaver created his own methodology for the voluntary carbon markets.

However, the voluntary market presents its own challenges: buyers usually prefer the Verified Carbon Standard (VCS) for forestry projects. While elements of the methodology were created with VCS, the overall project has been verified under the lesser-known ISO14064-2 carbon standard – principally because Carbon Partnership and its funders could not afford the transaction costs of the VCS path. But both standards present complications and New Zealand project developers face other larger risks in developing current projects, Weaver explained.

Despite these hurdles, he hopes that the project’s strong biodiversity and conservation co-benefits will interest buyers – and he’s not afraid to look outside of the voluntary carbon markets to find them. Ecosystem Marketplace’s just released State of the Voluntary Carbon Markets 2014 executive summary highlights the growing trend (in New Zealand and elsewhere) of companies preferring and paying above-average prices for projects with strong co-benefits.

Kelley Hamrick: What stage are you at right now?

Sean Weaver: We're just at the stage of commercializing the project. That's also including a plan to try and find buyers who aren't interested in carbon but are more interested in saving rainforests; for which, the bigger story is: what kind of forests are you protecting? Because, of course, there are buyers, even in the voluntary carbon market, who are more interested in a corporate social responsibility (CSR) claim than they are in offsetting carbon. It's those kinds of people we need to try and connect with, for this particular project and program in New Zealand.

KH: Are buyers local or international then?

SW: Well, I'll tell you when I get a buyer. I don't mind who I sell them to, as long as somebody's willing to pay the reserve price. We're pricing these things transparently, but the pricing we’re going after is very similar to what you'd expect in the international carbon market with this type of boutique carbon, which are fairly small-scale rainforest protection.

My view on the matter is that transparent pricing is the way to go, which is why, what I'm doing in the Pacific Islands and New Zealand is to open up the books to the buyer and say, ‘Look, there's the spreadsheet. Here's the break-even price. That's what we're asking for, and if you can't pay that, then we can't do a deal.’ Of course, by doing that, we're giving up the opportunity to earn higher than that. But if you price it properly and prudently and include margins for project developers and so forth, then there's no reason to need windfalls. We're only in it to make a living, not a fortune. I think a buyer would appreciate that they're trying to help save rainforests, not help middle guys get rich.  

KH: Any problems you’re running into?

SW: The New Zealand project is under the ISO14064-2 because I couldn't afford to use the VCS. Because I was building a new methodology, and that would've cost me around $100,000 in auditing costs. I was able to get it over the line at a lower cost through the ISO. Not that the ISO is a standard that anybody or everybody’s after. It’s not a very popular standard. But it was prohibitively expensive to go to use another one.

What I’ve done, the specifications of the methodology are very close to the VCS anyway. In fact, if I had to upgrade to VCS, I think technically it wouldn’t be an issue. It's just a matter of whether I could afford to finance the double validation of the methodology. 

KH: What is it about your methodology that makes it different?

SW: I was making it align much more closely to New Zealand’s national forest carbon monitoring system. I was also simplifying it in some areas and using a simplification that was still technically robust. Some of the methodologies in the VCS are very, very complicated and require very expensive project development activities. For small projects, that can mean that they simply can't access the instrument. The project scale for the first project in this one in New Zealand is less than 1,000 hectares. It's likely that the average project size is between 2,000-5,000 hectares going forward for new projects. But even still, at that scale, it can dramatically increase the project development costs and some of the methodologies. So that's why I wanted to simplify the methodology: grab parts of methodologies I did want to use, but simplify some other things.

KH: Do you think buyers care about the difference?

SW: They do, yeah. When I've started to scope out buyers and brokers and traders and so forth, nobody was interested in ISO credits. They were like, ‘get out of here, we're not interested. Give us VCS or nothing.’ That's all very well, if you're big enough to afford to use the VCS. And if you can't, then you've got to do the next best thing. The challenge I have in the carbon market is to convince buyers that the quality of the project and the program is sufficient to meet the quality needs even if the standard being used isn't the standard they'd prefer to go with. That's a challenge, but that's something I have to deal with.

The Australian carbon offset standard won't accept ISO units so we can't sell into Australia. The carbon zero program in New Zealand, which is not a government program but it's the most visible carbon neutrality program, won't even accept any voluntary units – including VCS. They'll only allow their participants to buy compliance carbon, so that shuts us out of that. So the headwinds are fairly strong for trying to engage in the carbon market from a demand side. And because our volumes are quite low, you may have buyers who do want to buy but they don't want to get out of bed for less than 50,000 credits per year.

So that's why it’s important for us to think about going outside the carbon market as a potential place to seek buyers in this space. You know I used to think that carbon was the way that you could save rainforests, where biodiversity got a free ride on a carbon story. But I'm starting to think the reverse now: that carbon might have to get a free ride on the back of looking after biodiversity and rainforests because carbon has become so unpopular.

KH: You're not the only person I’ve heard who's trying to re-frame carbon by putting a price on co-benefits. It's an interesting time.

SW: I think payment for ecosystem services is here to stay – I think results-based, social impact bonds and selling of units ex-post, after they've been produced for environmental outcomes, I think that's a really clever economic instrument. I feel that that's going to endure.

Whether the carbon market will endure is something I'm not so sure about. Even if it does endure, if its prices are so low that it can't support these activities, then we do have to look elsewhere in order to finance these activities. 

You know the reason I'm in this game is because I get a kick out of saving rainforests and there's a major need for it, given the race against the clock against logging interests... Ultimately, the main thing that people in my position have to do is say to landowners – “hey, if I get you the same amount of money you would've got if you had logged your forest, would you be willing to keep it standing?” Usually they say yes. So the break-even price has to at least match the timber opportunity cost because the landowners aren't going to take on that risk – they're not going to give up their right to revenue from timber in exchange for a pipe dream where they might make 50 cents or a dollar or two dollars a ton on their carbon.

 

Kelley Hamrick is an Associate in Ecosystem Marketplace's Carbon Program. She can be reached at khamrick@ecosystemmarketplace.com.