Forest Fires Put Carbon Credits At Risk

Forest owners face multi-million dollar carbon credit loss risk from fires

A forest fire burning near Dunedin is highlighting the risk of natural disasters to carbon which run into millions of dollars, Carbon News reports this morning.

Wenita Forest Products, which owns the 700ha of forest which has been burning most of the week, has registered under the Emissions Trading Scheme, but has not yet claimed credits.

If it had, it would be liable for the carbon lost in the fire, according to Carbon News, the country’s specialist news service on the carbon markets..

Under the ETS, the destruction of trees through natural disaster is treated in the same way as harvesting – making the forest owner liable for the loss of carbon.

That means that in the case of fire or wind damage, the forest owner would have to surrender as many credits as it had received for the forest lost.

If, for example, a company had been receiving credits on 700ha of forest for 20 years it could be liable for some 500,000 tonnes of carbon – worth $10 million at a carbon price of $20 a tonne.

Carbon News says the issue of how to protect forest owners from the cost of carbon loss through natural disaster is now being investigated.

In a paper commissioned by the Ministry of Agriculture and Forestry, Chandler Fraser Keating, EcoSecurities and Simpson Grierson propose creating pool system to cover the risk.

The report says that 40,000ha of exotic plantations have been lost to fire since 1940 – an average of 570ha a year, or 0.12 per cent of the national estate a year, while 80,000ha of forest (1155ha or 0.18 per cent a year) has been lost to wind damage since 1945.

“The results of our study suggest that there are many things that a pool can do to help mitigate Kyoto foresters’ technical and market risk, including creating market information and economic signals in regard to replanting, afforestation, delay of harvest, physical swap contracts, and price hedging,” the report says.

“The economics of these solutions are compelling, though in general will require adoption of dual-market perspective as plantation foresters move their economic perspective closer to those of permanent foresters.”

ENDS