76566 BioCarbon Fund Experience Insights from Afforestation and Reforestation Clean Development Mechanism Projects Ethiopia Humbo Assisted Natural Regeneration Project After, 2010 (front cover) Before, 2005 (title page) Images courtesy of World Vision BioCarbon Fund Experience Insights from Afforestation and Reforestation Clean Development Mechanism Projects ii | BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects Table of Contents Acknowledgments. . . . . . . . . . . . . vii 6. Finance . . . . . . . . . . . . . . . . . . . . . . . 89 6.1 Introduction. . . . . . . . . . . . . . . . . 89 Abbreviations and Acronyms. . . . ix 6.2 CDM Catalyzing Investment for Afforestation and BioCarbon Fund . . . . . . . . . . . . . . . xi Reforestation . . . . . . . . . . . . . . . . 90 Executive Summary. . . . . . . . . . . . . 1 6.3 Relevance of Carbon Finance in the A/R Sector . . . . . . . 92 1. Introduction . . . . . . . . . . . . . . . . . . 17 6.4 Recommendations. . . . . . . . . . . 105 1.1 Afforestation and Reforestation in the CDM. . . . . . 18 7. Institutions. . . . . . . . . . . . . . . . . . . 106 1.2 The BioCarbon Fund . . . . . . . . . . 20 7.1 Introduction. . . . . . . . . . . . . . . . 106 7.2 Legal and Institutional 2. CDM Regulations. . . . . . . . . . . . . 33 Framework. . . . . . . . . . . . . . . . . 107 2.1 Introduction. . . . . . . . . . . . . . . . . 33 7.3 Challenges . . . . . . . . . . . . . . . . . 114 2.2 Regulatory Process. . . . . . . . . . . . 33 7.4 Recommendations. . . . . . . . . . . 117 2.3 Challenges . . . . . . . . . . . . . . . . . . 35 2.4 Recommendations. . . . . . . . . . . . 45 8. Measuring Under-delivery Risk . . . . . . . . . . 118 3. Non-permanence. . . . . . . . . . . . . . 46 8.1 Introduction. . . . . . . . . . . . . . . . 118 3.1 Introduction. . . . . . . . . . . . . . . . . 46 8.2 Methodology for Assessing 3.2 Temporary Crediting . . . . . . . . . . 47 the Under-delivery Risk. . . . . . . 118 3.3 tCERs vs. lCERs . . . . . . . . . . . . . . . 50 8.3 BioCF Risk Mitigation Measures at the 3.4 Challenges in Applying the Portfolio Level . . . . . . . . . . . . . . 122 tCERs Accounting Method . . . . . 50 8.4 Good Practices for 3.5 Other Approaches to Reducing the Under-delivery Non-permanence. . . . . . . . . . . . . 54 Risk of Carbon Credits. . . . . . . . 123 3.6 Recommendations. . . . . . . . . . . . 55 9. Conclusions and 4. Land-related Issues . . . . . . . . . . . . 56 Looking Ahead. . . . . . . . . . . . . . . 125 4.1 Introduction. . . . . . . . . . . . . . . . . 56 Annexes 4.2 Land Eligibility and Project . . . 131 Annex 1 BioCF A/R CDM Active Projects Boundary . . . . . . . . . . . . . . . . . . . 57 Annex 2 Indicative Flowchart of the 4.3 Land Tenure . . . . . . . . . . . . . . . . . 63 Combined Tool to Identify 4.4 Recommendations. . . . . . . . . . . . 68 the Baseline Scenario and Demonstrate Additionality 5. Greenhouse Gas in A/R CDM Project Activities. . . . 133 Accounting. . . . . . . . . . . . . . . . . . . . 69 Annex 3 Simplification of the A/R CDM 5.1 Introduction. . . . . . . . . . . . . . . . . 69 Rules for GHG Accounting (as of November 2011) . . . . . . . . . . 134 5.2 GHG Accounting . . . . . . . . . . . . . 70 Annex 4 Steps for Setting Up a 5.3 Challenges . . . . . . . . . . . . . . . . . . 77 Benefit-sharing Plan . . . . . . . . . . . 137 5.4 Tools to Facilitate GHG Accounting . . . . . . . . . . . . . 85 Annex 5 Glossary . . . . . . . . . . . . . . . . . . . . . 138 5.5 Recommendations. . . . . . . . . . . . 88 Annex 6 References . . . . . . . . . . . . . . . . . . . 142 BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | iii Figures Figure 1.1 Bringing Carbon Markets to Rural Areas in Developing Countries. . . . . . . . . . . . . . . . . . . . . . . . 21 Figure 1.2 Overall CDM and BioCF Distribution of Projects Across Regions. . . . . . . . . . . . . . . . . . . . . . . . . . 22 Figure 1.3 Percentage of Resources Invested in Different Carbon Sequestration Technologies in BioCF A/R Projects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 1.4 Types of Tree Species Planted in BioCF Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Figure 2.1 Stages of the A/R CDM Project Cycle and Principal Actors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 . . . . . . . . . . . . . . . . . . . . . . . . . 44 Figure 2.2 Mean Time for Issuance of CERs Each Month from 2005 to 2011. Figure 3.1 Accounting of tCERs and lCERs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Figure 3.2 Expiration of tCERs and lCERs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Figure 3.3 Comparison of tCERs and lCERs in Two BioCF A/R CDM Projects . . . . . . . . . . . . . . . . . . . . . . . . . 49 Figure 4.1 Change in Area in Eight BioCF Projects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Figure 4.2 Land Tenure Situation Before and After Project Implementation (26 Project Sites). . . . . . . . . . 65 Figure 5.1 Expected Emission Reductions from Some BioCF Projects: Estimations With and Without Applying TARAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Figure 5.2 CDM Requirements on Project Monitoring and Elements of the BioCF’s SMART Tool. . . . . . . . 87 Figure 6.1 Sources of Underlying Investment in the BioCF Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Figure 6.2 Expected Average Annual Emission Reductions in Different Types of Registered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 CDM Projects Figure 6.3 Variation of Validation Costs in CDM Projects Developed in the BioCF . . . . . . . . . . . . . . . . . . . . 97 Figure 6.4 Project Development Cost by Technology ($/tCO2e)—Weighted Average . . . . . . . . . . . . . . . . . 97 Figure 6.5 Partial Cash Flow of a Project with Multiple Purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Figure 6.6 Partial Cash Flow of an Assisted Natural Regeneration Project . . . . . . . . . . . . . . . . . . . . . . . . . 101 Figure 6.7 Transaction Costs and Carbon Revenues Expected in Two BioCF Small-scale Projects . . . . . . . 102 Figure 7.1 Simple Partnership Structure—COOPEAGRI Project in Costa Rica . . . . . . . . . . . . . . . . . . . . . . . 108 Figure 7.2 Complex Partnership Structure—Caribbean Savannah Project in Colombia. . . . . . . . . . . . . . . 109 Figure 7.3 Carbon Revenues and Forest Products Distribution in BioCF Projects . . . . . . . . . . . . . . . . . . . . 112 Figure 7.4 Benefit-sharing Arrangement in the Ethiopia Humbo Assisted Natural Regeneration Project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Tables Table 1.1 Evolution of A/R CDM Compared to Other Sectors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Table 1.2 Project Categories in the BioCF Portfolio and the Associated Non-carbon Benefits. . . . . . . . . . 24 Table 2.1 Average Years BioCF Projects Have Spent on the CDM Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Table 2.2 Project Start in the BioCF, A/R CDM Methodology, Tool, and Guidance Development . . . . . . . 36 Table 2.3 Issues Highlighted in DOE Requests for Clarification or Correction. . . . . . . . . . . . . . . . . . . . . . . 41 Table 3.1 Volume and Value of the Forest Carbon Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Table 4.1 Frequent Problems Project Developers Face at Validation on Land-related Issues . . . . . . . . . . . 60 Table 4.2 Land Tenure Changes in Some BioCF Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 iv | BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects Table 5.1 Measures for Quality Assurance and Quality Control of the Monitoring Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Proposed in BioCF Projects Table 5.2 Issues Highlighted in the Validation of BioCF A/R CDM Projects . . . . . . . . . . . . . . . . . . . . . . . . . 78 Table 6.1 Transaction Costs in BioCF A/R CDM Projects by Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Table 7.1 Examples of Types of Partnerships in the BioCF Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Table 7.2 Examples of Project Benefit Distribution Schemes in the BioCF Portfolio . . . . . . . . . . . . . . . . . 111 Table 7.3 Institutional Challenges in the BioCF Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Table 8.1 Cycles of Risk Assessment Undertaken in the BioCF Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Boxes Box 0.1 Processes and Rules for A/R CDM Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Box 0.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Key Rules for A/R CDM Projects Box 0.3 Regulatory Lessons for Other Land-based Climate Change Market Mitigation Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Box 1.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Moldova Community Forestry Development Project Box 1.2 India Himachal Pradesh Reforestation Project: Improving Livelihoods and Watersheds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Box 1.3 Employment Opportunities Created by the Facilitating Reforestation for Guangxi Watershed Management in the Pearl River Basin Project in China. . . . . . . . . . . . . . . . 28 Box 1.4 Income Generation in the Reforestation on Degraded Lands in Northwest Guangxi, China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Box 2.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Tool for Assessing the Additionality of A/R CDM Projects Box 3.1 The Forest Carbon Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Box 4.1 Project Boundary and Land Eligibility Assessment in the Moldova Soil Conservation Project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Box 4.2 Land Eligibility Challenges in the San Nicolas Project, Colombia . . . . . . . . . . . . . . . . . . . . . . . . . 62 Box 4.3 Evidence of Increased Land Tenure Security in the Niger Acacia Senegal Plantation Project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Box 5.1 GHG Accounting in the Humbo Assisted Natural Regeneration Project, Ethiopia. . . . . . . . . . . .75 Box 5.2 Challenges to Determining Tree Biomass Stock and Increment in the Himachal Pradesh Reforestation Project—Improving Livelihoods and Watersheds . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Box 6.1 Financing of the Moldova Soil Conservation Project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Box 6.2 Financing of the Reforestation on Degraded Lands in Northwest Guangxi BioCF Project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Box 6.3 Eligibility Criteria for Applying the A/R CDM Simplified Modalities and Procedures . . . . . . . . . 95 Box 6.4 Illustration of Cash Flow up to 2018 in Two Types of BioCF Projects. . . . . . . . . . . . . . . . . . . . . . 100 Box 6.5 Innovative Financial Mechanism in a BioCF Project in Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Box 7.1 Benefit-sharing Mechanism in the Humbo Assisted Natural Regeneration Project in Ethiopia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Box 9.1 Regulatory Lessons for Other Land-based Climate Change Market Mitigation Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | v vi | BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects Acknowledgments This report was prepared by a World Bank team consisting of Zenia Salinas and Ellysar Baroudy (lead authors), Leticia Guimaraes, Marco Van der Linden, Rama Reddy, and Mirko Serkovic, and with contributions from André Rodrigues de Aquino, Adrien de Bassompierre, Uma Bhamidipati, Franka Braun, Neeta Hooda, Liu Jin, Daigo Koga, Saima Qadir, Stephanie Tam, Monali Ranade, Sebastian Scholz, and Nuyi Tao. The report benefitted greatly from the valuable comments and suggestions from several peer reviewers with significant experience and expertise in carbon finance, forest carbon, and Kyoto Protocol mecha- nisms: Philippe Ambrosi, Veronique Bishop, Benoit Bosquet, Joëlle Chassard, Alexandra Conliffe, Charles E. Di Leva, Wojtek Galinski, Keith Grocock, Sebastian Hetsch, Alexandre Kossoy, Danielle Lessard, Jonathan Mills Lindsay, Ian Noble, Marcelo Rocha, Martin Schröeder, Nikolaus Schultze, and Klaus Oppermann. The team is also grateful for the support and input of many other World Bank colleagues throughout the research and drafting process. This work would not have been possible without the support of the BioCarbon Fund’s Participants; their constant guidance, insights, and feedback are much appreciated. Editorial acknowledgments are due to Daria Steigman. For more information, please contact the World Bank Carbon Finance Unit at helpdesk@carbonfinance.org. Washington, DC, December 2011 BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | vii viii | BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects Abbreviations and Acronyms AAU Assigned Amount Unit GHG Greenhouse Gas AFOLU Agriculture, Forestry and Other Land-Use IPCC Intergovernmental Panel on Climate Change ANR Assisted Natural Regeneration LoA Letter of Approval A/R Afforestation and Reforestation lCER Long-term Certified Emission Reductions AR-AM Afforestation Reforestation Approved LULUCF Land Use, Land-Use Change and Forestry Methodology PDD Project Design Document AR-WG Afforestation Reforestation Working Group (of the CDM EB) QA/QC Quality Assurance / Quality Control BioCF BioCarbon Fund REDD+ Reducing Emissions from Deforestation and Forest Degradation in developing countries, CAR Clarification Action Request the role of conservation, sustainable management of forest and enhancement CCBA Climate, Community and Biodiversity of forest carbon stocks Alliance RMU Removal Units CDM Clean Development Mechanism SBSTA Subsidiary Body for Scientific and CDM EB Executive Board of the CDM Technological Advice (of the UNFCCC) CER Certified Emission Reductions SMART Simplified Monitoring for Afforestation/ Reforestation Tool CLR Clarification Request TARAM Tool for Afforestation/ Reforestation COP Conference of the Parties Approved Methodologies COP/MOP Conference of the Parties serving as the tCER Temporary Certified Emission Reductions or CMP Meeting of the Parties tCO2e Tonne of Carbon Dioxide Equivalent DNA Designated National Authority UNFCCC United Nations Framework Convention on DOE Designated Operational Entity Climate Change EB Executive Board VVM Validation and Verification Manual ER Emission Reduction Notes: Annex 5 provides a glossary of key terms. ERPA Emission Reductions Purchase Agreement All dollar amounts are U.S. dollars unless otherwise indicated. ERU Emission Reduction Unit EU-ETS European Union Emissions Trading System BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | ix The BioCarbon Fund Housed within the Carbon Finance Unit of the World Bank, the BioCarbon Fund (BioCF) is a public- private initiative mobilizing resources for pioneering projects that sequester or conserve carbon in forest- and agro-ecosystems, mitigating climate change and improving local livelihoods. The over- all goal of the Fund is to demonstrate that land-base activities can generate high-quality emission reductions with strong environmental and socioeconomic benefits for local communities. The BioCarbon Fund became operational in 2004 with participants providing funds for both Afforestation and Reforestation (A/R) Clean Development Mechanism (CDM) projects and for other land-based projects currently excluded from the CDM (e.g., Reducing Emissions from Deforestation and Forest Degradation-Plus (REDD+) and sustainable agricultural land management). The Fund has two tranches. The first tranche became operational in 2004 with a total capital of $53.8 million. Because of the high levels of interest, the second tranche, capitalized with $38.1 million, started in 2007. Participants investing in the BioCF include six public entities and 12 private companies. Most of the BioCF resources (about 80 percent) have been earmarked to A/R CDM projects (first windows of each tranche); the remainder has been allocated to REDD+ and sustainable land man- agement projects (second windows). The emission reductions generated by these projects are pur- chased by the BioCF on behalf of its participants and are subsequently transferred to them pro rata their financial participation in the Fund. The contractual undertakings of a project entity and the BioCF for the sale and purchase of ERs are contained in an Emission Reductions Purchase Agreement (ERPA). As of November 2011, the BioCF had contracted over nine million emission reductions from 21 A/R CDM projects. These projects are located in 16 countries and five regions of the world. The BioCF resources are allocated to projects on degraded lands: more than half to projects with en- vironmental restoration purposes, 25 percent for fuel wood, and 21 percent for timber. All of the projects directly benefit poor farmers. At the time of writing, 13 BioCF projects have been regis- tered under the CDM, one is requesting registration, three are undergoing validation, and four are under preparation. Registered projects are preparing for verification. Projects duly validated start receiving carbon payments as per their ERPA provisions. x Executive Summary 0.1 The Clean Development Mechanism (CDM) of the United Nations Frame- work Convention on Climate Change (UNFCCC) is one of the flexible mechanisms of the Kyoto Protocol intended to reduce the concentration of greenhouse gas (GHG) emissions in the atmosphere in a cost-effective manner. The CDM allows developed countries to use Certified Emission Reductions (CERs) generated from sustainable development projects in developing countries to meet part of their emission reductions targets under the Kyoto Protocol. Developing countries in return receive investments in clean technology and revenues from the sale of these emission reductions once they are generated. Emission reductions are quantified and certified as Certified Emission Reductions (CERs) by the Execu- tive Board of the CDM (CDM EB). One CER is equivalent to one tonne of carbon dioxide equivalent (tCO2e), and forest projects account for CERs with a limited validity due to potential reversibility of achieved carbon stock changes. 