2023 - 03 Prague - Forest Carbon Markets

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Forest carbon markets

Forest carbon
markets
How growing demand for forest
carbon is shaping wood markets
25th Fastmarkets Forest Products Europe Conference, Prague
9 March 2023
Forest carbon markets

Agenda

1. Role of forests in tackling climate change

2. Rise of carbon pricing

3. Overview of forest carbon markets

4. Implications for wood supply

© 2023 O’Kelly Acumen AB


1. Forests’ role in climate change Forest carbon markets

The path to limit global warming to 1.5°C is challenging


Effect of current climate pledges and policies • Paris Agreement: 196 countries
Global temperature increase by 2010 vs. pre-industrial level; °C signed in 2015, to limit the rise
in mean global temperature to
3.4 <2.0°C (preferably <1.5°C).
2.9 • Current policies are not enough:
2.5
− Pledges made could limit
2.0 warming to 1.6-2.5°C by 2100

− Current policies could limit


warming to 2.2-3.4°C by 2100
2.2
1.9
1.5 1.6 • More aggressive interventions
1.2 will be required to achieve
targets, and limit climate change
to safe levels.
Current (2022) Paris agreement Pledges 2030 targets Policies & actions

SOURCE: Climate Action Tracker (2022). The CAT Thermometer. November 2022. Available at: https://climateactiontracker.org/global/cat-thermometer/ 3

© 2023 O’Kelly Acumen AB


1. Forests’ role in climate change Forest carbon markets

Carbon removal is needed to achieve (net) emissions targets


Pathway to 1.5°C with emissions reduction and carbon removal • Focus of climate change
abatement policy is on
emissions reduction (e.g.,
energy efficiency, renewable
energy sources).

• Increasing focus on carbon


removal, to reduce net
emissions (e.g., biomass carbon
capture and storage, forest
sequestration).

• More carbon removal required


to meet targets set in the Paris
Agreement, which require net
zero emissions by 2050.

SOURCE: Climeworks / Mercator Research Institute on Global Commons and Climate Change (2019) and data from IPCC (2018) 4

© 2023 O’Kelly Acumen AB


1. Forests’ role in climate change Forest carbon markets

Forests store a lot of carbon – in trees, soil, litter and dead wood
CO2 stored in a typical production forest – Nordic example
Typical tree Tree volume Wood composition CO2 in tree CO2 in ecosystem
m3 / hectare dry tonnes / ha tonnes CO2 / ha tonnes CO2 / ha

Dry mass of Molecular mass


pine is ~0.4 of CO2 is 3.67x 60 760
tonnes per m3 higher than 280
Stem is 40-45% of carbon
total tree volume
145 580 350
About half of
115 dry mass is C
305 420

70
250 115 A lot more carbon
is stored in the
115 soil, litter and
dead wood

Stem Bark Branches, Stump, Total Water Other Carbon O2 CO2 Soil Dead Total
foliage roots tree elements wood forest

SOURCE: Skogforsk; FAO FRA; Academic papers; OA analysis 5

© 2023 O’Kelly Acumen AB


1. Forests’ role in climate change Forest carbon markets

Forests represent a large source of carbon emissions, and an even


larger carbon sink
Forest carbon emissions and sequestration, 2001-2018; GtCO2 / year • Forest carbon
emissions and
Forest types Emissions Sequestration Net sink sequestration
are not evenly
Tropical
e.g. Brazil, 5.3 7.1 1.7
distributed.
Congo, Indonesia • Emissions
mainly in
Subtropical
e.g. Mexico, India, 1.0 1.6 0.7 tropical forests.
Australia • Sequestration in
Temperate
most regions –
e.g. W.Europe, 0.9 4.4 3.6 increased forest
US, Japan, China area and stock.
Boreal • Implications for
e.g. Russia, 0.9 2.5 1.6 where and how
Nordics, Canada to do forest
carbon projects.
Global total 8.1 15.6 7.6

SOURCE:Harris et al (2021). “Global maps of twenty-first century forest carbon fluxes” in Nature Climate Change 6

