Case study example: European recycled containerboard mill

In this case study example, a recycled containerboard producer invested approximately 40 million euros into a biomass boiler at its European mill, which houses one average-size machine with a width of 5.0 m and a capacity of around 250,000 tonnes/year.

Before the investment, the mill was fueled with purchased natural gas and, to a small share, biogas from the effluent treatment plant. After the investment, the two existing natural gas boilers remained at the mill as a backup.

The biomass boiler is primarily fed by two major types of fuel. The bio-based fiber fractions of the on-site recycling rejects, which prior to the investment were disposed, count roughly one-fourth of the boiler infeed mass. The balance consists of purchased discarded wood which is collected in a radius of below 100 kilometers. Both of these fuels are estimated to have zero direct fossil CO2 emissions.

The other reject fractions of recycling are mainly plastics and metals, which in this case are disposed of against an assumed fee.

Comparison with and without investment

To evaluate the competitiveness of this investment, a typical exercise is to compare the estimated costs and CO2 emissions with and without it. In our Analytical Cornerstone cost benchmarking tool, this is easy to do, as historical consumption levels are available for comparison, even at the more recent unit cost level.

Given that a single quarter may have significant outliers from the medium-term average, comparing several quarters or annual averages, rather than just a specific quarter, gives a better understanding of the competitiveness.

The annual average cost comparison in 2019-2022, with and without the biomass boiler investment, is shown in the chart below.

Case 1 assumes the biomass boiler investment in 2018, at average industrial user prices of electricity and natural gas, as per reported by Eurostat. In Case 2, there is a biomass investment and energy prices have been replaced by their spot prices. Case 3 and Case 4 assume that there wasn’t a biomass boiler investment, with energy at average and spot prices, respectively.

The cash manufacturing cost analysis includes six categories: fiber, chemicals, energy, labor, recycling reject disposal and other. Fiber and chemical costs are assumed to be the same in both cases for our benchmark product, which is a regular recycled corrugating medium, as the product specification or the paper machine operation does not change. The value of fossil CO2 emission rights has been excluded from this cost analysis.

The investment is likely to reduce cost and fossil CO2 emissions

Altogether, the investment is estimated to reduce gas consumption and therefore direct fossil CO2 emissions by around 90%. Steam consumption is assumed to be quite consistent in both cases, while electricity consumption is likely to somewhat increase in the biomass boiler investment, due to the requirements of solid biomass handling. Even if the prices of biomass have increased in many European regions, they have generally remained more stable than those of fossil fuels and electricity.

At very low electricity and natural gas prices in 2019 and 2020, the competitiveness of the investment may have seemed questionable. However, the benefits became clearer already in 2021 and especially in 2022, when the European spot prices of natural gas and electricity increased to historical highs. Without the boiler investment and especially if this mill would have been at the mercy of spot-priced natural gas and electricity, operational conditions in 2022 could have been unbearable.

Analyzing the capital cost of a biomass investment

Many users of our energy consumption tools also want to analyze the capital cost of the investment. For that, we need to assume factors like the deprecation period, the weighted average cost of capital (WACC) and the investment sum. In this particular case, where the investment sum was known to be 40 million euros, the simulation with typical factors would give a visible, but still very reasonable, addition to the capital cost.

When we combine the cash cost and capital cost into total direct cost, we can conclude that the biomass boiler investment has been competitive, except for extremely low energy cost periods. In addition to these cost benefits, biomass boiler investments also significantly reduce direct fossil CO2 emissions, in this particular case around 300 kg/tonne.

At the spot price of EU carbon permits, which since 2019 has fluctuated in the range of around 20-100 EUR/tonne of fossil CO2, the value of the saved emissions would have been some 6-30 EUR/tonne of paper.

To discover more about our Analytical Cornerstone and energy consumption tool talk to our team today. The tool facilitates carbon emissions benchmarking and offers consumption estimates by machines at every mill and for every product produced.

The post How to estimate the competitiveness and emissions of European biomass boiler investments appeared first on Fastmarkets.

Watch a recording of the webinar here or scroll down to read Glen’s answers to some of the frequently asked questions that came up in the webinar.

1. What is the role of the forest in combating climate change?

Reducing global carbon emissions and removing carbon from the atmosphere are two key levers in the pathway toward keeping global warming at or below 1.5°C, as set out in the 2015 Paris Agreement. The focus of policymakers has until now largely been on reducing emissions by improving energy efficiency and switching to renewable sources of energy. However, because the energy transition is not moving at the necessary pace, policymakers’ focus has broadened out to include carbon removal as a way to reduce net emissions.

Forests contain more carbon than any other biome and play a significant role in the global carbon cycle. They represent a large source of carbon emissions – approximately 20% of carbon emissions globally – and an even bigger carbon sink, sequestering around 40% of global emissions, providing a net annual sink of 8 billion tonnes.

