Opportunities for Forestry in the Emerging Carbon Market

1. Opportunities for Forestry in the Emerging Carbon Market Delta Institute

2. About the Delta Institute • Transforming the Great Lakes Region into the • vital center of an emerging green economy. • Delta creates, funds and implements programs that promote a healthy environment, a strong economy and thriving, vibrant communities.

3. About Me Education BS Forestry – Michigan State University MS Environmental Law – Vermont Law School Work Experience US Forest Service -Mt Hood NF -Tongass NF -Huron-Manistee NF -Southern Research Station Private Industry -Rothig Forest Products

4. Current U.S. Carbon Markets • Chicago Climate Exchange • Carbon Offset Credits

5. Chicago Climate Exchange • Voluntary, private, member-based, cap-and-trade market for the reduction of greenhouse gases • Self-regulated market with legally binding emission reduction targets • Cap is the member’s average annual emissions from 1998-2001 • Phase 1 Members – 4% reduction by 2006; 2% by 2010 • Phase 2 Members – 6% by 2010 • Phase 3 Members – Under consideration • The Delta Institute is an Associate Member and Registered Aggregator on the Chicago Climate Exchange • Over 400 Members • Ford, Dow Chemical, DTE Energy, Steelcase, DuPont, Waste Management, International Paper, AEP, Michigan State University, MeadWestvaco, Neenah Paper Inc, Plum Creek, Stora Enso, Temple-Inland • Emission Reduction Results • 2003 – 32,806,900 mT (9.0%) • 2004 – 42,711,000 mT (12.1%) • 2005 – 32,540,200 mT (9.7%) • 2006 – 20,819,600 mT (5.9%)

6. Regional Greenhouse Gas Initiative (RGGI) • Cap-and-trade compliance market for the reduction of greenhouse gases • 10 participating states (CT, DE, ME, MD, MA, NH, NJ, NY, RI, VT) • Each state sets limits on GHG emissions from electric utilities, creates CO2 allowances and establishes participation in allowance auctions • Phased-in approach, so initial reductions are modest • Offsets are allowed, but constrained to 3.3% of utilities total compliance obligation during control period. • May be expanded to 5% or 10% if certain price thresholds are reached • Afforestation projects are the only approved forestry projects • Must have a 99 yr easement to prevent development • Sustainably Managed Forest Protocols under some consideration

7. Over-the-Counter Markets (OTC) • Over-the-Counter Markets • Gold Standard • Protocols based on the Kyoto Protocol Clean Development Mechanism • Focused on energy efficiency and renewable energy • No Forestry credits • Voluntary Carbon Standard (VCS) • Opportunities for agricultural and forestry projects • Standards that include a risk assessment to measure permanence, additionality and leakage of the project • Requires conservation easement • Prices typically trade higher than CCX at $5-7 per mT

8. Other Policy Drivers • California • Climate Action Registry (CCAR) • Credits from forestry allowed with 100 yr commitment • AB32 Regulatory requirement for California to reduce GHG emissions • “As California goes, so goes the U.S.” • Western Climate Initiative • Members: Arizona, British Columbia, California, Manitoba, New Mexico, Ontario, Oregon, Quebec, Utah, Washington • Midwest Greenhouse Gas Reduction Accord • Post-Kyoto Protocol

9. Introduction to Managed Forest Program • Project Eligibility • Enrollment Process • Inventory Guidance • Contractual Terms

10. Project Eligibility • Private, non-industrial working forestlands, actively managed for sustainable timber management, wildlife habitat, conservation, etc. • All forestlands in a single state under same title holder or controlling interest must be enrolled • Complete forest inventory to establish baseline carbon stock and future carbon sequestration • Participation in stewardship certification program • American Tree Farm System • Sustainable Forestry Initiative • Forest Stewardship Council • Forest Stewardship Plan or other sustainable forest management plan • Letter of intent to maintain forestland in certification program for at least 15 years

11. Enrollment Process • Complete enrollment application and contract • Binds project owner through 2012 • Perform forest inventory to establish carbon baseline • Emphasis on measuring total growth • Performed by qualified forester in the dormant season • Project owners bears the cost • Delta enters inventory data into USFS FVS model to establish carbon baseline and gross sequestration • Project owner earns credits for above-ground live, below-ground live and possibly, long-lived wood products • Landowner/Foresters submits annual update on changes in carbon stocks • If a harvest is reported, foresters must re-inventory the affected areas so the annual net carbon storage can be determined • Verification for aggregated enrollment pool occurs year • Desk/Field audits in Year 1 – desk audits in remaining years • Project owners shares cost with other enrollees

