Guidebook for Designing and Managing Rights-of-Way for Carbon Sequestration and Biomass Generation (2015)

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10 Overview The scientific consensus is that the Earth’s climate is changing as a result of human-caused emissions of greenhouse gasses (GHGs) and that a changing climate poses severe risk to human and ecological systems. Many of the anticipated impacts of climate change, including higher temperatures, rising sea levels, and more severe storms will directly affect transportation systems physically and at a policy level. In response, the public and private sectors have developed both voluntary and regulatory mechanisms to limit and reduce GHG emissions. One of the outcomes of these efforts is the emergence of carbon offset markets, where market participants can buy, sell and trade instruments—carbon offsets—that represent the reduction, avoidance or sequestration of GHGs. One carbon offset is equivalent to the reduction or removal of one metric tonne of carbon dioxide equivalent (tCO2e). While these markets may eventually open up new revenue opportunities for DOTs, it is important to note that these markets are currently still developing. In particular, the markets for agriculture, forestry, and other land-use carbon sequestration offsets are some of the least developed. The nascence of these markets limits demand and leads to weak pricing, presenting a challenge to DOTs seeking to monetize changes to their vegetation management practices through carbon offsets. Current carbon offset prices are generally not sufficient to recover the vegetation establishment and transaction costs of carbon sequestration projects in the highway ROW. Developing carbon sequestration projects in the ROW is further hindered by considerations about motorist safety and long-term asset management. A primary method for enhancing carbon sequestration is through the planting of trees. The potential safety risk associated with planting trees in the highway ROW is well established and planting trees is only permissible in areas outside of the clear zone, significantly limiting the total area of ROW available for project imple- mentation. Perhaps the more significant constraint is the common requirement that carbon sequestration projects be committed to maintaining and monitoring for a minimum period of 40 years to more than 100 years. These timeframes are well beyond what is typically planned for by most DOTs. That said, these limitations may not rule out all possible projects and some may not hold in the future. Moreover, if a DOT is motivated by more than pure monetary gain, it may still be able to benefit from project activities that result in increased carbon sequestration, even if they do not produce saleable carbon offsets. DOTs can generate education and reputation value by implementing projects that showcase environmental leadership. Moreover, the types of project activities that increase carbon sequestration often have other environmental co-benefits such as improvement to local air quality, aesthetic enhancement, and enhanced storm water filtration. C H A P T E R 2 The Carbon Offset Market: A Primer for DOTs

The Carbon Offset Market: A Primer for DOTs 11 This chapter describes the basics of carbon sequestration, types of project activities that tech- nically can be implemented in the ROW, the current state of carbon offset markets and protocols to bring projects to market, the considerations for selecting a potential site and vegetation types, and how to conduct an evaluation of a potential opportunity. What Is Carbon Sequestration? Terrestrial carbon sequestration is the process through which carbon dioxide (CO2) from the atmosphere is absorbed by plants through photosynthesis and stored as carbon in plants and soils. Figure 2 illustrates the process. Most scientists believe that implementing management practices that enhance terrestrial carbon sequestration can reduce atmospheric concentrations of CO2, thus mitigating some of the effects of global climate change. However, to be effective, the stored carbon must be sequestered in long-lived “pools.” The major terrestrial carbon pools are above-ground living woody biomass (e.g., the trunks, branches, and limbs of trees and other vegetation) and soil organic matter (e.g., decomposed and partially decomposed biomass and microorganisms). Carbon is also stored in dead organic matter (e.g., lumber in structures, fallen branches, leaf litter, and standing dead trees) and below-ground living biomass (i.e., the living biomass of root systems) (Intergovernmental Panel on Climate Change, 2003). Terrestrial carbon sequestration can be enhanced primarily in two ways: • Increasing the amount of carbon stored in living above-ground biomass by increasing the amount of woody biomass. This can be accomplished by leaving plants in place that otherwise would be removed or increasing the amount of woody vegetation by either establishing new vegetation or adopting management practices that provide for existing vegetation to grow larger and Source: TERC Figure 2. Terrestrial carbon sequestration process.

