Strategy

Carbon finance: The money trees

Carbon finance is a win-win for business and the environment.

Maple Ridge is a bedroom community 40 minutes east of Vancouver. Its popular developments stretch from gravel benchland on the north shore of the Fraser River to the lower slopes of the Coast Mountains. Alexis Doyle, a young biologist on the staff of ERA Carbon Offsets Ltd. (TSXV: ESR), directs me onto Cottonwood Avenue. Large newish duplexes on the left face older and smallish bungalows on the right. Then the duplexes give way to bare tree limbs above frozen greenery. Days of hard, bright cold have banished the West Coast’s famously mild winter drizzle. Feathers of hoarfrost soften twigs and muffle sound as we crunch over snow into the stillness of the suburban forest. Away from the street, the land drops steeply to a creek. The next subdivision begins no more than 200 metres away beyond the gully. Doyle points out a cluster of conifer seedlings, scraps of pink plastic tape fluttering from the tips rising out of the snow.

It’s a small start on the restored coastal forest that Doyle, her ERA colleagues and the District of Maple Ridge hope to establish here. Defended by hand from the invasive ivy and Himalayan blackberry that, come summer, will invade this long-ago-lumbered green space, these hemlock will be tall enough to stand on their own within five years. By then, the gaunt, mossy trunks of senescent alder that give the spot a forlorn air will likely fall — either on their own or with a cutter’s help — to make way for the more diverse ecology the conifers will support for a century or longer. ERA has planted more than 75,000 hemlock, fir, cedar, spruce and, yes, cottonwood, on dozens of patches of once neglected land like this across Maple Ridge in the past three years — at no charge to its 76,000 residents. “Tree planting is one of those things we always want to do more of, and never have enough money to do as much as we’d like,” admits Mike Murray, general manager of community development, parks and leisure services for Maple Ridge. Without ERA, he adds, “it would have been very difficult for us to do.”

In return for revitalizing the green space gratis, ERA asked for (and got) just one thing: the right to sell greenhouse-gas offsets based on the carbon that will be removed from the atmosphere and stored as wood in the forest growing on Maple Ridge’s land over the next century. “It’s called carbon finance,” explains ERA CEO Robert Falls. “The landowner, in this case Maple Ridge, gets its degraded riparian and park lands restored for free — so no tax burden. We take the risk, because we undertake the work, we have it validated, we have it verified. Then it’s our challenge to sell it into the voluntary offset market.” That market, worth US$265 million in 2007 after tripling in value and doubling in volume year-on-year, is a fraction of the larger “compliance” market for emission allowances and offsets regulated under the European and a handful of other carbon cap-and-trade systems. Worth more than US$100 billion in 2008, it is forecast to reach US$3 trillion in a decade.

More than just a shrewd example of innovative asset creation, the new forest rising alongside suburbs in Maple Ridge demonstrates how such financial energy in a still-nascent marketplace can generate novel win-win-wins for business, the public and the planet. ERA is duplicating its suburban reforestation model in three other southern B.C. suburbs, as well as Metro Vancouver. It also has international projects under development in Rwanda, Peru, Ecuador, Congo and Hawaii. In November, it reported revenue of $452,686 for the first nine months of 2008. Growth on the ground has not been reflected in ERA’s market cap, though. Since the consultancy went public last year in a reverse takeover of TSXV-listed Interim Capital Corp., its stock has slipped from 65¢ a share to hover between 5¢ and a dime. “Our timing could hardly have been worse,” says Falls philosophically.

The serial eco-entrepreneur previously put his PhD in resource management to work helping to bring a wind-energy company to market and bench testing North America’s first carbon purchases for a consortium of large greenhouse-gas emitters. He says he is “not worried” about ERA’s stock skid — “I know what we’re doing, and it’s solid.” Some of the headwinds confronting ERA are the same ones buffeting every business. Some are symptoms of the carbon economy’s adolescence. And some are local.

As the global economy circled the drain, companies once happy to burnish their green cred by buying “voluntary” carbon offsets not required by law have developed second thoughts. Others are awaiting the pending details of significant new carbon markets expected to launch in the next year in North America, at least regionally, and with President Barack Obama in the White House, possibly on a continental scale.

Meanwhile, an atypical frost hasn’t been the only chill in ERA’s backyard. Vancouver is home to the David Suzuki Foundation, one of Canada’s most influential environmental lobbies. As Falls was celebrating his company’s final approval for trading last year, the foundation released a “credit check” of the kind of products ERA sells. It was a crushing thumbs-down. Claims for carbon captured in growing forests, Suzuki asserted, are poorly supported; prone to “leakage,” where carbon removed in one place is made up for by bumped-up emissions nearby; and subject to “reversal” when fire, insect infestations or logging release the supposedly sequestered greenhouse gas prematurely. “Tree-planting,” it concluded, “cannot be considered as effective as projects that reduce fossil-fuel use in reducing the net buildup of greenhouse gases in the global atmosphere. If individuals or companies are unable to reduce their own fossil-fuel-related emissions, the best alternative is…[e]nergy efficiency and renewable energy offsets.”

“I’m not opposed to forest-derived offsets,” Suzuki scientific director Faisal Moola told Canadian Business. “Trees are the only practical way we have to remove CO2 from the atmosphere.” Moola agreed that technology-based offsets like those his foundation favours suffer “common limitations” with biological carbon capture, including leakage and imprecision about how much carbon reduction is truly “additional” to a business-as-usual case. Forest-carbon vendors, he noted, have found ways around the problem of “reversal” by setting aside some of the carbon a forest captures as an unsold buffer against future losses.

“It can be done right,” Moola said. But he defended the 2008 report’s assertion that buyers have no way of knowing which projects do so and which fall short. “We need to have that standard, but right now,” he insisted, “they’re not on the market.” In fact, a variety of independent standards address the issues the Suzuki science director claimed are unmet. The conspicuous exception is a seal — the so-called Gold Standard — the foundation has itself adopted with Greenpeace and the World Wildlife Fund. Other accreditations are issued by mainstream agencies such as the International Organization for Standardization (ISO) and by consortia of industry and NGO groups such as the alliance behind the Climate, Community and Biodiversity (CCB) Standards. All require carbon impact to be reliably quantified. Some require additional commitments on biodiversity and social responsibility. (ERA validates its offsets to the ISO: 14064-2 standard and is in the process of securing Climate, Community and Biodiversity Standards validation.)

The Suzuki Foundation’s most telling point is that forest-credit vendors wish to be paid today for carbon trees won’t remove for decades. This so-called ex ante problem has to date barred ERA and vendors such as Borealis Carbon Offsets Ltd. (which is reforesting marginal pasture land in the B.C. interior) out of the compliance market. But as increasingly sophisticated standards have largely settled other doubts, Falls said that ERA is also, “looking at new products that embrace ecological offsets and address any concerns around ex ante. I do think we’ll be playing into the compliance markets in the next couple of years.”

Meanwhile, Falls frets that the public and policy-makers are being misled about what’s necessary to mitigate climate change — and unaware how much it could help the rest of nature. “I was in David Suzuki’s kitchen when we founded the Suzuki Foundation,” he says. These days, Falls claims, the organization is mesmerized by a “bean-counting approach to fixing the climate,” and it fails to see that capturing carbon in restored forests also benefits wildlife, watershed functions and the amenity values of communities like Maple Ridge.

“What’s the unique asset of British Columbia in climate-change mitigation?” Falls asks. “It’s not technology. It’s ecology. I’m looking at a landscape that’s been ravaged by historical logging and urban development — and could be a huge sink for carbon.”