0.2 The land use, land-use change and forestry (LULUCF) sector is responsible for about 17 percent of global anthropogenic GHG emissions.1 The UNFCCC has recognized the importance of this sector for stabilizing concentrations of GHG in the atmosphere, and has included Afforestation and Reforestation (A/R) as one of the 15 sectors that are eligible to generate emission reductions and 1 IPCC (Intergovernmental Panel on Climate Change), 2007. Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II, and III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Geneva. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 1 offset credits under the CDM. A/R projects remove can contribute to climate change mitigation while carbon from the atmosphere through the planting of achieving important co-benefits in rural areas. trees and by assisting in the natural regeneration of degraded lands. Quantification of emission reductions 0.6 Despite its potential to mitigate climate is done by applying baseline and monitoring method- change, the A/R sector remains underdeveloped for ologies approved by the CDM EB. two main reasons. First, the demand for forest carbon credits is still very limited.3 Second, most project de- 0.3 The BioCarbon Fund (BioCF), housed with- velopers still lack the capacity to apply today’s rules for in the Environment Department of the World Bank, greenhouse gas accounting effectively. The A/R CDM is a public-private initiative mobilizing resources for rules and procedures need to be further simplified to pioneering projects that sequester or conserve car- become more pragmatic and to accommodate realities bon in forest- and agro-ecosystems, mitigate climate on the ground. Moreover, communication between change, and improve local livelihoods. Most of the the CDM EB and project developers needs to be more BioCF resources (about 80 percent) are earmarked for effective and the local capacity for developing forest A/R CDM projects using different carbon sequestra- carbon projects strengthened. tion technologies, including assisted natural regen- eration, forest restoration, community reforestation, 0.7 This report presents the main insights from agroforestry, and silvopastoral systems. the BioCF experience in accompanying the devel- opment and implementation of A/R CDM projects 0.4 This report presents insights from the BioCF’s covering the following aspects: (i) CDM regulations, seven years of experience designing and implementing (ii) land-related issues, (iii) non-permanence, (iv) 21 A/R CDM projects in 16 developing countries. All land-related issues, (v) greenhouse gas accounting, of the projects directly benefit poor farmers. The re- (vi) finance, (vii) institutional arrangements, (viii) port is intended to inform project developers of the and under-delivery risk.4 A summary of the main in- challenges and opportunities that A/R CDM pro- sights from each section of this report is presented in jects have encountered on the ground. The insights this Executive Summary. The report concludes with a presented here are also relevant for policymakers and discussion of the reforms needed to scale up the A/R negotiators currently involved in the debate to reform CDM in a significant manner and how this experience the CDM rules and for informing discussions on new could inform the ongoing debate about other land- market-based strategies for climate change mitiga- based carbon market mechanisms to mitigate climate tion in the agriculture, forestry, and other land use change and support rural development. (AFOLU)2 sector. Co-benefits: An Opportunity for 0.5 Besides the structural hurdle of generat- Creating Synergies ing limited CERs, the BioCF experience shows that initially A/R CDM project developers encountered 0.8 A/R projects have environmental, eco- significant difficulties applying the methodologies ap- nomic, social, and institutional co-benefits. The proved by the CDM EB and preparing their Project strength of these co-benefits stems from the type of Design Documents (PDDs), a requirement for project project, the baseline project situation, the project de- registration under the CDM. In response to feedback veloper’s goals, the level of participation by local com- about these challenges, the CDM EB has improved munities, and considerations made in project design and simplified the A/R CDM rules and procedures. As and implementation. a result, some project developers are now replicating and scaling up their experience. Some governments 3 The European Union (EU) excludes forest carbon credits from the cat- are also working to mainstream carbon finance into egories of eligible assets to be used by EU operators to comply with their national sustainable land-use strategies. BioCF their emission reductions commitments under the EU Emissions Trading projects have demonstrated that forest carbon finance Scheme (EU-ETS). 4 The report is based on an analysis and in-depth desk review of project idea notes, PDDs, reports on environmental and social assessments, BioCF annual reports, World Bank evaluation reports, safeguard policy 2 AFOLU is a term that superseded Land Use, Land-Use Change and compliance, and CDM validation reports. The data collected were ana- Forestry (LULUCF) in the latest Intergovernmental Panel on Climate lyzed with descriptive statistics, and illustrative examples were used as Change guidelines, integrating agriculture, land use, and forestry. case studies. 2 | Executive Summary 1 Box 0. Processes and Rules for A/R CDM Projects A/R CDM projects follow the same processes as the other CDM sectors: project preparation, validation, regis- tration, monitoring, verification, and issuance of certified emission reductions. The crediting period of an A/R project is either a 30-year single period or a 20-year period that is renewable twice. P ro ces ses a nd Sta kehol d er s I n v o lv e d i n t h e A / R CD M P r o j e ct C y c l e PROJECT DEVELOPER STAKEHOLDERS DNA DOE CDM EB 1 2 3 PREPARATION PDD Local Confirms Development stakeholders whether the participate in project project design furthers the country’s sustainable development goals 4 5 Global Validation Stakeholder Consultation Process 6 Registration IMPLEMENTATION 7 Monitoring 8 Local 9 10 stakeholders Verification Credit participate in issuance monitoring Steps 1 and 2: Following CDM rules, project developers and local stakeholders produce a Project Design Document (PDD). To do this they have to apply a CDM-approved baseline and monitoring methodology. Steps 3, 4, and 5: The PDD is validated by a Designated Operational Entity (DOE), an independent auditor. This assessment aims to ensure PDD conformity with the A/R CDM rules and stakeholder comments, as well as the project’s contribution to the host country’s sustainable development goals. The latter is confirmed by a Designated National Authority (DNA). Step 6: With a positive validation report, the DOE submits the PDD for registration under the CDM. Before reg- istration, the CDM EB checks the completeness of documentation submitted by the project and reassesses it to address concerns if any were brought up by at least three of its members or a project participant. Steps 7 and 8: The monitoring plan is implemented by the project developer and local stakeholders. Such a plan is designed based on the GHG accounting methodology selected for the project. Steps 9 and 10: At verification, the DOE verifies the monitoring report submitted by the project developer; a positive verification report will result in the issuance of Certified Emission Reductions. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 3 Box 0.2 Key Rules for A/R CDM Projects La n d El ig ibi l it y Developers must demonstrate that the A/R project will neither cause deforestation nor prevent natural regen- eration. To do this, they have to prove that the project land was deforested on December 31, 1989, and at the project start date. Project developers must also demonstrate that any observed deforestation at project start is not temporary. P ro je ct Boun dary, Con tr ol o v er th e Land, an d Land T e n ur e Project developers must delineate and provide geo-referenced coordinates of the discrete land areas where trees will be planted. At validation, the project developer must provide the coordinates for the total project boundary (or maps in the case of small-scale projects) and evidence of control over at least two-thirds of the project; evidence for the remainder must be provided at verification. Developers must also demonstrate legal title to the land and rights of access to the sequestered carbon. GHG A cc oun ti ng The baseline and monitoring methodologies prescribe the procedures to estimate the ex-ante “net actual an- thropogenic emission reductions by sinks� achieved in projects. In doing this, project developers deduct the GHG removals by sinks that would have occurred in the baseline from the actual emission reductions achieved in the project scenario. The emissions attributable to the project happening within and outside its boundary (leakage) must be deducted from the project removals by sinks. Sources of leakage include displacement of crop cultivation, grazing, and fuel wood gathered on the project land area; other emissions, such as biomass burning, must also be accounted for. Following a monitoring methodology, project developers calculate ex-post emission reductions. N on- p e rma nen c e Reflecting the CDM’s approach to non-permanence in the A/R sector, tonnes of CO2e produced in projects are accounted for as temporary credits. Conversely, credits originated in other CDM sectors are considered perma- nent. Temporary forest credits have a limited life: credits having a five-year life are called temporary CERs (tCERs) and those expiring at the end of the crediting period (30-year single or 20-year renewable twice period) are called long-term CERs (lCERs). Buyers of tCERs and lCERs must replace them with permanent credits before their expiration dates. Sca le o f P r oje ct s Projects producing less than 16,000 tonnes of CO2e per year are allowed to apply simplified modalities and procedures for A/R. Small-scale A/R projects have to be developed or implemented by low-income communities. Following defined rules, a project developer is allowed to bundle small-scale projects as a way to benefit from economies of scale. 0.9 Co-benefits are an important incentive for A/R CDM projects contribute to strengthening the local participation in forest carbon projects. GHG natural capital of rural communities participating in emission reductions are an abstract concept for most projects by recovering severely degraded lands, pro- local communities. The possibility of benefiting from tecting water resources, and conserving biodiversity. greater land tenure security, employment opportu- The projects also strengthen the social and financial nities, and new sources of income are in many cases capital of communities, thus contributing not only the main incentives for community participation and to climate change mitigation but also to local com- long-term commitment to forest carbon projects. munities’ adaptation to the adverse impacts of climate change. The fact that these projects are often under- 0.10 Forest carbon projects also contribute to taken precisely for these reasons also makes them po- climate change adaptation by increasing the resil- tentially more sustainable in the future. ience of communities and the local environment. 4 | Executive Summary 0.11 There is great potential for synergies be- of the project and has serious implications for effec- tween forest carbon projects and other develop- tive implementation of later stages of the project cycle ment initiatives. A/R CDM provides the means (e.g., monitoring). for achieving the objectives of other United Nations Conventions, such as combating desertification and 0.14 Additionality is difficult to demonstrate promoting biodiversity conservation. A/R projects at the project level. Although forest projects in most can also contribute to the Millennium Development developing countries face barriers that prevent them Goals by alleviating poverty and promoting the socio- from happening and succeeding, project developers economic development of rural areas. struggle with providing properly documented evi- dence of such barriers. Projects for which profitability is not their main rationale (e.g., projects with social Regulatory Issues: The Challenge of and environmental objectives) and in countries with Pursuing Forest Carbon Credits with weak forestry sectors struggle the most in demonstrat- Environmental Integrity, Efficiency, ing additionality. Weak evidence of additionality is and Effectiveness a frequent reason for clarifications and corrective ac- 0.12 Designing a project and developing a PDD tions from Designated Operational Entities at valida- can be a time-intensive and costly task. Projects tion. In addition, projects in countries with national developed by highly motivated entities with good payment for environmental service programs that managerial capacity in countries with a strong forestry started before 2001 find it difficult to demonstrate sector have been the most effective in project prepara- additionality; therefore, these pioneer countries are tion and PDD development. Developing a forest car- discouraged from using CDM as an instrument to at- bon project—including writing the PDD—requires a tract additional investment to expand or sustain their wide range of technical and managerial expertise (e.g., environmental service programs. Private sector-led forestry, forest carbon, financing, land-use change, projects, on the other hand, find it difficult to bal- economics, institutional, legal, and coordination). ance the need to demonstrate that their projects are Gathering such multidisciplinary teams in rural areas the less economic attractive to the CDM and viable to of developing countries is a challenging task. Reliance their investors; they therefore end up modifying their on external consultants remains high, increasing pro- business-as-usual project designs to be eligible under jects’ transaction costs. In addition, lack of host coun- CDM, which increases their risk. Thus the private- try forestry sector information for additionality has sector forest industry is discouraged from participat- proven to be a major challenge for timely completion ing in the A/R CDM (unlike projects in other sectors). of PDDs. 0.15 Designated National Authorities can have 0.13 Validation is often delayed because many an effect on the time projects spend on valida- project developers do not fully grasp the rules tion. DNAs must play a supportive role and focus on for GHG accounting or lack the capacity to track the analysis of the project’s contribution to the nation- the changes in rules, methodology versions, and al sustainable development objectives. In some coun- required documents forms. Increased experience tries, these entities have at times delayed the issuance in PDD preparation and the development of tools to of documentation required by projects at validation. facilitate GHG accounting have partially addressed This is sometimes due to the DNA’s lack of under- these challenges. The CDM EB continues consolidat- standing of its role in facilitating project registration ing methodologies and presenting rule changes in a and overall project feasibility. Small-scale projects are more consistent manner. Still, additional efforts are particularly delayed because of DNAs’ difficulties needed in this direction. Project developers have seri- in confirming that projects are developed or involve ous difficulties tracking the latest versions of CDM low-income communities, as per the national relevant EB guidance to effectively update their PDDs, and definitions. It is important to recognize, however, that this is a major source of delay in validation. Because DNAs are on a learning curve; in some countries this of this, developers continue to rely on external con- challenge has been overcome. sultants for validation, which prevents total ownership BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 5 0.16 Designated Operational Entities are on a because project developers and field teams are not ac- learning curve for A/R CDM, and this had contrib- tually involved in the preparation of the PDD. The uted to delaying the validation process. The num- monitoring of A/R projects also has its own com- ber of DOEs accredited for the A/R sector started to plexities and requires developers to assess many vari- be significant in 2009 when the demand for validation ables. Significant deviation from the PDD at project increased. Once accredited, many of the DOEs used implementation will increase the number of formal their first validation experience as a learning opportu- processes since a revised monitoring plan must be ap- nity; this often delayed the