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GHG and Ecosystem Markets – State of Affairs, Trends and Access to the Markets QUEST Workshop

GHG and Ecosystem Markets – State of Affairs, Trends and Access to the Markets QUEST Workshop Sustainable Forestry and Climate Mitigation 25 July 2005, Bristol Robert Tippmann, EcoSecurities Ltd., UK. Why Investing in Carbon Forestry or Buying Carbon Credits - The Policy Framework

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GHG and Ecosystem Markets – State of Affairs, Trends and Access to the Markets QUEST Workshop

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  1. GHG and Ecosystem Markets – State of Affairs, Trends and Access to the Markets QUEST Workshop Sustainable Forestry and Climate Mitigation 25 July 2005, Bristol Robert Tippmann, EcoSecurities Ltd., UK

  2. Why Investing in Carbon Forestry or Buying Carbon Credits - The Policy Framework Other EcoSystem Services – Biodiversity and Watershed Protection Services GHG Markets – Which Markets, State of Affairs and Trends Other EcoSystem Markets - Which Markets, State of Affairs and Trends Current Trends in the GHG Markets, Particularly in View of Carbon Credits from Land Use, Land-Use Change and Forestry Criteria for Projects to be (Most) Successful in the GHG Markets and in Attracting CER Buyers Steps in the Generation and Commercialisation of ERs Food for Thoughts Key Points

  3. 1.Why Investing in Carbon Forestry or Buying Carbon Credits - The Policy Framework - • The three flexible mechanisms of the Kyoto Protocol to the UNFCCC • Emissions Trading (ET) under Art. 17: Exchange or trade of surplus emission reduction credits (AAUs) between Annex I countries or entities (industrialised countries or economies in transition). • Joint Implementation (JI) under Art. 6: Annex I Party or entity invests in or buys emission reduction/removal credits (ERUs/RMUs) from an emission reduction/removal project in another Annex I country. • Afforestation, reforestation, and forest and land-use management activities. • The Clean Development Mechanism (CDM) under Art. 12: An Annex I Party or entity invests in or buys emission reduction credits (CERs) from an emission reduction/removal project in a developing country (Non-Annex I country). • Only afforestation and reforestation.

  4. 1.Why Investing in Carbon Forestry or Buying Carbon Credits - The Policy Framework - • Domestic activities or projects under the Kyoto Protocol: • Art. 3.3 and 3.4: Generation of RMUs through an Annex I Party (or entity?). • Afforestation, reforestation, or (avoided) deforestation, revegetation, forest/cropland/grazing land management activities. • National Projects in Annex I countries: Basically a unilateral JI project in an industrialized country or an economy in transition through Art. 3.3 or 3.4 activities that would generate NRUs/RMUs. • Governments will have to decide approval of such project. • Non-Kyoto compliant or voluntary projects • All projects that do not fit the (Kyoto-)bill but do comply with internationally agreed standards.

  5. 2. Other Ecosystem Services – Biodiversity and Watershed Protection Services • Watershed protection services: • Water flow regulation; • water quality maintenance; • erosion and sedimentation control; • land salinization reduction/water table regulations; • maintenance of aquatic habitats. • Commodities • Best management practice contracts, ecolotree plantings, salinity-friendly products, salinity credits, fish habitat or safe products related payments, stream flow reduction licenses, transpiration credits, water rights , water quality credits, watershed lease, watershed protection contract.

  6. 2. Other Ecosystem Services – Biodiversity and Watershed Protection Services • Biodiversity protection services: • Providing habitat conditions that support diverse wild plant, animal and microorganism populations of economic, subsistence or cultural value; • maintaining ecosystem functioning; • conserving genetic and chemical information of potential future utility; • providing insurance against future change; • providing spiritual, aesthetic and cultural values; • ensuring the continued existence of wild organisms as legitimate claimants on earth’s resources. • Commodities • Purchase of high-value habitat/land, payment for biodiversity-conserving management, tradable rights, support biodiversity-conserving businesses.

