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Sinks in the CDM: Assessment of Carbon Accounting Options

XVIII Meeting of the Subsidiary Body for Scientific and Technological Advice Bonn (Germany) 4-13 June, 2003. Side event organized by the Swiss Delegation 6 June 2003, 6:00-8:00 PM. Sinks in the CDM: Assessment of Carbon Accounting Options. Lucio Pedroni*

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Sinks in the CDM: Assessment of Carbon Accounting Options

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  1. XVIII Meeting of the Subsidiary Body for Scientific and Technological Advice Bonn (Germany) 4-13 June, 2003 Side event organized by the Swiss Delegation 6 June 2003, 6:00-8:00 PM Sinks in the CDM:Assessment of Carbon Accounting Options Lucio Pedroni* *CATIE, Tropical Agricultural Research and Higher Education Center

  2. Content • Issues at stake • Accounting methods • Comparison of accounting methods • Scenario analysis of hypothetical project • Case study • Conclusions and recommendations

  3. Issues at stake • Carbon accounting = paradigm to address non-permanence of carbon in forests ( energy projects). • Carbon accounting will impact on project viability and scale. • Project scale is relevant: • Equity & participation • Impacts • Leakage • Investment requirements • AR-CDM project viability is relevant.

  4. Accounting methods • Stock-change:Credits = Difference between stock at time t and stock at time t+i (measured in CO2 equivalents). • Ton-year:Credits = annual stock divided by the equivalence time (Te) [or multiplied by Ef = 1/Te]. • Equivalence-adjusted average storage:Credits = average stock stored during the project lifetime adjusted for Te. • Temporary crediting:Credits with finite lifetime.

  5. Equivalence time (Te) “Length of the period of time that 1 t CO2 must be stored as carbon in the biomass or soil for it to prevent the cumulative radiative forcing effect of a similar quantity of CO2 during its residence time in the atmosphere” (IPCC, 2000) Length of Te? for ever? 100 years?* 55 years? * 100 years is the reference used to calculate the global warming potentials of non-CO2 GHGs.

  6. Ton-year accounting Credits generated at a year t: CERsyear t = (CO2 project – CO2 base line)t / Te Credits generated during a period of time i: t=x+i CERsperíodo i =  (CO2 project – CO2 base line)t / Te t=x

  7. Ton-year creditsTe = 55 350 Ton-year creditsTe = 100 300 250 200 tC/ha 150 100 50 0 25 75 50 0 100 years Pinus patula plantation managed in 25 year harvesting cycles

  8. Ton-year accounting... • Advantages: • Safe for the climate: there are no risks at the time of credit issuance. • Credits do not expire. • Disadvantages: • Projects earn credits very slowly. • An agreement on the length of Te is required.

  9. Equivalence-adjusted average carbon storage accounting (ACS) Te-adjusted average carbon storage = t=n  (CO2 project – CO2 baseline)t t=1 Te

  10. Running average storage ACS credits, n = 100, Te = 100 350 ACS credits, n = 50, Te = 100 300 250 200 tC/ha Average C storage n = 100 150 Average C storage n = 50 100 50 0 25 75 50 0 100 years Pinus patula plantation managed in 25 year harvesting cycles

  11. “Uncertainty time” “Uncertainty time” ACS-crediting requires special provisions (insurance, risk discount, buffer, banked TCERs or a combination) to cover the risk of carbon re-emission during the “uncertainty time” (time between verification and project end) 300 250 200 tC/ha Average C storage n = 100 150 Average C storage n = 50 100 50 0 25 75 50 0 100 years

  12. ACS-accounting... • Advantages: • Projects earn more credits earlier. • Credits do not expire. • No need to create a new currency. • Disadvantages: • Risks for the climate (“uncertainty time”, not really ex-post). • Requires provisions to address the risk of carbon re-emission during the “uncertainty time”. • An agreement on the length of Te is required. • Requires monitoring and periodical verification during the entire planned project duration.

  13. Temporary crediting • Credits with finite life-time. • Appealing (non-permanence is fully recognized). • Critical questions: • Length of life-time? • Quantification? • Renewal? • Expiring or not expiring? • Market viability?

  14. b b b a a a t-x t t-x t t-x t TCERx = b TCERx = a+(b-a)/2 TCERx = a How to quantify TCERx?

  15. Uncertainty time (= x/2) b a t-x t TCERx = a How to quantify TCERx? b b a a t-x t t-x t TCERx = b TCERx = a+(b-a)/2 (TCER-1) (TCER-2)

  16. Energy: 1 tCO2 1 CER = 1 t CO2 “forever” time 1 verification LULUCF: 1 tCO2 1 TCER 1 TCER 1 TCER 1 TCER 1 TCER time Periodical verifications for the same ton of CO2 (T)CERs are two-dimensional: f (tCO2, time) TCERs are less valuable and more expensive to produce than CERs

  17. Are new TCERs and renewed TCERs something different? New TCER Renewed TCER tCO2 Verif. & Certif. time Crediting period

  18. If this would be an Energy project... CERs tCO2 Verif. & Certif. time Crediting period

  19. Are new TCERs and renewed TCERs something different? New TCER Renewed TCER tCO2 Verif. & Certif. ? time Crediting period

  20. Temporary crediting... • Price of TCERs: • Obviously less than permanent CERs. • An economic approach to estimate the price of TCERs would be: • $CERp2 • $TCER = $CERp1 - • (1+i)LT • $TCER= Price of TCER • $CERp1 = Today price of permanent CER • $CERp2 = Price of permanet CERs in LT years • i = Discount rate • LT = Life time of TCERs

  21. Temporary crediting... • Advantages: • More credits in less time. • Buyer liability. • Moderate or zero risk for the climate (depending on the lenght of “uncertainty time”). • Disadvantages: • Economic risk of TCERs, particularly their price (projects could be unviable). • Need to create a new currency. • More complex international book-keeping.