12 Guidebook for Designing and Managing Rights-of-Way for Carbon Sequestration and Biomass Generation • Increasing the amount of carbon stored below ground in soils by increasing the amount of soil organic matter, decreasing the loss of soil organic matter, or a combination of both. Increased plant growth, less plant removal, and less soil disturbance generally aid in increasing soil organic matter. Enhancing Above-Ground Biomass Carbon Sequestration There are two primary methods of enhancing above-ground biomass carbon sequestration. The first is to change management practices so that perennial vegetation is allowed to grow longer and thus store more carbon. This could include extending harvest rotations, avoiding deforestation, or permanently setting aside an area for conservation. These types of activities are generally not applicable to the highway ROW since the limited forested areas along highways are not managed for timber production and little opportunity exists to increase the rate of carbon sequestration above what already occurs. The second is to plant additional perennial vegetation so that more carbon can be stored. This approach is known as afforestation when it is applied to lands that previously did not have perennial vegetative cover or reforestation when it involves the restocking of existing forests or woodlands. In urban environments this method is referred to as urban forestry. These types of activities may be applicable to the highway ROW, if they are conducted in a manner consistent with other DOT management priorities such as motorist safety. Enhancing Soil Carbon Sequestration There are also two primary methods for enhancing soil carbon sequestration. The first is to increase the amount of organic matter incorporated in the soils by maximizing the return of plant biomass to the soil. This might be accomplished by converting annual croplands to perennial grasslands; or by increasing species diversity; or replacing existing species with better adapted, higher producing species in existing grasslands. Generally native or improved perennial grasses can produce more biomass than annual crops and non-native grasses. These types of activities may be applicable to the highway ROW. The second method is to decrease the rate at which soil organic matter is lost to soil disturbance and erosion. This can be accomplished by reducing soil disturbances from livestock grazing and cropland tillage. These types of activities are generally not applicable to the highway ROW since lands along highways are not typically subject to these types of disturbances. Sequestration Activities Potentially Applicable to the Highway ROW Table 3 summarizes the types of carbon sequestration activities that might be applicable to the highway ROW and notes some of the potential constraints. While each of these project activities is technically applicable to the ROW context, implementation of these activities in a manner that results in saleable carbon offsets is subject to additional requirements and guidelines and market constraints. Carbon Offset Markets, Standards, and Protocols Carbon offsets are tradable instruments that represent the reduction or removal (i.e., seques- tration) of GHGs below a business-as-usual level. Offsets are typically denominated in tCO2e. While a wide variety of activities could result in a net decrease in GHGs, not all of these activi- ties may be able to generate saleable offsets. To generate a saleable offset, the activity must be

The Carbon Offset Market: A Primer for DOTs 13 implemented in accordance with strict eligibility, accounting, and verification rules, variously called “protocols” or “methodologies.” These rules, promulgated by various offset issuers, are intended to provide offset buyers assurance that the offset project results in credible GHG reduc- tions or removals. To be considered credible, a project must meet five quality criteria: Real—Projects should result in actual emissions reductions or removals (i.e., sequestration) and not be the result of incomplete or inaccurate accounting. The basis for issuing offsets should be the net emissions reductions or removals. Additional—Projects should result in emissions reductions or removals that are in excess of those that would have occurred in the absence of the project. Projects that are required to be undertaken for a regulatory purpose or are otherwise a common practice are not considered additional. Permanent—Projects must result in reductions or removals that will not be reversed at some future time. In order to guard against the risk of a reversal, sequestration projects are often required to set aside a percentage of offsets or must commit to long-term management horizons ranging from several decades to more than a century. Verifiable—Projects should be audited by an independent third party to ensure they conform to eligibility requirements, that monitoring and reporting procedures are in place, and that the project activities have actually been implemented. This review typically occurs both prior to and after implementation, and is ongoing through the life of the project. Enforceable—As a tradable commodity, project offsets must have clear property rights established through a contractual assignment or other legal instrument. These legal instruments should have a mechanism to ensure program rules are followed and to spell out who bears the risk of project failure. Project offsets should also be serialized and accounted for in a transparent tracking and registration system, often called a registry. Size and Scale of Carbon Offset Markets In 2011, the total value of the global market for new carbon offsets exceeded $3.8 billion, representing 379 million tCO2e (Kossy and Guigon, 2012). Table 4 shows carbon offset transac- tions in 2011 according to primary market. The carbon offset market is composed of compliance and voluntary segments. While the compliance market dwarfs the voluntary market both in terms of volume and value, compliance markets are overwhelmingly composed of projects related to implementation of the Kyoto Protocol, and, as such, are not accessible by project developers in the United States. Activity Description ROW consideration Afforestation/Reforestation Planting trees to establish or re- establish forest Trees pose potential risk to motorist safety, requires substantial acreage to be profitable Urban forestry Planting trees in urban and other developed areas Trees pose potential risk to motorist safety Restoration of native vegetation Replace low biomass producing vegetation with higher biomass vegetation Generally compatible Table 3. Carbon sequestration activities potentially applicable to the highway ROW.

14 Guidebook for Designing and Managing Rights-of-Way for Carbon Sequestration and Biomass Generation Voluntary Carbon Offset Markets Until U.S. compliance markets more fully develop, the more significant market segment for U.S.-based projects is the voluntary offset market. For-profit corporations are the primary drivers of the voluntary offset market. While individual motivations vary in general, buyers purchase offsets either to fulfill voluntary pledges to mitigate their own GHG emissions or in anticipation of some future regulatory obligation. While some buyers seek out projects with “storytelling appeal” aligned with their customers’ interests, many buyers are simply motivated to find the lowest-cost reputable offset (Peters-Stanley et al., 2011). In order to ensure that the offsets purchased result in credible emissions reductions, buyers prefer to acquire offsets from projects that have been vetted and issued by an offset standards organization. These offset standards organizations have developed specific procedures and pro- tocols that projects must follow in order to be issued carbon offsets. The leading standards orga- nizations in North America, measured by market share of offsets issued in 2011, are: Verified Carbon Standard; Climate Action Reserve; and American Carbon Registry (Peters-Stanley and Hamilton, 2012). Verified Carbon Standard The Verified Carbon Standard (VCS, v-c-s.org) is the most widely used offset standards program in the voluntary market, accounting for 58% of global and 34% of North American voluntary market transactions in 2011 (Peters-Stanley and Hamilton, 2012). Rather than directly developing project protocols, VCS provides quality assurance standards for project proponents and other interested parties to develop their own protocols and procedures for the critical review and approval of those protocols. VCS refers to project protocols as methodologies. In addi- tion, VCS allows projects to follow methodologies developed under the Kyoto Protocol’s Clean Development Mechanism (CDM) and certain Climate Action Reserve (CAR) methodologies. In addition to providing a framework for protocol development, VCS also specifies the procedures and guidelines for independent third-party validation and verification. VCS-issued carbon offsets are called verified carbon units (VCUs). Climate Action Reserve The CAR (climateactionreserve.org) is the second-most utilized voluntary carbon offset pro- gram, accounting for 12% of global and 30% of North American voluntary market transac- tions in 2011 (Peters-Stanley and Hamilton, 2012). CAR directly develops project protocols that include project-level eligibility criteria, accounting rules, and validation and verification proce- dures in a single document. CAR-issued carbon offsets are called climate reserve tons (CRTs). The protocols developed by CAR also served as the basis for the initial protocols adopted by California rulemakers to generate compliance carbon offsets under that state’s cap-and-trade program. Volume (million tCO2e) Value ($, millions) 2010 2011 2010 2011 Compliance market 69 87 414 569 Voluntary market 265 292 3,205 3,319 Total 334 379 3,619 3,888 Source: World Bank State and Trends of the Carbon Market 2012 (Kossey and Guigon, 2012) Table 4. Carbon offset transactions volumes and values by primary market 2010–2011.