12. Enrollment Process • Verifier submits reports to CCX • CCX removes reserve pool credits • Annual, 20% deduction to reduce impact of catastrophic events • At end of contract period, unused credits are released and sold on market • End Result: Salable carbon credits • Delta sells credits on the Chicago Climate Exchange trading platform with net profits returned to project owners • Aggregation & Data Management Fee – 10% of gross revenue • CCX Trading Fee - $0.20 per ton • Verification fee – proportional to amount of credits that a landowner contributes to the enrollment pool

13. Inventory Guidance • “Qualified” foresters conduct inventory • State Registered Forester • SAF Certified Forester • Member of Association of Consulting Foresters • Variable and fixed radius plots • Variable radius plot to measure overstory vegetation • Hundredth (1/100) acre plots to measure understory vegetation • Inventory to be done with error rate of +/- 20% of mean wood volume at a 90% confidence interval

14. Inventory Guidance Stand Data Requirements Plot Data Requirements • Variable radius, overstory plots • Record species and count of trees using FIA codes • Measure diameter for all trees greater than 4.6” dbh • Management prescription • Stratify property by forest cover type • List site index and site index species for each stand • Record the approximate age of each stand • Delineate stands on maps, preferable in GIS shapefiles • Fixed Radius , Understory Plots (1/100 acre) • Record species and count of trees using FIA codes • Measure diameter for all trees less than 4.6” dbh • If trees are greater than 1’ ft but less than 4.5’, record diameter as 0.1 • Estimate height in 1 ft increments

15. Other Programmatic Items • Baseline • Fall enrollments means 2009 baseline – credits earned for net carbon storage during 2009, 2010, 2011 and 2012 growing seasons • Crucial to establish baseline as soon as possible to preserve salability of credits • Reserve Pool • CCX requires that 20% of credits each year be placed in a reserve pool to protect against catastrophic events • In the event of wholesale catastrophe, liability is limited to the credits in the reserve pool. Will not have to buy credits to account for catastrophic losses • Losses to timber harvesting • CCX does not permit reserve pool credits to be used for timber harvesting losses • If project owner has an carbon deficit due to timber harvesting, future are applied to the deficit before anything can be sold. • If deficit occurs in final contract year, landowner buys credits off market

16. Project Examples

17. Example 1 – Typical Property

18. Example 2 – Property w/Harvest

19. Example 3 – Property w/Harvest & Deficit

20. Cost/Benefit Relationship

21. Managed Forest Project Costs • Upfront costs • Forest Inventory • Landowners pay an average of $1-10 per acre • Larger landowners (>5,000 acres) pay $1-3/ac • Smaller landowners (<200 acres) pay $6-10/ac • Sustainability certification (SFI or FSC - $10,000 - $500,000) • Back-end fees deducted from the annual sale of credits • 10% of gross revenue for Delta aggregation & data management fee • CCX registration and trading fee - $0.20 per ton • Verification fee – depends on enrollment pool. For most landowners, will only be a few hundred dollars, at most.

22. Managed Forest Project Revenue Typical Midwestern forestland sequesters between 3 – 5 mT of CO2 annually • Enrollment pool grossed $468,837 • Average sales price $3.39 per ton • Net Revenue to landowners - $389,097 • Net Revenue per acre - $8.00 • Represents credits for 2007 only!

23. What’s Next?

24. The Future of U.S. Carbon Trading • Chicago Climate Exchange • Scheduled to end in 2010 - CCX members discussing a Phase 3 which may extend to 2012 • CCX is positioning itself to be the trading platform in a mandatory system • CCX will likely fill the gap until the compliance market takes effect • Best Case Scenario – CCX credits fungible in compliance market • President Obama • Reduce to 1990 levels by 2020 • Reduce 80% below 1990 levels by 2050 • Unclear what role agriculture or forestry would play in a compliance market • Democrat Leadership in the House will introduce bills to establish cap-and-trade market

25. contact me Contact Information • Delta’s Carbon Portfolio • Chicago Climate Action Plan and Offset Fund • Carbon Offset Opportunities through Product Substitution • Reducing GHG Emissions through Environmentally Preferable Purchasing • DeltaCarbon.org • Retail Carbon Sale • “Coal in Your Stocking” Event • Illinois Conservation & Climate Initiative (ICCI) • Michigan Conservation & Climate Initiative (MCCI) • Managed Forest Carbon Offset Program Michigan Office 600 W St Joseph Ste 1G Lansing, MI 48933 517.482.8810 tparker@delta-institute.org Main Office 53 W Jackson Blvd Ste 230 Chicago IL 60604 www.delta-institute.org www.deltacarbon.org delta-institute.org deltacarbon.org