*Update on 11/10/22: See our updated Methodology for Harvest Deferral based upon feedback from the our methodology comment period.

Forest carbon projects have vast potential as a tool to create immediate and affordable climate impact at scale. However, developers of these projects must consider how land use and behavior change based on the project in one location might have the potential to influence behavior changes in other locations outside the project boundary. 

In forest carbon offset projects, leakage is the concern that deferring harvest activity in one forest carbon project will simply shift that harvest activity somewhere else outside the project area. To be valid, forest carbon projects need to prevent leakage when they can and account for the leakage that can’t be prevented.

For example, if a carbon offset project protects a forest from logging but that leads to an increase in logging somewhere else, the carbon offsets wouldn’t necessarily be decreasing overall emissions. 

There are two types of leakage that can occur in forest carbon projects:

Activity-shifting leakage is the concern that a forest carbon project will cause a landowner to shift harvest activity to occur outside of the project’s boundaries, which in turn would cancel out some or all acreage in an NCX program area. NCX eliminates activity-shifting leakage by using an eligibility condition: to participate in the Natural Capital Exchange, landowners must enroll all of their owned or managed acreage in an NCX program area.

Market-shifting leakage is the concern that changes in the supply and demand equilibrium of timber due to forest carbon projects will induce harvest activity on the landscape, thus canceling out some or all of the project’s climate impact. The Natural Capital Exchange currently accounts for market-shifting leakage using leakage deduction factors recommended by Verra. 

Verra requires a leakage deduction of 10% for NCX projects that include landowners choosing to defer harvest, year over year, for up to 7 years. Beyond that timeframe, the leakage deduction factors increase as it is presumed that a permanent reduction in timber supply has occurred. These increased leakage deduction factors are based on the ratio of merchantable biomass (trees suitable for harvest) in the project area relative to national-level data for the same or similar species. The appropriate leakage deduction, which ranges from 20% to 70% for a particular property, is then applied based on this ratio.

In addition, NCX is evaluating a path forward for a model that directly accounts for market-shifting leakage associated with project activity, by using empirically-based methods to assess market leakage specifically for each landowner and each mill basin. This would require working with forest economists to develop new local economic variables based on local price elasticities of supply and demand.