If Kyoto targets could be met at a profit, would the world see tackling global warming as a problem?

The Kyoto Protocol has created an international drive to reduce greenhouse gas emissions and combat climate change. One mechanism used is the United Nations Clean Development Mechanism (CDM). This creates commercially driven investment into the world’s poorest nations to promote sustainable development and it is starting to achieve through commercial means what years of aid has not: sustainable jobs in the developing world. Carbon Capital is at the forefront of creating these opportunities.

The Clean Development Mechanism

Under Kyoto, industrialised countries must reduce greenhouse gas emissions by c.5% from 1990 levels. Non-industrialised countries are encouraged to make reductions but face no legal reduction targets. Kyoto recognises that “the west” produces most of the world’s emissions and can afford to reduce them, whereas targets would inhibit growth in poorer countries. It also recognises that, should these countries develop without considering the consequent emissions, the increase in emissions would more than counteract any reductions made under Kyoto commitments.

The CDM promotes “clean-development”; allowing economies to grow while minimising emissions. It recognises that climate change is a global problem; reductions or sequestration anywhere in the world benefit the whole world so it does not matter where they occur. The cost of reducing emissions in the non-industrialised world is, however, generally lower so, for example, it is cheaper to fund clean electricity-generation projects there than to replace polluting power stations in the west.

The CDM creates a commercial system whereby industrialised countries can meet emission reduction targets by subsidising projects elsewhere. If projects fulfil sustainability and additionality criteria they qualify for Certified Emissions Reductions (CERs), or ‘carbon credits’. These can be traded fungibly with emission allowances issued by the industrialised countries, and used by companies within these countries to meet emission reduction requirements. The sale value of CERs should, in the long term, be about the same as emissions allowances, therefore giving an effective subsidy of about c.$20/tonne for emission reduction or sequestration projects. This can provide either an additional year-on-year income stream for projects or, by selling forward the credits, provide up-front venture capital for the projects themselves.

Sustainable forestry and carbon sequestration

Stuart Clenaghan Director

Forestry is one of the world’s biggest industries. The World Bank estimates that c.25% of the global economy is related to forestry. Low-risk returns make it attractive to pension funds but these tend to invest in developed economies where investment may give a 10%-12% IRR, rather than the developing world, where low land and labour costs (and, in tropical areas, growth rates three times higher than in northern climes) make much higher IRRs possible.

The carbon sequestration effect of forestry is achieved as trees grow. They ‘breathe in’ carbon dioxide and, via photosynthesis, strip carbon from the gas, use it for growth and ‘breathe out’ oxygen. Trees are typically 30% carbon, and to acquire one gramme of carbon weight, a tree sequesters approximately three grammes of CO₂. Nonetheless, natural forests are generally in carbon balance, as carbon sequestered by growing trees is roughly balanced by carbon released as dead wood decomposes.

As natural forest is lost and the wood is burnt or rots, CO₂ is emitted. If no new trees are planted to resequester CO₂, CO₂ levels in the atmosphere rise. Deforestation also causes environmental degradation. Habitat and biodiversity is lost. Exposed topsoil is often washed away.

Projects around the world are exploring ways of sequestering carbon through reforestation. Generally, these projects seek to re-establish natural species and biodiversity. These forests sequester CO₂ through regrowth before again reaching natural carbon equilibrium when the forest reaches maturity. Such projects can sequester 200-300 tonnes of CO₂ per hectare over a project life of 50-60 years. The carbon trading revenue from this is potentially greater than the cost of reforestation. So by certifying reforestation as a qualifying sequestration mechanism, Kyoto creates a mechanism for commercial reforestation. This benefits the environment and also local communities that gain jobs in forest planting and management.

Critics often argue that the global climate change problem is so great that it cannot possibly be addressed by forestation alone. With sequestration levels from forestry of 4-6 tonnes per hectare per year, and an immediate goal of reducing global emissions by about 1 billion tonnes a year, they seem to have a point: it would require the reforestation of about 150 million hectares to meet the Kyoto target through reforestation alone.

However, alternative approaches to sustainable forestry can create significantly higher carbon sequestration levels, while also creating additional value from timber and biofuel.

If forests only sequester carbon as trees are growing, why not, when they reach maturity, fell them and replant? With fast-growing timber reaching maturity in 15 years in the tropics, commercial forestry can quadruple the amount of carbon sequestered.

Commercial forestry creates not only timber, but also biofuels. When logs are processed only c.60% becomes useable timber. Sawdust, offcuts and prunings are sources of biomass that can be converted into biofuel. Carbon sequestration or emission reduction rates of up to 30 tonnes CO₂/ha can be achieved.

This increase would reduce the area of reforested land required to meet Kyoto targets to just over 30 million hectares; about the same area lost in Brazil alone since 1990 – but with a business model that could create a profit, on today’s prices, of c.$50bn a year. In other words, Kyoto targets could be achieved at a profit of about $150 per tonne, rather than at a cost.

Carbon sequestration can be increased still further through the energy-forestry model, which focuses on planting and managing trees to maximise carbon sequestration and energy value, rather than timber value: for energy forests, about three times as many trees are planted per hectare, felled to stump level after two to three years, and left to regenerate. This ‘coppicing’ technique creates, in effect, a solar energy battery of regenerating woodfuel.

Thus, forestry can be used rapidly to establish sustainable woodfuel sources for firewood or electricity generation. These energy forests can produce 20 times the biomass of natural forests and could help solve fuel crises throughout the developing world – where more than 80% of felled trees are used as fuel.

Not only can forestry address climate change and the timber and fuel needs of developing countries, it can also jump-start local economies. It brings employment in forestry and also spawns ancillary industries, such as road building, construction and food production. With the addition of renewable electricity based on energy forestry fuel sources, additional industry can be attracted and a virtuous development circle established. A 5000ha commercial energy and timber forest could meet the transport and electricity needs of a sizeable town, thus providing decentralised growth and counteracting the urbanisation afflicting many developing countries.

The following illustrations show the approaches being taken by two companies in this field, The New Forests Company and Better World Now!

Edward Seyfried Director +44 (0)20 7117 0505 edward.seyfried@carboncapital.com

Stuart Clenaghan Director +44 (0)20 7117 0505 stuart.clenaghan@carboncapital.com

QUID NOVI

Edward Seyfried and Stuart Clenaghan are principals of Quid Novi.

Quid Novi develops businesses that profitably address global environmental problems.

• Carbon Capital Ltd is a wholly owned subsidiary of Quid Novi

• Quid Novi is Better World Now!’s commercial joint venture partner

• Quid Novi has helped finance New Forests Company