validation process. DOE’s proved by the CDM EB; this can delay credit issu- inexperience is reflected in their paying attention to is- ance. To overcome this challenge, it is important to sues that are no longer relevant, inefficient data collec- further simplify the monitoring rules and increase lo- tion for the assessments, and lack of sound judgment cal capacity. to assess the application of the A/R CDM rules in light of national circumstances. Project developers cannot The Temporary Crediting Approach neglect DOE’s demands at validation, and changing to Non-permanence: A Narrow a DOE has time and cost implications. In the BioCF Window of Opportunity for A/R experience, promoting activities that enhance the CDM Projects communication between project developers, the A/R 0.19 tCERs are more flexible commodities than Working Group of the CDM EB, and DOEs helps to lCERs. In the BioCF experience, the shorter lifespan smooth validation and verification—but there is no substitute for capacity building for DOEs. of tCERs is more compatible with the carbon market, land-use-change dynamics, and existing information 0.17 Delays at registration and issuance are on project risks. From the buyer’s perspective, deter- significant due to the stringent scrutiny of pro- mining prices for lCERs requires precise and long- jects by the CDM EB. At registration, project docu- term information on project risks, which could be dif- mentation undergoes a “completeness check� process. ficult to obtain in certain areas and for certain project Projects frequently fail this check as developers get types. This conclusion may point to the BioCF’s own overwhelmed with complying with the validation pro- strategy of acquiring replacement credits; other buyers cess and disregard the importance of presenting the could arrive at a different conclusion depending on required documentation in a comprehensive and ac- their willingness to take on additional risk. curate manner. The difficulties in tracking CDM EB 0.20 The replacement credit rule increases the decisions are also reflected in this poor performance. Moreover, additional technical review may be required risks for buyers of forest credits. The temporary if at least three members of the CDM EB or a party crediting approach to non-permanence adopted by involved in the proposed project activity request it. As the UNFCCC for A/R projects allowed this sector to stated in the World Bank report 10 Years of Experience be included in the CDM—but it has also put forest in Carbon Finance, such reviews were frequent in the projects at a disadvantage. The price of forest carbon past. The CDM EB has made important improve- credits depends on future prices for permanent carbon ments to reverse this trend, but extra examinations at credits, and these are difficult to estimate given the registration and issuance may put A/R projects at risk uncertainty and volatility of carbon markets. In ad- of not getting carbon credits before the end of the first dition, since forest credit prices are commonly fixed commitment period of the Kyoto Protocol because the in an Emission Reductions Purchase Agreement, the queue of projects requesting registration and credit is- willingness to pay for replacement credits is limited suance is increasing as the 2012 deadline approaches. as well. This leaves little opportunity to accommodate variations in discount rates and price uncertainties. 0.18 The verification process can be delayed 0.21 The non-permanence approach results in when the specifications of the PDDs are not strict- ly followed. Project developers and field teams often delayed carbon revenues. Projects can only under- disregard the importance of strictly complying with take one verification event per each commitment pe- the PDD at implementation. This is compounded riod of the Kyoto Protocol. This has implications for by the live nature of such projects and, sometimes, project viability. 6 | Executive Summary 0.22 Temporary crediting as an approach to ad- usually been in charge of doing the land eligibility as- dress the non-permanence of A/R projects has a sessment, stakeholders involved in projects have be- limited effectiveness. The impossibility of renewing come increasingly frustrated as the process of selecting temporary credits beyond a project crediting period eligible lands has to be repeated. hampers long-term carbon sequestration goals. This could be a perverse incentive for some projects. For ex- 0.26 Project developers in tropical agriculture ample, reforestation projects with environmental goals lands struggle with identifying eligible lands; depend on carbon revenues; the absence of payments this especially affects projects involving multiple after the crediting period could lead to deforestation farmers. Tropical vegetation may regenerate quickly, and forest degradation. reaching the forest definition; if this coincides with validation, auditors may judge these lands as ineligi- 0.23 The lack of fungibility between tempo- ble (even though these lands may be only temporarily rary credits and credits from other CDM sectors stocked with carbon). Developers find it difficult to notably reduces the demand for forest CDM cred- demonstrate the temporary nature of the land regen- its. Temporary credits are not always desirable credits eration as this requires undertaking broader and more as their holders cannot carry them over. This, along complex studies on land-use patterns and ecology. with the prevailing notion among potential buyers Developers often have to redo the land eligibility anal- that credits from A/R CDM projects are not meas- ysis until they can find enough lands to ensure pro- urable, verifiable, and reportable, as well as that they ject viability, delaying project implementation. Such entail environmental and social risks to local commu- delays affect farmers’ willingness to participate in the nities and their local environment, have reduced the project as they lose confidence in the potential benefits demand from the European Union Emission Trading of committing their land and investing labor and time Scheme (EU-ETS), which is so far the biggest market in the project. The CDM EB simplified this rule by for CDM credits. allowing project developers to present control over the land of two-thirds of the project area at validation, but 0.24 The lessons learned from A/R CDM projects they still have to present the total delineation of the presented in this section can be enriched with ex- project boundary. periences in the voluntary carbon market where other approaches to non-permanence are used. 0.27 The “1990 rule� excludes areas with sig- The insights on non-permanence should also contrib- nificant potential for A/R and results in scattered ute to the development of the REDD+ mechanism. planting plots. Many areas in developing countries were deforested and degraded in the 1990s and are The A/R CDM Land-related Rules: therefore ineligible for A/R CDM projects. In some Challenges and Opportunities cases, areas neighboring the projects are excluded from participating because of the same rule. This leads to 0.25 Complying with the land eligibility and “patchwork forests,� negatively affecting the social, project boundary rules is a challenging task for ecological, and financial aspects of projects. project developers. It demands both human and technical capacity to interpret satellite imagery, and 0.28 Carbon finance can contribute to increas- resources to invest in technologies. Early projects ing land tenure security in project areas. With the have struggled the most in assessing land eligibility right institutional instruments in place, different land because of lack of CDM expertise; in many cases as- tenure systems can provide enough security for the de- sessments were done without taking full account of velopment of sound forest carbon projects that ensure the CDM-specific requirements and using maps and farmers’ long-term commitment. The indicia of suf- land-use data for purposes other than CDM. In ad- ficient tenure security for project purposes will differ dition, developers have struggled with tracking the from context to context. In some contexts, long-estab- many changes that the CDM EB has introduced to lished customary rules may suffice even if individual the land eligibility rule. These changes have created parcels are not formally documented and registered, ambiguity and generated different interpretations of provided there is political and legal recognition of the the rules by validators and project developers respec- legitimacy of those rules. In other contexts, the ab- tively. Since consultants external to the project have sence of clear records may be a real concern that needs BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 7 Land degradation, the baseline scenario in Moldova. to be addressed. The possibility of achieving higher 0.31 Simplifications initiated by the CDM EB levels of land tenure security can be an additional have been helpful to a certain extent. The projects incentive for farmers to participate in forest carbon registered using the early versions of methodologies projects. have not benefitted from the simplifications as they still need to account for GHG emissions as prescribed 0.29 Securing land tenure can be a costly and in older versions of methodologies. Most recent ver- time-consuming process. Carbon finance has con- sions of methodologies are shorter, but the number tributed to increasing the level of land tenure security of procedures, tools, and guidelines has increased. To in five projects, but this came with a cost as it required further streamline the registration process, it is neces- time. Depending on the existing level of land tenure sary to remove certain requirements for estimation of security, that cost can be prohibitive. But, in some cas- project emissions and leakage which, relative to the es, the benefits of investing in land tenure security— minimal volume of emissions measured, is time-con- both in terms of project performance and improving suming and costly to determine. The use of default local livelihoods—outweigh the costs. data to calculate emissions and leakage based on ro- bust research should be encouraged. Accounting for Emission Reductions: The Rigor and Practicality Imbalance 0.32 Training of project developers is required to strengthen their capacity for GHG accounting. 0.30 The level of complexity of early method- It is easier for project developers to apply procedures ologies made them less accessible to project de- that are closer to those that they are familiar with from velopers. Only highly skilled professionals were able traditional forestry projects (e.g., measurement of tree to understand and follow the first versions of the A/R biomass growth). Many forest carbon procedures, CDM methodologies. As a result, the CDM EB and however, are not generally used in traditional forest the BioCF developed tools to make these methodolo- inventory, including estimation of carbon stocks in gies more user-friendly. Still, project developers with the baseline as well as measurement of carbon stock low capacity need intensive help to apply them, in- changes in non-tree vegetation, soil, litter, and dead- creasing project transaction costs and under-delivery wood pools. Similarly, project developers are usually risks. unfamiliar with calculations of project emissions and leakage, principles of stratification, sampling, statisti- cal procedures of monitoring, and measurement. 8 | Executive Summary 0.33 Lack of available data on native species based on verified monitoring data, activity that is not negatively affects projects with a biodiversity fo- monitored will not earn credits. cus. The information required for accounting for emis- sion reductions in A/R projects with a large number of Carbon Finance: Catalyzing native species is rarely available. Projects that propose Underlying Investment for to plant these species have to use default data from the Forest Projects Intergovernmental Panel on Climate Change’s 2003 0.36 A project entity´s ability to secure invest- Good Practice Guidance or other published sources. ment financing is critical to success in the A/R Use of default data, which is generally conservative, typically penalizes projects (especially with regard to CDM. Efforts are needed to facilitate access to financ- expansion factors). Alternatively, developers use aver- ing for developers of A/R CDM projects. A large por- age local data from average sites; where there is a mis- tion of the project idea notes with emission reduction match between site conditions in the inventory sourc- potential that were submitted to the BioCF could not es and planting sites, however, projects overestimate be considered because of lack of financing. In addi- biomass growth in degraded sites, leading to potential tion, projects were sometimes delayed in being accept- project underperformance. Lack of suitable data may ed into the BioCF portfolio because project entities force some projects to change the composition of spe- struggled with closing a financial gap. Projects having cies or to reduce the portion of the project area that is financial gaps were assessed on a case-by-case basis and planted with native species. Alliances between project accepted into the portfolio if they presented strong developers and universities or research institutions are evidence of alternatives to fill in the gap. Delays in needed to produce and publish data to support these closing the financial gap, however, negatively affected projects. the implementation of these projects. 0.37 The A/R CDM has done little to help forest 0.34 Estimation of activity-shifting leakage is projects overcome the disproportionately large time- and information-intensive. The information investment barriers they face in most developing required for estimation of leakage emissions associated countries. A/R CDM projects are exposed to several with shifting of grazing and fuel wood collection is not available in many rural areas of developing coun- disadvantages. First, because of their very nature, the tries. Project developers need to spend significant time amount of emission reductions (tCO2e) achieved in and resources to collect this data. There is a need to these projects is low. Second, the length of ERPA con- simplify the estimation of leakage emissions. In addi- tracts is usually short, reflecting the uncertainty asso- tion, projects located in degraded areas often have very ciated with the continuation of the Kyoto Protocol. low leakage risk because of the status of degradation Third, the transaction costs of meeting the CDM of the surrounding areas; they should be exempted requirements tend to be high due to local stakehold- from the monitoring and estimation requirements. In ers’ poor capacity for adequate project development situations with a high probability of leakage, the guid- and implementation. Fourth, the price of tempo- ance for leakage assessment in A/R methodologies for rary credits and their demand are low because of the large-scale projects should be simplified to allow for UNFCCC’s approach to non-permanence. As a result, the use of discount factors in the calculation of emis- carbon revenues’ contribution to improve projects’ sion reductions (following the guidance presented in cash flows is limited. In addition, carbon finance’s po- the small-scale methodologies) to make the assessment tential to catalyze underlying investment and front- of leakage more practical. load capital to cover the high upfront capital needs of forest projects is very limited; financial institutions 0.35 Practical challenges arise in monitoring and banks barely understand carbon finance, or they biomass growth. The effort required for monitor- perceived it as highly risky. ing the carbon component of the project exceeds the 0.38 Carbon revenues, depending on their size workload for monitoring a conventional forest project. and timely delivery, can positively impact project Projects have to create a monitoring unit, build and viability. In the BioCF portfolio, the potential for sustain capacity, and maintain reliable records. Since the carbon credits that will be issued are calculated carbon sequestration ranges widely (from 3-22 tCO2e/ BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 9 hectare/year), depending on the design and objectives involvement of low-income communities can fur- of the project and the productivity of the lands. Since ther increase transaction costs where capacity is low. carbon revenues are paid on delivery, the timely deliv- In such cases, developers also struggle with bundling ery of carbon revenues depends on the project entity’s projects to benefit from economies of scale. The rules capacity to secure financing, implement the forest car- should be further simplified and the cap on emission bon project, and manage project risks. Delays put pro- reductions should be increased to facilitate small-scale jects expecting carbon revenues to cover maintenance projects. costs at severe risk. Delays can also lead to changes in expectations and land-use priorities. Project entities The Institutional Framework: A Key must manage the expectations of all project partici- Success Factor for Effective Project pants and design appropriate incentive schemes. Development and Implementation 0.39 The transaction costs of meeting the CDM 0.42 Designing and creating