Net Zero Transition: Improved Forest Management

Author: Argus

Adam Nye, VP of Business Development for Carbon Markets at Argus, talks to Joshua Strauss, President of Environmental Products at Anew Climate, and Lizzie Aldrich, VP of Business Development at Anew Climate, about Improved Forest Management (IFM), including the:   

• Key methods and diverse co-benefits of IFM.  
• Changes taking place in forest management practices to optimise carbon sequestration. 
• Outlook on IFM from both commercial and development perspectives.   
  
  

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Adam: Hello everyone and a warm welcome to our podcast series on carbon markets. In this episode, we're going to look at improved forest management. Among the range of nature-based solutions that supply the voluntary carbon market, IFM is perhaps less familiar to many than activities such as REDD+, avoiding deforestation, but it has grown in importance, and at Argus, we recently added IFM to our coverage in response to the greater level of liquidity we've seen develop. 

I'm very pleased to have Lizzie Aldrich and Joshua Strauss from Anew Climate joined me.  So, the first question, what is improved forest management? How can we define it? 

Joshua: Improved forest management really is thinking about forest management in terms of carbon sequestration and the maintenance of carbon on the landscape. So, you could target a lot of different things when you think about how a forest is going to be managed, right? Do you want to optimize wildlife habitat? Do you want to optimize for timber production? In this case, when we say improved forest management, we're saying how do we improve on what we're doing, how we're managing the forest landscape specifically for the carbon benefit? Right? And there's landowners across the U.S. who manage in many ways. Our core goal here is we will work with them to help design a management regime that will maintain as much carbon as possible on the landscape, as well as increase that carbon stocking over time. 

Adam: What are some of the changes in practice and improvements made? What are some of the concrete changes that happened? 

Joshua: Most commonly, what you will see is a movement away from shorter-rotation pulp and paper-type regimes. So, the idea is, for certain products, pulp and paper namely, you generally harvest at a relatively rapid clip when trees reach certain minimum size thresholds. That's fine for producing those types of products, but if you really want to think about carbon, you want to have larger trees, that are continuing to sequester carbon over time on that landscape. When and if there is harvesting, those materials will go towards long-lived wood products, such as furniture or house-building materials, that allow that carbon to be sustained even after a tree is cut down, right? The idea is that you might move from something where you're producing a bunch of paper that, in effect, will be very short-lived in its solid form, right. The carbon that was once in a tree, then transferred into a piece of paper, is not going to be maintained there for any material amount of time. Now, if the carbon from the tree is transferred into a two-by-four in a house, you're seeing substantial maintenance of the carbon stocks. That's an adjustment in the way you manage products. But broadly, you may just see less harvesting in general, right? We have several landowners that may make the choice that says, you know what, I'm going to opt for keeping more trees standing, period, just less harvesting altogether. The combination of that sort of changed rotations, or changed timing of harvest, as well as sometimes reductions in harvest broadly, really can lead to meaningful, meaningful amounts of carbon being kept out of the atmosphere. 

Adam: Then is the motivation from the landowners' point of view purely a commercial one? It's effective, it's almost like a diversification of revenue stream, in some ways, right? Or are there ESG goals they're also trying to hit?  

Joshua: That is part of understanding why someone would choose an improved forest management regime, is thinking about, what are these key motivations? First and foremost, this is the carbon market driving these decisions. It's a financial choice. People are looking at their management and saying, "If I harvest at X rate, for my typical wood products, I'm going to get X return. And now, I can blend carbon strategies into that mix, and compare." So, in certain cases, it may make more sense to keep a tree standing for that carbon value than it does to cut it down. In other circumstances, as I mentioned before, it may make more sense to grow the tree for a longer time, such that it falls into a different product class when harvests occur. But this is financial calculus. And you've been seeing over the last several decades that IFM has even existed on the landscape, greater and greater understanding of the potential for utilizing IFM from a financial standpoint, and more and more uptake as folks realize that this wasn't just a sort of flash-in-the-pan scheme, and what is really a viable opportunity to try and diversify revenue from a forest, or even change the whole management strategy. 

Adam: Lizzie, on the credit side of things, what is the appeal of IFM credits to your clients? How does it fit in with what they're trying to do in terms of offsetting, but also their broader strategy? 