  22. Comparison of accounting methods Model: What is the minimum project area at which: Revenues from (T)CERs = Transaction costs? Case study: Viability of two potential projects in Nicaragua and Honduras

  23. COP-9 Logic of the Model Minimum project area = function of: • Biophysical and management features: • Growth, thinning-harvesting regime, ... • CDM modalities: • Accounting methods, crediting period, ... • Carbon-market and its rules: • Price of CERs, transaction costs (design, validation, monitoring, verification, share of proceeds), economic discount rate, ...

  24. The Model Variable area Present value of benefits Input: Parameters Net benefits minus Present value of transaction costs Output: Minimum project area

  25. Input parameters • 4 accounting methods (ton-yr, ACS, TCER-1, TCER-2) • CER price: 3, 6, 9 or 12 US$/tCO2 • Annual variation rate of CER price: -3%, 0%, +3% yr-1 • Time interval between verifications: 5 or 10 years • Crediting period: 10, 30 or 50 years • Risk discount factor: 0%, 1% or 2% yr-1 • Cost Factor F: 1, 2, 3, 4 or 5 • Design and validation: • F * US$ 40.000 • Monitoring costs: • F * US$ 2000 / monitoring event • F * US$ 0,1 / ha / monitoring event • Verification costs: • F * US$ 15.000 / verification event • Economic discount rate: 3%, 6% or 9% yr-1 Totaling 7,776 simulations.

  26. Model suppositions • Baseline = 0 • Leakage = 0 • Project duration: 75 years • Harvesting cycle: 25 years • Equivalence time: 100 years • National and international share of proceeds: 7% • Risk discount = f (duration of “uncertainty time”, annual risk discount factor) • Price of TCERs: $TCER(t) = $CER(t) - $CER(t+5)/(1+r)5

  27. Minimum project area, all 7776 scenarios % of scenarios allowing the CDM to be profitable Minimum Project Area (ha)

  28. Frequency distribution according to the carbon accounting method

  29. Net present benefits of carbon selling (constant CER price) Net present benefits of carbon selling (US$/ha) Area (ha)

  30. Net present benefits of carbon selling (increasing CER price) Net present benefits of carbon selling (US$/ha) Area (ha)

  31. The “best method” in all simulations (“best method” = the one that allows the smallest projects to benefit from the CDM) % of scenarios in which the method allows benefits to the smallest project

  32. “Best method” with constant or increasing CER prices Only with constant CER price Only with increasing CER price % of scenarios % of scenarios

  33. “Best method” with high or low risk discounting Only with high risk discounting Only with low risk discounting % of scenarios % of scenarios

  34. Median value of minimum project area (ha) under “extreme conditions”

  35. Case study Reforestation 1800 ha, 15 m3/ha/yr (Nicaragua) Regeneration 51,063 ha , 2.4 m3/ha/yr (Honduras) TCER(original Colombian proposal) + = Project PNV > 0 - = Project PNV < 0

  36. Conclusions Ton-year: Excludes small projects from the CDM. ACS: Is “better” if risks are low and prices of permanent CERs increase. Can be environmentally integer if adequate provisions are taken to address the risk of C re-emission during “uncertainty time”. TCERs: Are the “best” method only if the price of CERs does not increase in the future. Critical issues have still to be clarified.

  37. Economic risk of TCERs is high, • particularly if: • Price of CERs increases (likely!) • Crediting periods are short • No credit renewal after crediting period • TCERs expire once certified • TCERs are quantified as the stock existing 5 years before the certification

  38. Recomendations • TCERs =TCER-1 or TCER-2 (see slide 15), or “average storage between two verifications, multiplied by the time elapsed between the verifications and divided by credit lifetime”. • Long crediting periods • Native species • Long-term C storage • Smaller-scale projects • New and renewed TCERs • New TCERs only during crediting period. • Renewed TCERs: as long as stocks exist and can be verified (see slide 19).

  39. Banking • = Offset of future emissions = good for climate • Makes AR-CDM more attractive • 1% CDM-cap prevents from excessive banking • Not expiring TCERs could be used as insurance or buffer for other LULUCF-CDM projects Two options: • TCERs without expiration date =Banking by developing countries(YES) • TCERs can by consumed in whatever commitment period =Banking by Annex-1 countries(NO)

  40. Flexible accounting regime • Minimizes economic risks of TCERs • Promotes LULUCF project portfolio allowing learning by doing • Requirements: • Each approved method shall be equivalent in terms of “environmental integrity” • Only approved methods (approval by EB or COP-MOP) • Start with: • TCERs • Equivalence-adjusted average C storage

  41. TCERs: • Not expiring TCERs • No banking by Annex 1 • Long crediting periods • Possibility to renew credits beyond the crediting period • Equivalence-adjusted average C-storage: • Risk discounting based on credible risk assessment • Carbon discounting on projected flows • Insurance (or buffer or TCERs or combination) until end of “uncertainty time” • 100 year equivalence time • Ton-year to determine amounts to be covered by insurance in case of C re-emission.

  42. Tropical Agricultural Research and Higher Education Center Thank you CATIE thanks the support provided by the Swiss Government for the preparation and organization of this side-event

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