As ARB continues to refine its post-2020 cap and trade rules, and California’s legislature prepares to launch an offset task force, we decided to do some back of the envelope analysis of potential California-based offset supply for the 2021-30 period.  This is important because after 2021, the legislation calls for half of California compliance offsets to provide direct environmental benefits to the state.  If demand for those projects outstrips supply that could mean potentially higher prices. To us an obvious question that needs answering is: with this new mandate, will there be enough California-based offsets to meet future supply?   California’s cap and trade allows for six different offset project types.  Improved forest management is the most frequently used project type – at over 80% – so we thought we’d start there.

First, our assumptions. Improved forestry offsets will come from private land (federal lands, which make up about half of California’s forests, are not eligible), projects will be based on forested lands larger than 5,000 acres, the forest products industry will dedicate 15% of their timberland to carbon projects, and we do not account for the drought and fire losses of the past two decades (most of which occurred on federal lands). We have relied heavily on analysis from California’s 2018 Forest Carbon Plan and the Forest Service’s Forest Inventory and Analysis (FIA) data.  Total carbon is estimated assuming below ground carbon is 50% of above ground carbon. Using this methodology and FIA data, average carbon sequestration rates are estimated at 2.0 tons/acre/year for non-corporate private and 1.2 tons/acre/year for industrial timberland.

FIA data show that of the approximately 7.6 m acres of non-corporate forest land in California, less than 7% are greater than 5,000 acres.  That’s about 500,000 acres.  Maybe a quarter of those landowners will be eligible or interested in carbon offsetting: that’s 130,000 acres.  Multiplying that by the average carbon sequestration rate equates to about 260,000 tons/yr.  The corporate (or industrial) side of the equation is trickier.  There are about 4.7 m acres of private industrial timberlands in California.  Those timberlands are the raw material for the forest products industry.  It would be naïve to expect them to devote a majority of those timberlands to carbon offsetting.  We’d say 15% maximum, would be eligible and interested in a carbon project.  That’s about 700,000 acres which, according to FIA, yields another 840,000 tons/yr. 

Our back of the envelope shows there’s about 1.1 m tons per year.  But we’re leaving out a critical piece: the built-up carbon store from private land owners (corporate and non-corporate) that could add significantly to the carbon inventory.  That built-up store is known as the “flush” in carbon offsets, and essentially translates into a first-year bumper crop of carbon offsets to account for years of storing on the stump.  Flushes can be huge – i.e., millions of tons.  But we’re guessing the low hanging fruit of big flushes is almost over.  Lastly, there are 45 m or so offsets that are being held in inventory.  We expect most of those could be retired in the next compliance period in late 2020.

Carbon offset pundits estimate that the average annual California-based offset demand will be about 5 to 6 m tons between 2021 and 2030.  If 80% of those tons are expected from forestry, that’s 4 to 5 m tons.  Will the forestry offset projects currently in place be enough to meet that demand?  If not, then there is the potential for a significant supply shortfall if ARB is relying on new forestry projects. Even with flushes. And if our simplistic analysis is even near the ballpark, it begs the question: Where does California expect to get its offsets from?  Expanding the eligible land-based sectors to include grasslands?  That makes sense.  Allowing for small land owner aggregation, which could expand the land base by millions of acres? That seems right, too. More in depth analysis is certainly needed on this critical issue.  We thought we should start the conversation.