Climate Forward’s first credit forecast methodologies seek to overcome start-up cost barriers for new carbon projects.
Climate Forward, Climate Action Reserve’s program that issues credits to projects based on forecasted emissions reductions, was launched earlier this year. On September 25, Climate Forward approved its first three forecast-based methodologies for dairy digesters, solar photovoltaic, and improved cook stoves. The Mature Forest Management and Reforestation protocols should be released for public comment in the next few weeks. Climate Forward will issue credits, called Forecasted Mitigation Units (FMUs), that will allow offset projects to recognize revenue earlier based on future emission reductions. Generating revenue earlier in a project’s lifespan will reduce the often high start-up costs of emission reductions projects, that are currently keeping some carbon offset projects on the sidelines.
While Climate Forward’s project activities are the same or similar to their conventional “ex-post” (after occurrence) counterparts, they include important new accounting provisions to address uncertainty in predicting future emissions reductions. For instance, the dairy digester methodology does not require annual metering, but instead opts for modeling of the annual baseline and project emissions. Two factors are used to address potential underperformance of the digester over the forecasted period. The first is an adjustable crediting period based on digester longevity, which relies on financial, design, operating, and dairy closure documentation. The second is digester performance, which applies a conservative discount factor based on statistical analysis of 56 existing digester projects. A true up at the end of the crediting period allows a project to recoup additional credits that were not issued at start up.
For many potential carbon projects, development costs are a significant barrier and owners may have to wait years to “pay back” those costs in carbon offset revenues. When The Climate Trust launched Climate Trust Capital Fund I in 2016, our primary goal was to provide a financial model to defray those significant development costs with an upfront investment based on forecasted offset credit revenues. Fund I was fully committed within 18 months because demand for this type of approach was clearly needed. In fact, Climate Trust intends to launch a second fund, similar to Fund I, in 2020 to again address the need for development capital and carbon market expertise. It is encouraging to see Climate Action Reserve’s Climate Forward program offer another innovation in the carbon markets to reduce development barriers and encourage more carbon sequestration projects.