How Wall Street’s Biggest Forest-Carbon Wager Is Starting to Pay Off | Mint

How Wall Street’s Biggest Forest-Carbon Wager Is Starting to Pay Off

How Wall Street’s Biggest Forest-Carbon Wager Is Starting to Pay Off
How Wall Street’s Biggest Forest-Carbon Wager Is Starting to Pay Off

Summary

Aurora Sustainable Lands sold more than $100 million of carbon offsets since buying about 1.7 million acres of U.S. timberlands.

Investors who made one of the biggest timberland purchases in years with plans to make carbon deals said they sold more than $100 million of so-called forest offsets during the gambit’s first year.

Aurora Sustainable Lands, created to carry out the biggest wager yet on forest-carbon markets, said it expects its 1.7 million acres of eastern U.S. forest to annually yield additional offsets worth between $60 million and $150 million at current prices. Aurora paid about $1.8 billion for the properties last year.

Although many carbon-offset schemes have flopped due to dubious environmental benefits and higher interest rates, demand is mounting for pledges from big players in forestry and high finance to leave trees standing and sucking carbon from the atmosphere.

Aurora, previously known as Blue Source Sustainable Forests, is a venture between Anew Climate, one of the country’s biggest offset project developers, and investors led by T. Rowe Price Group subsidiary Oak Hill Advisors, which bought the woodlands spread over 17 eastern states.

Aurora said it has reduced logging on its land by about half and plans to sell offsets everywhere on its properties where trees grow.

“We are changing…from primarily timber revenue to carbon as the main revenue source," Aurora Chief Executive Jamie Houston said. “The greatest value of formerly industrial forests will come from increasing carbon storage."

Big timber companies have entered the offset market previously dominated by nonprofits, land trusts, tribes and timberland investment managers.

Weyerhaeuser, the country’s largest landowner, in September gained approval from an organization that vets environmental credits to proceed with its first sale of forest-carbon offsets. The lumber producer said it is selling offsets tied to about 50,000 acres of mixed hardwood forest in north Maine and has two more carbon projects in the South that are slated for completion next year.

Rival PotlatchDeltic, another big logger, told investors that it is preparing to sell offsets against about 50,000 acres of bottom-land hardwood forest it owns among its pine plantations in the South.

The types of offsets that those firms and Aurora offer prohibit the landowners from removing more wood from the subject properties than the trees can add through growth. The idea is that offset buyers can take credit for the trees remaining standing and the carbon they absorb.

The length of the agreements ranges from a few decades in unregulated, or voluntary, deals to 100 years for offsets sold in California’s regulated cap-and-trade emissions market.

Critics say carbon offsets allow companies to pay a relatively small price to avoid reducing emissions.

Specific to forest offsets—the most popular variety in the U.S.—is the contention that some of the promised harvest reductions are merely theoretical, either because the forests are too remote or rugged to be logged economically or the owners aren’t in the business of clear-cutting. And even when there are fewer harvests on one tract, demand from mills simply shifts logging to other properties, critics argue.

Aurora, like the lumber companies, is marketing offsets from slower-growing hardwood stands, where the price in environmental markets is competitive with what mills would pay for wood. Offsets usually aren’t economical on pine plantations, where trees are grown for lumber and cardboard.

Offset prices have risen as more companies pledge to make up for their emissions without having many ways to do so beyond paying landowners not to cut down trees.

California offsets, considered top quality, have recently sold for between $20 and $25 apiece, each representing a metric ton of sequestered carbon. That is up from less than $14 in 2020 and not quite $10 a decade ago, according to California Air Resources Board records.

Aurora has sold offsets in the voluntary and California markets, Houston said. The buyers have been technology, energy and industrial companies, he said.

James Renouf, director of environment and origination at Edmonton, Alberta’s Capital Power, said the Canadian power producer bought offsets from Aurora because the seller owns the land and can ensure the credits represent real reductions of atmospheric carbon with close monitoring and control of harvests.

“Quality is what buyers want," Houston said. “We hope price follows quality."

Write to Ryan Dezember at ryan.dezember@wsj.com

How Wall Street’s Biggest Forest-Carbon Wager Is Starting to Pay Off
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How Wall Street’s Biggest Forest-Carbon Wager Is Starting to Pay Off
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