The forest is a low-tech and cost-effective way to tackle climate change, for example by creating new forests and avoiding deforestation. And the forest offers many co-benefits in addition to carbon sequestration, including biodiversity and erosion control.

2. What’s the difference between commercial forests and natural forests when comparing carbon emissions and reductions?

The carbon profile of a forest depends on multiple factors, including the type of forest and whether it’s used for forest sequestration only or to produce forest products.

In general, a permanent carbon sink forest stores a larger volume of carbon than a forest in productive forest management – because an unharvested forest can reach maturity, with larger trees and more carbon in the soil, deadwood, and so on. (There is generally more demand from voluntary credit buyers for projects that not only offer carbon offsets but also present co-benefits.)

Commercial production forests also represent a significant carbon sink and offer other economic and climate benefits. Many argue that the climate benefits are in fact larger with production forests, considering the supply of forest products that substitute less climate-friendly alternatives, for example, lumber to replace concrete and steel in construction, cartons to replace metal, glass and plastic packaging, and biofuels to replace fossil alternatives.

Commercial forests may represent a smaller carbon sink in living biomass, but these other climate benefits, obtained through the ongoing supply of forest products, accumulate over time. And, while an unharvested forest represents a larger carbon sink, once it reaches maturity, it ceases to grow and sequester further carbon.

3. Why are forest carbon pricing mechanisms emerging as a tool for reducing emissions?

Carbon pricing mechanisms have become an important tool in reducing emissions because they reward those that reduce their emissions or remove carbon from the atmosphere, and penalize those that increase their emissions or emit more than their allocated allowance. Carbon credits put a price on carbon to incentivize investments and innovations in technology and behavior that helps us reduce our global emissions.

Forest carbon markets are quickly evolving as the importance of forests in tackling climate change is recognized and rewarded. The global market for forest carbon credits is growing at almost 20% p.a., driven by independent supply from mainly emerging regions, and compliance demand concentrated in North America, Europe and Oceania.

4. How can we measure the impact of the forest carbon credits market on global climate change?

The world has a long way to go to meet its climate goals, and the forest and forest carbon credits market is just one of many levers (albeit an important one).

Although forest carbon credits are already one of the most common types of credits, at around 20% of all credits bought and sold, their use is still in the early stages, and the market is far from reaching its full potential. Only about 25% of global carbon emissions are covered by carbon credits, carbon taxes, and traded emissions allowances.

The direct impact on global temperature of any intervention is difficult to predict, particularly at this early stage in a nascent market. But it’s clear that the world can only meet its climate goals through a combination of emissions reduction and removal, and there’s where the forest will play a critical role.

5. Are governments buying up all of these forest carbon credits?

In short, no. About 20% of forest carbon credit demand comes from the voluntary market – organizations and individuals that buy credits to offset their emissions, for example to achieve a net-zero pledge. And the remaining 80%, the demand from compliance markets, represents purchases from parties that have a legal obligation to reduce their emissions – in many cases, companies, such as those in heavy manufacturing or energy production.

While governments play a role in creating compliance markets, for example by setting emissions quotas and establishing emissions trading schemes, government represents a relatively small part of actual purchases of forest carbon credits.

5. Can commercial forestry plantations get involved in this market?

Absolutely. First, afforestation/reforestation projects can simultaneously earn carbon credits and be managed for the production of timber. Second, established plantations can earn carbon credits if they are managed in a way that increases carbon sinks, for example, by improving growth, reducing damage, or reducing harvest. The last of these three options involves reduced wood supply, but the first two represent a win-win for wood production and carbon.

Get answers to your questions

Want to find out more about how the forest carbon credits market works, the opportunity it represents for forestry owners, and how challenges and opportunities vary by region?

• Watch a recording of the recent webinar with expert Glen O’Kelly, “Forest carbon markets – How growing demand for forest carbon credits are shaping wood markets”
• Contact Glen directly at glen.okelly@okelly.se
• Find out more about a newly released 80-page report on the forest carbon credits market
• Read more from Glen:
  • Forest carbon markets: Carbon pricing mechanisms
  • Forest carbon markets: The role of the forest in climate change and the emergence of forest carbon credits

The post Forest carbon markets: Frequently asked questions appeared first on Fastmarkets.

This is the second of a series of blogs about forest carbon markets as we try to understand what is happening, and how it can impact global forest product markets. The focus of this blog is the rapid growth in carbon pricing mechanisms, including carbon taxes and cap-and-trade systems – for forestry and other carbon credits.

