THE ROLE OF TRANSACTION COSTS IN LUCF PROJECTS

1. THE ROLE OF TRANSACTION COSTS IN LUCF PROJECTS Oscar Cacho School of Business, Economics and Public Policy University of New England AUSTRALIA Research funded by ACIAR Cacho (2008)

2. Outline • Background • The CDM project cycle • Carbon accounting-issues • Implications for REDD • Overview of transaction costs • Strategies to reduce transaction costs Cacho (2008)

3. Background Clean Development Mechanism (CDM) allows Kyoto signatories to reduce greenhouse gas emissions in developing countries (Article 12). The medium of exchange is the Certified Emission Reduction (CER) CDM projects can operate in the energy sector (reduced emissions) or in the land-use change and forestry (LUCF) sector (sinks). Afforestation and reforestation projects are eligible within the LUCF sector. Cacho (2008)

4. Transaction Costs cost of participating in the CER market (CT). SA P($) CT SP PA PP D QA QP Q(CERs) Abatement Costs opportunity cost of land-use change (SP). Cacho (2008)

5. CDM project cycle project developer PDD Development host government (DNA) approval by host country ex ante (pre-implementation) validation operational entity (DOE) registration CDM executive board project developer monitoring ex post (implementation) t operational entity verification + certification CDM executive board CER issuance Cacho (2008)

6. Carbon-Accounting Issues • Additionality • Permanence • Leakage Cacho (2008)

7. Carbon-Accounting Issues • Additionality • Permanence • Leakage Carbon sequestered by the project must be additional to “business as usual” Cacho (2008)

8. Carbon-Accounting Issues • Additionality • Permanence • Leakage Carbon sequestration can be reversed through fire and deforestation Cacho (2008)

9. Carbon-Accounting Issues • Additionality • Permanence • Leakage Emission reductions achieved within a project cause increased emissions outside the project boundary Cacho (2008)

10. Full Carbon Accounting (FCA) An FCA system measures all changes, positive and negative, in all carbon stocks from all lands continuously… lands are monitored permanently over contiguous commitment periods… “ultimately the atmosphere does not differentiate (and neither should climate policy) between carbon dioxide molecules produced by fossil fuel combustion and such molecules produced through forest destruction” Bonnie et al (2002), p. 1871 Cacho (2008)

11. Implications for REDD • REDD will only ever work under a Full Carbon Accounting (FCA) scheme • FCA avoids the problems of permanence and leakage • The link between FCA and forest dwellers still needs to be established and rewards must be distributed • This link will carry transaction costs Cacho (2008)

12. Transaction costs • Search and negotiation • Approval • Project management • Monitoring • Enforcement and insurance Cacho (2008)

13. Transaction costs • Search and negotiation • Approval • Project management • Monitoring • Enforcement and insurance • find site, establish contact, organize information sessions, draft contracts, provide training • establish baseline for region • estimate potential C stocks and flows of project • produce PDD Cacho (2008)

14. Transaction costs • Search and negotiation • Approval • Project management • Monitoring • Enforcement and insurance • approval by host country (DNA) • validate the project proposal (DOE) • Submit to CER Board Cacho (2008)

15. Transaction costs • Search and negotiation • Approval • Project management • Monitoring • Enforcement and insurance • purchase hardware and software, establish office • establish permanent sampling plots • maintain database and administer payments • coordinate field crews, pay salaries • distribute payments to landholders • interest costs Cacho (2008)

16. Transaction costs • Search and negotiation • Approval • Project management • Monitoring • Enforcement and insurance • sample C stocks • verification and certification by DOE • check for leakage Cacho (2008)

17. Transaction costs • Search and negotiation • Approval • Project management • Monitoring • Enforcement and insurance • maintain buffer of C • purchase liability insurance, • settle disputes • protect plot from poachers and fire Cacho (2008)

18. Reducing transaction costs • Generate and disseminate information on carbon stocks, baselines and potential carbon sequestration. • Train landholders to measure carbon. • Select cohesive communities and encourage community self-regulation to meet project commitments. • Bundle projects and payment schemes. • Grant land tenure to landhoders who restore degraded land. Cacho (2008)

19. Reducing transaction costs enforcement and insurance project management search and negotiation monitoring approval Generate & disseminate information Bundle projects Teach landholders to measure C Encourage community self-regulation Promote secure land tenure Cacho (2008)

20. “It is unlikely that developing countries will be willing to take emission budgets that require FCA unless they gain experience in successfully curbing tropical deforestation while also providing for the needs of their citizens” Bonnie et al (2002), p. 1872 Cacho (2008)