  7. 3.GHG Markets – Which Markets, State of Affairs and Trends • Kyoto compliant trading schemes or initiatives • EU Emissions Trading System • National trading systems (e.g., UK, Denmark, others within the EU) • Canada and Japan • Non-Kyoto compliant or voluntary trading schemes or initiatives • US schemes, state and city (Seattle, Oregon, Massachusetts, Chicago Climate Exchange) levels • Canada • Australia – New South Wales

  8. 3.GHG Markets – Which Markets, State of Affairs and Trends Project-based emissions reduction trading (1998-2012) Source: World Bank 2005

  9. 3.GHG Markets – Which Markets, State of Affairs and Trends Project-based emission reductions - Distribution among regions and project categories (PDD database)

  10. 3.GHG Markets – Which Markets, State of Affairs and Trends Methodological status: share of total emission reductions and PDDs Share of total PDDs Share of total emission reductions

  11. 3.GHG Markets – Which Markets, State of Affairs and Trends State of affairs regarding the approval of AR-CDM methodologies • 11 baseline and monitoring methodologies have been submitted so far • (five submission rounds until July 2005): • Out of these 11 two projects resubmitted new methodologies; • 3 methodologies have been rejected (recommendations by the AR-CDM Working Group); • 2 methodologies have been sent back for further clarifications (recommendations by the AR-CDM Working Group); and • 4 more methodologies have been submitted in round four which will be assessed after 20 July 2005.

  12. 3.GHG Markets – Which Markets, State of Affairs and Trends Location of emission reduction projects (share of volume supplied) January 2003-December 2004 January 2004-April 2005 Source: World Bank 2005

  13. 3.GHG Markets – Which Markets, State of Affairs and Trends Market buyers (share of volumes of ERs purchased) January 2003-December 2004 January 2004-April 2005 Source: World Bank 2005

  14. 3.GHG Markets – Which Markets, State of Affairs and Trends Observed prices for project-based emission reductions (until 2004) Source: World Bank 2005

  15. 4.Other EcoSystem Markets – Which Markets, State of Affairs and Trends • Markets for biodiversity and watershed protection services less developed or rather consist of dispersed and less regulated niche markets • Watershed markets or services are rather locally based whereas biodiversity services are much more suited to international trading. • More direct deals with less governmental intervention or approval procedures with less clear transaction structures and more variable prices than for carbon credits. • International regulatory framework for biodiversity offsets or efforts to link existing national or regional frameworks in the future is speculative at the moment. • First experiences with voluntary offsets with a number of companies developing technical expertise, building institutional support and making the business case. • There are already mandatory offsets that could eventually be part of an emerging market in tradable “offset credits”. • Other hybrid approaches between voluntary and mandatory offsets.

  16. 5. Current Trends in the GHG Markets, Particularly in View of Carbon Credits from Land use, Land-Use Change and Forestry • Current trends in the GHG markets • EU Emissions Trading System (ETS) started in 2005. • Utilisation of land use, land-use change, and forestry (LULUCF) credits to be decided during review in 2006. However, certain governments can and will buy LULUCF credits independently from this decision. • Canada and Japan are about or have introduced emission reduction measures and policies. • Voluntary, non-Kyoto compliantmarkets have emerged in the US and Australia.

  17. 5. Current Trends in the GHG Markets, Particularly in View of Carbon Credits from Land Use, Land-Use Change and Forestry • Where are the known foci for LULUCF activities and credits on the demand and supply side? • Canada; • Japanese Government plus private sector; • Italy; • Further EU members that are far behind their targets such as Spain or • Portugal (Greece?); • Countries with a traditionally strong forestry sector (e.g., in • Scandinavia), plus others when demand for credits (CERs/ERUs) • is expected to further increase later on.