The Carbon Offset Market: A Primer for DOTs 15 American Carbon Registry The American Carbon Registry (ACR, americancarbonregistry.org) is the third most utilized voluntary carbon offset program accounting for 6% of global and 14% of North American voluntary market transactions in 2011 (Peters-Stanley and Hamilton, 2012). ACR relies on project proponents and other interested parties to develop project protocols. New protocols are subjected to a rigorous scientific review process. ACR also allows projects to follow methodologies developed under the Kyoto Protocol’s CDM. ACR also specifies the procedures and guidelines for independent third-party validation and verification. ACR refers to project protocols as methodologies. ACR-issued carbon offsets are called emissions reduction tons (ERTs). Compliance Carbon Offset Markets Globally, the compliance market for carbon offsets is driven by implementation of the Kyoto Protocol—the international treaty that set a goal for most industrialized countries to reduce their GHG emissions. Under the rules of the Kyoto Protocol, carbon offsets can only be generated from projects in developing countries and former Soviet bloc countries. While U.S.-based projects are not eligible for the Kyoto offset compliance market, there are two important domestic compliance programs that allow U.S.-based carbon offsets—the Regional Greenhouse Gas Initiative (RGGI) and California’s Cap-and-Trade program. Regional Greenhouse Gas Initiative The RGGI is a mandatory, regional cap-and-trade program targeting the electric power indus- try in nine northeast and mid-Atlantic states. The program establishes a regional cap on carbon dioxide emissions from power plants through the issuance of a finite number of tradable emis- sions allowances. Capped entities are required to purchase allowances equal to their emissions through a quarterly auction. Over time, the number of available allowances is reduced, effectively requiring capped entities to reduce their emissions. The program also allows capped entities to meet up to 3.3% of their compliance obligation by acquiring qualifying carbon offsets including afforestation and reforestation. The RGGI forest protocol was updated in 2012 and is ultimately based on the Forest Project Protocol developed by CAR. To date, no carbon offsets have been issued by RGGI because there is no market incentive to do so, as the program is over-supplied with emissions allowances and allowance prices are not expected to exceed about $7 per tCO2e (Regional Greenhouse Gas Initiative, Inc., 2012). The combination of very low allowance prices and protocol restrictions (see discussion under Climate Action Reserve above) makes pursuit of RGGI-issued carbon offsets an unlikely path- way for sequestration projects developed in the highway ROW at the time of publishing this Guidebook. California Cap-and-Trade California’s Global Warming Solutions Act of 2006 (Assembly Bill 32 or AB 32) requires the state to reduce GHG emissions to 1990 levels by 2020. One of the ways the state intends to meet this goal is through a mandatory cap-and-trade program. The program caps GHG emissions through the issuance of a finite number of tradable emissions allowances. Over time, the number of available allowances is reduced, effectively requiring capped entities to reduce their emissions. Unlike the RGGI program, the California program regulates all sources with emissions above a certain threshold—25,000 tCO2e annually.

16 Guidebook for Designing and Managing Rights-of-Way for Carbon Sequestration and Biomass Generation Under the program rules, capped entities can meet up to 8% of their compliance obligations with carbon offsets. This equals approximately 201 million tCO2e through 2020 (Hernandez, 2012). The California Air Resources Board (CARB), the regulator charged with implementing the program, has adopted four project types eligible to be awarded Cap-and-Trade-compliant carbon offsets—including afforestation and reforestation and urban forestry projects. Each of the project protocols is derived from a protocol originally developed by CAR. Project Development and Origination Process While there is some variation in the specific sequence of events, there are some common steps a project must go through in order to bring a carbon offset to market. Notably, developing carbon offset projects, and in particular those involving carbon sequestration activities, is a complex and highly technical undertaking that involves a substantial commitment of time and money. Figure 3 below provides a generalized overview of the process. Feasibility Assessment Prior to developing a project, it is prudent to assess the technical and economic feasibility of the project concept. The key elements of a feasibility assessment are the identification of an applicable protocol or methodology, the preliminary identification of project location, vegetation selection, estimation of sequestration potential, and a preliminary financial analysis. Guiding a DOT through this type of feasibility analysis to determine if a project is worth pursuing further is the primary purpose of the Carbon Sequestration Feasibility Tool described in detail in the Feasibility Toolkit. If a decision is made to move forward with a project, it is advisable to consult with a professional project developer to review findings of internal feasibility assessment before moving forward with formal project development. Figure 3. Steps to bring a project to market. Marketing Monitoring, verification, and offset issuance Implementation, validation, and project registration Project planning and documentation Feasibility assessment