© 2023 O’Kelly Acumen AB


2. Carbon pricing mechanisms Forest carbon markets

Carbon pricing has grown to cover almost 25% of global emissions


Growth of carbon pricing mechanisms • Pricing carbon = highly effective
tool for reducing emissions.
Share of global emissions covered Carbon pricing mechanisms
Percent Number • Cap-and-trade + carbon tax.
25 70
• Imposes cost on emitters and
60 rewards those that reduce
20 emissions (or remove carbon
50 from atmosphere).
15
40 • Rapid growth in carbon pricing
mechanisms and share of
30
10 global emissions covered.
20 • Between 2000 and 2022:
5
10 − From 7 to 68 mechanisms

0 0 − From <1% to 25% emissions


1990 1995 2000 2005 2010 2015 2020

SOURCE: World Bank (2022) 7

© 2023 O’Kelly Acumen AB


2. Carbon pricing mechanisms Forest carbon markets

Most regions now have carbon pricing mechanisms – either carbon


taxes or emissions trading schemes
Carbon pricing mechanisms globally • Almost 70
mechanisms
now in place.
• Concentrated
in North
America,
Europe, Asia
and Latin
America.
• Emissions
Trading
Schemes
(ETS) are most
popular – and
growing faster.

SOURCE: World Bank (2022) 8

© 2023 O’Kelly Acumen AB


2. Carbon pricing mechanisms Forest carbon markets

Prices are rising for carbon emissions, and credits from nature-
based projects sell at a premium
Global carbon prices on leading exchanges; USD / tonne Prices by project type; • Prices have
2022 Q1, USD / tonne risen sharply
100
EU ETS on most
90
Artificial
19
exchanges in
80 removals 2021-23.
70 NZ ETS • EU ETS now
Nature
based1
14 above 100
60
USD/t.
50
Emissions • NZ ETS and
40 8
avoidance California cap-
30 California and-trade also
Renewable
7
record highs.
20 energy
RGGI • Nature-based
10 Korea ETS credits (like
0 Corsia2 7 forestry) trade
2008 2010 2012 2014 2016 2018 2020 2022 2024 at a premium.
1. Including forestry (e.g. avoided deforestation, afforestation, improved forest management) 2. Mix of credits eligible for use in Carbon Offsetting and Reduction Scheme for International Aviation

SOURCE: ICAP Allowance Price Explorer; World Bank 9

© 2023 O’Kelly Acumen AB


3. Forest carbon credits Forest carbon markets

Carbon credits are traded to help governments, companies and


individuals meet legal obligations or voluntary committments
Carbon credit supply and demand landscape (simplified) • Carbon credit
markets consist of
Supply – Carbon crediting mechanisms Demand – Carbon credit buyers crediting
mechanisms and
Based on international To meet legal obligations buyers.
treaties (e.g. UN), or Buyers are nations and
government systems at • Supply is from
Government Compliance companies government
regional / national /
subnational level e.g. NZ ETS mechanisms and
e.g. California COP independent
agencies.
Non-government Voluntary offsets • Demand is from
crediting agencies buyers that offset
Buyers are companies,
e.g. Gold Standard organizations, individuals
emissions to meet
Independent Voluntary legal obligations
e.g. Carbon Trade
(compliance) or
Exchange
voluntarily.

SOURCE: OA analysis 10

© 2023 O’Kelly Acumen AB


3. Forest carbon credits Forest carbon markets

Forest carbon credits are popular among developers and buyers


Forestry and landuse share of all credits issued1; Percent • Forestry projects are popular
with project developers and
By source By market Total
credit buyers.
47
• Visible and tangible.
38
• Offer significant co-benefits:
29 − Biodiversity / forest habitat
− Reduced erosion and soil loss
19
17
− Improved water quality

7 − Improved air quality, less dust


− Social benefits for local
International Regional / Independent Compliance Voluntary Total communities (e.g. jobs,
national / firewood).
subnational
1. Until year-end 2019

SOURCE: OECD; World Bank; OA Analysis 11

© 2023 O’Kelly Acumen AB


4. Implications for wood supply Forest carbon markets

There are three main types of forestry projects that generate


carbon credits Baseline Project Volume of credits

Type of forest carbon projects Description Change in emissions

REDD Reduce loss of forest carbon stock, e.g. slash and Reduced emissions
Reduced burn agriculture conversion, logging
Emissions from Involves surveillance and working with communities
Deforestation and to provide alternative sources of income.
forest Degradation

Sequestration
A/R Establish forests on land with low carbon stock,
Afforestation / ecological and economic value (e.g. scrubland).
Reforestation Other values, e.g. erosion control, sustainable
timber supply.

