Tag Archives: forestry

Debate Over Bolivia Carbon Project Spotlights Risks

The New York Times published an article highlighting questions surrounding a major forest preservation project in Bolivia sponsored by American Electric Power, BP and PacifiCorp, known the Noel Kempff Climate Action Project.

Greenpeace claims it found that from 1997 to 2009, the estimated reductions from the program had plummeted by 90 percent, to 5.8 million metric tons of carbon dioxide, down from 55 million tons. It also questioned the “additionality” of the program, which says that a specific forest area would not have been preserved without the program.

What is striking about this matter is not the debate of the project’s effectiveness (given the on-going controversy surrounding the use of forestry in climate risk management).  The surprise was a comment made by Glenn Hurowitz, a director of Avoided Deforestation Partners, a small nonprofit organization that claims to “advance the adoption of U.S. and international climate policies that include effective, transparent, and equitable market and non-market incentives to reduce tropical deforestation”:

In the proposed climate legislation, you can’t get credit for conservation or any other type of offsets until you’ve delivered the offsets. So inaccurate projections would not affect the issuance of credits.

This statement clearly demonstrates a critical business risk in using forestry for carbon management.

While “inaccurate projections” may not impact the issuance of credits, the sequestration calculations/projects have a significant impact on the upfront project support and financing.

It is reasonable to foresee that a failure of forestry to deliver on its projections will have a severely negative impact on the perception of forestry projects as a financially successful and viable carbon risk management tool.

As with any business investment, financial analyses are based on projections about what an investment will deliver in terms relevant to the investment.  In the case of forestry projects, calculations are completed to determine the amount of carbon that is projected to be absorbed and therefore generate the amount of credits/offsets.  These offsets create a financial return in terms of both cost avoidance and potentially revenue.  Financial analyses may be completed for different carbon management options and an investment is made in accordance with the option judged to be the “best” as defined by the criteria applied by the investor.

So what happens if the projections are inaccurate?  Sure, some offsets will likely be delivered by the project.  But will the investment deliver the anticipated return?  Will a shortfall trigger the need for pollution control investments and/or non-compliance penalties?

There continues to be a critical need to reduce risk in forestry-based carbon management investment.  As we have discussed before, it is advisable to take a deep dive into to uptake calculation methodologies, delivery milestones and scenario planning in advance of such investments.

Tiny Bug – Giant Financial Risk

Recently, we published discussions related to various risks associated with certain aspects of corporate carbon management programs – planning, calculations and reporting.  But we have had discussions with clients about other risks specifically posed by sequestration techniques.

Today, a Reuters report provides stark evidence of the reality of a disastrous threat to forestry sequestration: the tiny pine beetle. Infestations of the insect cause huge impacts:

In Colorado, aerial surveys show that from 1996 to 2008 Colorado lost almost 2.5 million acres (1 million hectares) of pine forest to the beetle outbreak, Wyoming 677,000 acres and South Dakota 354,000 acres.

Over the same period of time, the spruce beetle, which has also ravaged forests as far north as Alaska, took out 374,000 acres of spruce trees in Colorado and 340,000 in Wyoming.

That cumulative total of over 6 million acres (2.5 million hectares) is an area larger than Israel or South Africa’s Kruger National Park.

As the excerpt states, this is the impact over 12 years.  Commercially-viable forestry sequestion projects typically span 15 to 30 years.  The article stated that Colorado-based U.S. Forest Service scientist Mike Ryan is concerned that pine beetle destruction may lead to forests changing from carbon sinks to net emitters due to carbon releases from the increase in dead timber.

This would mean big problems for companies who have made investments or developed strategies that include forestry sequestration.

Geologic or subsurface seuqestration has also garnered attention.  But this brings an even wider range of exposures – third party damages.  Two scenarios include:

  • Equipment failures or human errors related to the technology for capturing, preparing and injecting CO2 emissions into the subsurface receptor
  • Releases from the receptor itself.

There are many instances of process equipment failures or human errors in industrial settings that have lead to catastrophic events.  Just earlier this week an unidentified chemical release at a household waste transfer station sent more than 100 people to the hospital and triggered a full HAZMAT response by emergency authorities.

What may be less known are instances and impacts of massive CO2 releases from natural “storage”.  Perhaps the most dramatic and relevant is the 1986 Lake Nyos disaster in Cameroon where 1700 people lost their lives.

As CO2 regulation moves forward in the US, thorough identification of risks and solutions becomes imperative.