Duke Carbon Offsets Initiative: Forestry Carbon Financial Risk Analysis

In 2007, Duke University signed the American College & University Presidents’ Climate Commitment, committing the University to develop an institutional plan to achieve carbon neutrality by 2024. Achieving this goal will require Duke University to offset approximately 183,000 tons of carbon dioxide equivalent (CO2e) in 2024. To address this challenge, the University established the Duke Carbon Offsets Initiative in 2009 to procure carbon offsets that prioritize investment in local and regional carbon offset projects that yield significant environmental, social and economic benefits beyond greenhouse gas emission reductions. The Offsets Initiative is currently assessing the feasibility of purchasing or developing forestry-based carbon offset projects in North Carolina and the Southeast region.

From the perspective of Duke University, this report assesses the financial implications of forestry carbon offset procurement. Specifically, this report analyzes two potential investment opportunities: an existing afforestation project and a hypothetical avoided conversion project. Each project analysis begins with a project overview and identifies key players to understand incentive structures and assess qualitative project risks. Following this qualitative description, a quantitative analysis is performed to determine the levelized cost per offset (LCO) in present value terms to Duke University and to further assess additional risks and mitigation strategies. The analyses do not attempt to quantify intangible benefits such as educational, research, or ecosystem co-benefit values. Rather the financial analyses are intended to compliment the Offsets Initiative’s larger feasibility study on forestry carbon offsets.

The analyses show both projects as potential candidates for long-term investments. The afforestation project has low project risk and provides sufficient offset supply to meet the University’s need. Additionally, the LCO is low relative to substitute over-the-counter forestry offsets. However, the project requires high upfront investment and exposes Duke University to price risk. This risk may be mitigated through the purchase of a real option from the project developer. The avoided conversion project is found to require little upfront investment and may produce a large offset supply if scaled up. However, sensitivity analysis performed on key parameters derived from the tax equity project finance structure produces a wide range of possible LCOs. Duke University can better understand its LCO by first performing an assessment on the tax equity value to determine if the project is financially feasible.