IFM Changes in management of established forests to Increased sequestration


Improved Forest increase their carbon stock, e.g. improved growth,
Management longer rotations, and reduced damage from fire,
pests and diseases.

SOURCE: OA analysis 12

© 2023 O’Kelly Acumen AB


4. Implications for wood supply – REDD Forest carbon markets

Tropical deforestation is declining, and is seldom for wood supply

Annual deforestation in tropical regions; Million ha / year Drivers of deforestation, Brazilian Amazon, 2001-13
Percent
10.3
Logging Other1
South & Southeast Asia 1.8 9.0
Large-scale
0.3 6 2
7.7 agriculture
Eastern & Southern Africa 1.3 1.8 7.2 8
1.1 0.8
Western & Central Africa 1.7 1.5 Fires 9
0.2 1.9 2.0
Central America 0.2

1.9 1.9
South America 5.1 5.2 0.1 0.1 Small-scale 12 63 Cattle
agriculture ranching
2.7 2.5

1990-00 2000-10 2010-15 2015-20

While still a large problem, tropical deforestation is in decline. Also, deforestation is usually not driven by
logging, nor linked to wood supply. Most often it is due to conversion to grazing and agriculture.
1. Including mining, urbanization, road construction, dams

SOURCE: UN FAO Forest Resource Assessment 2020; World Resource Institute 13

© 2023 O’Kelly Acumen AB


4. Implications for wood supply – A/R Forest carbon markets

Some regions are more suitable than others for A/R projects
Plantation forestry share and industrial wood supply growth1,2 • Plantations mainly in Asia, Latin
Plantations’ share of productive Annual growth of industrial America and Oceania
forest area, 2020; Percent wood supply, 2000-20; Percent
− Planted forests1 that are
Europe Asia North America intensively-managed “tree farms”2
2.6
1 6 − Grow wood supply with expanded
1.0 forest area and productivity
42

− Wood supply growing 2-3% p.a.

-1.1 • Managed natural forests in Europe


and North America
Africa Oceania Latin America − Balance wood supply with
2.5 ecological and social objectives
2.1
9
28 − Static area, productivity
0.5 47
constraints
− Flat / declining wood supply
1. Planted forests: predominantly composed of trees established through planting or deliberate seeding
2. Plantation forests: Planted forests that are intensively managed, consisting of no more than 2 species, with even age class and regular spacing

SOURCE: UN FAO Forest Resource Assessment 2020; FAOSTAT; OA analysis 14

© 2023 O’Kelly Acumen AB


4. Implications for wood supply – IFM Forest carbon markets

In managed natural forests, reducing harvest is often the quickest


way to increase forest carbon sinks
Carbon sinks in natural forests Levers to increase forest carbon sinks • Forest carbon
sinks are
Scope Speed
1. Increase forest growth
(mainly) the
1 difference
• Good for forest owner, industry and climate
• Requires investment e.g. improved
between growth
Carbon sink
regeneration, pest and weed control and removals of
Mortality 2 • Takes a long time to get results timber.
• In the short-term,
2. Reduce natural mortality
reducing harvest
• Another win-win
is mostly likely
Harvest 3 • Few easy steps to e.g. avoid loss from fire,
storms, insect outbreaks lever, but at
• More challenging with climate change large cost to
forest owners.
3. Decrease harvests
• Soil carbon
Forest Growing • Can be implemented immediately, but with
growth stock huge cost to forest owner and industry represents an
removals additional sink,
Other levers: re-wetting peatlands, treatment to large but poorly
increase soil carbon understood.
SOURCE: OA analysis 15

© 2023 O’Kelly Acumen AB


4. Implications for wood supply Forest carbon markets

Forest carbon markets can impact wood supply in different ways


– the net impact will vary by region
Summary of implications of forest carbon markets on wood supply

REDD A/R IFM

Abatement Reduced emissions from Increasing forest area through Improved forest management to
lever deforestation and forest afforestation and reforestation achieve larger carbon stock (e.g.
degradation – mainly tropical longer rotations, faster growth).

