HB 49-CARBON OFFSET PROGRAM ON STATE LAND  CHAIR MCKAY announced that the second order of business would be HOUSE BILL NO. 49, "An Act authorizing the Department of Natural Resources to lease land for carbon management purposes; establishing a carbon offset program for state land; authorizing the sale of carbon offset credits; and providing for an effective date." [Before the committee, adopted as the work draft on 3/8/23, was the proposed committee substitute (CS) for HB 49, Version 33-GH1372\S, Dunmire, 3/3/23, "Version S."] 1:19:12 PM HELGE ENG, Director/State Forrester, Division of Forestry and Fire Protection, Department of Natural Resources (DNR), gave a PowerPoint presentation, entitled "Forest Management Current and Future," dated 3/8/23 [hard copy included in the committee packet]. He began on slide 2, "Forestland Ownership," which pictured a pie chart measuring forest land ownership in Alaska. He noted that the federal government owned nearly half of the forest land in the state. He continued to slide 3, "Timber Ownership and Production," which featured a bar chart distinguishing Alaska's timber harvest by ownership class. 1:22:11 PM REPRESENTATIVE SADDLER asked Mr. Eng to expound on the definition of sawtimber. MR. ENG defined "sawtimber" as trees that are of a species, size, and quality that are commercially viable or merchantable. These trees can be sent to a sawmill and made into value added wood products and sold on the market as lumber. REPRESENTATIVE ARMSTRONG asked how the percentages on slide 3 translated to the number of acres logged on state land and questioned how that had changed over time. MR. ENG offered to follow up with the requested information. 1:24:09 PM REPRESENTATIVE MCCABE questioned whether the 77 percent [of sawtimber] was managed by the federal government. MR. ENG said the management intensity of national forests was low compared to private [forest management]. He added that the National Forest System (NFS) had an initiative to transition from old growth to young growth and harvested timber on a smaller scale. 1:25:45 PM MR. ENG continued on slide 4, "Forest Management," which read as follows [original punctuation provided]: Alaska Constitution, Article VIII sections 1 and 4 require that timber resources are to be made available for maximum use consistent with the public interest and to be utilized, developed, and maintained on the sustained yield principle. 1:27:11 PM REPRESENTATIVE ARMSTRONG asked whether Alaska was unique in having the sustained yield principle, or whether that principle was common in other states. MR. ENG said the [sustained yield principle] was common among state forests throughout the nation. He addressed slide 5, "Sustained Yield," which read as follows [original punctuation provided]: Harvesting at most the amount of timber growth that accumulates on the forest tract in any given year. This is often referred to as the annual allowable cut (AAC). AS 41.17.950(26): The achievement and maintenance in perpetuity of a high level annual or regular periodic output of the various renewable resources of forest land and water without significant impairment of the productivity of the land and water; does not require that timber be harvested in a non-declining yield basis over a rotation period AS 38.04.910(12): The achievement and maintenance in perpetuity of a high level annual or regular periodic output of the various renewable resources of the state land consistent with multiple use. 1:30:36 PM REPRESENTATIVE MCCABE asked whether the forest harvests were at parity. MR. ENG replied that both state and federal forests were not reaching parity. The multiple use mandate charged the state with accommodating recreation and other uses, as well as supplying raw material on a regular basis to the timber industry. He indicated that sometimes, less timber was harvested to keep that bank account and the "spigot" of raw material flowing. 1:33:13 PM REPRESENTATIVE MCCABE clarified that he was more concerned about forest management and forest fires. He asked Mr. Eng to expound on the concept of multiple use. MR. ENG replied that trees were a finite resource and an underutilized resource in Alaska. He welcomed the governor's charge to revitalize the state's timber industry. He shared his belief that more than forest management, keeping up with the increasing fire intensity was an important challenge. REPRESENTATIVE MCCABE shared his understanding that Scandinavian countries had very few forest fires. He opined that if Alaska could manage its forests, money and industry could be made from timber sales, and money could be saved on fighting forest fires. He asked what was in the way of reaching parity [in regard to timber sales.] MR. ENG discussed the challenge of distance in Alaska, explaining that hauling logs out of the woods encumbered a cost per mile, which ate into profit margins. In addition, the lack of roads created a costly challenge. He noted the tension between wilderness, which was desirable in Alaska, and timber production. He said there were solutions to keeping wilderness while logging. He added that there were opportunities to expand the timber industry in the state, such as the local lumber grading bill, which was an effort to make it easier for small sawmills owners to get started. 