Carbon forestry projects growing tree species native to a particular area are emerging as niche nature-based solution in the carbon credit market and attracting premiums over credits generated from plantations growing exotic or commercial trees.
While plantation-based carbon projects can sequester carbon faster in the initial years due to fast growth and generate additional revenue through timber, their carbon accumulation saturates in the long run. On the other hand, native trees tend to grow slower but deliver credits over a long period as they continue growing for as long as 40 years.
"When we look at it from an investment point of view, the native species for conservation are likely to be able to demand higher prices in the market for their credits, mainly because of the biodiversity co-benefits that are associated with it," said Adam Gibbon, natural capital lead at AXA Investment Managers, part of the French insurance giant AXA.
Gibbon added, however, that buyers also recognize the need to support plantations to reduce the pressure on existing forests for the supply of wood, which will be essential in the shift away from the petrochemicals industry.
About 14 million credits were issued in January-August based on natural carbon capture methods, with 6.56 million retired, according to data from S&P Global Commodity Insights. A total of 182 million credits were issued over the same months from all types of projects.
The key concern among buyers is how long carbon is going to stay out of the atmosphere, said Peter Fernandez, founder and CEO of Mombak, a nature-based carbon removal startup focused on the Amazon in Brazil.
"If you have a monoculture, the answer is probably not very long," Fernandez said. "If the wrong disease or the wrong pest shows up, it can kill your entire forest because they're all the same tree."
There used to be a strong push for monoculture, with fast-growing non-native species plantations under the UN-backed Clean Development Mechanism carbon credit scheme. It led to a backlash in the market, said Jeffrey Chatellier, CEO of Forest Carbon, a Jakarta-based carbon project developer planting native species on degraded land in Sumatra.
Non-native tree species create risks for a restoration project as they could outcompete other species on which a lot of local biodiversity depends for sustenance, Chatellier said.
"When you start disrupting that, it can lead to a sort of extinction – not as a species, but in that zone," he added. "A lot of those niche species would cease to exist because of the promotion of non-native trees."
Carbon projects like World Vision's Sodo in Ethiopia have seen the return of birds and baboons to the project area after the land was allowed to be regenerated with native vegetation, said Rob Kelly, acting manager for climate action and resilience at the developer.
Premiums and returns
Carbon credits from natural carbon capture methods, such as forestry, already attract one of the highest prices among carbon market project methods.
Platts, part of S&P Global Commodity Insights, assessed the price of natural carbon capture at $13.45/mtCO2e on September 29.
Native tree-based forestry projects continue to attract a premium over plantation-based projects, with prices ranging from $14/mtCO2e to above $50/mtCO2e, depending on the co-benefits from the project, market participants told S&P Global.
The magnitude of the premium also depends on the volume, with smaller parcels getting higher prices compared with large direct-offtake deals.
"If we talk about relevant significant volume transactions of, let's say, 5,000 mt or more, the highest price we have seen was $28/mtCO2e," said Julian Ekelhof, senior director for climate solutions at Forliance, a Germany-based project developer and broker.
The price for smaller volumes of as low as 5 mt, which can be bought on the Gold Standard platform, can rise to as high as $45-$50/mtCO2e, Ekelhof added.
"When you start dealing with big volumes of credit, the buyers look at their cost," said Clement Chenost, managing partner at the Shared Wood Company, a Paris-based forestry project developer. "Maybe they can pay once for a credit at $50, but when you talk about 1 million credits, the negotiation is much tougher.
Fernandez said Mombak is in talks to sign a large offtake deal for its native tree-based carbon credits with "one of the largest companies in the world" at more than $50/mtCO2e and the deal will account for about 30% of its total production.
"All of the rest of the carbon we will sell in the spot market in the future because we believe that the price has a very bullish outlook," he said.
While most of the native tree-based credits continue to rely on demand from the voluntary carbon markets, some countries are using their compliance regime to push forestry in a more sustainable direction.
The concerns over carbon markets fueling monoculture-based projects reached a tipping point last year in New Zealand, where the emissions trading scheme allows forestry developers to earn allowances for sequestering carbon.
To offset the risks from projects largely populated by exotic pine trees, the government is undertaking a consultation on whether to mandate some long-term forestry projects registered within the ETS to transition to native trees.
France in July published a decree under its Label Bas Carbone, or low-carbon label, voluntary certification scheme that incentivizes local airlines to offset their emissions through credits from biodiverse forestry projects.
"If they buy a certificate with co-benefits, instead of having to compensate 1 mt, they have to compensate half a ton, meaning it's basically a premium of 50%," Chenost said.
Barriers and risks
Some native tree-based forestry projects carry risks in the form of the survival rate on degraded land, the lack of infrastructure for seedlings, limited revenue streams and low knowledge base.
"Nature-based solutions as a sector has not matured to the same scale as plantation forestry, so the key thing is you need access to seed, you need teams that can identify seed, know how to treat the seeds, and how to start managing nurseries at scale," Chatellier said.
Brazil, which has seen a surge in forestry projects, is facing similar bottlenecks. Native tree-based reforestation projects in the country used to be handled mostly by non-government organizations.
While NGOs have the capacity to plant 3,000 hectares/year, they will not be able to scale up to 10,000 hectares, said Felipe Viana, sales director at Carbonext, a Sao Paulo-based project developer and credit seller.
There is also an increased risk in planting native species at scale due to limited research and experience compared with commercial plantations.
There has been as much as 50 years of research on exotic pine forestry, but only about 10 years for native trees, said Mitchell McLaughlin, co-founder of New Zealand-based MyNativeForest, adding that the company is working to lower the cost of planting through more research.
Fernandez, whose company is bringing a tech-centered approach to scaling reforestation rapidly, said the supply of seeds can be managed by professional procurement. Land titles are a bigger challenge.
"We have to invest in a lot of people and technology to do very thorough due diligence on every piece of land that we look at to make sure that we have bulletproof land titles," he said.
The demand for credits from native tree-based projects has increased as more companies seek to offset their emissions with credits that have co-benefits.
World Vision, which also operates the Humbo carbon project in Ethiopia, said the prices were low before 2018 when it was selling credits to the World Bank under the CDM scheme.
Both Sodo and Humbo are based on the farmer-managed natural regeneration method, which involves assisting the growth of remnants of native vegetation by removing human and animal pressure on the land.
The project was able to attract higher prices after it transitioned to Gold Standard in 2018.
"We're returning on average 65%-70% of carbon revenue back into the hands of the communities," said Kelly.
The demand for native tree-based credits was especially higher from the luxury goods and technology companies as well as consumer goods companies whose supply chains run through forestry, market participants said.
"I think as we move toward 2030, we will see a lot of supply constraints and upward price pressure on both but I still would expect the native species to be an even rarer commodity and hence with those added co-benefits commanding higher prices," Gibbon said.
This article first appeared in the October 2023 edition of Commodity Insights Magazine