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ERA Carbon Trading Offsets a Green Opportunity

Commodities / Climate Change Oct 13, 2009 - 09:03 AM GMT

By: Midas_Letter


Best Financial Markets Analysis ArticleThe idea of trading carbon offsets as a mechanism for reducing greenhouse gas concentrations has been a hotly contested debate for several years now. But one certainty has emerged regardless of which side of the fence you sit on: carbon offsets as an emissions reduction strategy is here to stay. Embrace that concept, and you start to position yourself to capitalize on the opportunities emerging in the nascent sector.

In Canada, the largest purveyor of forest based carbon offsets, or Verified Emission Reductions (VER’s) as they are officially called, is ERA Carbon Offsets Ltd., (TSX.V:ESR) a newcomer to the TSX Venture exchange, but a company that has been growing for half a decade.

The company was founded by Dr. Robert Falls, a resource management scientist with an academic history in photosynthesis and carbon sequestration, and a business background in the energy and environment industries. Dr. Falls has a strong history in the field of climate change and has, over the past two decades, developed and supported projects in China, the United States and Canada for corporate clients.

According to Dr. Falls, “ERA Ecosystem Restoration Associates, as it was originally named, was established 5 years ago and has since been actively pursuing and advancing opportunities in the carbon offset and carbon credit space. We began our operation in the lower mainland of BC, and have advanced to develop opportunities in equatorial Africa, South America and throughout North America.”

How are Carbon Offsets created?

A carbon offset, simply stated, represents the reduction, removal or avoidance of one metric ton of carbon dioxide or its equivalent in other greenhouse gases (GHG’s) from the atmosphere. In the case of ERA, they focus specifically on the removal of carbon from the atmosphere through the planting of trees, and the avoidance of carbon emissions that occur through the preservation of forest ecosystems that would have otherwise been cleared by logging or for other uses such as grazing lands for cattle.

“Plants, through photosynthesis, are the only way known to man to sequester carbon, and one cannot debate climate change adequately without addressing the need to protect existing forests for the massive carbon sinks that they are, and to re-establish degraded ecosystems back to their natural state through reforestation efforts. GHG emissions from deforestation account for approximately 20% of global greenhouse gas emissions worldwide, which is more than all emissions from all transportation sectors put together. We focus on both restoring ecosystems to add to the ‘lung capacity’ of the planet, and protecting existing forest ecosystems in an attempt to slow the current rate of deforestation that sees an area the size of a football field destroyed every second."

“The way that we currently develop carbon offsets is by establishing 100 year agreements with local governments that assign us the carbon rights in exchange for our significant commitment to restore their degraded forest ecosystems. These lands are in a very degraded state, having been logged more than a century ago in some cases, and never restored properly. As a consequence, they have become overrun with invasive plant species, and currently exist as degraded ecosystems, with a fraction of the carbon capacity they once supported. We get in there and restore the original native species that made up the forest historically, and in doing so, not only lay the groundwork for generations of future carbon sequestration, but provide numerous social and biodiversity co-benefits ranging from better stream water quality, to ground stabilization and replenished animal habitats.

“These native trees will grow and flourish, and remove significant tonnages of carbon dioxide from the atmosphere, thus generating carbon offsets for us to monetize in the global carbon markets, which pays for this work to be done. To date, the native forests we have reestablished will result in the removal of over one million of tonnes of carbon dioxide from the atmosphere in the first 100 years of their lifetime. That’s our local programming and that’s the source of the carbon offsets that we have been selling to date. As mentioned though, we will be expanding and developing carbon offsets that should be fungible in regulated (“Cap and Trade”) markets, particularly in the United States, from our programs in equatorial Africa and elsewhere.“

ERA’s approach to creating offsets for the US market is centered around a strategy called 'Reduced Emissions from Deforestation and Degradation' (REDD), which, as suggested above, is directed at reducing or stopping deforestation, specifically in tropical and sub-tropical areas. In many cases, this strategy is or can be linked with the restoration and ongoing protection of healthy ecosystems that have been severely damaged by the activities associated with logging and agricultural related deforestation.

As is the case with ERA’s domestic programming, REDD projects are also community-based. They are designed to provide the impetus for the creation of a much larger and sustainable bio-economy that will engage local communities in creating and sustaining healthy ecosystems. This programming is intended to generate equitable employment, new infrastructure, renewable energy sources and education for the communities in these regions. The robust nature of these programs help ensure the long term viability of the communities and the projects.

Carbon offsets arising from REDD projects are expected to address demands from both voluntary and emerging compliant markets. Under the current proposed legislation, REDD offsets will be accepted under the Waxman-Markey Bill, which was recently advanced through the House of Representatives in United States. Estimates on the dollar value of the pending US regulated market range from the mid billions to the low trillions annually, with offset prices expected to range from $11-$28 USD/tonne once legislated compliance comes into effect.

Until then, ERA will continue selling into the international voluntary markets, which have seen exponential growth over the last four years. The voluntary carbon market is projected to be worth as much as $1 billion by 2010, with double digit percentage growth for years to come.

So that’s how ERA generates carbon offsets. But who buys them?

“Our clients –- the people and organizations that buy our offsets -- range from Ma’s and Pa’s that go to our website and by a couple of tonnes to offset the carbon output of their homes and cars,” says Falls, “to large enterprise class businesses such as Shell Canada and HEAG Südhessische Energie AG (HSE) in Germany who are looking to voluntarily offset either their operational footprint, or provide a green products that have climate mitigation and ecosystem restoration attached to their products.”

Corporate clients in particular form the backbone of ERA’s revenue stream. HSE recently remitted the first $750,000 USD payment specified under a previously announced Verified Emissions Reductions Sales Agreement (the “VERSA”) between HSE and ERA’s wholly owned subsidiary, ERA Ecosystem Restoration Associates. The payment is the first of five bi-monthly payments specified under the VERSA in which ERA is required to deliver 300,000 tonnes of validated and verified emission reductions (“VERs”) in the third and fourth quarter of 2009, and 200,000 tonnes of VERs in the first quarter of 2010, at an average price of $8.00 USD per tonne. Total consideration payable to ERA for the transaction is in the order of US$4 million.

The VERs sold are validated and verified to ISO 14064-2 and are currently pending a second validation from the Climate, Community and Biodiversity Alliance Standard (“CCBA”), which contemplates the many social co-benefits of the project. ISO 14064-2 represents the foundation for verification under the Canadian Federal Offset System for Greenhouse Gases (as published on June 10, 2009). CCBA is the leading voluntary international standard for projects that simultaneously minimize climate change, support sustainable development and conserve biodiversity.

“ERA’s revenues have grown dramatically,” said Falls. “We started very slowly of course which reflects the early nature of this market, but this year our revenue should be up by almost a magnitude over the previous year, in the neighborhood of $5 million. That’s roughly a 10X multiple of our revenues over the previous year, so it would appear that both our operations and our sales are growing dramatically at this point in time, and that growth is required to keep pace with a carbon market that is growing exponentially.”

This is the first in a series of articles on ERA Carbon Offsets Ltd.

By James West


© 2009 Copyright Midas Letter - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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