New Forests: carbon offsetting to hit $2bn by 2020

Owning a forestry asset and integrating carbon and timberland management can often generate a higher internal rate of return than a pure forestry strategy, says New Forests chief executive officer David Brand.

New Forests’ US carbon offset and forestry investment vehicle for individual accounts, Forest Carbon Partners, has been working with US landowners to develop profit-sharing carbon projects since 2011.

We caught up with chief executive officer David Brand to ask why fund managers are finding value in the strategy, and whether it could attract more institutional investors.

Why have you decided to go into carbon offsetting through the California Air Resources Board programme?

It is not like the European Union emissions trading scheme, where [investors] are entirely reliant on the carbon market. With the California scheme you can own a forestry asset and integrate carbon and timberland management. Landowners get upfront California carbon offsets, which can be sold on. And the California market isn’t just in California; it’s expanding. Quebec, Tennessee and Ontario have joined the California scheme, and landowners [in those states and provinces] now qualify for credits [from the California Air Resources Board] that they can sell to emitters.

How are you investing in this market?

Our investment vehicle, Forest Carbon Partners, is structured to work with landowners to develop the carbon projects on their land, and do a profit share. We are now moving towards acquiring forestry assets for clients for both timber and carbon value.

How much opportunity do you see in combined carbon and forestry investments?

To date there have been about 30 million tonnes of carbon offsets produced, and about half has been in forestry. The market is underserved, and probably requires 150 million tonnes [of carbon offsets] by 2020.

Parties that are regulated under [US carbon rules] include some of the world’s top 100 companies. We estimate it will be a market worth $1.5 billion to $2 billion between now and 2020; it’s of some scale and significance.

What sort of timberland can benefit from a carbon strategy and how does this affect the overall timberland investment landscape?

[Carbon offsetting] is re-segmenting timberland assets in the US into those that have a carbon offset value and those that don’t, according to region.

Intensively managed southern pine and Douglas fir plantations don’t tend to qualify for the scheme, for example.

Properties with a higher standing biomass than the regional average often can generate a higher internal rate of return from a blended carbon and forestry strategy as oppose to a pure forestry strategy. They tend to be longer-lived, high density forests managed less intensively.

What kind of investors does a carbon offsetting forestry strategy attract?

There are still more venture capital and private equity investors. But carbon market prices have become relatively stable, [investment] volumes are increasing and carbon offsetting through forestry is starting to enter the institutional investment market.