Understanding Carbon Credits for Your Forested Property
What you should know, anticipate, and evaluate to gain carbon credits.
Carbon credits from tree growth provides an opportunity for forest landowners to gain a potential, periodic income from their forested property. Celluloses and lignin, the primary wood components in trees are composed of carbon. Thus, management of trees and forests has always inherently involved the management of carbon. The purpose of this article is to explain how carbon accumulates and is maintained in forests, why carbon credits are being offered to owners to mitigate atmospheric carbon, and to provide information about various components of some carbon credit programs.
The information presented in this article are for those who could be interested in receiving carbon credit payments for their forested land. The Tennessee Forestry Association neither endorses nor rejects the various carbon credit programs that are available. Forest owners should assess whether a program contributes to their forest management objectives. Obtaining or having your carbon credits purchased is a process involving various carbon markets, carbon programs available in your area, and having a forest inventory conducted to establish a baseline of carbon units present.
Each carbon credit program is highly variable in its requirements and interpretations. Although this article presents several perspectives, there may be other views to consider. Our experience is that program requirements are changing as carbon markets develop. How a particular program operated a year ago might have been modified today. Carbon credit markets are not new phenomena. For example, the Chicago Climate Exchange (CCX) Carbon markets, was established over 20 years ago, but subsequently discontinued because of low purchase prices, few buyers and sellers, lack of transparency, and the cost of inventories in determining the amount of carbon present on forest land.
Figure 1. Biomass and carbon accumulation curve in forest stands with time. The X designates when growth is increasing at a decreasing rate as a result of competition. The zigzag at the end of the curve indicates that total growth has reached carrying capacity and little growing space remains. Biomass/carbon is more or less in equilibrium with the release and gains of carbon.
Figure 1 depicts how forests grow and occupy space. The y-axis is the accumulation of biomass (carbon) of trees as they grow and the x-axis represents time. The horizontal line is the maximum biomass that a site can maintain, known as carrying capacity, when all growing space is utilized. This is usually accomplished when forests are at closed canopy, when little or no direct sunlight reaches the ground.
Initially, forests grow at an increasing rate when in full sunlight. Where the “X” occurs on the curve, competition for growing space among adjacent stems begins. The growth rate is still increasing, but at a decreasing rate as available growing space diminishes. Once the growth curve approaches carrying capacity, biomass growth is no longer increasing as all growing space is occupied. Slight decreases in biomass occur when trees die due to lack of growing space. The relinquishment of growing space by dead trees allows adjacent tree crowns to capture that space with slight increases in biomass, maintaining a balance of biomass with time at carrying capacity.
Carbon dioxide is sequestered from the atmosphere during photosynthesis when trees are accumulating biomass as they grow. However, once forests reach carrying capacity, little new carbon is sequestered, but previously sequestered carbon is stored within the wood of trees. While photosynthesis creates sugar molecules from carbon dioxide and water and expels oxygen to the atmosphere, respiration of trees in the absence of sunlight does the opposite. The breakdown of sugar molecules in the presence of oxygen produces water and energy and releases carbon dioxide. At carrying capacity, carbon absorption and expulsion is more or less in balance as trees die or grow based on available growing space.
Figure 2. Carbon sequestration in Tennessee. Source: Forest Resources Association. Forest Carbon Report: Tennessee. Washington, DC. 2021
With carbon offsets, two carbon phases could be taken into account. First, the sequestration of carbon as trees are actively growing and accumulating biomass each year. Second, storage of residual carbon in trees where photosynthesis and respiration are in balance at carrying capacity. In this phase, little, if any carbon is accumulating in trees and total carbon may actually be diminishing as carbon is released from dead, decaying trees. Young forests are best for carbon sequestration (Figure 2), while older forests are best for carbon storage.
Before entering a forest carbon program, forest landowners should be aware of the following.
