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Attention, Public Financiers: Money Is Now Growing on Trees

As polluters pay up for absolution, state treasuries and public pension funds might be able to capitalize on carbon offset credits. Public forests and timberland investments could yield untapped value.

Pennsylvania's Michaux State Forest
Long Pine Run Reservoir in Pennsylvania’s Michaux State Forest. For the 38 states with state forests, a developing global marketplace for carbon offset credits could provide an opportunity to monetize a public asset. (Shutterstock)
Last month, Alaska Gov. Mike Dunleavy introduced carbon management and monetization bills that could be forerunners of similar legislation, in the 38 states with state forests, seeking to capture some of the economic value of global efforts to reduce carbon emissions. Just a month before, a major U.S. oil company promised the government of Guyana, where it has discovered a massive subsea oilfield, a $750 million deal to buy what are called carbon offset credits for local forest preservation. A week later, JP Morgan asset managers cut a deal to buy $500 million of loblolly pine timberland in Arkansas, Mississippi and Oklahoma, with investment analysts pointing to the trees’ hidden environmental value as carbon sinks.

What spurs these actions is a slowly developing global marketplace. In simple terms, carbon offsets are tradable credits earned by property owners and enterprises that take actions to reduce or offset carbon dioxide emissions. Those credits can be sold for hard cash to businesses that pollute, in order for buyers to achieve a zero-carbon or reduced-carbon footprint. An example would be carbon credits earned by large landowners in the Amazon region who refrain from deforestation, which otherwise would yield them a higher land value if exploited for conventional agriculture.

To earn marketable credits, the owners must prove their value to a recognized agency or registry, of which there are several. Once registered and authenticated, these credits can be sold to third parties through private sales or a recognized exchange. Although it is still in a primitive state, there is even a futures market for certain of these tradable carbon offset credits, which adds an element of standardization — and some would say credibility — to what once seemed a pie-in-the-sky concept of economists and environmentalists.

Not unlike with cryptocurrencies, there are die-hard believers that the carbon offset marketplace will eventually explode in scale as world leaders increasingly require industrial polluters to reduce their own emissions or at least buy their way out with offsets. It’s too soon to declare a major trend, but the level of hard cash now moving in this direction looks to be more than just a flash in the pan.

The Alaska initiative includes strategies to monetize both carbon offsets that could be earned from state forestlands as well as carbon capture that could ensue from its oil and gas industry, which of course is the source of the state’s unique Permanent Fund that writes a check to every Alaskan every year. Whether the state can spin gold from straw — or in this case, from forests and underground carbon storage — is yet to be seen. But it’s a sure bet that other governors, legislatures and environmental lobbyists will be keen observers of how that idea moves along.

As for public pension funds, they have been investing in timberland as long-term real assets for decades. Pension funds are deep-pocket investors with multidecade horizons and a definite need for hedges against the salary and benefits inflation that are anathema to their actuarial requirements. Many of the public funds already own timberland outright or through investment partnerships. The central idea was that growing trees with (probably) higher future prices in 25 to 30 years would be a smart bet to pay for the future pensions of rookie police officers and beginning teachers.

Until very recently, these institutional investors did not envision the potential for carbon offset revenues as a supplemental source of investment returns. In fact, over the past decade these timberland investments had been dogs in many public plans’ portfolios, but the COVID-19 pandemic’s supply chain disruption of lumber supplies and the resulting 2021 price spike, along with global price inflation since then, have reawakened interest in these investments. JP Morgan’s pine timberland purchase exemplifies what some deem to be hidden value in such properties, if managed well.

As usual, a good deed rarely goes unpunished. In those states where environmental, social and governance investing is out of favor with vocal politicians, it won’t surprise anybody to see culture-war pushback on this concept. But for those who think beyond their knee-jerk reactions to ESG investments, Alaska’s Republican governor may have an angle that even the oil and gas lobby will find acceptable: the facilitation and monetization of carbon sequestration credits that could not only yield additional revenues to the state but also keep their golden geese laying those royalty-rich eggs in their oilfields while supporting U.S. energy self-sufficiency.

Several governmental professional associations are promoting the concept of putting public assets to work. They should add state forests and opportunities for carbon sequestration on leased public lands to their checklists.

This is still too early in the game to call these separate episodes a movement or a trend, but for state policymakers, revenue managers, environmentalists and public pension trustees and professionals, here’s a topic — and possibly an opportunity — that should not be ignored.



Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
Girard Miller is the finance columnist for Governing. He can be reached at millergirard@yahoo.com.
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