The Carbon Offset Market: A Primer for DOTs 17 Identify Applicable Protocol or Methodology The pre-development feasibility analysis should include the identification of an applicable protocol or methodology. Each offset program has different project eligibility rules, management requirements, and carbon accounting procedures. Determining if the proposed project complies with these criteria is critical for generating saleable carbon offsets. While some programs allow project developers to propose new methodologies, this approach is costly, takes years to move through the process, and may not result in a viable protocol. That said, it may be worth pursuing the development of a protocol if the cost and effort were shared by many states through a representative body. The status and applicability of current methodologies for project types suitable to the highway ROW from the leading offset programs are discussed below. Site Selection The assessment of a project’s feasibility should also include an evaluation of the areas available for project implementation. Site selection should con- sider project eligibility requirements, land tenure, and compatibility with DOT management considerations. Each carbon offset program has different project eligibility rules that specify where projects can be implemented. In general the eligibility requirements limit project implementation to specific land uses or conditions. A com- mon requirement for carbon sequestration projects is that the project must be located on lands that have not been cleared of vegetation within a minimum period of time, typically 10 years. This requirement is in place to avoid the incentive to clear vegetation in order to claim credit later for carbon seques- tered from revegetation. Another common requirement of carbon offset programs is that projects be maintained for long periods of time. This requirement not only binds the project proponent to maintain the area in its improved condition, but also to continue to monitor the project and verify to the carbon offset program that all terms and conditions continue to be met. The term of the project commitment ranges from several decades to more than a century. Importantly, all carbon offset programs require that project proponents have a clear legal claim to the GHG benefits generated by the project and projects should only be implemented where these rights can be clearly established. For DOTs, this essentially restricts eligible sites to property held in fee simple. Where the DOT’s title interest is limited to an easement, developing an offset project is more problematic. In such circumstances, offset issuers often require that the easement be amended or require other documentation to clarify which party has the right to be issued carbon offsets. Sites should also be selected in order to minimize conflict with the DOT management con- siderations described in the preceding chapter. For example, tree-planting project sites should be located outside of the clear zone or otherwise located where project activities will not pose a risk to motorist safety. Likewise, projects should be implemented in areas where they will not conflict with other current or planned uses. This is especially important given the requirement that projects make long-term commitments to maintain and monitor project activities. Additionally, potential sites should be subjected to a context-sensitive evaluation that considers the sites’ environmental, economic, and community attributes; engages local stakeholders; and inventories potential issues and concerns. The Feasibility Toolkit includes a checklist of envi- ronmental, economic, and community attributes likely to be encountered in the development of a carbon sequestration project in the ROW. For further understanding of context-sensitive site selection and project development, see contextsensitivesolutions.org. Key elements of feasibility assessment • Identify applicable protocol or methodology • Site selection • Vegetation selection • Estimate sequestration potential • Examine financial feasibility

18 Guidebook for Designing and Managing Rights-of-Way for Carbon Sequestration and Biomass Generation While offset issuers generally do not specify a minimum acreage for a project, given current market conditions, professional project developers look for projects offering annual emission reductions on the order of 20,000 tCO2e. While carbon sequestration rates vary by species and growing conditions, in order to achieve this threshold, an afforestation project would require an area at least 5,000 acres in size. Grassland and urban forestry projects would require sub- stantially larger tracts of land, given their higher establishment costs and lower rates of carbon sequestration. Vegetation Selection Once a potential site, or sites, has been identified, the next step is to identify the mix of species and planting arrangements the project would likely include. The goal is to identify those plant species that are 1) suitable to the site’s growing conditions, 2) adapted to survive and thrive in the roadside environment, and 3) able to maximize the quantity and rate of carbon sequestration. Notably, offset issuers often require that project proponents design projects so that they encourage a diversity of native or naturalized species. In the pre-development stage it is not necessary to develop a specific landscape plan—this is required during actual project development—but it is important to get an understanding of the scale of a project’s sequestration potential and establishment costs by estimating the type and number of species. The categories of growing conditions to consider include macro-climatic and micro-climatic variables, soil type and conditions, topography, and hydrology. Climatic variables that influence plant growth include seasonal temperature ranges, length of growing season, amount and timing of precipitation, and wind exposure. Soil characteristics that influence plant growth and survival include surface pH, texture, drainage, structure, compaction, contamination, depth, and avail- able nutrients. Topographic features to consider include slope, aspect, and surrounding terrain, all of which influence sunlight exposure. Hydrological factors to consider include drainage and propensity to flooding, the presence and relative location of ground water, and surface water features. Each of these factors will influence the ability of a plant species to grow and survive, with most species best adapted to a specific combination of conditions. It is not enough for a particular species to be generally adapted to a given area; the selected species must also be well suited to survive and thrive in the roadside environment. Roadside environ- ments are typically harsher than those found in the natural environment. These harsh growing conditions make it more difficult to establish and maintain plantings. Commonly encountered conditions include extensive soil disturbance and compaction, drier or wetter than normal soils, exposure to vehicle emissions and de-icing chemicals, and pressure from invasive and noxious weeds. The type of vegetation selected for a roadside planting should be able to tolerate these conditions. Special attention should also be paid to the quality of plant materials and techniques used to establish plantings. Many DOTs have developed lists of species adapted to the roadside environment. These lists also frequently include information about a species’ preferred growing conditions. Where state- wide lists do not exist, there may be other regionally-specific lists developed by municipalities, regional planning organizations, or local agriculture extension services. A final factor to consider in plant selection is the quantity and rate at which selected species sequester carbon. The quantity and rate of carbon sequestered is directly related to the accumu- lation of above-ground and below-ground living biomass—that is, the dry weight of all living plant materials including roots, trunks, and branches. The carbon content of vegetation is fairly consistent across the type of plant material and plant species, and is between 45–50% on a dry- weight basis. While all plants sequester carbon, trees sequester considerably more, given their

