Inclusion of Forestry into the EU ETS Arguments and Responses

1. Inclusion of Forestry into the EU ETSArguments and Responses Brussels Dr Charlotte Streck 25 June 2008

2. A complicated relationship:The EU and Forestry in Climate Agreements • Primary objective of EU climate policy: reduction of GHG emissions from industry and energy • Biological sequestration (but not geological sequestration) is a distraction from this effort • EU policy characterized by bias against acknowledging the contribution of forestry in climate change mitigation EC: “LULUCF projects cannot physically deliver permanent emissions reductions. Applying these in a company-based trading system would impose great liability risks on Member States and is contrary to the intentions of the EU ETS to steer the EU towards a low-carbon economy.”

3. EC Policy on Forestry & Climate • Participation in the REDD negotiations under the UNFCCC • No support for reform of the CDM to expand the scope of forestry • No consideration of forestry under the EU ETS • Earmarking of auctioning proceeds to reduce emissions from tropical deforestation • Focus on EE, RE and Carbon Capture and Storage EC on CCS: While energy efficiency and renewable energy are shorter-term solutions, other options are needed in longer term if we are to reach 50% GHG reduction globally in 2050 It is crucial from a global perspective CCS has been demonstrated as functioning, but not yet as an integrated process or at reasonable costs Not True (Even more So) For Biological Sequestration?

4. What are we talking about? Similar to CERs/ERUs linked to the EU ETS, t/lCERs for CDM Very low numbers till 2013 Forestry Credits • Defined credits • Credits from A/R projects under CDM • Credits from LULUCF projects under JI • RMUs from Art 3.3/3.4 activities in Annex I countries • Future, potential credits • REDD credits • Others? Modalities and quantities unclear

5. Non Permanence EC Arguments Counterarguments The risk of loss from a natural event in managed forests is very small, averaging 0.04% of loss per year. Hancock Timberland Investor, 2nd Quarter 2003, Risk from Natural Hazards for Timberland Investments . Forests can be considered permanent the moment when the CO2 the bind would have disappeared from the atmosphere anyway • Biological sequestration is inherently reversible, and carbon stored can at some point be released. • All options to include LULUCF in the EU ETS (via JI/CDM) as well as via domestic projects or by including the entire sector) pose problems concerning the temporary and reversible nature of LULUCF activities

6. The Permanence Risk EC Arguments Counterarguments Loss of carbon benefits are monitored and deducted on carbon balance sheet Strategies to reduce and address the risk of loss of permanence e.g. fire breaks, pest control, etc Non permanence has been addressed for CDM A/R projects by means of temporary crediting Insurance (e.g. AIG) and reserve buffers (e.g. CCX, VCS) can be established to cope with unforeseen loss in carbon stocks • Insufficient modalities have been developed in relation to the non-permanence problems arising in relation to LULUCF projects, jeopardising the environmental effectiveness of the EU ETS.

7. CC Effects on Carbon Update EC Arguments Counterarguments “Experiments have unequivocally shown that plants can grow faster and larger in a CO2-enriched atmosphere, and the mechanisms of response are well understood” Norby, R.J et al,. 2005. Forest response to elevated CO2 is conserved across a broad range of productivity. Proceedings of the National Academy of Sciences 102: 10.1073 “Carbon is accumulating in northern mid-latitude terrestrial ecosystems” Woods Hole Research Center • The capacity of carbon sequestration by forests diminishes with time, and climate change will have further negative influence on a natural carbon uptake by the terrestrial biosphere.

8. Leakage EC Arguments Counterarguments Leakage is not specific or exclusive to LULUCF activities Sources of leakage can be identified using a conservative approach Leakage can be minimized. When it does occur it can be quantified and deducted from a projects carbon balance sheet Baseline methodologies approved under the CDM to deal with displacement of specific activities e.g. cattle grazing, agriculture etc • Whereas emissions reductions in industry can be quantified by measuring input and output values, ecosystems are inherently prone to leakage. • This problem is further enhanced through the risks of leakage when a LULUCF sequestration activity results in the displacement of emitting activities outside the boundaries of the project.

9. Monitoring EC Arguments Counterarguments IPCC’s 2003 GPG-LULUCF 2006 IPCC Guidelines for National Greenhouse Gas Inventories Data and analytical methods for monitoring change in land cover using remote sensing and field based techniques (GOFC-Gold report series, FAO, World Bank, Winrock Intl) Third party validation and verification of measurement and monitoring required in all mandatory schemes Conservativeness mandatory • The inclusion of LULUCF projects in the ETS would require a quality of monitoring and reporting that is comparable to the monitoring and reporting of emissions from the installations currently covered by the system.

10. Scale EC Arguments Counterarguments The contribution of CDM A/R credits is less than 1% of 1% of Annex I emissions in 1990. Future targets likely to be more stringent, and can be adapted to reflect opportunities, including LULUCF The high end of forecasts for credits from A/R (2.8 million tCO2e), annual reductions from A/R would be less than one half of the average daily trading volume in the EU ETS in 2006. • Because of the sheer quantity of potential credits entering the EU ETS the functioning of the carbon market might be undermined (unless their role in the ETS is limited, which would make the potential benefits marginal).

11. Summary: Integrity EC Arguments Counterarguments Influx of credits can be controlled. Permanence and leakage are being addressed under the KP rules and EB decisions. No risk of flooding from A/R credits. Other credits (REDD) to be allowed only after quantitative assessment and qualitative measures ensure risk-free integration. • Allowing LULUCF credits into the EU ETS would put at risk the integrity of the system.

12. Benefits from opening the EU ETS for forestry credits • Environmental benefits • Key to achieve the + 2°C target • Also helps to preserve biodiversity and avoid land degradation • Helps to accept ‘tougher’ commitments • LULUCF activities help build the biomass resources for future renewable energy system • Economic Benefits • Creates additional flexibility under the EU ETS. • Gives companies breathing space for smooth transition to low carbon economy • Development Benefits • Ensures flow of capital to LDCs and rural areas in developing countries

13. Extra EU developments • New Zealand • New Zealand Emissions Trading Scheme • Permanent Forest Sink Initiative • Australia • New South Wales Greenhouse Gas Abatement Scheme • Proposed Australian ETS • United States • None of the proposed bills exclude LULUCF credits • Bills of Senator Feinstein and Senators Lieberman and Warner explicitly include LULUCF credits • US Northeast States Regional Greenhouse Gas Initiative • California Climate Action Registry • Voluntary Schemes • Voluntary Carbon Standard (Climate Group, IETA, WEF) • Climate, Community and Biodiversity Standard • Chicago Climate Exchange

14. Possible EU ETS Amendment Amendment: Add new Article 11(a)(4): An operator that has used a tCER shall surrender a CER, [tCER] ERU, or allowance at least 30 days before the tCER expires to cover the emissions which had been covered by the expired tCER. If the operator has not replaced any tCERs it has used to cover its emissions by the time they expire, the operator shall be held liable for the payment of the excess emissions penalty in accordance with Article 16.

15. Thank you very much! For more information: Charlotte Streck Director Climate Focus Ph: +31 64 64 2 64 81 E-mail: c.streck@climatefocus.com