1:40:39 PM REPRESENTATIVE MCCABE asked whether logging companies were given a credit or discount if the land was unreachable by existing roads. MR. ENG said indirectly, yes, because road construction was included in the timber sale. He explained that loggers were responsible for pushing in the road as part of the purchase. He agreed that more could be done in terms of subsidizing outlying areas. REPRESENTATIVE RAUSCHER asked whether second or third generation growth was being harvested anywhere in Alaska. MR. ENG reported that second growth harvest was well underway in many areas of the state with most of the old growth concentrated on federal lands in the Tongass National Forest. He reported that Southeast Alaska was the most productive timber growing region in the world with more stored biomass per acre than the Amazon rainforest. He distinguished between forest management practices in Southeast and Interior Alaska. REPRESENTATIVE RAUSCHER asked whether logging was more difficult to manage after the original harvest. Mr. Eng said it depends on the wildfire cycle and explained how wildfires create habitat to regenerate forests. 1:46:57 PM CHAIR MCKAY refocused the discussion on HB 49. MR. ENG continued on slide 6, "Multiple Use," which read as follows [original punctuation provided]: AS 38.04.910(5): The management of state land and its various resource values so that it is used in the combination that will best meet the present and future needs of the people of Alaska, making the most judicious use of the land for some or all of these resources or related services over areas large enough to provide sufficient latitude for periodic adjustments in use to conform to changing needs and conditions; it includes (A) the use of some land for less than all of the resources; and (B) a combination of balanced and diverse resource uses that takes into account the short-term and long- term needs of present and future generations for renewable and nonrenewable resources, including, but not limited to, recreation, range, timber, minerals, watershed, wildlife and fish, and natural scenic, scientific, and historic values. Mr. Eng narrated slide 7, "Sustained Yield, Example," which pictured a forest divided into harvest units labeled 1-100. 1:51:34 PM REPRESENTATIVE MCCABE asked whether area control was the best practice or whether a percentage cut would be better. MR. ENG said he did not mean to imply that area control was better than volume control. He added that the planning of the harvest was less important than the amount harvested to stay within the sustainable harvest level. REPRESENTATIVE SADDLER, in reference to the 100-year example on slide 7, asked which forestry construct would allow for such long-term management. 1:54:35 PM MR. ENG said slide 7 depicted a hypothetical textbook example, explaining that in Oregon, for example, the oldest harvest unit would be 45 or 50. REPRESENTATIVE WRIGHT referenced the inclusion of seaweed farming on page 6, line 24 of the bill and questioned the intention for "blue carbon." 1:56:08 PM RENA MILLER, Special Assistant, Office of the Commissioner, Department of Natural Resources (DNR), acknowledged that seaweed farming was included as an example of a resource that could be used with mitigation measures to increase the carbon stock on the land. She noted that while ideas for seaweed farming were out there, registries with specific protocols were lacking. Should the bill pass, registries could be approached to build a scientific and technological case for how a kelp project could realize the benefits required for a carbon offset project. REPRESENTATIVE WRIGHT sought to confirm that the state was still actively exploring this option. MS. MILLER affirmed that people were exploring it and DNR wanted to be a part of it. 1:57:41 PM MR. ENG narrated slide 9, which showed state forest and forest classified state land. He continued on slide 10, "State Forests," which read as follows [original punctuation provided]: State Forests, managed by the Division of Forestry & Fire Protection, are generally more evenly managed and less event-driven than private lands or other State lands with a profit maximization objective: • Multiple use mandates, including recreation • Sustained yield mandate • Provide the timber industry with a perpetual, stable, non-declining supply of raw material year after year • Consider and incorporate public input For these and other reasons, State Forests in most years harvest less than the sustained yield. They are therefore generally sought after for forest carbon offset projects. MR. ENG concluded on slide 11, "Timber management and carbon offset projects are complementary," which illustrated the concept of additionality with a graph. 