Forest carbon markets: Frequently asked questions

Part 3 of the forest carbon markets series, based on the report, “Forest Carbon Markets: How demand for forest carbon credits is shaping wood markets”

Forest carbon markets are quickly evolving as the importance of forests in tackling climate change is increasingly recognized and rewarded. Almost 25% of global carbon dioxide emissions are now covered by pricing mechanisms, with a market value of more than USD 80 billion in 2021. Forestry is one of the most popular and fastest-growing sources of carbon credits. As this market evolves, it can have profound impacts on timber supply, forestry investments, and raw material sourcing to forest industries. In a recent webinar with expert on this topic, Glen O’Kelly, we discussed some of the key findings from a recent study on the state of forest carbon markets, and implications for forest industries in three case-study regions; US, Europe and New Zealand.

Watch a recording of the webinar here or scroll down to read Glen’s answers to some of the frequently asked questions that came up in the webinar.

1. What is the role of the forest in combating climate change?

Reducing global carbon emissions and removing carbon from the atmosphere are two key levers in the pathway toward keeping global warming at or below 1.5°C, as set out in the 2015 Paris Agreement. The focus of policymakers has until now largely been on reducing emissions by improving energy efficiency and switching to renewable sources of energy. However, because the energy transition is not moving at the necessary pace, policymakers’ focus has broadened out to include carbon removal as a way to reduce net emissions.

Forests contain more carbon than any other biome and play a significant role in the global carbon cycle. They represent a large source of carbon emissions – approximately 20% of carbon emissions globally – and an even bigger carbon sink, sequestering around 40% of global emissions, providing a net annual sink of 8 billion tonnes.

The forest is a low-tech and cost-effective way to tackle climate change, for example by creating new forests and avoiding deforestation. And the forest offers many co-benefits in addition to carbon sequestration, including biodiversity and erosion control.

2. What’s the difference between commercial forests and natural forests when comparing carbon emissions and reductions?

The carbon profile of a forest depends on multiple factors, including the type of forest and whether it’s used for forest sequestration only or to produce forest products.

In general, a permanent carbon sink forest stores a larger volume of carbon than a forest in productive forest management – because an unharvested forest can reach maturity, with larger trees and more carbon in the soil, deadwood, and so on. (There is generally more demand from voluntary credit buyers for projects that not only offer carbon offsets but also present co-benefits.)

Commercial production forests also represent a significant carbon sink and offer other economic and climate benefits. Many argue that the climate benefits are in fact larger with production forests, considering the supply of forest products that substitute less climate-friendly alternatives, for example, lumber to replace concrete and steel in construction, cartons to replace metal, glass and plastic packaging, and biofuels to replace fossil alternatives.

Commercial forests may represent a smaller carbon sink in living biomass, but these other climate benefits, obtained through the ongoing supply of forest products, accumulate over time. And, while an unharvested forest represents a larger carbon sink, once it reaches maturity, it ceases to grow and sequester further carbon.

3. Why are forest carbon pricing mechanisms emerging as a tool for reducing emissions?

Carbon pricing mechanisms have become an important tool in reducing emissions because they reward those that reduce their emissions or remove carbon from the atmosphere, and penalize those that increase their emissions or emit more than their allocated allowance. Carbon credits put a price on carbon to incentivize investments and innovations in technology and behavior that helps us reduce our global emissions.

Forest carbon markets are quickly evolving as the importance of forests in tackling climate change is recognized and rewarded. The global market for forest carbon credits is growing at almost 20% p.a., driven by independent supply from mainly emerging regions, and compliance demand concentrated in North America, Europe and Oceania.

4. How can we measure the impact of the forest carbon credits market on global climate change?

The world has a long way to go to meet its climate goals, and the forest and forest carbon credits market is just one of many levers (albeit an important one).

Although forest carbon credits are already one of the most common types of credits, at around 20% of all credits bought and sold, their use is still in the early stages, and the market is far from reaching its full potential. Only about 25% of global carbon emissions are covered by carbon credits, carbon taxes, and traded emissions allowances.

The direct impact on global temperature of any intervention is difficult to predict, particularly at this early stage in a nascent market. But it’s clear that the world can only meet its climate goals through a combination of emissions reduction and removal, and there’s where the forest will play a critical role.

5. Are governments buying up all of these forest carbon credits?

In short, no. About 20% of forest carbon credit demand comes from the voluntary market – organizations and individuals that buy credits to offset their emissions, for example to achieve a net-zero pledge. And the remaining 80%, the demand from compliance markets, represents purchases from parties that have a legal obligation to reduce their emissions – in many cases, companies, such as those in heavy manufacturing or energy production.

While governments play a role in creating compliance markets, for example by setting emissions quotas and establishing emissions trading schemes, government represents a relatively small part of actual purchases of forest carbon credits.

5. Can commercial forestry plantations get involved in this market?

Absolutely. First, afforestation/reforestation projects can simultaneously earn carbon credits and be managed for the production of timber. Second, established plantations can earn carbon credits if they are managed in a way that increases carbon sinks, for example, by improving growth, reducing damage, or reducing harvest. The last of these three options involves reduced wood supply, but the first two represent a win-win for wood production and carbon.

Get answers to your questions

Want to find out more about how the forest carbon credits market works, the opportunity it represents for forestry owners, and how challenges and opportunities vary by region?

What to read next
Fastmarkets’ Director of EMEA mill intelligence, Ville Henttonen, uses a case study to explain how mill intelligence tools can estimate the cost competitiveness and fossil CO2 emissions of energy transition related investments
Part 2 of the forest carbon markets series, based on the report, "Forest Carbon Markets: How demand for forest carbon credits is shaping wood markets"
Part 1 of the forest carbon markets series, based on the report, "Forest Carbon Markets: How demand for forest carbon credits is shaping wood markets"