Carbon banking: Creating flexibility for forest owners

Abstract

The focus of forest-based systems for sequestering carbon has largely been on creating permanent stores of carbon on defined areas of land with a single payment to the forest owner for the carbon. In terms of forest management, this focus leads to two outcomes, continuing production of timber if the forest area is sufficiently large to create an effective permanent carbon pool, or a cessation of harvesting if the forest area is too small. In addition, the payment system for carbon is generally based on matching a specific buyer and seller of carbon using a single payment to the forest owner. In combination, both of these factors create a carbon sequestration system that is too inflexible to attract anything but the largest land or forest owners. The paper presents an alternative system for carbon sequestration, carbon banking. Carbon banking treats sequestered carbon in the same way that a financial institution treats capital. In essence, forest owners ‘deposit’ carbon, in exchange for an annual payment, and those who need carbon offsets ‘borrow’ carbon by making an annual payment. The role of the carbon bank is to aggregate deposits of carbon and use these to meet various demands for carbon. There are a number of benefits of this system. It provides an opportunity for small forest owners with different types, age classes and management strategies to participate in carbon markets because payments are based on current carbon sequestered. It also allows participants in the carbon market to receive current value for carbon rather than what effectively represents the capitalised value of the future benefits of sequestering carbon, thus removing some uncertainty about locking into the wrong value for carbon.