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

Current U.S. Carbon Markets 4 Chicago Climate Exchange Regional Greenhouse Gas Initiative Over-the-Counter Carbon Offset Credits

Chicago Climate Exchange 5 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 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%)

Regional Greenhouse Gas Initiative (RGGI) 6 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 CO 2 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 consideration

Over-the-Counter Markets (OTC) 7  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

Other Policy Drivers 8  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

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

Project Eligibility 10  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

Enrollment Process 11 1.Complete enrollment application and contract  Binds project owner through 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 3.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 4.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 5.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 6.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 7.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 Enrollment Process

Inventory Guidance 13 1.“Qualified” foresters conduct inventory  State Registered Forester  SAF Certified Forester  Member of Association of Consulting Foresters 2.Variable and fixed radius plots  Variable radius plot to measure overstory vegetation  Hundredth (1/100) acre plots to measure understory vegetation 3.Inventory to be done with error rate of +/- 20% of mean wood volume at a 90% confidence interval

14 Stand Data Requirements  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 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 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 Plot Data Requirements Inventory Guidance

Other Programmatic Items 15  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

Project Examples 16

Example 1 – Typical Property 17 StandAcreage2007 StartEndWght Incrmnt A B C Total Baseline (mT CO2) StandAcreage2008 StartEndWght Incrmnt A B C Total StandAcreage2009 StartEndWght Incrmnt A B C Total StandAcreage2010 StartEndWght Incrmnt A B C Total

Example 2 – Property w/Harvest 18 StandAcreage2007 StartEndWght Incrmnt A B C Total Baseline (mT CO2) StandAcreage2008 StartEndWght Incrmnt A B C A Total StandAcreage2009 StartEndWght Incrmnt A B C A Total StandAcreage2010 StartEndWght Incrmnt A B C A Total

Cost/Benefit Relationship 19

Managed Forest Project Costs 20 1.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  Forest Management Plan Development 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.

Managed Forest Project Revenue 21 MF Pool 1 (Pilot)48,665 acres Gross Credits 201,300 Harvest 28,400 Annual Net Cseq 172,900 Reserve Pool (20%) 34,600 Tradable Credits 138, Gross RevenueAggregationTradingNet Revenue $2 per ton $ 276,576 $ 27,685 $ 27,658 $ 221,261 $3 per ton $ 414,864 $ 41,486 $ 27,658 $ 345,720 $4 per ton $ 553,152 $ 55,315 $ 27,658 $ 470,179 $5 per ton $ 691,440 $ 69,144 $ 27,658 $ 594,638 $6 per ton $ 829,728 $ 82,973 $ 27,658 $ 719,098 $7 per ton $ 968,016 $ 96,802 $ 27,658 $ 843,557  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! Typical Midwestern forestland sequesters between 3 – 5 mT of CO 2 annually

What’s Next? 22

The Future of U.S. Carbon Trading 23  Chicago Climate Exchange  Scheduled to end in 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 viable in compliance market  President Obama  Reduce to 1990 levels by 2020  Reduce 80% below 1990 levels by 2050  Democrat Leadership in the House will introduce bills to establish cap-and-trade market  Unclear what role forestry would play in a compliance market  President is including$465 billion in cap-and-trade revenue in federal budget blueprint for

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