The Carbon Offset Market: A Primer for DOTs 19 size. Fast-growing trees sequester carbon more quickly than slow-growing trees, yet slower-growing trees tend to live longer and therefore sequester more carbon over their lifetime. Where there is no plan in place to ensure that fast-growing, short-lived species are harvested and utilized in a long- lived wood product, e.g., dimensional lumber, the better choice is to select a long-lived species. In choosing among long-lived species, larger tree size at maturity should be prioritized. Estimating Potential Volume of Carbon Offsets The quantity of offsets generated is a function of project size, sequestration rate, and discounts applied to satisfy protocol requirements. A number of tools are available to help estimate the quantity of carbon sequestered by veg- etation, each appropriate for a different context. At this stage, the purpose of using such a tool is to provide a rough estimate of the carbon sequestration potential of the project. It should be emphasized that the estimates provided by these tools do not satisfy the project carbon accounting that will be required during full project development. They should be used only to provide a sense of scale and should be conservative. For afforestation projects, the most appropriate tool is the Reforestation Afforestation Project Carbon On-Line Estimator (RAPCOE), developed for the U.S. Environmental Protection Agency (U.S. EPA) and based on data developed by the U.S. Forest Service. The tool allows a user to select a project location, specify baseline conditions, and designate the acres of a given forest type that will replace the baseline condition. It is important to note that these estimates are available only for generic forest types and not for a specific planting composition. (See http://ecoserver.env. duke.edu/RAPCOEv1) The RAPCOE tool makes certain assumptions about the rate of land-use change in order to determine the baseline condition. The most appropriate scenario for the highway ROW context is “pastureland conversion.” While the conversion rate assumption is plausible for ROW projects, the leakage estimates are not plausible and should be modified to 0%. This is because afforestation of lands in the ROW is unlikely to result in a land-use conversion outside of the project boundaries. One shortcoming of the RAPCOE tool is that it only provides carbon sequestration data for the first 20 years of a project. In order to model a project’s carbon sequestration potential for a longer period, the user must manually look up the volume of accumulated tCO2e and calculate an annual sequestration rate. For a given forest type, these values can be looked up by selecting the forest type on the “Step 2. Set the project size” page of the RAPCOE tool. This average annual sequestration rate can then be entered into this Guidebook’s accompanying Afforestation & Soil Pro Forma in the Feasibility Toolkit. For urban forest projects, this Guidebook’s accompanying Urban Forest Pro Forma tool (part of the Feasibility Toolkit) has integrated sequestration look-up tables for urban forest sequestration listed in the U.S. Energy Information Administration’s (EIA) Method for Calculating Carbon Sequestration by Trees in Urban and Suburban Settings (U.S. Department of Energy, EIA, 1998). These tables list carbon sequestration per tree age for 100 different tree species organized into six categories. The Urban Forest Pro Forma tool allows the user to select any of these six categories to derive a project’s gross carbon sequestration. There are no tools for estimating changes in soil carbon applicable to the highway ROW context. In order to provide a sense of scale estimate of the rate and quantity of carbon a given project activity may sequester, the project proponent should review the academic literature to identify similar projects that may have quantified changes in carbon stocks. The types of studies that would likely be most helpful are those that look at the carbon sequestration rates of projects that convert annual croplands to native perennial grasses.

