There is significant momentum and demand for forest-based carbon offsets, but their impact has been controversial due to historical lack of impact

• Supporters argue that a massive mobilization of international capital is needed to save the forests, and carbon offsets will incentivize the flow of capital towards crucial forestry projects
• However, there is a real danger that carbon offsets become a distraction from the goal of emissions reduction. There is also a strong financial incentive to sell low quality carbon offsets, which enable buyers to make environmental claims and enable project developers to profit.
  • If the price of offsets is too low, then voluntary buyers may not make sufficient effort to reduce their emissions
  • If the quality of the offsets is low (e.g., leakage occurs), then carbon emissions will not fall
• There is controversy around whether carbon offsets actually reduce any carbon. A 2016 report suggest that 85% of carbon offsets, including forest carbon projects, have a low likelihood of real and additional impact (e.g., projects would not have happened without carbon credits). This means that emitters continued to emit AND no carbon was reduced!
• It is possible for carbon projects to have a real impact. However, they must stringently meet the following criteria:
  • Additionality: Proof that the project would not have happened anyways, without carbon payments. It's easier to prove additionality for afforestation / reforestation projects, compared to avoided deforestation (e.g., the trees might have remained standing even without carbon payments).
  • Leakage prevention: Proof that deforestation did not simply shift to another location or activity. This is a particular problem with one-off forestry projects that do not have significant support at the jurisdictional level.
  • Permanence: Confidence that stored greenhouse gases will not leak back into the atmosphere. Forestry projects can lose permanence if local groups decide to cut down the forest, if politicians open land to agriculture / logging, or if a forest fire or pests destroy a forest.
  • Verifiability: An objective third party should be able to verify that carbon reductions are credible, and above and beyond what would have happened in a baseline scenario (which itself is a challenge to define)

The market for forest carbon will be driven by purchases in the voluntary market, which is currently small ($172M in 2018 sales at average price of $3.20 / ton) but growing quickly

• Carbon credits from forest projects are currently sold on voluntary markets.
  • The average price of offsets from LatAm was $3.79 / ton and from Africa was $4.14 / ton (mostly forestry and land use). Average price for offsets from North America was $2.90 / ton and Asia was $1.60 / ton
  • It's a buyers' market - in 2016, 56.2 MtCO2 worth of offsets remained unsold (compared to 63.4 MtCO2 sold). So, developers have offsets they would eagerly sell at a low price.
• In the short to medium term, voluntary carbon markets will be the main focus of forest carbon programs. Compliance markets will remain difficult:
  • EU compliance market: Participants in the EU Emissions Trading System can use international offsets until 2020, though afforestation and reforestation projects are specifically not allowed. After 2021, no international offsets will be allowed, as the EU has a domestic emissions reduction target
  • CA compliance market: California's Tropical Forest Standard set the rules for how tropical forest governments can sell into carbon markets, but California still needs to approve that companies can use offsets to meet their emission caps. Some observers don't think this will happen anytime soon, particularly given how controversial the TFS was. Right now, the California Air Resources Board only allows carbon offsets from a few specific types of activities, including US forest projects (which trade at $14 / ton)

Forest carbon offset growth will be driven by companies looking to claim carbon neutrality

• Forestry and land use offsets grew much more quickly than any other category of offset, increasing from 16.6 Mt CO2e to 50.7 Mt CO2e (270% growth) from 2016 to 2018, growing to a $172M market
  • REDD+ projects grew from 10.6 Mt CO2e to 30.5 Mt CO2e from 2016 to 2018 (187%), almost completely due to a project in Peru
  • Tree-planting projects grew from 2 Mt CO2e to 8.4 Mt CO2e (342%) in locations around the world
• Corporations are rushing to claim "net zero" carbon targets, and most are banking on fulfilling a large portion of their pledges via carbon offsets (ideally at relatively low cost)
  • JetBlue has announced they will offset their entire US domestic carbon footprint, about 6.8 to 7.7M tons of CO2. Assuming a 30% discount from the North American average carbon price of $2.9 / ton, this will cost approximately $14.7M a year
  • Passenger jets generated 900 Mt CO2e in 2018; this is more than 9 times the volume of the 2018 carbon offset market, and could be a strong source of offset demand!
• The Science-Based Targets Initiative may recognize carbon removal (not avoidance, and not avoided deforestation) as a way for companies to hit net-zero targets. If recognized, this could increase demand for removal projects, such as afforestation / reforestation and soil carbon sequestration.

However, there are risks to international forestry projects, as companies and consumers look to ensure their dollars are having a real impact

• International forest projects carry the risk that they aren't additional, aren't permanent, and that deforestation gets shifted to another location (leakage)
  • Buyers have always preferred offsets close to home, which also tend to be more expensive
  • There is risk in nature-based offsets:
    • As the climate continues to change, there is increasing risk of wildfires and pests. The recent California wildfires showed that carbon stored in trees can easily be released into the atmosphere when trees die
    • The Amazon used to sequester 2B metric tons of carbon per year in the 1980s and 1990s, but now captures perhaps 1 to 1.2B tons of carbon per year across 1.4B acres, or ~0.8 tons / acre. Some scientists forecast that sequestration in the Amazon will drop to zero by 2035; we will need to continue protecting and restoring the forest to prevent the forest from turning into a carbon source