Woodland carbon & Incentives for Climate Change Mitigation by the UK Forest Sector

1. Woodland carbon & Incentives for Climate Change Mitigation by the UK Forest Sector Gregory Valatin Forest Research Centre for Human and Ecological Sciences Roslin Scotland

2. Change of presentation focus The ‘comprehensive title in the programme: Originally international cooperation on climate change • Early results from game theory literature suggested: • a self-enforcing international environmental agreement (IEA) may not exist (Barrett 1994) • where one does it is unlikely to: • be signed by more than a few countries (Barrett 1997; Carraro and Siniscalco 2001) • to significantly improve upon the non-cooperative equilibrium (Barrett 1997; Carraro (Ed.) 2003). • Framing the problem as an issue of environmental security reverses these results • how we frame problems can drive the results we get! Apologies for any disappointment due to change of focus!

3. Overview 1) Significance of UK woodland Carbon • UK National Ecosystem Assessment • sequestration • storage 2) Cost-effectiveness of UK forestry for Climate Change Mitigation • Marginal Abatement Cost Curves • Other studies: • Flood risk management: ‘Slowing the Flow’ at Pickering • Agroforestry / farm woodland: Ammonia abatement 3) Incentives for Carbon sequestration by UK woodlands • Regulatory frameworks • EU Emissions Trading Scheme • recent Forestry Commission led initiatives • Investigating potential for new financial instruments • Woodland Carbon Code • Carbon Valuation, Discounting & Risk Management • Additionality of woodland carbon projects 4) Summary and Concluding remarks

4. Variety of UK Forest Ecosystem Services NEA Woodlands Chapter: • Provisioning services • 9 million tonnes of wood in 2009 • Social & cultural services • 250-300 million visits to UK woodlands a year • Landscape amenity • Educational value • Regulating services: • Detoxification/purification • Water quality • Soil quality • Air quality • Hazard reduction • Flood risk • Carbon sequestration • Biodiversity http://uknea.unep-wcmc.org

5. Carbon sequestration by UK woodlands CEH / UK GHG inventory estimates (UK forests planted since 1921): ● annual net carbon sequestration rose from 2.4 MtCO2 in 1945 to a peak of 16.3 MtCO2 in 2004, falling back to 12.9 MtCO2 in 2009. ● mean net sequestration rates of 5.2tCO2/ha over 2001-2009.

6. Carbon sequestration by UK woodlands UK NEA (CEH/UK GHG inventory data): ● Social value of net carbon sequestration by UK woodlands increased five-fold, from £124m in 1945, to £680m in 2009 assuming woodland carbon stock remains at least at current level in perpetuity and does not account for forestry establishment or management costs. Figure 17 – Value of annual carbon sequestration by UK woodlands (at 2010 prices). Note: based upon DECC (2010) social value of carbon central estimate of £53/tCO2 in 2009.

7. Future UK carbon sequestration? (1) UK NEA 2010-2050 BAU (‘business as usual’) scenario forecasts (based upon CEH estimates): ● indicate a drop of more than half in net carbon sequestration by UK woodlands from over 10 MtCO2 in 2010 to under 4 MtCO2 in 2028. ● Forecast net carbon sequestration then falls further and becomes negative in the years 2030-2034 (as well as in 2048) with UK woodlands becoming a carbon source rather than a sink. ● once the net carbon sequestered in harvested wood products (HWP) is added, total net sequestration remains a carbon sink over the entire period. Figure 19 – Net carbon sequestration by UK woodlands & HWP. Figure 20 – Forecast values 2010-2050 (at 2010 prices). . Due to increasing social value of carbon ● per hectare value of net carbon sequestration by UK woodlands projected to increase overall from £200/ha in 2010 to over £250/ha in 2050 (at 2010 prices). Note: based upon current woodland creation rates of 8,360ha per year and woodland removals of 1,128ha per year continue throughout .

8. Future UK carbon sequestration? (2) UK NEA 2010-2050 (based upon Read Report scenarios): Figure 22 – Impact of scenarios on projected net CO2 uptake compared to BAU scenario: a) woodlands only; (b) total including HWP and substitution effects. Figure 19 – Net carbon sequestration by UK woodlands & HWP. Source: Adapted from Matthews & Broadmeadow (2009), p.148. annual value of net carbon sequestered by UK woodlands under the enhanced afforestation scenario (EAS) additional woodland creation of 23,000ha/yr under EAS could potentially rise by around £3,000m-£4,000m by 2060 at 2010 prices compared with the CEH BAU scenario (based upon valuing the additional net 12-15MtCO2 sequestered in 2060 at the DECC central value of £275/tCO2e recommended for that year).

9. Significance of carbon sequestration NEA finding: Estimated social value of net carbon sequestration per hectare of UK woodland (£239/ha/yr) was more than three times the market value of softwood produced (£66/ha/yr) in 2009. (NB mean market value of the carbon sequestration in 2009 probably far below 1% of the market value of the timber).

