RTI International is a trade name of Research Triangle Institute

1. Estimating Leakage from Forest and Agricultural Carbon Sequestration ProjectsPresented byBrian C. MurrayRTI InternationalPresented at3rd USDA Symposium on Greenhouse Gases & Carbon Sequestration in Agriculture & ForestryMarch 23, 2005Baltimore, MD 3040 Cornwallis Road ■ P.O. Box 12194 ■ Research Triangle Park, NC 27709 Phone 919-541-6468 Fax 919-541-6683 e-mail bcm@rti.org RTI International is a trade name of Research Triangle Institute

2. Funding and Collaborators • Funding: US EPA, Climate Change Division • Collaborators: • RTI: Brent Sohngen* • Texas A&M: Bruce McCarl, Dhazn Gillig, Heng-chi Lee • EPA: Ken Andrasko, Ben DeAngelo * On sabbatical from Ohio State University

3. Project Based Approaches to GHG Mitigation • Projects involve intentional activities or actions to reduce GHG’s • The product of these projects may (may not) be used to produce GHG emission offsets • Mitigation projects are voluntary, not required by law • Development of mitigation projects contain nuances that are location and sector specific

4. What is Leakage? • Leakage: Emissions that occur outside the project boundaries as a result of the project activities themselves • It is caused by the shifting of emitting activity elsewhere in response to reductions (sequestration) in the project area • Spatial • Local: aka “primary” • Distant: aka “secondary” or “market” • Sectoral/life cycle: • GHG effects up and down the supply chain

5. * Important Point about Leakage • Leakage is only a problem if the “leaked” (shifted) emissions fall outside some accounting framework, • E.g., from a capped or monitored sector or region to an uncapped/unmonitored sector/region • From a monitored project to an unmonitored activity • Otherwise, its captured in the accounting and does not undermine net emissions reduction

6. Why do we care about leakage at the project level? • It erodes the GHG benefits of a project • Can be difficult to measure • Difficult to enforce due to incomplete contracts • Potential to undermine a project-based offset system

7. Accounting for Leakage

8. Leakage as an issue in forestry and agriculture projects • Induced by economic forces: Supply/demand supplanted by the project is met elsewhere • Formal markets • Other institutional arrangements • Leakage is not unique to forest and ag projects • But, features of forestry and agriculture make them somewhat susceptible to leakage • Fixed land base: Land use change has spillover effects • Commodity markets are often broad in scope (regional, national, global)

9. Emissions Shifting as a Spatial Concept Local shifting: observable and contractable “Primary” Project “Secondary” Regional, National, Global Markets

10. How to Address Leakage at the Project Level

11. Project Leakage in a Market Context Market A (Commodity i, region x) S1 S0 P1 P0 Project Leakage Q’0 Q1 Q0 Market B Market C Market D

12. Simple comparative statics of individual market equilibria Estimating Leakage through Market Modeling L´ = Where e, E, γ, Φ, and Ci are market parameters • Sector models • Forest (e.g., Sohngen, Sedjo, Mendelsohn) • Forest and Ag (e.g., FASOMGHG) • CGE models

13. Myths and Reality Myth: Leakage only happens when projects are big enough to affect the market price Reality: Leakage can happen any time that a project involves goods and services exchanged in a market. In fact, leakage is proportionately larger for small projects than for large projects or policies

14. Leakage Estimates from Market Models • International emissions leakage/energy: ~10-20% of targeted reductions are offset by leakage (from the literature) • Forest carbon leakage Afforestation Program Leakage Estimates by Region (All Quantities Are Percentages) Source: Murray, McCarl, Lee. 2004. Estimating Leakage from Forest Carbon Sequestration Programs. Land Econ: 80(1):109-124

15. Leakage Estimates from Market Models (II) • Forest preservation (avoided deforestation, no harvesting*) Source: Murray, McCarl, Lee. 2004. Estimating Leakage from Forest Carbon Sequestration Programs. Land Econ: 80(1):109-124 * Leakage is moderately lower if harvesting is allowed

16. Some recent leakage results comparing different forestry and agriculture activities* Leakage Estimates by Mitigation Activity at a GHG Price of $15/t CO2 Eq.All quantities are on an annualized basis for the time period 2010–2110. * Ongoing work, Murray and McCarl

17. Regional dimensions of leakage * * Ongoing work, Murray and McCarl

18. Leakage over Time Effect of varying the time horizon over which leakage is quantified. Afforestation program paying $15 per t CO2

19. How is leakage being handled in project accounting protocols? • WRI/WBCSD: Screening, mitigation, quantification of primary and secondary leakage are prescribed but no specific requirements in place • California Registry Draft Protocol (2004) • Chicago Climate Exchange: leakage not explicitly considered • 1605(b) guidelines still in development

20. Conclusions • A project-based offsets/trading system seeks assurance that the emissions allowance correctly corresponds to the reduction by the project • For Carbon sequestration projects, the main factors that may disrupt this correspondence are • Permanence • Additionality • Leakage • Methods are now being developed to address each of these factors, but there is debate about how far to go in terms of reporting standards, stringency, etc…

21. Conclusions (II) • Early empirical evidence suggests leakage could either be trivial (~0) or enormous (over 90%) depending on the activity, location, and time period considered • Q: Is this enough to make these investments uneconomic? • Depends on the price and on the discounts applied to other offset credits • First: design projects to minimize leakage • Centralized efforts needed to harmonize approaches to address and quantify leakage