Duration of contract. The length of a carbon contract is binding, long term (often 20 years or more), and may exceed the present generation that could impact future family decisions. Most carbon contracts are encumbered in the property deed or title. If the property is sold or transferred within the contract period and the buyer is not interested in maintaining carbon credits, termination of the contract often incurs penalties through the forfeiture of previous carbon payments. Land management restrictions (including timber sales) associated with carbon sequestration and storage that are agreed upon should be expressed in the contract. An attorney knowledgeable about such contracts should be consulted before entering a contract so that property owners are informed about what they can or cannot do on their property during the contract period. Contacting a consulting forester is recommended to determine forest management alternatives or options prior to entering a carbon contract.
The carbon market and prices have little standardization. The carbon offset market has many unknowns and potential risks. Prices for carbon are not guaranteed and will fluctuate based on the market. The quantification of carbon present on the land today and how it may increase with annual growth may differ by the carbon program. The future of carbon offsets and markets are also uncertain. Many companies who are purchasing carbon credits today are implementing internal policies to become more carbon neutral so they can reduce their carbon footprint and expenditures for carbon offsets. Others may consolidate their interests to purchasing carbon credits in areas where they may gain more social benefit, such as protecting Amazon forests, thereby narrowing the carbon market. The potential for carbon markets to shrink or expand and for prices to escalate or decline will depend on national and global markets and policies. Income from carbon credits is taxed as ordinary income and is not associated with capital gains.
A timber inventory and a forest management plan are usually required for landowner participation in carbon programs. Establishing the amount of carbon on the land through a timber inventory is a cost that is usually borne by the carbon program. However, those costs will be recovered by the program from the early carbon payments to the property owner, usually lowering the amount of carbon payment. The carbon developer or aggregator owns the carbon credit as the intermediator between the carbon credit buyer and the landowner. The property may be visited periodically during the contract period to ensure that contract terms are being followed. Costs such as audits and third-party verifications of carbon during the contract are incurred by the aggregator and are reflected in the prices of carbon paid to property owners. A reporting requirement about the property by owners to the program aggregator on a periodic basis is often necessary to continue carbon payments.
The purpose of current carbon offset contracts is to increase or at least maintain carbon on the property during the contract term. Timber harvests that would decrease the amount of carbon on the property are restricted. The ability for the landowner to alter the property for other purposes such as improved wildlife habitat or recreational opportunities may be constrained. The delay of timber harvests may jeopardize forest health especially with the long-term aspects of the carbon contract. Regeneration and sustainability are deterred in disturbance-dependent forests like we have here in Tennessee and risks to mature (and hopefully valuable) trees from unexpected influences such as weather events and insects and disease can influence tree and property values. While carbon programs often suggest in their promotional materials that “good” or “improved” forest management results from their carbon agreements, this may not fully consider the long-term risks in growing trees or the private forest owners’ other objectives for their property. Carbon is being optimized for payments in these programs, not fulfilling ownership objectives and forest health.
However, carbon projects may be opportunities for some private forest owners to gain periodic income through the sale of carbon credits from their property. Forest owners should be cautious if considering an emerging carbon program and understand the processes and risks involved. The future of carbon markets, programs, prices, and policies that govern carbon offsets are uncertain and continue to change frequently.
Additional information about forest carbon credit programs may be obtained from the following sources:
An Overview of Forest Carbon Credit Programs in Virginia. March 2024. Virginia Cooperative Extension publication (CNRE-177P) available at https://www.pubs.ext.vt.edu/CNRE/cnre-177/cnre-177.html The publication provides comparisons of five carbon credit programs that are available in Virginia with similar attributes in Tennessee.
Forest Carbon Programs Are Missing Out on the Full Goodness of Wood. Spring 2024. West Virginia Forestry Association Magazine, pages 8-11.https://www.associationpublications.com/flipbook/wvfa/2024/Spring/8/ The article presents carbon impacts from the substitution of wood products.