2:02:02 PM REPRESENTATIVE MEARS returned to slide 10 and asked whether state forests were generally sought after for forest carbon offset projects because the newer growth sequestered more carbon. MR. ENG said that was part of it. He explained that carbon was accumulated over time when harvest was less than new growth, adding that additionality was a balancing act. He stated, "When you harvest less, you accumulate more." 2:05:27 PM REPRESENTATIVE MCCABE sought to clarify the term "area control" and shared his understanding that carbon offset programs would require a percentage cut for the whole area. MR. ENG contrasted the advantages and disadvantages of percentage cuts. He reiterated his belief that distinguishing between harvest methods was less important than the amount of biomass of trees remaining per acre to store carbon. 2:08:22 PM REPRESENTATIVE SADDLER asked whether old or young trees did a better job at capturing and storing carbon. MR. ENG said, in general, neither one was a "winner." He explained that younger trees consume carbon at a more rapid pace than old-growth, but old-growth trees store more carbon in their trunks, leaves, and branches. 2:11:34 PM REPRESENTATIVE ARMSTRONG asked, given the difficulty of the process, how to calculate carbon offset and determine carbon credits. MR. ENG suggested jumping in and trying the carbon credit process. He discussed attempts in Michigan and California, adding that Alaska could learn from their poor experiences. He pointed out that with the state's enormous forest land base, Alaska had the luxury of making mistakes and recovering. REPRESENTATIVE ARMSTRONG requested a case study example that would paint a before and after and highlight the potential impacts. REPRESENTATIVE MCCABE questioned the value per board-foot and whether that figure was fixed or variable. MR. ENG said the value was highly variable. He explained that "stumpage," defined as the right to harvest timber, was sold by the state to loggers. He offered to follow up with a range of values and realized revenues. 2:17:29 PM CHAIR MCKAY invited Mr. Steininger to answer finance-related questions from the committee. 2:18:34 PM REPRESENTATIVE MEARS sought more clarity on the carbon offset revenue fund; how the funds would be used; and how the general fund (GF) would receive revenue from it. 2:19:07 PM NEIL STEININGER. Director, Office of Management and Budget (OMB), explained that per Section 2 of the bill, money coming in through the carbon offset program was defined as a designated general fund (DGF) source of revenue. The carbon offset revenue fund was a separate fund that would be populated by appropriations from the legislature from either GF dollars or revenue from the program itself. The department could then spend the money without further appropriation to manage the program. He noted that the legislature, through the annual appropriation process, would have the option to divert a portion of the revenue to other uses or straight to the GF. He noted that the provision in question had been slightly reworded in Version S, making it so program revenue would go directly into the fund without an appropriation by the legislature. Consequently, to take a profit out of the program, the state would need to appropriate a balance from the fund back into the GF or to another purpose. 2:21:50 PM REPRESENTATIVE SADDLER expressed concern that there were not many dedicated funds. Although the legislature might intend to designate the funds to support the program, he said, the state may not be able to encumber that money. MR. STEININGER acknowledged that the prohibition on designated revenue made it so a single source of revenue could not be dedicated specifically to a purpose without legislative appropriation. He likened the carbon offset revenue fund to the spill prevention and response (SPAR) account. REPRESENTATIVE SADDLER asked whether the fund would be sweepable. MR. STEININGER answered no and expounded. MS. MILLER clarified that DNR would like the latitude to spend because the department would have commitments under project contracts entered into with the registry. CHAIR MCKAY asked whether the federal government would have separate carbon offset programs on their land. MS. MILLER clarified that the bill specifically addresses state proponent projects on state land. CHAIR MCKAY asked whether the federal government could do a "cap and trade" on their forested land in Alaska. MS. MILLER said theoretically, the federal government could do as they need to with their land; however, to date, there was no registry with protocols for federal lands owners. 2:27:53 PM REPRESENTATIVE ARMSTRONG questioned the total number of acres of state forest. MS. MILLER reported that Tanana Valley State Forest was roughly 2 million acres, the Haines State Forest Resources Management Area was roughly 75,000 acres, and the Southeast State Forest had somewhere between 30,000 and 40,000. He noted that in addition to the state forests, there were other acres of forested state land. REPRESENTATIVE MCCABE requested another explanation of the carbon offset revenue fund. MR. STEININGER summarized the movement of money from the carbon offset revenue fund to the GF. He reiterated that the revenue would stay segregated in the fund for access by DNR until the legislature should choose to withdraw moneys to "cash out" into the GF or appropriate for another purpose. 