Impact on
wood
supply Small negative impact Large positive impact: New Significant short-term decline:
Most deforestation due to landuse plantings are often productive Longer rotations, forests “locked
change (e.g. conversion to forests that will contribute to future up”
agriculture) not wood supply wood supply Some potential up-side long-
Only a small share of global Long horizon: Depending on term: If better-managed forests
industrial wood supply is linked to location, plantations typically take lead to better growth, and if some
deforestation/ degradation 10-40 years to mature of increased productivity is
allocated to wood supply.
SOURCE: Interviews; OA analysis 16

© 2023 O’Kelly Acumen AB


5. Regional case studies Forest carbon markets

We have studied three forestry regions where carbon markets are


impacting wood supply in different ways
Summary of case studies – Carbon markets in key productive forestry regions
New Zealand United States European Union
Established compliance Emerging voluntary Latent market with large
market driving A/R market with mainly IFM potential growth

Market maturity High Medium Low

Type of market Compliance Voluntary and compliance Voluntary

Mechanisms National government Independent Independent

Project types A/R: productive forest plantations and IFM: Improved forest management, IFM: Improved forest management,
permanent sinks especially deferred harvest esp. deferred harvest and protection

Impact Current Increased planting rate Limited direct impact so far, but Limited impact so far. Isolated
on a contributing factor examples of forests locked up.
wood
supply
Potential Risk for reduced harvest Opportunity for increased supply Risk of significant reduction in
(permanent sinks) through A/R in US South. supply, where carbon markets
can be an instrument in EU
policy.

SOURCE: OA analysis 17

© 2023 O’Kelly Acumen AB


5. Regional case studies – Europe Forest carbon markets

Carbon markets barely exist in Europe but are seen as a core


lever to achieve ambitious targets for forest carbon sinks
European forest carbon markets – status and outlook

Current state of carbon market New EU forest policy Potential for forest carbon credits

• Currently no compliance • Forest Strategy (2021): more • Policy implies additional cost or
market for forest carbon protection, sustainable reduced income to forest owners
management, afforestation
• Only a handful of independent • EC recognizes need to incentivize
projects • LULUCF targets: national forest owners
targets for 2030 carbon sinks
• Isolated examples of • EC introducing a European-wide
voluntary offsetting by large • 3 billion trees pledge: system for forest carbon credits.
emitters commitment for large-scale
• Member states could buy credits to
afforestation /reforestation
meet LULUCF targets?

SOURCE: Press; Interviews; OA analysis 18

© 2023 O’Kelly Acumen AB


5. Regional case studies – Europe Forest carbon markets

To meet LULUCF targets, some EU countries might need to


reduce annual harvest by up to 4%
Potential impact of EU LULUCF1 targets on wood supply (selected countries) • EU’s targets for
higher carbon sinks
Sweden Finland Germany
will require forests to
be managed
Target sink 2030 (MtCO2eq./year) 47.3 17.8 30.8
differently.

Current sink (MtCO2eq./year) 42.6 16.9 27.4 • Potential 1-4%


reduction in harvest
Required increase of sink (unless improved
(MtCO2eq./year) 4.7 0.9 3.4
forest growth,
reduced damage).
CO2 per m3 factor 1.375
• Significant loss of
Required addition forest income to forest
3.4 0.7 2.5
sequestration (million m3/ year) owners – role of
carbon credits to
Potential impact on wood supply2 4% 1% 3% compensate.
1. Land use, land use change, and forestry
2. If full LULUCF target achieved by reducing harvests – i.e. no improvement in forest growth, forest damage, or soil carbon

SOURCE: European Commission; OA analysis 19

© 2023 O’Kelly Acumen AB


Forest carbon markets

Key take-aways

Market will Impact will vary Challenging


grow by region for Europe

• Carbon pricing is here • Mix of projects • Risk of reduced harvest


in short-term
• Forests important for • Current forest
climate change management systems • But investment in forest
growth, reduced damage
• Cost-effective • Government policy
• Forest owners:
• Co-benefits • Still lots of uncertainty
compensation, another
option to capture returns

New report! Forest Carbon Markets – See Fastmarkets sales or www.okelly.se for details
20

© 2023 O’Kelly Acumen AB


Forest carbon markets

Contact details

O’Kelly Acumen

Mr. Glen O’Kelly


Stockholm
Sweden

Phone: +46-73-56-98-039
E-mail: [email protected]

www.okelly.se

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