In October 2007, the California Air Resources Board adopted the Forest Sector Protocols. The Protocols, which originally were created by the California Climate Action Registry, detail how to measure the amount of carbon that can be stored in a forest. This measurement process is necessary in order to properly certify and verify that emissions reductions actually occur.

Once verified, the credits can be sold in either voluntary markets to individuals or businesses, or in compliance markets, as part of a comprehensive cap-and-trade system designed to reduce greenhouse gas emissions. California is in the process of establishing a cap-and-trade system within the State, as required by the Global Warming Solutions Act of 2006 (also known as AB32).

Last week saw the first sale of emission reduction credits under the Forest Sector Protocols. Natsource Asset Management purchased 60,000 tons of carbon dioxide emissions reductions for an undisclosed price. The theory behind the investment is that the credits will increase in value once the cap-and-trade system begins operating, providing a return for the project’s investors.

The most important aspect of this transaction is the possibility that it will lead to a legitimization of forestry and land use based emissions reduction credits. In its recent proposal for the next phase of Europe’s cap-and-trade markets, the European Commission indicated that it will prohibit the use of credits derived from forest and land use offset projects. The Commission reasoned that the projects’ lack of verifiable standards could threatens the integrity of the system. Similar complaints about the legitimacy of offset projects have been common recently, which led to hearings before the Federal Trade Commission.

If California is able to demonstrate that forest-based offset projects can be properly verified and monitored for compliance, it should provide a much-needed boost toward fully integrating forest protection efforts into regulatory schemes aimed at reducing greenhouse gas emissions. Deforestation is one of the leading causes of greenhouse gas emissions worldwide. By creating a monetary incentive for forest protection, these efforts can preserve an important natural resource and provide critical environmental benefits as well.

For further information about this topic, please contact Akin Gump.