  18. 5. Current Trends in the GHG Markets, Particularly in View of Carbon Credits from Land Use, Land-Use Change and Forestry • Carbon Finance Group of the World Bank (in particular the • BioCarbon Fund and the Community Development Carbon Fund); • US; • Australia; • There is a strong interest in developing countries in CDM/carbon forestry • projects in the land use and forestry sector, as well as the first ones are • already underway. • In Russia and some other countries in Central and Eastern Europe and • Asia is also a strong interest in generating and selling carbon credits from • forestry activities.

  19. 6. Criteria for Projects to Be (Most) Successful in the Market and in Attracting CER Buyers Institutional framework and support for best results • Kyoto Protocol ratified; • DNA established to approve CDM projects; • DNA should coordinate the agencies responsible for setting sustainability policies, environmental and investment regulations, and the organisations involved in CDM project development; • Sustainable development policies, plans and control systems developed; • National and regional policies developed and integrated; • Priorities and opportunities for projects identified; • Promotion of investment into LULUCF CDM projects; • Capacity and infrastructure for project implementation built; • In-country understanding of carbon flows and data availability in the land-use sector developed; • Legal landscape for carbon ownership defined.

  20. 6. Criteria for Projects to Be (Most) Successful in the Market and in Attracting CER Buyers Project-level design aspects • Good/best practice CDM project development standards (e.g., IPCC LULUCF GPG, CCBA standards); • Sustainability criteria, indicators and standards; • Good forest management principles and criteria (e.g. FSC); • Criteria and indicators for sustainable land use and agriculture or complex systems including agroforestry (e.g. IFOAM); • Regulations and guidelines existing on country-level (e.g. biodiversity indicators); • Environmental and social impact assessments and forest certification.

  21. 6. Criteria for Projects to Be (Most) Successful in the Market and in Attracting CER Buyers • Project-level development criteria • Accurate baseline and project scenario determination and prove of additionality; • Assessment of risks and uncertainties; • Assessment and accounting for leakage; • Consideration of transaction costs; • Positive environmental and socio-economic impacts; • Early stakeholder involvement and consultation; • Consider local, regional, and national requirements for project development; • Overall contribution to the sustainable development goals of the host country.

  22. 6. Criteria for Projects to Be (Most) Successful in the Market and in Attracting CER Buyers forest products - wood and non-wood carbon storage biodiversity forestry investment watershed protection scenic beauty socio-economic benefits

  23. 6. Criteria for Projects to Be (Most) Successful in the Market and in Attracting CER Buyers • Additionally, buyers ask to fulfil certain criteria • Projects with defined implementation plans and clear starting dates; • Financing secured (or close to be secured); • Minimum annual volume of tCO2e; • Kyoto and relevant emissions trading system rules apply; • Only certain project types/interested in LULUCF or not; • Country/regional priorities; • Delivery of emission reductions/removals rather sooner than later; • Risk management strategy in place.

  24. 7. Steps in the Generation and Commercialisation of ERs PIN Project Idea Note PCN Project Concept Note Letter of Intent + Letter of Endorsement LOI + LOE PDD + LOA Project Design Document + Letter of Approval Validation Emission Reduction Purchase Agreement ERPA Verification, registration and transfer Payment

  25. 8. Food for Thoughts • Can we come back to where we started before Kyoto by including avoided deforestation into a post-2012 regime? • Can (methodological) problems on the supply side be solved? Do we need climate mitigation projects to solve the deforestation problem? Can this be part of a solution to bring the US back on board? Who else will buy the credits – demand side? Links to implementing the CBD? • How can we ensure that the share of LULUCF projects in the post-2012 market will be increased? • What is needed to support project developers in getting better access to the market? Combined (biomass) energy LULUCF projects? • What role can/will play other ecosystem services in the future regarding land use and forestry based activities? • What can projects/initiatives do from now on up 2012 to prepare for a post-2012 trading regime? • Include other non AR-activities? Biodiversity/watershed protection services? What about the inclusion on HWP?

  26. EcoSecurities Group Ltd. For further information please contact:Robert Tippmann, 21 Beaumont Street, OX1 2NH Oxford, UK - robert@ecosecurities.com - +44-1865-297488 www.ecosecurities.com

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