equitable benefit- requirements were high in most BioCF projects. sharing schemes that effectively improve local The World Bank’s development costs for A/R projects livelihoods is essential to the long-term success of exceed $1 per tCO2e and are higher than for any other forest carbon projects. The BioCF experience shows CDM sector. The transaction costs represent from that local farmers’ participation is driven by the ben- 0.5 to 20 percent of the total project investment. It efits that they can derive from participating in these is impossible at this point to compare the transaction projects and also from their trust in the project entity. costs with the full potential for carbon revenues since Due to the CDM’s technical complexity, getting local projects have only contracted a small portion of their farmers to actively participate in all project activities emission reductions. Project preparation costs, how- may be an unrealistic goal. It is important nevertheless ever, have tended to decrease in more recent projects to keep them well-informed throughout the process as project developers benefit from increased experi- and to ensure that local partners agree with the direc- ence in the application of CDM requirements, an tion that the project takes. Project entities backed by improved understanding of project risks, and an en- local communities with knowledge of the project area hanced CDM institutional structure with approved have fared better. and more simplified methodologies and established 0.43 Investing in and sustaining local capacity DOEs. can ensure the permanence of forest carbon ini- 0.40 The price of permanent CDM credits de- tiatives. Forest carbon projects are long-term partner- termines the price of credits from A/R projects, ships, at the core of which are the farmers/communi- which limits the potential of carbon finance to ties and the project entity. These partnerships often support the viability of projects. The non-perma- need to be extended to bring in capacity where it is nence rule—forcing buyers to purchase a replacement missing, such as project design, implementation, man- credit for each temporary credit purchased—makes agement, and funding. Developing capacity in forest- the price of a forest carbon credit discounted relative ry and project management at the local level increases to the price of credits from other CDM sectors. This the partnership’s resilience to staffing changes. It also puts A/R projects at a disadvantage. creates the potential for communities to take over the project in the future and to continue to invest in for- 0.41 The threshold beyond which projects no estry activities—increasing long-term sustainability. longer qualify as small-scale projects, with sim- plified modalities and procedures (16,000 tCO2e 0.44 Institutional agreements defining land annually), is too low to achieve project viability. The use, carbon ownership rights, and benefit sharing simplified modalities and procedures defined by the play a crucial role in the development of forest UNFCCC for these projects do not significantly re- carbon projects. When designed with strong rules of duce transaction costs. The fact that transaction costs good governance, these agreements help partners un- of some BioCF small-scale projects are comparable derstand their rights and responsibilities and reduce to those of large-scale projects indicates that project the potential for conflicts. Institutional agreements developers have little incentive to engage in small- also ensure that all participants share a clear and com- scale projects. In addition, the rule requiring the mon vision of the project. Careful planning at an early 10 | Executive Summary stage and avoiding complex arrangements are crucial All BioCF projects assess the potential of risks to local for project success. communities and the local environment and propose actions to manage risks as they comply with the World 0.45 Private-public partnerships with clear re- Bank’s environmental and social safeguard policies sponsibilities for each partner seem to work best. and CDM requirements. In addition, some projects Projects that have governmental agencies as their lead are required by host country national forestry laws to project entities have, in most cases, performed rela- undertake an impact assessment. Some projects go a tively less well than others. The exception has been further step by undertaking voluntary assessments to countries with centralized governance. Where the pro- get additional certification of the sustainability of their ject entity is not the government, the success of the forest management (e.g., Forest Stewardship Council) project depends on having a constructive collabora- and/or their capacity to produce the expected co- tion with governmental entities. This is because gov- benefits (e.g., Climate Community and Biodiversity ernments can facilitate the CDM process. They also Standard). have the opportunity to promote replication of pro- jects in other areas of the country, taking advantage Conclusions and Looking Ahead: of the synergies between forest carbon initiatives and Building on A/R CDM and Learning other national development strategies. Lessons for Other Land-based Climate Change Mitigation Mechanisms Risk Measurement and Management: Taking Advantage of Early Lessons 0.49 Overall, the BioCF experience with A/R on Project Development and CDM projects has been hugely valuable. It is clear Implementation carbon markets can work to bring in revenue streams to rural communities who otherwise have limited 0.46 The under-delivery risk of A/R projects sources of income. Furthermore, the BioCF experi- arises from multiple aspects of the project and ence has demonstrated that these initiatives are not can be measured and managed. Understanding the only mitigating climate change but also improving ru- risk of A/R projects requires an integrated assessment ral livelihoods, improving resilience to climate change, that takes into account that projects go through at conserving biodiversity, restoring degraded lands, and least three different cycles: commercial, operational, strengthening the human, social, and financial capital and regulatory. The BioCF developed a risk assess- of local communities. ment methodology that is used to monitor perfor- mance indicators as projects move through the several 0.50 Scaling-up of A/R activities is therefore crit- stages of these three cycles. ical for bringing these benefits to millions of hec- tares of degraded lands. Whilst successful project 0.47 Most of the operational risks can be an- entities are willing to replicate their experience, ticipated and managed. Risky elements of projects the overall number of A/R CDM projects remains can be effectively addressed through an appropriate limited. The approach adopted by the UNFCCC to forest management plan and sufficient human and address non-permanence acts as an structural barrier financial resources. At the same time, designing and dampening both demand and supply for forest car- implementing such a plan requires project developers bon credits. The demand for forest carbon credits is to have relevant forestry experience and managerial ca- negatively affected by the lack of fungibility of forest pacity. However, an effective project implementation CDM credits with credits produced in other sectors. in itself does not guarantee a successful credit issuance; The supply, on the other hand, is dampened by the it is important to crosscheck that the project is being low potential volume of credits achievable in projects, implemented according to the PDD in order to avoid short-term ERPA contracts, low prices, and the high delays in project verification and any shortfall in ex- transaction costs of meeting the CDM requirements. pected carbon credits. 0.51 Current regulatory rules are project-based 0.48 Projects’ potential threats to the local en- and, although opportunities to scale up activities vironment and the socioeconomic conditions of in- through Programmes of Activities exist, they re- volved farmers must be anticipated and managed. main to be tested under the A/R CDM and are not BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 11 Himachal Pradesh Reforestation Project: Improving Livelihoods and Watersheds. Photo: HP Mid-Himalayan Watershed Development Project likely to address the scale needed to reinvigor- transaction costs will enhance projects’ viability. ate degraded lands. To facilitate the scaling up of (See Paragraphs 0.12–0.13, 0.16, and 0.18.) A/R activities, it is important that lessons are learned ■■ Further simplify the rules and procedures for and that bottlenecks and unnecessary obstacles are re- baseline determination and additionality dem- moved. For this, four critical factors are essential: (i) onstration. This could include allowing develop- regulatory improvements, (ii) access to finance, (iii) ers to use standardized baselines established at the strengthened capacity, and (iv) increased demand for national or sub-national level. Simplifying addi- credits from A/R CDM projects. Based on the lessons tionality requirements without compromising envi- that were drawn from the BioCF portfolio, the follow- ronmental integrity is also important. Additionality ing actions are recommended: could be demonstrated at the sectoral level by tak- (i) Regulatory Improvements ing into account national circumstances as well as country or regional-wide afforestation/reforesta- ■■ Remove regulatory uncertainty. Much has been tion goals. Projects in countries with weak busi- invested in building the institutional framework to ness environments and facing disproportionately support A/R projects, and project developers are large investment barriers should be automatically still interested in undertaking and developing pro- additional until certain reforestation goals are met. jects in many poor countries where these activities Projects involving low-income communities with can make a difference in living conditions. The un- minimal capacity will greatly benefit from such a certain regulatory environment, however, is creat- simplification. (See Paragraph 0.14.) ing a dampening effect. (See Paragraphs 0.8–0.11, 0.17, and 0.31.) ■■ Improve the fungibility of forest project cred- its by addressing the non-permanence of for- ■■ Make the regulatory process more accessible est carbon in a broader way and allowing A/R and predictable by streamlining procedures projects to use alternative approaches to tem- and following strict timelines. Finding the porary crediting. This has already been recognized CDM EB’s latest decisions, guidelines, and ver- by UNFCCC negotiators proposing alternatives sions of tools, as well as PDDs and methodology alongside current tCERs and lCERs. A decision formats, is challenging for most developers and fa- on this issue is urgently needed. Allow A/R CDM vors specialized professionals. Following strict time- projects to select from a variety of approaches to lines for registration and issuance will help increase non-permanence in addition to the temporary the predictability of credit issuance. In addition, crediting approach. The approach(es) to non- simplifying the A/R CDM requirements to reduce permanence should avoid putting forestry projects 12 | Executive Summary at a disadvantage. In designing new approaches, bundle projects, making it difficult to benefit from also consider flexibility in the number of verifica- economies of scale. The abovementioned threshold tions permitted per commitment period so that must be increased for these types of projects to be periodic carbon revenues during the commitment viable and benefit low-income communities. In period can improve the cash flow to projects. (See addition, to be consistent with the CDM rules for Paragraphs 0.19–0.24 and 0.41.) projects in other sectors, the low-income require- ■■ Simplify the land eligibility requirements by ment for small-scale A/R CDM projects should be using more flexible criteria to eliminate incen- removed. (See Paragraphs 0.38–0.39 and 0.41.) tives for deforesting and subsequently reforest- ■■ Recognize the contribution of A/R CDM projects ing lands. As the BioCF experience has shown, the to the dual objectives of the UNFCCC: sustain- current land eligibility requirements in the CDM able development and climate change mitiga- tend to be socially impractical and can create ten- tion. Policymakers should consider increasing the sions in regions where neighboring farmers may be eligible land activities to cover croplands, grass- excluded. This rule also leads to fragmented CDM lands, wetlands, and sustainable forest management project areas, which are impractical from both a given their roles in environmental restoration and project development and an ecological standpoint. poverty alleviation. (See Paragraphs 0.49–0.50.) In addition, it would help to facilitate the devel- (ii) Access to Finance opment of projects on agriculture lands in tropi- ■■ Innovative ways to finance activities are need- cal climates by simplifying guidance for accepting ed. Carbon finance is a payment on delivery, and the eligibility of lands with temporary stocking and long-term threats, if the project region is under a yet the upfront investments needed for A/R pro- slash-and-burn type of pattern. Similarly, increas- jects are significant and economies of scale are ing the flexibility of the project boundary rule and not easily attained. Forestry investments are long considering accepting evidence other than con- term and deemed high-risk in many developing tracts signed by the participating farmers in two- countries. Institutional arrangements for financial thirds of the project area before validation to prove intermediation, an understanding by financial in- that the project area is controlled by the project en- stitutions of the role of carbon credits in financ- tity would be helpful. (See Paragraphs 0.25–0.29.) ing agriculture and rural development, and some upfront payments based on meeting performance ■■ Continue the simplification and consolidation benchmarks are needed. (See Paragraphs 0.37–0.39 of large-scale methodologies, including allowing and 0.41.) project developers to use default values for estima- ■■ Financial compensation for other benefits tion of leakage (in line with the simplifications re- cently made for soil organic carbon) and facilitating should be considered. The BioCarbon Fund ex- the project monitoring process. Appropriate dis- perience has shown that A/R projects encompass counting should be allowed at the project level for both mitigation, through removal of CO2 from the project developers with less access to sophisticated atmosphere, and adaptation, as they build up the technology and/or lower institutional capacity. (See resilience of the environment and communities to Paragraphs 0.30-0.35.) harsh environmental conditions. Projects improve living conditions, but the significant additional en- ■■ Increase the current threshold of 16,000 tCO2e vironmental and social benefits (besides carbon) are annually for small-scale projects and revisit the not rewarded. (See Paragraphs 0.8–0.11.) In addi- rule that limits the type of people that must tion, given that co-benefits are a strong incentive for be involved in small-scale A/R CDM projects. local participation and for improving projects’ per- Since projects involving low-income communities formance, alternative non-permanence approaches usually have limited capacity to develop and imple- that factor in the role of co-benefits in ensuring the ment A/R CDM projects, their transaction costs in permanence of forest carbon should be explored. meeting the CDM requirements are high and their emission reductions volume low, making the pro- (iii) Strengthening Capacity jects unviable. Similarly, developers of these projects ■■ Building and strengthening capacity at the lo- usually lack the managerial capacity required to cal level is critically needed to ensure successful BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 13 Box 0.3 Regulatory Lessons for Other Land-based Climate Change Market Mitigation Mechanisms The main BioCF lessons learned for other land-based climate mitigation mechanism are summarized below in the form of recommendations. These recommendations should be considered by parties when discussing a po- tential work programme for SBSTA on possible additional LULUCF activities under the CDM. ■■ Ensure simple and clear procedures and predictable timelines to achieve credit certification. Lack of predictable carbon revenues deters the carbon finance potential to leverage investment financing from private investors and to significantly impact projects’ cash flow. ■■ Define a simple approach to non-permanence that ensures the fungibility of LULUCF credits with other credits in the market. Lack of fungibility has limited the demand for A/R CDM credits. The temporary credit approach produces less-favorable assets difficult to understand and handle by both buyers and sellers. This approach has also led to a reduced price, which severely limits the impact of carbon revenues in projects’ cash flows. Several other options to address non-permanence exist and developers of LULUCF activities should be allowed to choose the most convenient option. ■■ Simplify additionality demonstration and baseline determination as much as possible. Modalities and procedures should provide for