10. Carbon storage by UK woodlands UK / NEA estimates: ● 803 MtC carbon stored in UK woodlands in 1990. ● Social value (relative to permanent loss) of £11,000/ha - £59,000/ha at 2010 prices (range depends if only above- and below-round biomass included, or also soil carbon). .

11. climate change mitigation cost-effectiveness? Depends upon species planted, inclusion or exclusion of carbon substitution benefits, etc: Read Report estimates (p.158) http://www.forestry.gov.uk/forestry/infd-7y4gn9

12. climate change mitigation cost-effectiveness? Marginal Abatement Cost Curves (MACCs) Interpretation: A single line segment (or bar) is used to represent each measure. Its horizontal width represents the abatement potential and its vertical height the unit cost. UK Marginal Abatement Cost Curves for renewable heat in 2022. Carbon savings in 2022 (MtCO2) Source: CCC (2011, p. 125). Notes: ASHP air source heat pumps; DH district heating; GSHP ground source heat pumps. Where a technology appears more than once in a curve, this reflects different applications. E.g. for households (url: http://www.theccc.org.uk spring 2010):

13. Climate change mitigation cost-effectiveness Estimates from MACCs covering UK forestry measures Valatin G. (forthcoming, Tables 1 & 2): Marginal Abatement Cost Curves for UK Forestry: A review

14. Climate change mitigation cost-effectiveness Forestry MACCs: importance of agricultural opportunity costs Carbon pools covered: T: Tree; L: litter; S: Soil; HWP: harvested wood products. * If annual agricultural opportunity costs converted at Treasury Green Book discount rates

15. Cost-effectiveness including other ES Forestry measures at project level: (1) ‘Slowing the Flow’: indicative cost-effectiveness estimates for floodplain, riparian farm woodland creation for flood risk management: -£61.61 to £2.85/tCO2 (central estimate -£28.83/tCO2). (2) ‘SAMBA’: indicative cost-effectiveness estimates for woodland creation for ammonia abatement: -£608 to £23/tCO2 (DECC cost-effectiveness comparator: £44/tCO2 to £46/tCO2). http://www.forestry.gov.uk/fr/INFD-7ZUCQY#final1

16. Cost-effectiveness: summary UK Forestry measures generally highly cost-effective: ● recent results draw upon current UK guidance including: ● DECC social values of carbon ● central estimate £53/tCO2 in 2012 (2009 prices, non ETS) ● rising to £469/tCO2 in 2100 ● Treasury Green Book discounting protocol ● decline from 3.5% (0-30yrs) to 1% (>301 yrs) ● results also dependent upon wider feasibility considerations ● e.g. landowners’ motivations & land availability ● cost-effectiveness estimates are sensitive to approach adopted: ● e.g. discounting protocol & assumed social values ● whether discounted social values of carbon rise ● inclusion of wider benefits ● standardising methodology across studies (& countries) would aid comparability

17. Incentives (Payments for Ecosystem Services) Q: How to ensure the social value of carbon sequestration (and other benefits) of woodlands are taken account in practice? (especially in an era of limited public finance) US 2007 study visit: • Wetland Mitigation: • Clean Water Act 1977 (section 404): • ‘No net loss of wetlands’ • Mitigation banks emerged in the 1990s • Conservation Banking: • Endangered Species Act 1973 (Section 10) requirements for a Habitat Conservation Plan • Requirements to avoid, minimise and compensate • Conservation banks established in 1990s • Water Quality Trading: • Clean Water Act 1977 • Carbon Trading: • Regional initiatives

18. EU Emissions Trading Scheme UK woodland carbon is not currently covered by regulatory (e.g. cap-and-trade) schemes. E.G EU ETS (a “cornerstone” of the EU's policy to combat climate change): • does not currently cover forest carbon due to: • Focus as technological driver for emission abatement by energy and industrial sources • potential impacts on incentives to reduce emissions • permanence • leakage • quantification, monitoring and verification • high transaction and administrative costs • added complexity • temporary nature of some forestry credits (CDM) • potential liability issues for Member States • potential for future inclusion of forestry remains a discussion point • EU ETS could be a potential funding source for forestry projects • ≥50% of government proceeds from auctioning EU allowances earmarked for nine activities • these include forestry carbon sequestration COST E51: Ciccarese, L., Elsasser, P., Horattas, A., Pettenella, D. and Valatin, G. 2011. Innovative market opportunities related to carbon sequestration in European forests?, Chapter 9 of Weiss, G. et al (eds) Innovation in Forestry, CABI, Wallingford.

