Alaska can be a rugged and unforgiving place, and that’s not just its landscape. Its economy is prone to big booms and wrenching busts. Lately, it has seen more busts.

More than any other state, Alaska is dependent on oil. As much as 85% of the state’s unrestricted general fund revenue comes from oil production, according to state estimates. In some years, it has been well over 90%. But oil production has been in long-term decline in the state, which was once America’s No. 1 producer of crude but has been surpassed by several shale oil boom states, including Texas, New Mexico and North Dakota. Alaska’s crude production in 2022 was roughly equal to that of Oklahoma, and it hit the lowest level since 1976, according to Energy Department data.

This trend helps explain why Alaska’s economy performed worse than any other state last year, according to the Commerce Department, shrinking by 2.4%. And it explains why the Last Frontier finished dead last in CNBC’s 2023 America’s Top States for Business rankings.

In addition to a last-place finish in the Economy category, Alaska ranks 49th in the Infrastructure, Education, and Access to Capital categories. It finished 48th in Cost of Doing Business. This is the seventh time since 2007 that Alaska has finished at the bottom, and the third time in the last five studies.

Alaska’s carbon turnaround plan for the future

Alaska isn’t giving up on crude. Recent approvals such as the controversial Willow Project have led state officials to forecast an increase in production in the years ahead. But Gov. Mike Dunleavy and the state legislature have a plan that they hope will reverse Alaska’s fortunes once and for all, by making the state less susceptible to gyrations in the oil market.

“Alaska was built on a promise that we would be north of the future. That we would be visionary,” Dunleavy, a Republican, said at a news conference May 23.

Dunleavy was marking the signing of SB 48, legislation that officially puts the state in the carbon business.

“Just like oil, just like gas, just like our timber, this is a commodity that can be monetized now,” he said.

Under the new law, Alaska will be able to sell so-called “carbon offset credits,” capitalizing on the state’s vast public forest lands. Companies that emit carbon will be able to buy the credits, effectively paying the state to preserve and protect its forests, thereby canceling out, or offsetting, those emissions.

What the state doesn’t spend on maintaining its forests, it can keep as revenue.

Alaska Natural Resources Commissioner John Boyle, who is working on the rules to implement the program, said in an interview with CNBC that the market for the new credits could be huge as companies discover the limits of carbon reduction technology.

“Across America, and in the rest of the world, you see a number of companies that have set very aggressive net zero (emission) targets for themselves,” he said. “Ultimately, in order for a lot of these companies to be able to hit the targets that they’ve set for themselves, they’re going to need to look for other options for offsets.”

The emissions offset market is growing

Carbon offset programs are already gaining popularity around the world. The California Air Resources Board operates an extensive offset program that the state says is an essential part of its program to reduce greenhouse gas emissions.

When Dunleavy unveiled the legislation in January, he noted that Alaska’s Native Corporations have generated $370 million in revenue selling offset credits since 2019.

The state has not offered any estimates of how much revenue its program could generate, but Boyle said it could begin making money soon.

“I don’t think it’s unfair to say that the state fully anticipates seeing revenue within a relatively short period of time, likely within the next 12 to 18 months,” Boyle said. “We fully expect to see some new revenues coming in as companies acquire our leases and do other things to prepare themselves to develop carbon offset projects.”

Carbon credits are controversial

Alaska is all in on the plan. The bill passed the state Senate unanimously; only two members of the House voted against it.

But outside Alaska, there is no shortage of skepticism.

“Multiple lines of evidence suggest that Alaska’s forest carbon offsets program could produce carbon credits that don’t represent real climate benefits,” wrote Freya Chay and Grayson Badgley of the climate research group CarbonPlan in a commentary published in May. 

They note that while the program promises to protect Alaska’s forests and the climate benefits they provide, it also promises not to reduce timber harvests. The researchers said the credits appear to be structured to “simply reward a landowner for doing what they already planned on doing.”

“Although this could be a win for the State budget, it would be a loss for the climate — and for the credibility of the voluntary carbon market,” they wrote.

Boyle argues that the funding from the offset credits will allow the state to manage its forests more effectively and efficiently. That way, he said, the state will eventually have larger forests — with more trees to capture carbon, and more timber left over to harvest.

“That gives you a margin by which, if you choose, you can do some selective timber harvesting, as long as you maintain a level that is appropriate with the baseline that’s been established,” he said.

Carbon credits are just the beginning of Alaska’s plan to transform its economy. Dunleavy has also proposed creating a “carbon sequestration” program, where the state would capture its carbon emissions — or accept shipments of carbon captured elsewhere — and inject them into underground storage beneath Alaska’s huge expanses of open land.

“There’s a real ability here to move the needle in managing the world’s carbon and storing it for geologically significant periods of time,” Boyle said.

They believe that there is also an ability to diversify Alaska’s economy and make it competitive again, while helping the planet at the same time.