additionality to be shown at the sector level to diminish the burden on individual projects. Existing unenforced national forestry development plans could be considered sufficient evidence of barriers limiting forest activity at a relevant scale. Similarly, a country’s forest conservation, pro- tection, and revegetation goals could serve as a basis for setting a threshold over which individual initiatives may be considered automatically additional. An expanded LULUCF mechanism should avoid disincentives to early movers on payments for environmental services, who have struggled to demonstrate additionality in the A/R CDM context. ■■ Develop easy-to-follow rules for ex-ante estimation of GHG accounting and allow for progres- sive adoption of detailed methodologies. Complex methodologies are time- and resource-intensive, cause confusion, and discourage project developers and investors from participating in LULUCF initiatives. Excessively detailed and complex methodologies should be avoided at least at the onset of the mechanism as developers usually lack the capacity to apply them. Carbon accounting in LULUCF projects should progressive- ly move from simple to refined rules. One alternative could be to allow projects to apply a tiered approach to GHG accounting—in line with IPCC’s Good Practice Guidance for National Inventory of Greenhouse Gases. More detailed methodologies should be developed based on experience from the ground and countries’ ad- vancements in removing data availability and human capacity constraints. Nevertheless, easy-to-follow tools (e.g., Excel-based tools) should be published to facilitate the application of methodologies. ■■ Develop easy to follow monitoring methodologies. Local stakeholders’ involvement in carbon moni- toring tends to increase project/program ownership, an important under-delivery risk mitigation measure. However, too complex methodologies usually prevent local stakeholders from participating in these tasks. There is room to develop simple yet rigorous monitoring methodologies. In addition, it is important to bear in mind that, because of their dynamic nature, land-use-based carbon initiatives may deviate from the origi- nal design at implementation. Modalities and procedures should therefore allow for certain level of changes, and easy-to-assess thresholds should be developed to account for permissible changes at implementation. ■■ Avoid restricting the type of people that must be involved in small-scale projects and carefully de- cide the cap in emission reductions imposed on this type of project. The participation of low-income people must be promoted through measures such as simple GHG accounting and by removing regulatory and financial barriers rather than enforcing through rules the involvement of low-income communities. This would bring land-based carbon projects/programs into alignment with other CDM sectors. In addition, define a relevant cap for small-scale projects based on technical, social, and financial studies of existing land-based projects to ensure their viability. 14 | Executive Summary forest carbon initiatives. The fact that A/R pro- but also need to come together along with regu- jects are useful tools for promoting both adaptation lators to ensure both a common understanding of and mitigation should be harnessed by building up the A/R CDM requirements and a timely provision capacity and strengthening programs in an inte- of feedback from the ground on the application of grated manner. Local capacity to monitor, verify, the rules. Furthermore, the land-use sector in de- and report the project emission reductions are suc- veloping countries needs support in strengthening cessful factors for credit issuance. There is a need to negotiators’ capacity on forestry and carbon to be use official development assistance for projects to able to influence the rules for land-base projects build and strengthen such capacity where needed. and programs being proposed under UNFCCC. (See Paragraphs 0.12–0.13, 0.18, 0.25, 0.30, 0.32, Developed countries can play a role in helping de- 0.36, and 0.39.) veloping countries fill these capacity-related gaps. ■■ Strengthen the capacity of DNAs and DOEs (iv) Increase Demand to ensure a smooth validation process. ■■ Developed countries committed to reducing Understanding the rules for A/R CDM projects GHG emissions should stop banning credits is not an easy task for a newcomer, and the chal- from A/R CDM projects in their bilateral/multi- lenge is compounded by the fact that the CDM lateral emission trading schemes. Where market EB changes the rules quite frequently to allow for signals have been given for post-2012 (as from the their improvement and simplification. Since these EU ETS), A/R credits from the CDM remain dis- changes are not retroactive for registered projects, advantaged. Market players should recognize the DOEs and DNAs need to be aware of the differ- substantial efforts the CDM’s stakeholders have ent sets of rules governing different projects in or- taken to demonstrate that credits from A/R projects der to support each one effectively. There is a need are measurable, verifiable, and reportable. In addi- for an easy-to-follow manual for A/R CDM to be tion, they should recognize that projects apply sev- published periodically, in line with the Institute eral safeguard instruments to avoid, minimize, and/ for Global Environmental Strategies’ publication, or mitigate any potential risk to the local commu- CDM in Charts. (See Paragraphs 0.15–0.16.) nities’ livelihood and environment, as well as the ■■ Developed countries committed to reducing under-delivery risk of emission reductions. It is also emissions should continue to support develop- worth noting that some projects go even further in ing countries in removing the capacity-related guaranteeing the significant delivery of positive net barriers hindering A/R CDM. Several capacity-re- co-benefits by attaining additional certification of lated constrains prevent developing countries from their project designs. Moreover some A/R CDM’s tapping into the opportunities that come with A/R stakeholders are proposing changes to the non- CDM. A wide range of actors need to be involved permanence rules so that forestry projects deliver in A/R CDM project development and implemen- credits fungible with other carbon assets generated tation, but they usually lack the capacity to sup- in the market. Strengthening the overall supply of port projects effectively. For example, Designated forest carbon credits may be fruitless without a sig- National Authorities’ role in approving projects is nificant demand for these credits from developed usually week due to bureaucratic procedures and countries. unclear project approval criteria. Similarly, many 0.52 As the UNFCCC negotiations evolve, par- Designated Operational Entities lack the neces- ties in the UNFCCC negotiations are currently dis- sary expertise for effective assessment of projects cussing further commitments under the Kyoto at validation and verification and few of these are Protocol. One of the activities being discussed as based in developing countries. Local companies part of this is to request that the Subsidiary Body for could be trained to provide this expertise. In addi- Scientific and Technological Advice (SBSTA) initiate tion, research institutions are not fully playing their a work programme to consider and, as appropriate, role in helping projects overcome data- and infor- develop and recommend modalities and procedures mation availability constraints for effective project for possible additional land use, land-use change and preparation and monitoring. All these actors not forestry activities (LULUCF) under the CDM. To only need to strengthen their individual capacity, make such a potential expansion of LULUCF under BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 15 the CDM successful, the early lessons from the A/R challenges that can arise in the application of regu- CDM should be incorporated in order to avoid some latory rules for climate change projects. The Fund is of the obstacles that have hindered the A/R CDM (see also exploring where methodological improvements Box 0.3). Many of the lessons learned from A/R also can be made. These include applying new CDM de- could be helpful in the development of REDD+. velopments on standardized baselines and developing methodologies and pilots in landscapes where various 0.53 In addition, because of the many interac- sectors (land-use or energy) can be considered as a tions between different land uses, policymakers whole. The BioCF is also working on innovative up- need to address the interface of all land-use ac- front financing mechanisms to assist the scaling up of tivities (e.g., A/R, REDD+, agriculture) in an inte- rural projects and on approaches to compensate pro- grated approach. There is also a need to bring in the jects for their co-benefits. All of this is in line with the biomass-energy dimension. The application of a land- World Bank’s triple-win-for-farmers strategy in which scape approach that integrates the land-use and energy the forestry, agriculture, and rural energy sectors are sectors at a landscape level would be more practical treated in an integrated way to increase food security, and cost effective. to improve the rural poor’s resilience to the impacts of climate change, and to mitigate climate change. 0.54 The BioCarbon Fund will continue to sup- port land-use interventions and is planning to build on its experience to date in A/R through scaled-up programs. The BioCarbon Fund will also work in areas not yet fully explored.Such pilots are invaluable for showing the opportunities and 16 | Executive Summary Introduction 1.1 Carbon finance recognizes the contribution of projects to mitigating climate change. To be able to access carbon finance, projects can certify their emission reductions under a variety of standards, one of which is the Clean De- velopment Mechanism (CDM) of the United Nations Framework Convention on Climate Change (UNFCCC). Project developers can sell their carbon credits either in the voluntary or the regulated market.1 Since 2002, projects from diverse sectors have been applying the CDM modalities and procedures to generate Certified Emission Reductions (CERs) that are traded in the carbon market Af- forestation/Reforestation (A/R) is one out of the 15 sectors2 that can generate carbon credits under the CDM. 1.2 The purpose of this document is to share the experience of the BioCarbon Fund (BioCF) of the World Bank in developing and implementing 21 A/R CDM projects in 16 countries (see Annex 1). This experience shows that the benefits associated with A/R CDM projects support the livelihood of rural people and their local environment in a significant manner. However, depending on their capacity, projects may struggle with getting credit certification and the associated benefits. This report presents the opportunities and challenges A/R CDM projects face and presents recommendations to facilitate their design and implementation as well as to scale them up significantly. 1 Voluntary market refers to carbon credit transactions that are carried out for purposes other than those regulated by law or conventions. 2 Other sectors are energy industries (renewable/non-renewable sources); energy distribution; energy demand; manufacturing industries; chemical industries; construction; transport; mining/mineral production; metal production; fugitive emissions from fuels (solid, oil, and gas); fugitive emissions from production and consumption of halocarbons and sulphur hexafluoride; solvent use; waste handling and disposal; and agriculture. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 17 Table 1.1 Evolution of A / R CDM Compared to Other Sectors Modalities and Procedures, Number of Approved Methodologies, and Registered Projects Per Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total Year of Decisions on Modalities and Procedures Other sectors x A/R CDM x Number of Approved Methodologies Per Year Other sectors 10 22 29 22 21 11 17 21 17 170 A/R CDM 1 4 8 3 1 3 1 21 Number of Registered Projects Per Year Other sectors 1 62 408 427 430 675 697 860 3560 A/R CDM 1 0 0 10 7 17 35 Note: Data updated up to November 2011. 1.3 This report is organized thematically. This report encompasses an in-depth desk review of docu- chapter presents a brief introduction to the A/R CDM ments, including project idea notes, Project Design as well as an overview of the BioCF portfolio, includ- Documents (PDDs), environmental and social assess- ing expected emission reductions and associated co- ments, BioCF annual reports, World Bank evaluation benefits from projects. Chapter 2 presents the A/R reports on safeguard policy compliance, and CDM CDM project cycle and addresses the major issues validation reports. The data collected were analyzed identified by BioCF project developers in complet- with descriptive statistics, and illustrative examples ing it. Chapter 3 looks at the non-permanence rule were used as case studies. as a major challenge for A/R projects. Chapters 4 and 5 present an in-depth analysis of the rules related to 1.1 Afforestation and Reforestation land and greenhouse gas (GHG) accounting respec- in the CDM tively. Chapter 6 analyzes the financial challenges A/R 1.5 The A/R sector has fewer registered projects CDM projects face and presents some recommenda- compared to the overall CDM, and the modalities and tions. Chapter 7 analyzes BioCF projects from an in- procedures were developed slower than in other sectors stitutional standpoint, presenting the institutional ar- (Table 1.1). A/R CDM methodologies and procedures rangements that BioCF projects use to clarify carbon were put in place in 2003 at the ninth UNFCCC’s ownership, agree on land use, and establish benefit- Conference of the Parties (COP), two years later than sharing plans; it also identifies the local capacity most for other sectors. The CDM EB approved the first needed to develop, implement, and manage an A/R A/R methodology for greenhouse gases accounting CDM project. Chapter 8 looks at the BioCF experi- in 2005, and the first A/R project was registered in ence addressing the under-delivery risk of getting car- 2006. This was the only registered A/R CDM project bon credits. Finally, Chapter 9 draws conclusions and until 10 additional projects were registered in 2009. looks at the way ahead for the agriculture, forestry, Because of the intricacy of the A/R CDM rules, up and other land use sector. to November 2011 only 35 A/R CDM projects had 1.4 The targeted audience for this report is for- been registered. This represents less than one percent est carbon project developers. The secondary audience of the total CDM-registered projects (n = 3560)3. By is policymakers and the Afforestation/Reforestation Working Group (AR-WG), the body of the CDM Executive Board (CDM EB) responsible for develop- 3 Afforestation/Reforestation is not the only underrepresented sector in the CDM. Overall, the majority of registered projects pertain to five out ing A/R CDM rules. The methodology used in this of the 15 eligible sectors. The transport and construction sectors are the most underrepresented, with seven and zero projects respectively. 18 | Chapter 1: Introduction april 2004 With the Moldova Soil Conservation and the Moldova Community Forestry Development 2007 Projects the june land has started to recover its productivity and erosion has diminished. Images courtesy of Moldsilva BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 19 the same date, A/R CDM small-scale4 projects repre- 1.9 Within each tranche there are two win- sented one-third of the total number of registered A/R dows. Window 1 focuses on CDM-eligible projects CDM projects, which is less than in the entire CDM and Window 2 on non-CDM projects, including (43.52%). Reducing Emissions from Deforestation and Forest Degradation (REDD+)7 and sustainable agricultural 1.6 The CDM EB has approved 14 method- land management. The emission reductions generated ologies for large-scale A/R CDM projects and seven by these projects are purchased by the BioCF on be- methodologies for small-scale projects. Not all the half of its participants and are subsequently transferred methodologies are currently being used. Developers of to them, pro rata, their financial participation in the registered large-scale projects have applied half of the Fund. The BioCF Window 1 participants typically use approved methodologies for this category, and small- their credits to meet their Kyoto targets. Participants scale ones have applied only one of the seven existing in Windows 2 of each tranche are supporting the de- methodologies. The same trend is observed in projects velopment of new methodologies and expanding car- currently under validation. bon markets to encompass more activities, countries, and communities. 