Read part 1 on the role of the forest in climate change

Growth of carbon pricing

To meet the formidable challenge of reducing global emissions of carbon and other greenhouse gases, governments are increasingly putting a price on carbon. Carbon taxes and emissions rights prices begin to reflect the true societal cost of emissions, and create an incentive for abatement – for example, actions to reduce emissions from the use of fossil fuel or to increase sequestration through carbon capture and storage or forestry.

At the turn of the century, there were only a handful of carbon pricing mechanisms globally, representing less than 1% of emissions (Figure 1). In 2022, this has grown to 68 mechanisms covering almost 25% of global emissions. The most recent additions in 2022 include the Ontario Emissions Performance Standards, Oregon ETS, and Uruguay CO2 tax. In addition to these government mechanisms is voluntary purchases of carbon credits.

There are two main types of carbon pricing mechanisms:

1. Carbon tax: a surcharge levied on emissions or on fossil fuels. For example, here in Sweden the government introduced a carbon tax on fossil fuels in 1991. Today it is around 130 USD/tonne of CO2, the highest rate in Europe (only surpassed by Uruguay’s new carbon tax, at 137 USD/tonne)
2. Cap and trade: organizations in sectors covered by such a mechanism are assigned an allowable level of emissions (“cap”), and must either reduce emissions to that level, or purchase emissions allowances from another organization within the mechanism (“trade”). Prices are not set but determined by the trade between participants in the system. The largest cap and trade mechanism globally is the EU Emissions Trading System (ETS).

There is a clear trend globally in favor of cap and trade mechanisms (Figure 2). While carbon taxes continue to grow, that growth is far outpaced by cap and trade, which grew almost 10-fold between 2016 and 2021. An advantage of cap and trade systems for governments, is that they set the emissions cap, and successively lower it, in accordance to their national targets and international commitments. There is greater uncertainty with a carbon tax about how the market will respond and how much emissions reductions will result.

Carbon credits

Credits are a unit of emissions, usually one tonne of carbon dioxide (tCO2e), which can be used by organizations to offset their legal obligation to reduce emissions (compliance markets) or purchased by organizations that voluntarily opt to offset their emissions (voluntary market). In some cases, credits can also be used to offset a carbon tax that would otherwise be levied on an emitter, for example as allowed in Colombia, one of the largest markets for forestry carbon credits.

In cap-and-trade compliance markets, such as the EU Emissions Trading Scheme (ETS) and California-Quebec ETS, most of the trade is of emissions allowances (the emissions rights allocated to each participant), but many markets also allow trade of credits from carbon offsetting projects from outside the system, i.e., carbon credits.

Demand for carbon credits arises from four areas:

1. International compliance markets, e.g., national governments to meet Paris commitments
2. Domestic compliance markets, e.g., EU ETS, California-Quebec ETS
3. Voluntary markets, i.e., non-legislated offsetting by organizations and individuals
4. Non-market buyers, government funding of climate change abatement, e.g., the Norwegian Carbon Credit Procurement Programme

Supply of carbon credits arise from three types of mechanisms:

1. International government, e.g., the Clean Development Mechanism (CDM) established by the UN under the Kyoto agreement
2. Regional, national, and subnational government, e.g., the California Compliance Offset Program
3. Independent (non-government), e.g., Gold Standard, Verra

Of these, independent has grown fastest to become the largest source of credits in 2021, with almost three quarters of supply. It is also the most important for credits for forestry and land-use.

Credits from forestry and land use

Forestry projects are one of the main sources of carbon credits, on all markets. We estimate that their share is almost 20% overall, with a higher share on voluntary markets (~30%) than compliance (15-20%). Forestry is popular with both project developers and credit buyers because the projects are very visible and tangible, and offer significant co-benefits (e.g., biodiversity and erosion control).

Seven of the top ten carbon crediting mechanisms cover forestry projects. This includes both government mechanisms, such as the UN’s CDM and Australia’s Emissions Reduction Fund, as well as independent mechanisms, such as Verra’s Verified Carbon Standard (VCF), Gold Standard, and the American Carbon Registry.

Independent crediting mechanisms are most important for forest carbon credits, representing almost 80% of supply in 2021. These credits are sold not only on voluntary markets but also on compliance markets (many compliance markets accept independent credits). And independent suppliers have clearly favored forestry projects; over the last 5 years, almost 50% of independent credit supply was from forestry and land use. It was the largest category, well ahead of renewable energy (Figure 3). But renewable energy is growing faster, and was the largest source in the first 10 months of 2022. Forestry and land use credits faced headwinds in 2022, with significant negative press around credits mainly from REDD (reduced emissions from deforestation and forest degradation). Addressing concerns about the real value of such credits in addressing climate change will be a key challenge for project develops in 2023.