Lizzie: IFM is a great solution for those clients that want to support a nature-based solution. They see the protection of forests, wildlife protection, nutrient cycling, watershed protection, as one of their core values. That is handy in that they can help meet their greenhouse gas reduction goals while meeting some other goals that they may have that are co-benefits to a project like an IFM project. We have recreation, educational partnerships, so many co-benefits that do accompany these projects. We also find that there are some U.S.-based corporates that want to support a project that is close to their headquarters. And our company, Anew, specializes in IFM in North America, so we're well-positioned to do that. A lot of these companies are looking for a geographic match as well. 

Adam: You're probably talking to a lot of North American clients within that, though, in terms of company type. Is there a typical client who's a buyer of IFM credits? 

Lizzie: We do see a lot of customers in the tech sector that are involved. Those tend to be very progressive companies, that do have, basically, the budget to spend on these types of credits. Having said that, we also see a wide variety of clients, from companies that are in the outdoor apparel industry, to food delivery services, to large steel manufacturers and large mining companies, to oil and gas. We've got across the board and work with tiny companies, to the largest Fortune 10 companies. So, we are very happy that we have a diverse, broad base. So, it's hard to categorize exactly who our clients are. 

Adam: There's a lot of debate in the voluntary carbon market between the relative merits of avoidance versus removals strategies in forestry. The one extreme REDD+, which is avoiding deforestation, that's clearly an avoidance approach versus ARR, which is afforestation, which is more on the removals end of the spectrum. IFM is often described as a hybrid approach. Can you help explain why it is a hybrid, and how does that work? 

Lizzie: So, with one IFM project, what you've got is typically, a landowner will choose to pursue carbon on the land. And in doing so, they typically have a well-stocked property that's ripe for a harvest. So, when they make that choice, to pursue carbon, what they're doing is they’re then choosing not to harvest or to harvest much less. You get a pool of carbon from what would have been cut in the baseline scenario. In other words, what are other landowners in that area doing? What was economically profitable to do? And through many additional arguments, we show that had it not been for the benefit of the carbon revenue, the stocks on that property would have been harvested. And so, the pool of carbon that comes from the carbon that is remaining standing on the property, from mature trees at the start of the project, and for the first about seven years of the project, are from avoided emissions. So, we're avoiding those trees from being harvested, or being cut down. 

Now, over the project lifetime, those trees that remain in existence, and the new ones that grow, create removals, because they are drawing down CO2 out of the atmosphere as they photosynthesize. So, they're removing CO2 out of the atmosphere. So, the growth of the trees over the project's life are removals. And those are the two pools of carbon. And under the American Carbon Registry, they are tagged as such. And other registries are following suit now. That's why you'll see two different pools of carbon from one project, even from one issuance. 

Adam: One question that a lot of people have is the history of IFM and where did it come from? It’s also often referred to as the dominant project type in nature-based solutions in the U.S., why has it become so prevalent in the US?  

Joshua: What you see in the U.S., other than, you know, following in the sort of footsteps of the initial forestry projects that generally were in the sort of REDD space, as you've discussed on other podcasts, what was recognized is, though there's less, or there was less large-scale conversion of forest land to non-forest uses in the U.S., not to say that there isn't any of it, because there is some. But broadly, that sort of focus on planned or unplanned deforestation that you see internationally isn't as much of a concern in the U.S. context. But there are a lot of forest assets in the country. It’s one of the one of the best-forested nations on the planet. And there's been a long history of commercial forest management in the United States. 

So, folks really started to think given this forest asset, and the longstanding history of commercial management here, sometimes for the better and sometimes for the worse from an ecological point of view, what can we do to try to think about carbon in the context of this significant industry? That's how folks started to move in the direction of given that carbon has value now, and we can easily quantify the amount of carbon represented in a standing forest and in the products associated with the harvest of that forest, can we maximize carbon benefit, utilizing carbon markets? And this has now been going on since the early aughts in the U.S. and has really taken hold into something that forest managers across the country think about commonly when they are making broader decisions. It's been very interesting to have seen this mature over that time, because Anew has really been engaged since the earliest days of these programs. It's also been very interesting to see the programs mature, because these are, you know, there's lessons that have been learned. And I think that, over time, the projects get increasingly refined in their methods for ensuring project efficacy, as well as making sure that all the concerns associated with projects are well thought through. 