20 Guidebook for Designing and Managing Rights-of-Way for Carbon Sequestration and Biomass Generation It is important to use such values cautiously, since they may over-represent the project potential. Since existing ROW grasslands are already in perennial vegetative cover, the existing ROW vegetation is already sequestering some carbon, whereas annual croplands can actually result in net emissions of GHGs due to cultivation, soil loss, and biomass harvest. This is the approach used in this Guidebook’s accompanying Feasibility Toolkit. Protocols typically require that projects account for the emissions from the combustion of fossil fuels associated with the establishment and maintenance of a project. The default emissions factor for establishment and maintenance activities for urban forest projects is 4.17 kgCO2e per tree per year and 90 kgCO2e per acre in the first year for afforestation and soil carbon enhancement project types. In order to mitigate the risk of intentional or unintentional project reversals, protocols also typically require projects to contribute a percentage of offsets to a buffer pool. Each offset issuer has different procedures for determining the risk of a project reversal with the percentage of credits required to be set aside ranging from 10% to 60%. The default percentage in the Feasibility Toolkit is 15%. A buffer pool discount is not applied to the urban forest project type because it is assumed, per the protocols, that any project reversals are made up for annually by replanting lost trees. In 2011, the average price for a carbon offset in the voluntary market was about $6 per tCO2e. While the implementation of policy frameworks designed to set a price on GHG emissions may have some positive effect on carbon offset prices, they are not expected to result in prices in excess of $30 per tCO2e over the near to medium term. The default offset price in the Feasibility Toolkit is $10 per tCO2e. Examine Financial Viability The purpose of the financial analysis is to determine if expected revenues would be sufficient to recover expected costs. For carbon sequestration projects, expected revenues are a function of the quantity of offsets generated and the price received for those offsets. Expected costs include those associated with plant establishment and maintenance activities as well as the “transaction costs” associated with bringing the project to market. It is vital that initial estimates of costs and revenues in the analysis are conservative, since much uncertainty about the ultimate design of the project remains. Those projects that cannot demonstrate profitability or are only marginally viable at this stage are not likely to withstand additional scrutiny by project financers during formal project development and should not be pursued further. Typical project development and transaction costs, as well as potential project revenues asso- ciated with the three project types that are suitable for the ROW are discussed below. Additionally, the pro forma tool included in the Feasibility Toolkit allows the user to calculate the net present value of a proposed project’s cash flow at various geographic scales and carbon offset prices. The Feasibility Toolkit includes default values for discount rate; establishment, maintenance, and transaction costs; sequestration rates; and carbon price based on a review of the literature conducted for this research project. These default values can be modified by the user in order to develop a customized analysis. Project costs—Typical project costs include vegetation establishment and maintenance as well as transaction costs, the costs associated with project development, documentation, monitoring, reporting, and marketing. Some of these costs only occur once while others are ongoing. Trans- action costs can easily exceed several hundred thousand dollars, generally making development

The Carbon Offset Market: A Primer for DOTs 21 of small projects prohibitive. The various costs are described briefly below and in more detail in the Feasibility Toolkit. • Vegetation establishment and maintenance—The initial and ongoing labor and material costs associated with plant selection, site preparation, planting, weeding, and replanting. Total establishment and maintenance costs are a function of project size (e.g., acres) and the unit cost of establishment and maintenance (e.g., dollars per acre). These costs can vary widely depending on project activity, geographic region, preexisting site conditions, and terrain. • Project documentation—The initial cost of preparing a report describing the planned project activities, the monitoring and quantification procedures that will be used to estimate changes in the level of GHG emissions or removals, and how the project meets the eligibility requirements of a given protocol. • Define baseline scenario—The initial cost of producing an estimate of the level of GHG emissions or removals that most likely would occur without implementation of the project. Baseline emissions or removals are those associated with current management activities. This task includes an initial inventory of project carbon pools. • Project validation—The costs for the pre-implementation review of a project by an indepen- dent third party to confirm project eligibility, the adequacy of monitoring and quantification procedures, and the accuracy of the baseline scenario. Some offset programs require these activities to occur post implementation. • Monitoring and data collection—The ongoing cost associated with collecting, recording, com- piling, and analyzing data to support the quantification of changes in emissions or removals. • Project verification—The periodic post-implementation review by an independent third party to check the project’s adherence to the stated project design, record keeping and data collection systems, and calculations used to estimate credits. • Carbon credit brokerage fees—An ongoing fee, typically in the form of a percentage of a project’s total credits, charged by market brokers who serve as intermediaries between buyers and sellers of carbon offsets. • Registration/issuance fee—An ongoing fee, typically a fixed amount per credit, charged by the offset issuer or registry to track credits in voluntary markets to provide accountability and assurance regarding issuance, holding, and acquisition of credits. Project revenues—Project revenues include both the value of the sale of offsets and potential savings from avoided or reduced maintenance costs that might be realized as a result of project implementation. The various revenues are described briefly below and in more detail in the Feasibility Toolkit. • Gross carbon offset revenues—The total proceeds from the sale of carbon offsets. These pro- ceeds are a function of the quantity of offsets generated by a project and the price for which those offsets are sold. • Avoided maintenance cost—In some cases, a sequestration project may displace or reduce the need for traditional maintenance activities on the ROW, like mowing, resulting in a cost savings to the agency. However, the default assumption in the Feasibility Toolkit is that no such savings are likely to occur since project implementation is likely to occur in areas where DOTs have already reduced or eliminated routine mowing. Finally, it should be noted that the Feasibility Toolkit does not seek to quantify the potential value of co-benefits that might result from project implementation, such as reduced storm water treatment costs, improvements to local air quality, and improved aesthetics. Project Planning and Documentation If, after completing a feasibility assessment, a project proponent decides to proceed, the next step is to assemble the necessary information to complete a formal Project Design Document (PDD).

