Carbon Credit Watch

A Great Wall of carbon credits

Nathan VanderKlippe
Financial Post
January 8, 2009

BADALING, CHINA – A bitter wind knifes down from the Great Wall of China and through a stand of smoketrees, Chinese pine, maidenhair and Shantung maple.

Rising in a small clump from a dusty field, this 13-hectare grove would be an unremarkable speck in one of the world’s largest countries save for one thing: this tiny forest is the beginning of what could be a giant new experiment by China to profit from the fight against global warming.

“We’ll plant another 27 hectares next year,” says Yao Yonggang, a technician with the Beijing Office of Forest Resource Management, who is tending the site, pointing to a small tree that he says has grown nearly a foot already this year, sucking up greenhouse gases as it springs from the sandy ground.

On average, every telephone pole-sized cubic metre of wood will wrest 1.83 tons of carbon dioxide from the atmosphere, he says. This forest, small though it is, will allow scientists to refine that number based on individual species, and educate the public on the Chinese government’s bold new plans.

“As you know, the forest is one of the major players in reducing carbon,” says the director-general of afforestation in the State Forestry Administration. “And we want to promote the carbon sequestration market in China.”

In years past, Ms. Li directed State Forestry Administration’s efforts at rebuilding forests that have been decimated by years of over-eager harvesting, home-building and industrialization.

But in recent months, her focus has shifted to carbon. On her bookshelf is a 65-page green folio dated July 15, 2008, the date the Chinese government published its own standards to regulate the selling of carbon credits from forests. And in her head is a single number that show the scale of the country’s ambitions: the Chinese land-base includes 54-million hectares of bare and hilly land, an area the size of France.

“In theory, all those lands can be used for carbon forests,” Ms. Li said.

To give a sense of what that would mean, Zhang Ying, a professor at the Beijing Forestry University, has calculated that in the municipality of Beijing alone, the planting of 12,000 hectares a year would generate $6.8-billion in carbon credits, at a price of US$20 per ton of sequestered carbon. That may be optimistic, given that most voluntary credits – those purchased outside of cap- and-trade systems, often for reasons of social responsibility – currently trade for around US$5 per ton. Yet the possibilities for China as a whole remain staggering, especially considering that the entire 2007 global trade in voluntary carbon offsets totalled just US$330-million.

There is corporate interest, too. Companies such as Canada’s Sino-Forest Corp., are engaging in negotiations with the Chinese government in hopes of selling carbon credits for the commercial plantations they are tending, which could become a lucrative new source of income.

“I think we have a bright future,” says Mr. Zhang, who has researched of vision of what’s to come that includes some extraordinary things.

For one, because Beijing has only 46,000 hectares of bare land suitable for planting forests, Mr. Zhang wants to start planting trees on farmland, an idea that is certain to stir up opposition from groups around the world.

“Farmers will change to forest farmers,” he says, and describes a vision where peasants will plant trees on land used for vegetables and other produce. Some of those trees, he said, could bear fruit – peaches, apricots, apples or grapes – while others, such as poplars, would be planted only for their carbon benefits, and eventually harvested to produce pulp and other products.

By his math, the combination of revenues from forest products and carbon credits will triple farmers’ per-hectare income over what they are currently making.

The first baby step in that grand plan came this summer, when Chinese officials planted the forest under Mr. Yao’s care, and plots like it in seven different provinces, using money invested by individuals, small companies and PetroChina Company, Limited. The largest producer of oil on the Chinese mainland, PetroChina invested $54-million in forestry projects in 2007, two- thirds of which is being used to pioneer a new green carbon fund administered by the State Forestry Administration and various provincial forest authorities.

That fund has stoked huge ambitions here and controversy worldwide from groups who fiercely dispute the validity of carbon credits produced from new forests and sold through a voluntary offsets market that has frequently been likened to the “wild west.”

“Tree planting offsets are the type that have been the most thoroughly discredited,” said Kevin Smith, a researcher with environmental justice advocate Carbon Trade Watch. Critics say forests don’t properly work as carbon sinks because they recycle carbon – sucking it down, then releasing it – rather than storing it permanently the way, for example, underground pools of oil do. It is also difficult to guarantee forests, which can be subject to cutting, insect damage or even fire.

Yet around the world, forests are increasingly being seen as one of humanity’s best hopes of preventing catastrophic global warming. In October, the UK Office of Climate Change published the Eliasch Review, a landmark report that examined the role trees can play in diminishing greenhouse gas emissions. Deforestation produces 17% of the world’s carbon emissions, equal to the output of the entire United States. Johan Eliasch, the special representative on deforestation and clean energy to Prime Minister Gordon Brown, calculated that selling carbon offsets for what is called “reduced emissions from deforestation and degradation,” or REDD,” in a global trading system could reduce deforestation by 75% by 2030.

Sales of carbon credits from “afforestation, reforestation and restoration,” the kind of offsets China is planting for, could boost that tally to 100%.

That could have a dramatic impact not only on the world’s warming, but on the cost of doing so. Saving and planting forests is much cheaper than, for example, sequestering emissions from a coal power plant – so much so that Eliasch concluded that “the cost of halving global carbon emissions from 1990 levels could be reduced by up to 50 per cent in 2030 and up to 40 per cent in 2050 if the forest sector is included in a global trading system.”

Moves to do so are already underway. United Nations meetings in Poland in December discussed the possibility, as have individual nations. Australia conducted its first forest-based carbon trade more than a decade ago; in the U. S., cap-and-trade bills introduced in both halls of Congress make allowances for the use of forestry carbon credits.

Yet one small project in China demonstrates the problems that can arise when carbon pledges are stapled to trees.

The Guanxi forest carbon project was the first attempt to sell tree offsets under the Kyoto-approved Clean Development Mechanism. Announced in 2005, it planned to seed 4,000 hectares of new forest. But according to research conducted by a team led by University of British Columbia professor Gary Bull, fully 55% of the land slated for planting had not, in fact, been seeded two years later. Worse, 14% of the land was deemed infertile, and the scheme brought forth numerous arguments over property rights and contractual fairness – a situation made worse by the fact that, as of late 2008, none of the farmers had been paid for their efforts.

Perhaps worse, forestry credits occupy a tenuous space in the carbon market. John Gao, deputy managing director of carbon credit developer Camco International Ltd., estimates that China has the capacity to become the biggest carbon market on earth. As the market develops, it could easily produce a billion tonnes of annual carbon credits, a third of which could be the voluntary type that the State Forestry Administration is producing.

The problem: “we can’t find a buyer who would like to buy these from forestry,” he says. Carbon customers just don’t trust the forest credits, he says – a problem compounded in the near-term by the falling demand for offsets created by the economic crisis.

Yet for those who have invested in forest credits, the few trees braving the cold in Badaling are a welcome sign.

“The fact that the Chinese have begun to dip their toe into this area bodes well for where the international negotiations are going on forestry financing,” said Abyd Karmali,

the London-based global head of carbon markets with Merrill Lynch.

Mr. Yao, too, is optimistic – both for China’s carbon dreams and the trees under his care.

“You can imagine,” he says, huddling against the wind, “in ten or 20 years, there will be very big trees here.”

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