The American Forest Foundation (AFF) recently announced that the nonprofit will hold the US's first nature-based carbon credit auction early next year.

In February 2025, buyers will be able to bid on premium carbon credits from four projects under the Family Forest Carbon Program, an initiative that connects landowners with technical and financial resources to more sustainably manage private forest lands.

"We are trying to address several pain points that exist in the current voluntary market for buyers of carbon credits, but also for landowners who are seeking to participate in the market," Nate Truitt, executive vice president of climate funding at the American Forest Foundation, told Yahoo Finance. "And we're also seeking to close what is a really substantial financing gap for natural climate solutions, a gap that we're going to have to close globally if we're going to stay on a 1.5- or even a two-degree scenario."

Price volatility, market inefficiency, and a credibility crisis in the voluntary carbon market — along with the AI boom and other factors — have contributed to the recent trend of companies pulling back from their net-zero pledges. Corporations such as Shell (SHEL), Microsoft (MSFT), and Crocs (CROX) have missed, delayed, or weakened their sustainability targets in recent years.

Truitt expects interest in the auction from companies in sectors, such as consumer goods that produce high emissions or are relatively less active in carbon markets but have decarbonization strategies in place. He also anticipates some interest from universities.

Among companies purchasing carbon credits, Microsoft dominates after setting an ambitious goal in 2020 to become carbon-negative within a decade. Other Big Tech firms such as Amazon (AMZN) and Google (GOOG, GOOGL) are consistent buyers. However, Truitt doesn't expect Big Tech companies to ultimately participate in this auction as they already employ large procurement teams.

Truitt instead sees the auction as attracting "the next wave of carbon credit buyers," comprised of actors that currently must navigate confusing spot markets, sift through individual carbon credit offerings, or sign on to long-term purchase agreements in a largely unregulated market.

“It's our hope that by lowering these transaction costs and the friction of this, ... we can get some of those buyers to come to the table,” Truitt said.

AFF is auctioning carbon credits for two types of projects. The first aims to improve forest management and carbon sequestration on 90,000 acres of land from Maine to Alabama held by 700 family landowners enrolled in the project. The second and newer project pays cattle ranchers and pasture owners in Georgia to plant trees on 1,500 acres of land.

Another feature of AFF's auction will be an advance funding mechanism. In addition to bidding on the number and price of carbon credits to be delivered at a later date, companies will determine a percentage they are willing to pay for up-front in exchange for a discount.

Buyers have spent roughly $3 billion on durable carbon removal credits since October 2019, according to reporting platform CDR.fyi; however, the market could grow more rapidly with better access to low-cost financing.

Truitt underscored that many projects are ready to get off the ground. But because these projects involve more risk — natural disasters and changing rules around offsets add to uncertainty — they often have a difficult time securing lending.

If successful, AFF hopes their auction design can be used by other carbon market participants and remove barriers to these transactions.

"We're not solving climate change, but we're trying to develop a tool that will enable the voluntary carbon market to scale quicker and to produce higher quality carbon credits that can be trusted by buyers, investors, and the general public," Truitt said.

Preserving 'a messy forest'

Tim Stout is one landowner participating in the project. Stout and his family own a 175-acre former dairy farm in Vermont that was passed down from his great-grandfather.

He and his brother have managed the heavily forested property for the past 40 years, and after evaluating different carbon projects, their family enrolled in the Family Forest Carbon Program.

The financial benefits are "fairly modest," Stout said. "I mean, over 20 years, it's a healthy amount," he clarified, "but I think for ... the program to really take off, the price of carbon credits has to go way up."

AFF said it uses Verra's verified carbon standard and its own internal methodology developed with the Nature Conservancy to vet the quality of the credits.

"A messy forest is better than a clean forest because … all the downed trees, all the branches, all the leaf litter is storing carbon," Stout explained about how these plans have changed the way he and his family manage their land. "We're moving more and more to kind of a messy forest."

At the same time, the cost of managing land has "gone up significantly," Stout said.

Extreme weather attributed to climate change has exacerbated costs. Heavy rainfall and flooding in Vermont, which experienced a 1-in-1,000-year rain event this summer, eroded the foundation of Stout's barn, incurring a large expense, he said. And strong winds toppled 200-year-old maple trees onto roadways, which needed to be removed.

Funding from the auction will go toward expenses related to managing the forest and creating long-term land use plans that are developed by landowners, state foresters, and consulting AFF foresters. These plans and smart forestry techniques help forest owners like Stout increase the amount of carbon their forests can sequester.

Stout, who now sits on AFF's board, said he was motivated to sign a contract with the Family Forest Carbon Program by his concerns over climate change. He also feels a strong calling to preserve the woodland for future generations and educate other small landowners about sustainable forestry.

"I would love to have my four-year-old grandson and two-year-old granddaughter be able to visit that [land] when they're my age and have a healthy, robust, resilient forest that's still playing a role in mitigating climate change," he said.

—

Click here for in-depth analysis of the latest stock market news and events moving stock prices

Read the latest financial and business news from Yahoo Finance