22 Guidebook for Designing and Managing Rights-of-Way for Carbon Sequestration and Biomass Generation A PDD summarizes the project’s activities, defines a project’s geographic boundaries, docu- ments how the project meets eligibility requirements, estimates the project’s GHG benefits, and describes the monitoring plan and procedures. Project implementation must follow the PDD exactly, as it is the basis by which a project will be formally evaluated for carbon offset issuance. It is therefore critical that the PDD be carefully thought through. As noted above, developing a carbon offset project is a highly technical endeavor. It is com- mon for a landowner to work with a professional project developer to guide a project through the planning and documentation phase. These project developers are often professional foresters or restoration experts that specialize in carbon offset projects. The project developer will work with the project proponent to define and describe the specific activities the project will implement. The definition of project activities should include a vegetation establishment and maintenance plan that describes project timelines as well as the techniques and resources that will be employed. The delineation of the project’s geographic boundaries will need to be documented with proof of ownership or control. The PDD will explain and document how the proposed project activities meet the eligibility requirements of the applicable protocol. This may require researching and assembling evi- dence, such as satellite imagery or aerial photographs, to document the project area’s historic land-use characteristics. The PDD will also include an estimate of the level of GHG removals expected through project implementation. This is accomplished by comparing the effect of the project activities to a business-as-usual, or baseline, scenario. In order to determine the baseline scenario, it is first necessary to perform an initial inven- tory of the carbon stocks in the project area. Next, a prediction is made as to what would likely happen to these starting conditions in the future and how project implementation will modify that outcome. The specific procedures for performing this analysis vary by offset issuer. The monitoring plan includes a description of the measurement techniques that will be used to quantify the actual GHG removals achieved by a project. Another critical element of this phase of project development is the arrangement for project financing. Since revenue from the sale of carbon offsets does not accrue until after the project has been implemented, arrangements must be made to pay for the upfront costs of project develop- ment. The required capital is typically provided through equity investments or debt financing, and can be either provided by the project developer, a third-party financing partner, or a designation of agency funds. Validation, Registration, and Implementation Following completion of the PDD, a third-party validator reviews the PDD to ensure that the project meets the requirements of the carbon offset issuer and the applicable methodology. Project validation is an iterative process where the validator may request additional information or adjustments to the PDD before a final report is issued. Following validation, the project can be officially registered with the carbon offset issuer. Registration consists of submitting the PDD, the validation report, and other supporting documentation. Key elements of project planning and documentation • Identify and assemble project team • Define project activities and boundaries • Document project eligibility • Perform inventory and document baseline and project sequestration scenarios • Define monitoring plan • Prepare formal project documentation • Arrange project financing

The Carbon Offset Market: A Primer for DOTs 23 Once the project has been registered, project activities are eligible for implementation. It is important that implementation follow exactly the activities described in the PDD, as the issuance of carbon offsets depends on the future verification that the project has followed these plans. Monitoring, Verification, and Offset Issuance While the procedures and intervals vary, each carbon offset issuer requires ongoing project monitoring and verification. Monitoring consists of recording, compiling, and analyzing data to support the quantification of emissions reductions and must follow the methodology laid out in the PDD. Verification is the periodic review—every five years—by a third-party auditor to check that the project is being implemented as described in the approved PDD. During verification, the auditor also reviews and certifies the volume of carbon the project has sequestered. The audit is based on the data collected through project monitoring. Once the auditor has completed a final verification report, the project proponent can then formally request issuance of carbon offsets from the offset issuer. Marketing A brokerage firm that specializes in arranging carbon offset market transactions typically manages the marketing and sale of carbon offsets. These firms do not buy the project carbon offsets directly, but rather identify buyers and negotiate contract terms in exchange for a commission. Existing Protocols and Methodologies Verified Carbon Standard Afforestation protocols—While VCS has not approved an afforestation/reforestation protocol, several U.S.-based afforestation and reforestation projects have registered under VCS by following a CDM-approved protocol. Only one CDM-approved methodology for afforestation and reforesta- tion projects is currently applicable to the highway ROW context: “AR-ACM0003: Afforestation and reforestation of lands except wetlands” (CDM Executive Board, 2012). The methodology details the means for determining additionality and calculating a base- line scenario, defined as following the CDM’s “combined tool to identify the baseline scenario and demonstrate additionality in A/R (Afforestation/Reforestation) CDM project activities” (CDM Executive Board, 2007) as well as the methods for calculating net changes in the above- ground and below-ground biomass carbon pools resulting from project implementation. The approved techniques and procedures for estimating changes in carbon stocks require the physical measurement of key variables, such as the height and diameter of planted trees within designated sample plots. Key project requirements include: • Eligible areas must not have been cleared of native vegetation within the past ten years; • Projects must commit to maintaining sequestered carbon for a minimum of 100 years; and • Based on the outcome of a risk analysis, a certain percentage, with a minimum 10%, of the project’s offsets must be set aside as non-saleable.

