Our team at NCX holds the belief that our planet’s forests are subject to colossal market failure. By any account, forests provide trillions of dollars of value to society in the form of climate regulation, biodiversity and wildlife habitat, aesthetics and recreation, forest products, and much more--but the only thing society efficiently values among those is forest products.
The NCX program is designed to address this global market failure by putting carbon on the same economic footing as timber. It pays forest landowners to defer harvesting activity on their properties that they would have otherwise undertaken, increasing the average age of forests across the landscape and, consequently, their standing carbon storage capacity as well. This harvest deferral is turned into credits and sold to buyers: primarily corporations with “net-zero” or other carbon-reduction targets.
On April 1 of this year, NCX launched in the US Southeast. NCX conducted a procurement auction, contracting with over 100 landowners of all types to defer the harvest of over 3.4 million tons of timber in the coming year. We’ll pay each landowner in this cycle $17 per Harvest Deferral Credit (HDC), a unit representing a certain amount of 1-year harvest deferral.
How the NCX program works
NCX runs in 1-year cycles, with a new cycle kicking off every three months. The four cycles each year roughly align with the seasons, so the 1-year program beginning on April 1, 2021, for example, can be called the Spring cycle for that year.
In January through March of this year, interested landowners enrolled by sharing their property boundaries with NCX and receiving an assessment of the carbon potential on their property, expressed in HDCs. (Enrollment for Summer 2021 is open now! And Fall 2021 will open as soon as our Summer cycle closes, covering an even broader geographic area.)
Then came time to bid: landowners expressed the prices at which they were willing to defer timber harvest on their property. (The next section of this post explains why a well-designed procurement auction is so helpful in achieving climate impact.) Bids for our Spring cycle were due on March 8. In the following week, NCX “cleared” the market, anonymizing all landowner bids, assessing their characteristics such as geographic location and landowner size, and then accepting the lowest-priced bids for our procurement quantity.
Why run an auction anyway?
In the NCX program, we recognize that every acre of forest is different. Forest composition and timber values differ widely, but perhaps even more importantly, landowner motivations differ widely, too. So instead of us telling landowners what the price of carbon should be, we allow them to tell us.
This has several important benefits. First, by comparing the prices that different landowners bid into the auction and then selecting the lowest ones, we ensure that society’s climate dollars are spent where they have the most impact. We’re in a climate emergency. The total climate impact of society’s mitigation budget will be maximized when it’s spent well and flowing to the most efficient carbon sinks.
Second, an auction helps ensure equity for landowners. NCX runs what’s called a “uniform price auction”, which means that every landowner is paid the same price for their harvest deferral. This construct makes it fair and simple for landowners—simply decide on the right price for you, and bid. If your bid clears, you’re paid the market-clearing price, which is higher than your bid price for almost all bidders. If your bid doesn’t clear, then you haven’t missed out on anything because “your price” was higher than what the market could pay. It’s not a “first come, first serve” system; landowners don’t have to do extensive research or pay any upfront costs to enroll; all they need to do is understand and express their own motivations and the auction does the rest.
Finally, auctions help sort through the complexity of buyer preferences. Some carbon credit buyers prefer credits sourced in their own state and are willing to pay a premium for them; other buyers prioritize economic empowerment for small family landowners and want to target their payments to properties of that type. As the number of NCX landowner participants grows into the thousands, tens of thousands, and eventually to the millions, auctions will allow buyers to preferentially source across these landowner “cohorts.”
Detailed Spring 2021 results
Spring 2021 participants represent a diverse range of landowner sizes and locations.
In this year’s Spring cycle, our team analyzed bids by dividing them into cohorts based on landowner size (small, medium, large defined in the table above) and state. Within each cohort, we examined the prices and quantities of the bids we received and then calculated the prices that would clear the supply and demand in each cohort. A consistent price of $17 across all cohorts was determined to best serve that purpose in this cycle; in the future, we anticipate modest price differences across cohorts as the market matures.
Drawing participation from across an enormous geographic area and landowners of all types, the launch of NCX demonstrated the appeal of a forest carbon program that is economically sensible, easy to understand, and has free enrollment for landowners. Our procurement auction ensured that NCX climate dollars are flowing to the landowners creating the most efficient, real forest carbon on the landscape. We were thrilled to validate the hypothesis that landowners of all types can be meaningful contributors to climate change mitigation while also improving economic and ecological outcomes on their properties. Join us on the Natural Capital Exchange today!