Adam: IFM seems to have some duality to it on a couple levels. We talked about avoidance versus removals, and then it's also a project type destined for the voluntary carbon and compliance markets. Talk us through that from the project developer's point of view, at what stage do you have to choose one or the other, or can the same project issue credits to both? Are the crediting processes different? What are the decisions and tradeoffs the developer must make? 

Joshua: You can't participate in both. The idea is there's a different protocol in the compliance space. California has a protocol based on the work the Climate Action Reserve did in the aughts, and then moving into the 2010s, where they have a specific program design. In the voluntary space, there are a wide variety of different protocols that can be utilized. At Anew, we generally focus on ACR's improved forest management protocol. But there are others out there. They're updated over time, and there's variance in the different ways in which calculations are done. One thing that is interesting about the compliance program in California is that it generally uses something called a programmatic baseline, which means that the counterfactual, or what you're comparing your, with project harvest regime to, is based on what average stocking is within a given region. This is designed to make it easier for developers to say, I have my project here, and I should be able to compare it to something that is sort of a regional level of stocking. 

Now, in the voluntary market, you've seen a heavy push towards what they call project-specific baselines, which are harder, in effect, to develop, and require more diligence and more modeling. Ultimately, that's saying that instead of comparing your project stocks to a region, you're generally looking at exactly that footprint, and building a custom or bespoke alternative scenario. So, you're going to be comparing your harvest regime to what likely would or could have happened to that very given property, considering a whole host of considerations, including markets, infrastructure, etc. 

Adam: If we look at the price, the prevailing price on California carbon offsets versus what we assess in our voluntary report on U.S.-originated IFM credits, prices right now are quite similar. What is the logical connection between those two, if any, from a price point of view? 

Lizzie: Right now, it’s just coincidence. And so, just to clarify, the voluntary prices are in the mid-teens. It is for avoiding emissions. Then the removals are trading in the mid-20s currently. The fact that the California compliance forestry price is in the mid-teens as well is just by circumstance, that those two do not track each other at all. In fact, there's very little overlap between the markets. There are just a few specific examples of buyers like Microsoft, who have purchased compliance offsets, to retire them for voluntary purposes. But that is highly unusual, is certainly not the norm. Typically, you've got California compliance buyers, regulated entities, that are purchasing California CCOs. And the CCOs, whether they're from forestry or other project types, all trade at the same price. Versus in the voluntary market, the price is determined by the project type, because buyers want to know what type of co-benefits and charismatic features their project has. The price is differentiated by technology. 

Adam: Are there co-benefits as well, or is it purely tons of CO2? And if so, what do they look like?  

Lizzie: Some of the co-benefits associated with IFM; by keeping the trees standing in the ground, you're providing wildlife habitat. You're providing the fact that the roots are staying intact from those trees. That holds the soil in place, and it helps filter the precipitation that comes down, slows it down, and filters out pollutants before it goes into local tributaries and waterways. So, you have watershed protection. You've got nutrient cycling that's supported by those trees in place, and recreation opportunities as well. On many of our properties, we've got bat studies, nesting boxes, and many educational partnerships going on too. So, a whole host of co-benefits that are associated with these projects. 

Adam: With additionality being very important to end buyers, and wanting to prove additionality, we're seeing a lot of evolution and advancements made in crediting agencies, crediting bodies, methodologies. What's happening in IFM on that? Are we seeing any kind of similar advancements in the way baseline calculations are done, and the methodologies in general? 

Joshua: Absolutely. I think this is a very interesting time in the IFM space for baselining. You alluded to some of the concerns that had arisen in the REDD context regarding baselines. Though there has been less controversy in the IFM space, there's, it still is an evolving discussion. One thing that I think that space is moving towards, and that we're, at Anew, also quite excited about, is what you would call a dynamic baseline, as opposed to what has historically been a static baseline. Now, what does that really mean? So, historically, with a static baseline, you develop your counterfactual scenario for your project, in that it's held constant for a substantial period, for basically the entire crediting period, which could be, 20, 40, 100 years, depending on what kind of project you're doing.  

So, that makes sense at the start of a project. You have a snapshot of what the likely alternative scenario would have been. You can see all the factors that are currently at play. But 15 years from that point, is it a fair assumption to generate credits based on that initial vision of how the project would be managed, continuing along indefinitely. There's clearly going to be changes in the marketplace. There's clearly going to be changes in what could be legal structures. There could be changes in the infrastructure around a project. Knowing that the world is a dynamic place, buyers have been increasingly wanting to see a baseline that actually changes over time as well, so that it's not just a frozen vision of what would have happened in the absence of the project, but actually what is more likely to be happening on the ground, in any given year, in the absence of the project, taking into account all the other factors. That's something that, though much more challenging to keep track of and to quantify, is ultimately worth doing. 