24 Guidebook for Designing and Managing Rights-of-Way for Carbon Sequestration and Biomass Generation Notably, VCS does not require projects developed following a CDM-approved methodology to meet a strict definition of forest, as required by other carbon offset standards programs. As a result, it is possible that a tree-planting project in the highway ROW could generate carbon offsets via VCS using a similar pathway to the CDM-approved protocol. Urban forest protocols—There are no VCS-approved methodologies specific to urban forestry project activities. However, it may be possible to develop such projects using a CDM-approved afforestation methodology and seeking VCS registration in a similar manner as the afforestation projects described above. Notably, no example of a project utilizing such a pathway existed at the time this Guidebook was written. Soil carbon protocols—VCS has approved one methodology for projects designed to increase soil carbon sequestration: “VM0021: Soil Carbon Quantification Methodology.” This method- ology is for projects that implement changes to cropland and grassland management practices that result in net increases in soil carbon levels. The methodology is intended to be applicable to a wide range of soil carbon projects from agricultural projects to ecosystem restoration (Earth Partners, 2012). The methodology is identical to the methodology for Afforestation. As written above, it details the means for determining additionality and calculating a baseline scenario—defined as following CDM’s “combined tool to identify the baseline scenario and demonstrate addi- tionality in A/R CDM project activities” (CDM Executive Board, 2007)—as well as the means for calculating net changes in the soil carbon and other pools resulting from project imple- mentation. The approved techniques and procedures for measuring changes in soil carbon levels require the physical sampling and laboratory analyses of key variables within designated sample plots. Key project requirements include: • Eligible areas must not have been cleared of native vegetation within the last ten years; • Projects must commit to maintaining sequestered carbon for a minimum of 100 years; and • Based on the outcome of a risk analysis, a certain percentage, with a minimum 10%, of the project’s offsets must be set aside as non-saleable. The protocol appears sufficiently broad to be applicable to projects in the ROW aimed at enhancing soil carbon levels, such as by increasing species diversity in existing grasslands through the establishment of native grasses. As a result, it is possible that such a project could generate carbon offsets via VCS using this methodology. Climate Action Reserve Afforestation protocols—CAR’s Forest Project Protocol describes the project eligibility criteria, the methods for calculating net changes in carbon pools, and the verification and monitoring requirements for carbon sequestration projects implemented on forestlands. Reforestation projects are one of three eligible project types—the other two being improved forest management and avoided conversion—described in this protocol (Climate Action Reserve, 2012). In general, the CAR protocol is more restrictive than the VCS protocol described earlier, and these restrictions likely preclude use of this protocol for projects developed in the highway ROW. Key project requirements include: • Adoption of management practices to encourage habitat for native wildlife and plant species, • A requirement that projects restore and maintain a minimum density of 10% tree cover,

The Carbon Offset Market: A Primer for DOTs 25 • That project areas be monitored and maintained for a period of 100 years following issuance of any offsets, and • A prohibition on the harvest or removal of reforested or preexisting trees within the project area for a period of 30 years. Urban forest protocols—CAR’s Urban Forest Protocol is the only carbon offset protocol specifically designed for tree-planting activities in urban and other built-up lands. The proto- col describes the project eligibility criteria, the methods for calculating net changes in carbon pools, and the verification and monitoring requirements for such projects (Climate Action Reserve, 2010). Two key restrictions likely preclude the use of this protocol for projects developed in the highway ROW: • Project eligibility is limited to tree-planting activities on lands owned or controlled by munici- palities, universities, or electric utilities and • Project trees must be maintained for a period of 100 years with trees lost to natural or human disturbance, such as disease or land-use changes, required to be replaced. While the protocol in its current form is not applicable to ROW projects, CAR periodically reviews and revises existing protocols and might consider expanding its eligibility criteria if it can be demonstrated that a significant opportunity exists. In making this determination, CAR would seek evidence that a standardized approach for establishing additionality and baseline emissions were possible. Soil carbon protocols—There are no CAR-approved protocols specifically for soil carbon enhancement project activities. While CAR is currently developing protocols aimed at enhancing soil carbon sequestration through implementation of improved agricultural management practices, none of the proposed protocols are applicable to the highway ROW context, as they are narrowly tailored to lands that support crop production. American Carbon Registry Afforestation protocols—ACR has approved one methodology for afforestation and refor- estation projects: “Methodology for Afforestation and Reforestation of Degraded Land.” The methodology describes the eligibility criteria and methods to account for GHG removals from projects that occur on “degraded lands” (American Carbon Registry, 2011). The concept of land degradation is typically associated with poor agricultural management practices, deforestation, overgrazing, and industrial pollution. Several features of the eligibility restrictions included in this methodology restrict its applica- bility to potential projects developed in highway ROW. These restrictions include: • A requirement that projects restore and maintain a minimum density of 10% tree cover, • A requirement that projects be monitored and maintained for a period of 40 years following the project’s start date, and • A requirement that the project be implemented on “degraded lands.” While this methodology may not be applicable to projects developed in the highway ROW, it may be possible to use a CDM-approved methodology, such as AR-ACM0003, described pre- viously, to develop a project via ACR. This approach would essentially remove the “degraded lands” requirement, but would not eliminate the other ACR eligibility requirements described above.

26 Guidebook for Designing and Managing Rights-of-Way for Carbon Sequestration and Biomass Generation Urban forest protocols—There are no ACR-approved methodologies specifically for urban forestry project activities. However, it may be possible to develop such projects via ACR using a CDM-approved afforestation methodology, so long as the project meets ACR’s project eligibility requirements, such as minimum canopy cover and project duration. Notably, no example of a project utilizing such a pathway existed at the time this Guidebook was written. Soil carbon protocols—There are no ACR-approved protocols specifically for soil carbon enhancement project activities at this time. Feasibility Toolkit A DOT interested in evaluating the specific opportunity for developing a carbon sequestration project in its state should use the accompanying Feasibility Toolkit (described in additional detail in Chapter 4) to determine if local conditions are favorable to project development.