1Carbon Banking: Creating Flexibility for Forest Owners

Carbon sequestration has emerged as one of the only ecosystem services with a market that allows forest owners to capture the value of the service. However, since the focus of forest-based systems for sequestering carbon has largely been on creating permanent stores of carbon on defined areas of land and with a single initial payment to the forest owner for the carbon, this has limited participation of many forest owners in carbon markets. The reasons for this are twofold. The first is that the only forest owners who can realistically participate in current markets are those with a forest area that is sufficiently large to create an effectively permanent carbon pool while continuing production of timber or those who have chosen to stop harvesting. The second is that the payment system for carbon is generally based on matching a specific buyer and seller of carbon using a single payment to the forest owner. The combined effect of both of these factors is to create a carbon market that is too inflexible to attract anything but the largest land or forest owners. This paper presents an alternative carbon market – carbon banking. Carbon banking treats sequestered carbon in the same way that a financial institution treats capital, with forest owners ‘depositing ’ carbon in exchange for an annual payment, and those who need carbon offsets ‘borrowing ’ carbon by making an annual payment. The role of the carbon bank is to aggregate deposits of carbon and use these to meet various demands for carbon. The key benefits of this system are that it provides an opportunity for small forest owners with different types of forest, age classes and management strategies to participate in carbon markets because payments are based on current carbon sequestered. It also removes some uncertainty about locking into the wrong value for carbon by allowing participants in the carbon market to receive current value for carbon rather than what effectively represents the capitalised value of the future benefits of sequestering carbon