That's something we're leaning into in a meaningful way at Anew. We've recently launched a new program that we call the Epoch program, where we are utilizing the latest technology in terms of remote sensing and machine learning to really assess harvest activities across a landscape, find truly comparable properties, and use those as examples of how a property might be managed in the absence of carbon, so we could directly link the harvest in our baselines to things that are happening on the landscape, and that changes over time. This is what, you know, I mentioned evolution in space. And that is where I think things are going here. It certainly requires a heavier lift on the side of the developer. But from a buyer's point of view, you can understand why there'd be significant value in seeing that the veracity of the counterfactual is maintained consistently over time. And you know what? Thankfully, the technologies are in place right now that make it possible in a way that you really couldn't have done reliably, or with, financially, would be completely impossible, even a few years ago, so, interesting time to be there, and we're happy to be taking and playing a part in it. 

Adam: Lizzie, from your point of view, you have currently quite a focus on North America and the U.S. Are there other regions that you're looking at for future growth of the client base? Do you see interest in IFM coming from other parts of the world? What's the sort of commercial thinking going forward, but beyond the U.S. now? 

Lizzie: We're seeing quite a lot of interest from European corporates that may have some operations in the U.S. We're certainly honing in on the European market. And it's a great fit, for example, for a European corporate that may have U.S. operations, because if they're looking to U.S. forests to help neutralize emissions from their U.S. operations, there's really no issue with cancellation at the national level, which is something we're all thinking about under Article 6, as we kind of operate in this post-Kyoto/Paris-aligned world. But if you've got those offsets coming from the country where the emissions are coming from, there's really no concern over any double-counting.  

Also, just the fact that in the U.S., we have very low political risk, we have boundaries that are respected, we can guarantee long project time horizons, is something that's very attractive when you compare that to some projects in developing countries, where there's a whole host of risk and uncertainty. And because of our regime here, we're able to offer long-term offtake. And that's very attractive to people that think that the price is going to rise significantly. We can lock in a price and a volume for those people, and that's certainly attractive from a budgeting and a risk perspective for them. 

And then we've also seen this is very exciting news in our world, but SBTI, the Science Based Targets Initiative, is a nonprofit group that sets guidelines for greenhouse gas reductions among corporates that adhere to this guideline. They have just recently announced that they're allowing offsets for scope 3 emissions. The details of that are forthcoming, to be released in July of '24. But that is a huge signal. For most corporates, those scope 3 emissions are about 97 percent of their emissions. And so, it, without the use of offsets, is a very big problem to try to get into their supply chain and try to reduce those emissions or find suppliers that have a smaller greenhouse gas footprint. And so, we're very excited by that. We anticipate that we're going to see a large demand in the coming months and years, because of that decision. And so, I think that's going to cause growth from corporates worldwide. 

Adam: Josh, might we see IFM adopted and grow in other parts of the world as well? Do you see any kind of pipeline for issuance from other countries? 

Joshua: Yeah, absolutely. And it's interesting, because you mentioned, Adam, customers. And it's true that Lizzie has spoken a lot about our customers on the buy side. But Anew has customers also on the supply side. We help folks manage over 6 million acres of IFM projects in North America alone. Those are landowners. So, those are customers as well. We're interested in expanding our customer base and seeing substantial uptake in Canada. First, of all, we do have existing projects there. But, hot off the press, there was recently released a British Columbia compliance program that includes an IFM component. There's a thriving voluntary market in Canada, where IFM is a piece. Under the Alberta compliance program, they are working through their official IFM protocol, which should be released. 

You've also increasingly been seeing uptake in Mexico in recent years as well. So, still sort of in North America and moving outwards, but very interesting potential coming from the EU now as well, as the EU starts to think about how they would integrate different removals strategies. So, particularly on the removals front, the idea of integrating in afforestation and some IFM, because you do have substantial growth in removals from IFM into the EU context. So, that's a live discussion, too. So, an exciting time to be in the space, and I think that you're going to be seeing quite a bit of uptake outside of the U.S.'s borders. 

Adam: Thank you very much to you both for joining me and for those insights. Thank you everyone for listening. 

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