2:32:01 PM REPRESENTATIVE SADDLER sought to confirm that the bill would change state leasing to allow the sale of carbon offsets while also allowing the state to package and sell its own carbon credits. MS. MILLER answered yes, it would allow DNR to lease state land for others to undertake carbon management, in which the lease revenue would not go into the carbon offset revenue fund. In addition, it would create a carbon offset program within DNR for the state to undertake projects on state land for which the revenue fund was created. REPRESENTATIVE SADDLER asked whether Ms. Miller had said that the state would only be a player on state forest land. MS. Miller clarified that the state could be a player anywhere on state land, and the only player that could do a project on a state forest was the state. REPRESENTATIVE MEARS speculated that carbon management would require a lot of resources and asked how much the state could potentially profit from carbon offset programs. 2:37:49 PM MS. MILLER noted that revised fiscal notes were forthcoming. She added that absent an existing project, a report on the pilot projects [included in the committee packet] was a useful tool for getting a sense of associated costs. The report presented gross revenues and project expenses, including cost of inventory; monitoring, reporting, validation; annual account fees; and credit registration and transfer fees. CHAIR MCKAY asked what aspect of a project would be done by state employees versus private contractors. MS. MILLER said employees, whether state or private, would vary by project and negotiated contractual arrangement. CHAIR MCKAY asked whether forestry personnel would be pulled away from timber sales to manage the carbon offset projects. MS. MILLER stated that the project activities may or may not be carried out by Division of Forestry and Fire Protection employees. If so, they would be compensated through project revenues. CHAIR MCKAY referenced a prior conversation with vendors who made a statement about eating costs until getting paid at the end. He sought clarity on that comment. MS. MILLER asserted that many project developers take a turnkey approach by covering the cost of project development until it generates credits. 2:42:02 PM CHAIR MCKAY requested a flow chart detailing the expected cash flow timeline for a carbon offset project. MS. MILLER directed the committee to Appendix B, which outlined a project schedule. She approximated that credits would be generated in 18 months; however, field work in Alaska was unpredictable depending on the project and its intensity. REPRESENTATIVE SADDLER asked how the management of state land would change if it was leased for carbon offset. MS. MILLER explained that when leasing state lands to a private party, any requests to constrain the land use would need to be presented with the application. DNR would consider the request in a best interest finding, which involved a period for public comment. She concluded that she did not anticipate a large impact from state land lease to third parties on curtailing other activities. REPRESENTATIVE SADDLER asked for an example of potential limitations. MS. MILLER said it was hard to give examples. She speculated that field work inventory may require site control to avoid potential loss of carbon stock. 2:47:05 PM CHAIR MCKAY compared slide 7 to slide 11 and asked whether slide 11 showed a percentage cut or an area cut. MR. ENG clarified that the slides were independent of each other. He added that the graph on slide 11 could be any forest management method, indicating that the harvest volume removed was the point of significance. MS. MILLER, in response to a follow up question from Chair McKay, clarified that slide 11 was purely hypothetical. CHAIR MCKAY inquired about permafrost and asked which tree species was the best at capturing carbon. MR. ENG opined that the species of tree does not matter, adding that the best way to consume carbon was to have many large, native trees that were genetically adapted to the site. 2:52:13 PM REPRESENTATIVE MEARS said she hoped to hear more about the characteristics of each state forest. In addition, she asked whether the forest management plans would need to be amended to include carbon management. MS. MILLER answered yes. The bill would enable management plans to be updated to identify land within a forest that was generally appropriate for a carbon project. REPRESENTATIVE SADDLER asked whether the area planning process would require the evaluation of general state land for carbon offset use. 2:54:21 PM MS. MILLER responded that in general, project developers would need to approach DNR with a concept for a project. REPRESENTATIVE SADDLER sought to confirm that it would not be a new category that would need to be evaluated for mineral development, recreation, or timber harvest. MS. MILLER answered yes. REPRESENTATIVE MEARS asked whether a 55-year lease length was efficient for any of the programs. MS. MILLER said leases of state land to third parties were capped at 55 years. The bill also capped the length of state project commitments at 55 years. 2:58:00 PM CHAIR MCKAY announced that HB 49, Version S, was held over.