A financial analysis of four carbon offset accounting protocols for a representative afforestation project (southern Ontario, Canada)

Abstract

Forestry projects participate in carbon markets by sequestering carbon dioxide equivalent (CO2e) and producing carbon offsets. The creation of forest-based offsets is guided by protocols that dictate how sequestered CO2e is converted into marketable offsets. Existing protocol designs aim to produce offsets that meet sustainability requirements, while providing financial incentives for landowner participation. However, limited Canadian uptake implies that current financial incentives are insufficient to encourage the production of carbon offsets via private landowners. Here we consider various design features of four protocols and their financial implications for an illustrative afforestation project in southern Ontario, Canada. We explore the protocols (two tonne–tonne protocols and two tonne–year protocols) under two afforestation project management systems (“no-harvest” and “harvest” management scenarios). Results indicate that a project that terminates in a harvest is not economically attractive at current CO2e prices under any protocol design at a scale likely to be undertaken in southern Ontario, Canada. Projects that do not conclude in harvest are generally more attractive. Tonne–tonne protocols that pay upfront for sequestered CO2e improve the economic attractiveness of afforestation projects, but the delayed realization of the value of offset credits under tonne–year protocols reduces the economic attractiveness of these projects. We discuss these results in light of the choices facing afforestation project proponents and offset protocol designers (including governments) in general, and provide detailed insights into the financial dynamics of the Canadian case.