This is the second blog in a series about the emergence of forest carbon markets. Our previous blog introduced the importance of forests in climate change. Our next blogs will discuss voluntary and compliance markets for forest carbon credits, and implications for wood supply.

Read part 1 on the role of the forest in climate change

The post Forest carbon markets: Carbon pricing mechanisms appeared first on Fastmarkets.

Almost 25% of global carbon dioxide emissions are now covered by pricing mechanisms, with market value of more than USD 80 billion in 2021. Nature-based credits, such as forestry projects, often sell at a significant premium. In the rapidly growing market for voluntary offsets, forestry projects represent 50% of all credits issued in Q1 2022, with an expected value of almost USD 1 billion in 2022.

This is the first of a series of blogs about forest carbon markets as we try to understand what is happening, and how it can impact global forest product markets. The focus of this blog is the role of forests in addressing climate change, and how that reflects the types of projects providing forest carbon credits.

Read part 2 on carbon pricing mechanisms here

The climate change challenge

During most of the last 800,000 years, atmospheric carbon dioxide levels never exceeded 300 parts per million (ppm). Starting with the industrial revolution in the mid-1700s, these levels started to rise exponentially. In 2021, the reached 415 ppm. By the end of this century, without interventions, they might exceed 800 ppm.

To curb emissions, and the global warming they cause, in 2015 the Paris Agreement was signed by 192 countries and the European Union. They agreed to reduce global greenhouse gas emissions to limit the global temperature increase in this century to 2°C while pursuing efforts to limit the increase even further to 1.5°C, review their commitments every five years, and provide financing to developing countries to mitigate climate change, strengthen resilience and enhance abilities to adapt to climate impacts.

Current climate pledges and policies are still not enough. The Climate Action Tracker (CAT) is an independent scientific analysis that tracks government climate action and measures it against the Paris Agreement. It quantifies the impact of those actions, aggregates to the global level, and predicts likely temperature changes. The current CAT predicts global warming of 2.0-3.6°C based on current policies and actions – still far from the 1.5°C target.

Increasingly, it is recognized that in addition to reducing emissions, removing carbon dioxide from the atmosphere will also be necessary to meet climate targets. Many 2050 targets set by countries and companies are net emissions targets, that is, emissions minus removals. Here, forestry can play a large role through sequestration, the biological uptake and storage of carbon in trees as they grow.

Forestry — a powerful lever in climate change

Forestry plays a very large role in climate change, both in a positive and negative sense. Total global CO2 emissions are currently around 35 billion tonnes, and 50 billion tonnes (CO2 equivalent) of all greenhouse gases. A recent paper in Nature found that forestry is responsible for CO2 emissions of 8 billion tonnes through deforestation annually. But this is more than offset by sequestration of 16 billion tonnes per year, providing a net annual sink of 8 billion tonnes.
Forests therefore offer an important (and vital) way to reduce net global emissions. Forests also offer important ecological and social benefits, and relatively cost-effective way to fight climate change. There are many different levers at our disposal to reduce global emissions of carbon dioxide and other greenhouse gases. Each lever has different costs associated and varying degrees of impact. In 2007, McKinsey & Company developed a now-famous analysis and policy tool, the GHG abatement cost curve. It shows that some interventions, such as improved energy efficiency, actually have negative cost – they save money. Others, such as carbon capture and storage, are relatively high-cost with current technology. Interventions involving forestry are mostly mid-range, with estimated costs of 5-10 USD/t for reduced deforestation, 10-20 USD/t for reforestation, and 20-30 USD/t for reduced conversion to intensive agriculture.

Other research by suggests that natural climate solutions (NCS, including forestry and agriculture) can provide up to 37% of climate mitigation needed by 2030 but receive less than 3% mitigation funding.

Types of projects

There are three main ways forests can be used to reduce net global emissions, which also reflect the types of projects that provide forest carbon credits:

1. Reduced emissions from deforestation and forest degradation (REDD); The focus is mainly on tropical forests in developing countries, including Africa, Latin America and Southeast Asia, where most deforestation currently occurs.
2. Afforestation and reforestation (A/R): Here the approach is to establish forests on land with relatively low carbon stock, ecological and economic value (e.g., scrubland). Often, it is land that was previously forested but was cleared by human activity.
3. Forest management (FM): Established forests can be managed differently to increase their carbon stock, e.g., through increased growth, longer rotations, and reduced damage from fire, pests and diseases.

This is the first blog in a series about the emergence of forest carbon markets. Our next blogs will discuss the growth in carbon pricing instruments globally, examples of voluntary and compliance markets for forest carbon credits, and implications for wood supply.

Read part 2 on carbon pricing mechanisms here

The post Forest carbon markets: The role of the forest in climate change and the emergence of forest carbon credits appeared first on Fastmarkets.