19. Forestry Commission initiatives (1) Investigating new business models & financial instruments for funding woodland creation • ‘forest bonds’ • Potential models: • community bonds (e.g. renewable energy retailer issue of bonds to customers) • charity bonds (low risk social housing projects, with donation to charity dependent upon investor’s chosen level of return). • social impact bonds (public sector commissioners pay if/when outcome specific milestones met for defined population) • examples for woodland creation in other countries include: • Bamboo bond launched in by EcoPlanet Bamboo (UK) Ltd in 2011 aimed at establishing 1,800 ha of Guadua Bamboo plantation in central America • Forest Bonds offered by Planting Empowerment based in Washington DC • Investor view that funding potential for woodland creation in England too small? • Potential for wider base forestry bonds (e.g. European)? • equity investment in community shares • may be preferred by local communities as does not put land purchased for woodland creation at risk NB equity is an unsecured investment so that if enterprise fails, investors stand to lose entire investment whereas bonds are generally secured against some form of collateral such as the land purchased http://http://www.forestry.gov.uk/forestry/INFD-8FPHL8

20. Forestry Commission initiatives (2) Woodland Carbon Code aims to: • help underpin emerging market for UK forestry carbon sequestration • not ‘offsets’ • help meet government climate change mitigation targets http://www.forestry.gov.uk/carboncode

21. Non-permanence risk management Approaches to non-permanence risk: • (i) Discounting • E.g. future carbon benefits with a risk of x% that they fail to materialise may be valued at (100-x)% of a benefit that is certain by a risk-neutral decision-maker • (ii) Maintaining a Buffer • Credit issuers withhold proportion of credits to cover risks • akin to discounting but increases rather than decreases value of a credit • (iii) Temporary crediting • Excludes benefits accruing beyond specified time • eliminates need to consider some more distant risks • (iv) Ex-post (rather than ex-ante) crediting • Reduces/eliminates need to consider future risks • (v) Insurance • (vi) Portfolio management http://www.forestry.gov.uk/fr/INFD-7WTDFQ

22. Carbon Additionality Meaning • Positive ‘net benefits’ compared to • baseline (‘business-as-usual’) • Climate change context: • GHG savingsabove those expected anyway • within specified project boundary • Distinguished from ‘leakage’ and ‘displacement’ Rationale • avoid carbon credits being issued for benefits that would have arisen anyway • avoid purchasers paying for activities providing no extra savings • Key determinant of quality of carbon units

23. Additionality: a multi-faceted concept Legal, Regulatory & institutional: 1) Barrier: Overcomes implementation barrier 2) Compliance: Exceeds statutory requirements 3) Date: Occurs after a particular date 4) Incentive: exceeds benefits associated with incentives provided by regulatory framework 5) Institutional: Independent of statutory targets 6) Jurisdiction: specific location/communities or social groups 7) Practice: not common practice 8) Reporting: national GHG accounting/reporting rules 9) Technology: specific technology used Financial & Investment: 10) Financial: would not be financed without sale of carbon units(type of barrier) 11) Investment: not viable /most financially attractive without sale of carbon units 12) Sales: Income from sale of carbon a decisive factor in decision to proceed Environmental: 13) GHG: Positive impact on GHG balances 14) Unit: Emissions per unit below specified level 15) Project: e.g. forests unable to establish themselves in the absence of planned activities or project

24. Additionality: summary transaction costs: influence of trade-offs between cost and precision determining additionality is an imprecise art for many aspects • comparing hypothetical scenarios (e.g. BAU determination) • variety of methodologies (e.g. investment additionality) Aspects seldom covered by additionality tests can be significant: • Institutional additionality • precipitous drop in the total EU voluntary carbon units sold from 2.3 mtCO2e in 2007 to 0.2 mtCO2e in 2008 due partly to concerns of double-counting associated with reductions being covered by national reporting under the Kyoto Protocol (Hamilton et al, 2009) Additionality tests can provide perverse incentives in some cases: • Classic example often focused upon: • trifluoromethane (HCF-23) destruction projects under the CDM • Incomplete coverage of climate change mitigation or wider woodlands benefits may provide perverse incentives (Forthcoming journal article in Forestry).

25. Summary & concluding remarks (1) Woodland carbon cost-effectiveness as ‘work in progress’: • Carbon sequestration is a significant ecosystem service provided by UK forests which existing estimates suggest increased five-fold from 1945-2009. • Carbon storage by UK forests is also very significant. • Available evidence points to UK forestry options being relatively cost-effective, although estimates vary & are sensitive to the method used, & approaches could usefully be standardised to aide comparability. • Evidence gaps remain in comprehensive assessment of the cost-effectiveness of UK woodland options (e.g. accounting for the entire range of ecosystem services associated with woodland carbon projects, spatial & temporal variations, & future climate impacts).

26. Summary & concluding remarks (2) Woodland carbon incentives as ‘work in progress’: • Little incentive exists from regulatory frameworks at present for UK owners to account for forestry carbon in making decisions • New instruments and mechanisms to help realise the societal benefits of woodland carbon are being explored. • A Woodland Carbon Code to help underpin emerging markets for UK forestry carbon has been developed. • Gaps remain in incentives for owners to account for forestry carbon in making decisions (e.g. the Woodland Carbon Code focuses on carbon sequestration associated with woodland creation, and does not extent to forest management, carbon substitution or storage benefits) and disparities remain between market and social values.