1.7 The low ratio between number of method- ology-approved and registered projects reflects the 1.10 The BioCF is responsible for identifying new learning-by-doing process prevalent in the early years project ideas and presenting them to participants for of the A/R CDM. Project developers5 elaborated their consideration prior to their inclusion in the port- complex methodologies that needed significant sim- folio. All forest carbon projects at the World Bank are plification. Project developers’ rigorousness in devel- also subjected to a process of due diligence. This as- oping methodologies denoted lack of field experience sessment follows the World Bank’s environmental and and was in line with the stringent approval process of social safeguard policies and is expected to result in methodologies led by experts. Most recent versions of proper risk mitigation measures. Once project prepa- methodologies are less complex, reflecting the CDM ration and due diligence are completed, the negotia- EB A/R Working Group’s significant efforts to incor- tion and signing of Emission Reductions Purchase porate feedback from existing projects; new project Agreements (ERPA) follows, allowing projects to trade developers are benefiting from this improvement. carbon credits as a commodity. As of November 2011, the BioCF had contracted over nine million Emission 1.2 The BioCarbon Fund Reductions (ERs). 1.8 The BioCF, which is housed in the Environment Department of the World Bank, is a 1.11 The BioCF supports the A/R CDM sector by private-public initiative mobilizing resources to pio- contributing to build the forest carbon market. The neer projects that sequester or conserve carbon in for- early development of forest carbon projects by the est and agro-ecosystems, thereby mitigating climate BioCF exemplifies this. When the first 17 projects en- change and improving rural livelihoods.6 The overall tered the BioCF portfolio in 2004 and 2005, there goal of this fund is to demonstrate that forest activities were no methodologies for A/R CDM. Eight BioCF can generate high-quality emission reductions with projects developed their own methodologies, seven of strong environmental and socioeconomic co-benefits which were approved by the CDM EB. These early for local communities. The BioCF started operations projects provided an opportunity to test the CDM in 2004 with a total capital of $53.8 million. Because rules and methodologies on the ground, which has of a high level of interest, a second tranche became contributed to the publication of guidance, clarifica- operational in 2007 with a capitalization of $38.1 mil- tions, and tools by the UNFCCC. lion. Participants investing in the BioCF include six 1.12 The BioCF has also supported a variety of governments and 12 private sector companies. capacity-building and outreach activities aimed at di- rectly assisting project entities within the BioCF port- 4 In A/R, small-scale projects are those that sequester less than 16,000 tonnes of CO2e per year. folio, improving the A/R CDM regulatory process, 5 It is worth noting that, to elaborate methodologies, project proponents ended up hiring highly specialized external consultants who developed methodologies that were scientifically sound but difficult to read and apply. 7 REDD+ also includes the role of conservation, sustainable management 6 http://wbcarbonfinance.org/Router.cfm?Page=BioCF. of forests, and enhancement of forest carbon stocks. 20 | Chapter 1: Introduction and creating forest carbon market knowledge. Some 1.2.1 The BioCF Projects of the BioCF activities in this area have included: 1.13 The BioCF A/R CDM portfolio is composed ■■ Providing feedback to the CDM EB on the applica- of 21 projects located in five regions (Figure 1.1)8 tion of the A/R rules on the ground and responding Compared to the overall CDM, in which the majority to their requests for information through formal of projects are taking place in East Asia, the BioCF submissions. is mainly supporting projects in Sub-Saharan Africa, ■■ Organizing roundtables with Designated Eastern Europe, and Latin America and the Caribbean Operational Entities (DOEs), project develop- (Figure 1.2). As of November 2011, 13 BioCF pro- ers, the A/R Working Group and the UNFCCC jects had been registered, comprising around 40 per- Secretariat to discuss issues pertaining to the valida- cent of the total number of registered A/R CDM pro- tion and verification of A/R CDM projects. jects; three of these are small-scale projects. ■■ Planning workshops at the request of negotia- 1.14 About 80 percent of BioCF resources are tors from Africa and Latin America on land use, earmarked to A/R projects that use multiple carbon land-use change and forestry (LULUCF) con- sequestration technologies; the remainder has been al- cepts currently under discussion in the UNFCCC located to REDD+ and sustainable land management negotiations. projects. As a result, all of the investments are allocated ■■ Supporting and developing research materials and to projects with several purposes, including environ- publications to inform the debate on LULUCF mental restoration (54 percent), fuel wood (25 per- mitigation strategies. cent), and timber (21 percent) (Fig. 1.3). All projects ■■ Participating in key conferences and events to pre- plant on degraded lands. Sixty-two percent of the pro- sent the progress made by the pilot projects and jects in the portfolio are government and nonprofit-led activities. projects; the remainder are private-sector-led projects (see Annex 1). ■■ Developing training materials and organizing workshops to build the capacity of project entities and field teams on the ground. 8 See the list of the active projects in Annex 1 of this report. Figure 1.1 Bringing C arbon Markets to Rural Areas in Developing Countries BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 21 Figure 1. 2 Overall CDM and BioCF landscape management. The sections below provide Distribution of Projects examples of expected9 benefits from BioCF projects. Across Regions Emission Reductions 1.16 Afforestation and reforestation projects vary 1% (Middle 100 in the amount of emission reductions they can attain. 3% East 1% 0%) On average, A/R CDM projects sequester 40,000 19% tCO2e/year10; however, this figure can vary widely de- 16% pending on several factors. For example BioCF pro- 80 jects’ potential for carbon sequestration ranges from 3 to 23 tCO2/ha/year, reflecting variances in types 27% 29% of ecosystems, project areas, forest management, tree 60 species, and level of soil degradation, among others. Expected emission reductions are, therefore, limited by project entities’ objectives, with projects for which commercial purposes are not their main rationale usu- 40 ally garnering the lowest productivity as they plant 33% slow-growing native species in low densities. Small- 52% scale projects have a built-in revenues ceiling as they cannot exceed 16,000 tonne of CO2e per year.11 20 10% Environmental, Economic, and Socio- institutional Benefits 10% 1.17 At the project level, A/R CDM projects de- 0 CDM Overall BioCF liver three types of benefits: ■ Latin America & ■ Middle East Environmental: There are net positive impacts on the Caribbean ■ Eastern Europe & ■ South Asia Central Asia environmental services that go beyond carbon seques- ■ East Asia & ■ Africa tration and global climate change mitigation, such as Pacific conservation of local biodiversity, control of soil ero- sion, and improved water infiltration. Source: UNEP RISØ Economic: Project participants benefit from revenues 1.2.2 Expected Benefits from the sale of carbon and other forest products, 1.15 The CDM, defined in Article 12 of the Kyoto from short- and long-term employment opportunities Protocol, was created to provide flexibility to countries created by the project, and from access to markets for 120 with emission reduction commitments to achieve their the sale of forest products. targets and to contribute to sustainable developmentMiddle East Social and Institutional: Stronger local organizations in developing countries (UNFCCC, 2006a). The (0%) and empowered communities are among the positive BioCF was created as a 1% way to test the benefits of the 100 effects from the institutional frameworks in place to A/R CDM in 3% different forest projects. The experienceEastern Europe & Central Asia 1% ensure adequate project implementation. shows that A/R CDM projects can 19% produce measur- 16% able, reportable, and verifiable carbon credits while significantly 80 contributing to improving rural liveli- Africa9 Since most projects are at an early stage of implementation, data hoods and restoring, conserving, and producing other presented in this report are based on early results. environmental benefits. The benefits from BioCF pro- 10 This is the average volume expected by projects so far registered under 27% the project area jects also go beyond 29% by increasing the the CDM. Forty-thousand tCO e/year is a low value compared with the 2 60 resilience of natural and human systems to cope withLatin America average& the Caribbean expected emissions of projects in other sectors of the CDM, which can achieve around 400 ktCO e/year. A few project types can 2 adverse impacts of climate change and promoting even exceed 3,000 ktCO e/year (see Chapter 6 Paragraph 6.24 for more 2 information). 11 See Chapter 6 for a detailed discussion on small-scale projects. South Asia 40 33% 52% 22 | Chapter 1: Introduction East Asia & Pacific 20 10% Figure 1. 3 Percentage of Resources Invested in Different C arbon Sequestration Technologies in BioCF A / R Projects Agroforestry 1% Silvopastoral 1% Wetland Restoration 1% Non-timber Forest Products 2% Assisted Natural Regeneration 16% Fuel Wood Forest Restoration 25% 27% Environmental Plantation Restoration 21% 54% Land Restoration & Timber 52% Note: Projects usually deploy a combination of carbon sequestration technologies. 1.18 Project benefits are influenced by many fac- dispersal of forest native species by extending areas of tors. These factors include the project objective, land forest habitat or providing connectivity among habitat use activity, location, scale, level of participation of patches in a formerly fragmented landscape. More than local communities, and land condition before project 20 percent of the BioCF projects are implemented in implementation. Table 1.2 presents a general overview areas with nearby forest patches or within natural re- of the co-benefits BioCF projects expect to achieve serves to create corridors and enhance the viability of from nine carbon sequestration technologies. Some of wildlife populations in mega-diverse world regions. the environmental, economic, and social co-benefits listed in the table are further described in more detail. 1.21 Over 80 percent 60 Environmental of the project areas in the Restoration BioCF portfolio are planted with native species or Agroforestry Environmental Benefits with a mix 1% species. of native and exotic (0%) This creates 50 Plantation 3% 1.19 The environmental co-benefits BioCF project 19% local biodi- diverse multi-strata plantations to restore 1% Silvopastoral 16% developers expect to obtain from their projects can be versity (Figure 1.4). One of the most diverse projects 40 Fuel Wood Wetland Restoration grouped into three categories: biodiversity conserva- in the BioCF portfolio, is expected to plant about 80 tion, soil rehabilitation, and watershed protection. 27% areas. native species in riparian 29% 30 Non-timber Forest Products Examples of these co-benefits are presented below. 1.22 In the implementation stage of BioCF pro- Biodiversity jects, the 20potential for biodiversity conservation is of- Assisted Natural Regeneratio 33% 1.20 About 70 percent of BioCF projects are im- ten fostered by minimizing 52% harvesting, thinning, and plemented on severely degraded barren lands; the re- weeding. 10 In addition, as part of their land manage- Forest restoration 10% maining 30 percent are implemented on degraded ment plan, projects outline strategies to address po- agriculture and pasture lands. By their very nature, tential threats 0 to local biodiversity (such 10% as invasive Land Restoration & Timber CDM Overall BioCF these reforestation activities are improving biodiversity species and fires). in the project areas. Reforestation contributes to the BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 23 Table 1. 2 Project C ategories in the BioCF Portfolio and the Associated Non - C arbon Benefits Project Co-benefits Categories Approach/Definition (108,200 Environmental Economic Social and Institutional ha; n=21) Plantation Establish plantations of ■■ Prevent fire and erosion ■■ Income generation ■■ Technical training (19,760 ha; fast-growing trees for ■■ Improve soil and ■■ Employment ■■ Improve local capacity n=8) extraction of timber. microclimate opportunities ■■ Develop a forestry These plantations can be ■■ Sustainable wood ■■ Sustainable supply of model established by local com- supply to reduce the forest products and ■■ Empower local munities and individuals pressure on natural services communities on their own land or by forests ■■ Alleviate local poverty ■■ Strengthen social private companies. The ■■ Improve the connectiv- ■■ Increase biomass cohesion land before the planta- ity of fragmented forest production resources ■■ Reduce migration tions was in some cases ■■ Gain valuable foreign severely degraded and ■■ Improve soil exchange in other cases degraded productivity ■■ Integrate the local pop- agricultural and pasture ■■ Contribute to main- ulation on a sustained land. taining or improving economic development ecosystems functions process ■■ Access to markets and financial credit Assisted Removing barriers to ■■ Regenerate native ■■ Poverty alleviation ■■ Land tenure security Natural natural forest regeneration forest ■■ Income generation ■■ Technical training Regeneration such as soil degradation, ■■ Biodiversity ■■ Employment generation ■■ Improve local capacities (8,740 ha; competition with weedy conservation ■■ Sustainable fuel wood n=3) species, and recurring ■■ Improve the connectiv- and other NTFP supplies disturbances. ity of fragmented forest to local communities resources ■■ Positive contribution to ■■ Soil protection the local economy ■■ Protection of fragile ■■ Increased fodder pro- water catchment areas ductivity on arable land, ■■ Improve regional improved pastures water supply ■■ Gain valuable foreign ■■ Greater infiltration of exchange water and build up to topsoil will enhance forest growth Silvopastoral Planting suitable trees into ■■ Reduce pressure on ■■ Income generation ■■ Stronger community (500 ha; n=1) permanent pasture land to primary forests ■■ Long-term employment organizations support cattle ranching. ■■ Increase productiv- opportunities ■■ Investments in ity and soil quality of ■■ Access for rural popula- education, health and marginal and degraded tion to forest and recreation lands livestock products ■■ Technical training ■■ Improve/diversify local ■■ Reduce migration economy ■■ Poverty alleviation ■■ Local food and energy security ■■ Gain valuable foreign exchange Fuel Wood Reforestation on degraded ■■ Reduce the pressure on ■■ Income generation ■■ Technical training (4,040 ha; land to supply fuel wood primary forests ■■ Short-term employment ■■ Improve local capacities n=2) to local communities and ■■ Improve the connectiv- opportunities cities. ity of fragmented forest ■■ Sustainable supply of resources fuel wood ■■ Increase habitat ■■ Improve/diversify local available for wildlife economy ■■ Gain valuable foreign exchange Notes: ■■ Some projects have more than one land-use activity within the project boundary. Some of the categories in this table are sub- components of such projects. ■■ The co-benefits presented in this table were listed by project developers in their PDDs after analyzing and addressing potential negative social and environmental impacts from their projects. 24 | Chapter 1: Introduction Table 1. 2 Project C ategories in the BioCF Portfolio and the Associated Non - C arbon Benefits ( continued ) Project Co-benefits Categories Approach/Definition (108,200 Environmental Economic Social and Institutional ha; n=21) Agroforestry The deliberate use of ■■ Reduce pressure on ■■ Increase self-reliance ■■ Increase community (760 ha; n=2) woody perennials on the primary forests ■■ Increase local incomes capacity for same land as agricultural ■■ Biodiversity management ■■ Improve/diversify local crops, pastures, and conservation economy animals. This may consist ■■ Improve regional of a mixed spatial arrange- economy and welfare ment in the same place, ■■ Improve food security at the same time, or in a ■■ Gain valuable foreign sequence over time. exchange Land Rehabilitate and restore ■■ Improve local ■■ Income generation ■■ Reduce pressure on Restoration severely degraded land environment ■■ Employment primary forests and Timber to supply timber and ■■ Hydrolology and opportunities (42,900 ha; non-timber products to watershed protection ■■ Increase biomass and n=4) local communities and ■■ Reduce soil erosion fuel wood supply timber to governments ■■ Improve nutrient cycling ■■ Financial benefits to the and private companies. within soil landless and the poor These projects have soil ■■ Reduce vulnerability ■■ Gain valuable foreign restoration as a main of forest ecosystems exchange objective. ■■ Reduce pressure on natural forests ■■ Biodiversity conservation ■■ Increase habitat available for wildlife Forest Rehabilitate and ■■ Improve local climate ■■ Income generation ■■ Land tenure security Restoration regenerate severely ■■ Improve water quality ■■ Employment ■■ Improve local capacity (20,910 ha; degraded forest to supply downstream opportunities ■■ Technical training n=6) non-timber forest ■■ Improve water ■■ Improve local economy ■■ Enhance sociocultural products to communities infiltration ■■ Supply non-timber conditions and ecosystem services. ■■ Improve soil quality products ■■ Create recreational and fertility ■■ Alleviate local poverty opportunities for local ■■ Reduce rainfall ■■ Gain valuable foreign residents impact on soil exchange ■■ Enhance aesthetics ■■ Enhance ecological functions ■■ Enhance forest connectivity ■■ Biodiversity conservation Wetland Rehabilitate and ■■ Enhance biodiversity in ■■ Income generation ■■ Enhance sociocultural Restoration regenerate severely the coastal wetland ■■ Employment conditions (1,200 ha; degraded wetland ■■ Increase habitat avail- opportunities ■■ Technical training n=1) ecosystems to their able for wildlife ■■ Improvement of fishing ■■ Improve local capacities natural state. ■■ Improve soil habitats (economic and for land management conservation leisure purposes) activities ■■ Improve water quality ■■ Create a potential ■■ Prevent salt water for ecotourism in the intrusion region ■■ Enhance the eco- ■■ Gain valuable foreign system’s capacity to exchange function as natural windbreak protecting the island from tropical storms Notes: ■■ Some projects have more than one land-use activity within the project boundary. Some of the categories in this table are sub- components of such projects. ■■ The co-benefits presented in this table were listed by project developers in their PDDs after analyzing and addressing potential negative social and environmental impacts from their projects. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 25 Table 1. 2 Project C ategories in the BioCF Portfolio and the Associated Non - C arbon Benefits ( continued ) Project Co-benefits Categories Approach/Definition (108,200 Environmental Economic Social and Institutional ha; n=21) Non-timber Reforestation of severely ■■ Combat desertification ■■ Catalyst for other ■■ Land tenure security Forest degraded areas to ■■ Shade and windbreaks NTFP initiatives ■■ Technical training Products supply non-timber forest for cropland ■■ Income generation ■■ Improve local capacities (9,320 ha; products such as Arabic ■■ Improve soil fertility ■■ Employment for land management n=2) gum, rubber, and honey ■■ Reduce soil erosion opportunities activities to local communities and ■■ Improve local economy companies. ■■ Sustainable fuel wood supply ■■ Economic empowerment ■■ Gain valuable foreign exchange Notes: ■■ Some projects have more than one land-use activity within the project boundary. Some of the categories in this table are sub- components of such projects. ■■ The co-benefits presented in this table were listed by project developers in their PDDs after analyzing and addressing potential negative social and environmental impacts from their projects. Figure 1.4 T ypes of Tree Species and it influences the choice of species and techniques Planted in BioCF Projects applied throughout project implementation. Projects contribute to reducing soil erosion, improving nutri- ent cycling, improving soil quality and fertility, reduc- ing the impact of rainfall on soil, increasing soil water Exotic infiltration, and reducing desertification. The BioCF 18% projects in Moldova (Box 1.1), China, and Ethiopia exemplify this. Native Watershed Protection 45% 1.25 BioCF projects are expected to improve water Mixture 37% quality downstream, improve water recharge in reser- voirs, improve groundwater quality, and provide hy- drology and watershed protection. Almost 30 percent of the BioCF projects are developed in watershed areas and integrated into wider watershed management plans. One of these projects, the Himachal Pradesh Reforestation project in India, seeks to implement A/R CDM activities in degraded lands in the watersheds of 1.23 BioCF projects’ contribution to biodiversity the Mid-Himalayan region (Box 1.2). Another BioCF conservation also goes beyond project boundaries. By project with net positive benefits on watersheds is plant- supplying fuel wood, timber, and other forest prod- ing trees in riparian areas which function as buffers to ucts to local communities and markets, planted forests keep sediments and pollutants away from water bodies. reduce the pressure on the tropical natural forests that Economic Co-Benefits contain about 70 percent of the world’s biodiversity. 1.26 The economic co-benefits BioCF project de- Soil Rehabilitation velopers expect to obtain from projects can be direct 1.24 Soil restoration is an integral part of the de- and indirect. While direct benefits are employment sign and management plan of most BioCF projects, opportunities and income generation, the indirect 26 | Chapter 1: Introduction Box 1.1 Moldova Community Forestry Development Project This project aims to create new community forests on over 10,000 ha by means of afforestation of eroded and unproductive lands, application of agroforestry practices, and creation of forest protection belts. The project will also improve forest and pastoral resources at the local and regional levels, provide wood to the local popula- tion, and contribute to local and regional sustainable development. The BioCF project proposes to restore the productivity of degraded pastures, glades, and abandoned arable lands in the northern, central, and southern regions of the country through A/R activities. Past forest manage- ment by Moldsilva, the national forest agency of the Republic of Moldova, has shown that A/R activities with lo- cally adaptive and naturalized species is a cost-effective way to prevent soil erosion, prevent landslides, stabilize slopes, and generate wood and non-wood products to meet the requirements of rural communities. A cti v iti es in Pl ac e t o A ddr ess La n d D e g radati o n For severely degraded lands, the project has elected to plant locally adapted and naturalized species, such as Robinia pseudoacacia and Populus sp. mixed with native species. Moldova forest management experience has shown that Robinia adapts easily to poor sites on which other species cannot cost-effectively be established. Native species are proposed to be planted as site conditions improve, after one or two rotations of naturalized and locally adaptive species. Secondary plantings using native species such as oak (Quercus sp.) and associated species are expected to improve the productivity and the vegetative cover of restored lands. For the partially degraded areas, the lead species chosen were oak (Quercus sp.) and poplar (Populus alba, P. nigra). Other broad- leaf species and shrubs were planted to improve floral diversity. Me t ho d U se d t o Assess La n d Co n diti o n i n t h e P r o j e ct A r e a The land condition in the project area was assessed through a baseline study that demonstrated that the histori- cal land-use trend of degradation would continue in the absence of the project. The project developer evaluated the likely impacts from the project using a scale from -3 to +3 in each land-use category,1 where -3 refers to major negative impact and +3 to major positive impact. This evaluation was also done in the baseline scenario, resulting in a score of -14. Variables such as soil type, depth, gradient, intensity of erosion, and drainage were considered in this assessment. In the project scenario, a significant positive impact on soil is expected: +2 in the short term (5 years) and +6 in the long run (project period). 1 The categories were landslides, ravines, other degraded lands, degraded arable lands, degraded pastures, glades, and open places. ones are reduced migration, increased soil fertility, restoration, timber, and fuel wood projects are more and secured sources of fuel wood. Examples of these labor intensive than assisted natural regeneration, sil- co-benefits are presented below. vopastoral, and agroforestry projects (Box 1.3). Employment Generation 1.28 The number of jobs created by a project also 1.27 BioCF initiatives create short- and long-term depends on the terms agreed to between project de- employment opportunities in the project areas. Short- velopers and participating communities during pro- term jobs are mostly seasonal, employing the people ject design. In some projects, when local beneficiaries living in the vicinity of the project area in project work in project activities as a means to contribute to preparation activities. The work includes planting their development, the labor is considered equity and nurseries, soil preparation, digging trenches, and plan- participants receive a share of the benefits incurred tation activities. Long-term employment opportuni- from the project. ties include activities such as maintenance and pro- 1.29 Employment opportunities are highly valued tection of the project area, harvesting, and thinning. by local communities, especially in poor rural areas. In The number of jobs created depends on the type and many of the stakeholder consultation meetings carried size of the project. In general, land restoration, forest BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 27 Box 1.2 India Himachal Pradesh Reforestation Project: Improving Livelihoods and Watersheds The main guiding principles of this project include the adoption of native and locally preferred tree species for reforestation and the provision of technical, financial, and capacity development support to reforestation activi- ties as part of the Himachal Pradesh-Himalayan Watershed Development Project. The project supports soil and moisture conservation and grassland development. The main environmental objective of this forest project, in addition to carbon sequestration, is the improvement of the productive potential of the degraded land around the watershed catchment areas. The project is expected to bring additional value to the ongoing catchment/drainage treatment activities under- taken as part of the larger project. A number of streams originate in the area and feed major northern Indian rivers. These streams and springs are likely to increase their discharge rate as a result of the A/R activities. This will, in the long run, help stabilize the sources of these springs and streams. out during BioCF projects, employment opportuni- generated from employment and the sale of carbon, ties was mentioned as an outcome that communities timber, and non-timber forest products (Box 1.4). In welcomed as local individuals prioritized being able to over 70 percent of the projects with local participants, work and provide for their families. farmers receive at least part of the revenue accrued from the sale of carbon credits; in 80 percent of the Income Generation projects, they are also entitled to timber and other 1.30 Before the BioCF projects, the main econom- tradable forest products. Forest is seen as a security ic activities in most of the project areas were subsist- buffer or savings for bad times. ence agriculture and small animal husbandry. More than 30 percent of the BioCF projects were developed Other Economic Co-benefits in extremely poor areas where the mean annual in- 1.32 Forest carbon projects also have other, less di- come was less than $1/day. These areas were often in- rect economic co-benefits. In some BioCF projects in- habited by marginalized communities with little or no itiated by private project developers, access to regional access to income-generating opportunities. and international markets for forest products is an im- portant asset for local individuals and communities. 1.31 Local communities that participate in BioCF For example, Achats Service International, the pro- projects can benefit from the additional income ject developer in the Niger Acacia Plantation project Box 1.3 Employment Opportunities Created by the Facilitating Reforestation for Guangxi Watershed Management in the Pearl River Basin Project in China This was the first A/R project to be registered under the CDM, and it aims to sequester carbon through reforesta- tion in watershed areas along the Pearl River Basin while enhancing the livelihoods of local peoples. The A/R CDM activity proposes to create a significant number of person-days of temporary employment from planting, weeding, harvesting, and resin collection. It also aims to create 40 long-term jobs during the crediting period. Most of the jobs will be filled by local farmers and others in communities involved in the project and neighboring farmers whose lands do not fall within the project boundary. The project will also provide employ- ment opportunities to local ethnic minority groups. 28 | Chapter 1: Introduction Box 1.4 Income Generation in the Reforestation on Degraded Lands in Northwest Guangxi, China This project aims to reforest over 8,000 ha of severely degraded land spread over two watersheds and encom- passes strategies to control soil and water erosion and to improve local livelihoods in a poor rural area. The A/R CDM activity proposes to generate over $50 million in total income in its first crediting period (20 years renewable twice), from employment, the sale of wood and non-wood products, and the sale of emission reduc- tions. The mean net annual income per capita in the project area is expected to increase by 64 percent relative to the baseline year. enables local communities to supply Arabic gum to empowerment; gender equality, ethnic minorities’ par- international markets where prices are more competi- ticipation, and overall rural development. Examples of tive. This is also the case in the India Improving Rural these co-benefits are presented below. Livelihood project, where the partnership with the Securing Land Tenure private project developer provides local participants12 with market support for the sale of wood products. 1.36 Forest carbon finance can contribute to in- The lack of market access was a barrier to economic creasing land tenure security in project areas. With development; each of these projects has enabled local the right institutional mechanisms in place to clarify participants to overcome that barrier. carbon ownership and ensure adequate project im- plementation, projects with different land tenure 1.33 Some BioCF projects are also expected to re- situations can participate in the CDM. Four BioCF duce migration from rural to urban areas. The main projects in Africa are evidence of this. Land is a key cause of migration is the lack of income-generating element of wealth for the poor, and secure land tenure opportunities in these poor rural areas. With new op- increases people’s welfare. Secure tenure can contrib- portunities for employment and additional income, ute to poverty reduction by increasing farmers’ ability there is less incentive to abandon the rural areas. The to receive financial compensation for the investments Himachal Pradesh BioCF project in India, for exam- they make on land and by providing these individuals ple, anticipates that the flow of carbon revenues will in with better access to credit. the long run reduce the migration of the rural popula- tion to urban areas in search of employment. Increasing Local Capacity 1.37 Designing and implementing forest carbon 1.34 BioCF projects are also expected to increase projects requires a wide range of local technical ex- soil fertility and provide a sustainable supply of fuel pertise. It is therefore essential that projects invest in wood for local communities, increasing food and en- creating and sustaining local capacity. Many BioCF ergy security. Before the projects began, these areas projects received financial support from grants (e.g., were degraded with low or no productivity; this, in Policy and Human Resource Development from turn, affected individuals’ ability to meet their basic Japan and the Norwegian Trust Fund) for technical needs. With these projects, the soil in these areas be- assistance and capacity building. The BioCF project in comes more productive, increasing productivity on ar- Niger, for example, has promoted capacity building in able lands and contributing to improved pastures. techniques for planting and maintaining Acacia trees Social and Institutional Co-benefits and for processing and tapping of Arabic gum. These communities were also trained in forest inventory 1.35 BioCF project developers expect to achieve techniques for accurate carbon measurement. With several social and institutional co-benefits from their the technical capacity in place, these communities will projects. These are land tenure security; increased local be able to develop Arabic gum plantations in other ar- capacity on forest and project implementation; local eas. Capacity building also increases the community’s social capital. 12 There are more than 1,500 participants, including minorities. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 29 Communities in Moldova planting on the project land. 1.38 BioCF projects have also contributed to fos- and increase the survival rate of the trees planted. In tering local knowledge about climate change impacts the BioCF projects in Ethiopia and Himachal Pradesh and potential mitigation actions. In some cases, the in India, for example, local communities are expected benefits from the transfer of know-how and training to manage the project on their own in the long run. in climate change have even contributed to national policies. In Ethiopia, for example, the project devel- 1.41 In some projects, investments are made to oper has supported the national government in in- empower women and minorities. The Kenya Aberdare ternational negotiations under the UNFCCC and is Range project is one example. The project developer, currently providing technical support for the design Green Belt Movement, is a local NGO with a strong of a strategy to scale-up forest carbon initiatives to the background in initiatives that empower women and national level. These projects also contribute to im- local communities. The Himachal Pradesh project in proving the knowledge base on lesser-known tree spe- India also has women’s empowerment as one of its cies and on forest projects overall. co-benefits. In this case, part of the revenues accrued from the sale of emission reductions from the project Empowering Local Communities and Strengthening will be invested in local organizations that work with Local Institutions local women. At the same time, these institutions will 1.39 The success of forest carbon initiatives de- play a key role in protecting and managing the A/R pends on the active participation of local farmers CDM project. and communities. Participation is enabled by invest- ments in capacity building and by strengthening local 1.42 A/R CDM projects have also provided op- institutions. The strengthening of local institutions, portunities to address equity issues. For example, such as local rural cooperatives, forest management eight out of the 21 projects target rural people that committees, watershed management committees, live below national and provincial poverty levels. The and other community-based organizations has mo- income generation of landholders involved in one pro- bilized landholders around a common goal. This has ject in Asia, for example, was less than $145 per capita increased farmers’ negotiating power with outside ac- in the baseline scenario. Similarly, the unemployment tors, fostered common interests, and promoted en- rate in the region of a project in South America was as hanced communication flow (Aquino et al., 2011). high as 22 percent. Other Social and Institutional Co-benefits 1.40 Empowering local communities and increas- ing the sense of community ownership of a project 1.43 In some projects, local participants opted also helps to ensure adequate project implementation to invest the revenues from carbon and other forest 30 | Chapter 1: Introduction products in local development projects rather than to and communities’ well-being is an important attribute receive it in cash. This is what has happened in the for credit buyers (Hamilton, 2010). Although such an Humbo Assisted Natural Regeneration project in expected price premium has not materialized yet, de- Ethiopia, where the local communities have jointly velopers expect this to develop in the future. Besides, identified priority areas for investment. (See Box 7.1.) with the regulatory uncertainty surrounding a second Kyoto Protocol commitment period, voluntary carbon Benefits Beyond the Project Boundaries markets, where co-benefits have proven to be in de- 1.44 Vast hectares of deforested and degraded mand, are an important niche to sell the surplus of car- forest lands around the world offer opportunities for bon credits beyond those contracted with the BioCF. forest landscape restoration. Tapping this potential could lead to significant benefits in terms of climate 1.2.3 Replicating the Experience— change mitigation, biodiversity, and poverty allevia- Power of the Pilot tion; the A/R CDM is a useful tool to realize such 1.47 Because of the benefits of the A/R CDM, potential. In addition, by strengthening the natural, some project entities are replicating their first experi- human, social, and financial capital of the rural poor, ence. Both China and Moldova, the first entities to A/R CDM projects contribute to increasing the re- ever register A/R CDM projects, have embarked on silience of rural people and their environment to the new projects. Moldsilva, the state forest agency of adverse impacts of climate change. More than that, the Republic of Moldova, initiated its first A/R pro- the projects’ efforts to prevent leakage13 are proving to ject prior to the approval of A/R CDM rules, thus be entry points to extend the benefits of projects at investing significant efforts in information gathering, the landscape level. Some projects plant fruit gardens, financing, and institutional development. Its second fuel wood plantations, and improved pastures as a way project is close to registration and increases the role to avoid displacement of crop cultivation, grazing, of local communities (and in-kind contributions). and fuel wood collection caused by the A/R CDM The Republic of Moldova has afforested most of its project. Leakage management provides strong incen- degraded lands through the A/R CDM. This success is tives for communities to manage their forest, pastoral, attracting buyers of carbon credits from the voluntary and agricultural resources in an integrated manner carbon market. and stimulates project developers to work in alliances with organizations operating in the same area to mini- 1.48 World Vision Australia and World Vision mize leakage. Ethiopia, NGOs with longstanding experience in rural development in Ethiopia, are also going beyond their 1.45 About a third of the projects in the BioCF first forest carbon experience, the Humbo Ethiopia portfolio expect to certify their project designs to A/R CDM project. The success of this first large-scale guarantee the delivery of net positive benefits to the African A/R CDM project ever registered has inspired local farmers or communities and to the local environ- the Ethiopian Government to consider mainstream- ment. All of these projects are applying the Climate, ing carbon finance into its sustainable land manage- Community and Biodiversity Standard, which assesses ment program as a new model of sustainability. several non-carbon characteristics of the project de- sign. This standard allows for verification of projects’ 1.49 Similarly, private-sector-led projects are rep- co-benefits throughout their lifetime comparing them licating their first CDM experience. Chinese private against the baseline situation; it also awards projects forest companies, with the support of the regional that are relevant for promoting/conserving biodiver- government of Guangxi, have incorporated lessons sity hotspots (CCBA, 2008). learned in a second project that has a more innovative financing model. In the same way, Novacel, a recent 1.46 In doing this, projects expect to gain a better player in the A/R CDM, has attracted national and price, or at least a market-access premium. Studies of international recognition because of an innovative the forest carbon market report that forest carbon pro- model to finance agroforestry and secure fuel wood, a jects’ positive contribution to the local environment major challenge in Kinshasa, Democratic Republic of Congo. Novacel registered its first A/R CDM project 13 Leakage refers to the greenhouse gases emissions happening outside in 2011 and is considering replicating its experience. the project boundary attributable to the A/R CDM project. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 31 Humbo Ethiopia Assisted Natural Regeneration Project. 1.2.4 Looking Ahead 1.50 Consistent with the UNFCCC’s ultimate Diversity, the Convention to Combat Desertification, goal, the BioCF looks forward to support developing and the Millennium Development Goals). Alliances countries in scaling up the A/R CDM and integrating are needed to leverage finance (e.g., through the recog- it into landscape-based carbon management strategies. nition of the market value of other ecosystem services) Inspired by the opportunities these projects bring to and improve projects’ performance in terms of envi- rural areas, the BioCF will continue seeking the recog- ronmental benefits other than carbon. Intending to en- nition this mechanism deserves as a tool for sustainable lighten the reform of the CDM and the development development. Achieving this will require fully exploit- of other land-base climate change mitigation market ing the opportunity for synergies among forest carbon mechanisms, this report documents lesson learned— projects and United Nations conventions dealing with and both the opportunities and the challenges in devel- crosscutting issues (e.g., Convention on Biological oping and implementing A/R CDM projects. 32 | Chapter 1: Introduction CDM Regulations 2.1 Introduction 2.1 Regulatory issues pertain to rules and procedures that CDM A/R projects need to follow for registration and credit issuance. On average, BioCF projects have spent close to four years achieving CDM registration. Developers of recent projects are taking advantage of methodologies, simplified procedures, and les- sons learned from previous projects, to reduce this time. The impact of these improvements, however, can be marginal considering that the post-preparation regulatory stages are increasingly lengthy. This chapter examines the regulatory issues relevant to A/R projects. Section 2.2 explains the regulatory A/R CDM cy- cle, Section 2.3 highlights the challenges encountered by the BioCF projects, and Section 2.4 offers recommendations for improvements. 2.2 Regulatory Process 2.2 The CDM cycle comprises the following stages: Project Design Document (PDD) prepara- tion, validation by a Designated Operational Entity (DOE), registration with the CDM EB, verifi- cation of emission reductions by a DOE, and credit issuance by the CDM EB.1 The principal ac- tors therefore are local stakeholders and project developers, Designated National Authorities (DNA), DOEs, and the CDM EB (Figure 2.1). These stages and the role played by the principal actors at each stage are described in the following sections. 1 See http://cdm.unfccc.int/Projects/diagram.html for more information on the regulatory CDM process. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 33 Figure 2 .1 Stages of the A / R CDM Project C ycle and Principal Actors PROJECT DEVELOPER STAKEHOLDERS DNA DOE CDM EB 1 2 3 PREPARATION PDD Local Confirms Development stakeholders whether the participate in project project design furthers the country’s sustainable development goals 4 5 Global Validation Stakeholder Consultation Process 6 Registration IMPLEMENTATION 7 Monitoring 8 Local 9 10 stakeholders Verification Credit participate in issuance monitoring 2.3 Most of the insights and lessons learned pre- not be established on forested lands or on lands with sented in this report are from the PDD preparation the potential to become forested lands.3 Preparing a to registration stages (stages 1 to 6 in Figure 2.1). As PDD also involves delineating the project boundary, no forestry project has completed the monitoring and estimating the emission reductions from the project, verification stages, only early insights on monitoring and outlining the forest management and monitoring are presented. The experience gained in the verifica- plan that will be implemented during the project cred- tion and credit issuance of energy sector projects, for iting period.4 To quantify the emission reductions, example, is highlighted to reflect the regulatory issues project developers must apply a CDM EB-approved pertinent to these stages. baseline and monitoring methodology. 2.2.1 Project Preparation 2.2.2 Validation 2.4 Project entities assess the economic, social, 2.5 Validation is an independent assessment of and technical aspects of proposed projects and dis- the project design against the CDM rules and require- cuss these with potential investors at an early stage. ments. It is carried out by a DOE5 duly accredited by Successful initiatives translate into projects for which the UNFCCC. The validation of a project starts after a PDD is developed.2 In the PDD, the developer must demonstrate that the proposed project complies with 3 As per the CDM forest definition of the respective host country. all CDM requirements, including additionality and 4 The crediting period for A/R CDM projects is either 30-year single or 20-year renewable twice (UNFCCC, 2006b). clear legal land tenure rights, and that the project will 5 At the time of writing, the UNFCCC had accredited 19 DOEs to validate and verify A/R CDM projects. Developers of large-scale projects have 2 The PDD template can be found on the CDM Web site (http://cdm. to use the services of different DOEs when undertaking validation and unfccc.int/Reference/PDDs_Forms/PDDs/index.html). verification. 34 | Chapter 2: CDM Regulations the project is submitted to the UNFCCC. The project Table 2 .1 Average Years BioCF first goes through a 45-day global stakeholder consul- Projects Have Spent tation6 process during which the DOE collect public on the CDM C ycle comments on the project via the CDM Web site. As Pre-2007 Post-2007 part of the validation, the DOE reviews project doc- Preparation 3.9 1.4 umentation, conducts site visits, and produces draft Validation 1.2 1.1 and final validation reports. A DOE can also request Registration 0.3 0.4 clarifications (CLRs) and corrective actions (CARs) to the project documentation in order to collect suf- Total 5.4 2.9 ficient information to assess the project’s compliance with the A/R CDM requirements and the applied simultaneously.8 Monitoring is the next step after reg- methodology.7 Project developers and validators usu- istration. The monitoring plan, included in the PDD, ally have back-and-forth communications until the is the basis for implementing the monitoring proce- DOE is able to close out the request. After the com- dures. It lists the variables that need to be monitored pletion of validation procedures, the DOE presents and measured as per applied methodology at specified a final validation report, which is then submitted to intervals during project implementation. It also speci- the UNFCCC. If the DOE concludes that the project fies the procedures that developers must undertake to design is compliant with all CDM requirements, the assure the quality of both measurements and data stor- project is submitted to the CDM EB for registration age. The project developer compiles the monitoring of the project as a CDM project activity. results in a monitoring report which is published and subject to verification. 2.2.3 Registration 2.6 Successfully validated projects are submit- 2.8 Verification is the periodic independent re- ted to UNFCCC to request registration. The project view and ex-post determination by the DOE of the documentation submitted by project entities is then emission reductions achieved by the registered project reviewed by the UNFCCC Secretariat for complete- since its start. The DOE assesses the monitoring re- ness. According to the modalities and procedures for port and checks compliance with the registered pro- A/R CDM projects, a successfully completed registra- ject design, monitoring plan, and the applied method- tion process should take a maximum of eight weeks, ology.9 As per the CDM modalities and procedures for unless a party involved in the project or at least three A/R projects, only one verification is expected to take members of the CDM EB request a technical review place per commitment period of the Kyoto Protocol. of the project to address concerns. Therefore, a suc- Project developers can decide on the date of the first cessful validated project can be delayed at registration verification; subsequent verifications have to be car- by the UNFCCC/CDM EB. ried out at 5-year intervals. Lastly, the CDM EB issues Certified Emission Reductions (CERs) based on the 2.2.4 Project Implementation, verification and certification reports submitted by the Monitoring, Verification, and DOE. Credit Issuance 2.7 The crediting period of an A/R CDM project 2.3 Challenges starts when project implementation starts: usually, de- 2.9 The challenges encountered by BioCF project velopers start implementation and PDD preparation developers while going through the CDM cycle are 8 The project design registered usually differs from the original project design, as the latter is based on early (and often inaccurate) screening of the proposed project compliance with the A/R CDM requirements. 6 The global stakeholder process is 30-days long for small-scale projects, Projects have to provide evidence of project implementation start, and which are those that reduce less than 16,000 tCO2e annually (UNFCCC, those new projects (starting after August, 2, 2008) that started imple- 2008j). mentation before the global stakeholder process must inform the DNA 7 DOEs check the project compliance with the A/R CDM requirements and the UNFCCC Secretariat about the commencement of the project according to: the modalities and procedures defined by the UNFCCC activity and of their intention to seek CDM certification (UNFCCC, for the A/R sector, the validation and verification manual, the applied 2009o). methodology, and the CDM EB guidance, clarification, and tools pub- 9 An important element of verification is that DOEs checks that there is lished to facilitate project preparation. no coincidence in carbon stock and verification events. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 35 Table 2 . 2 Project Start in the BioCF, A / R CDM Methodology, Tool , and Guidance Development Number of Number of Number of Number A/R CDM Number Clarifica- Guidance Tools of Projects Method- of Tools tions to Statements Developed DOEs Year Entering ologies Published Methodolo- Published by the Accredited the BioCF Approved by the gies Pub- by the BioCF Portfolio by the CDM EB lished by CDM EB CDM EB the CDM EB 2004 9 2005 8 1 1 1 3 2006 3 4 7 3 1 2007 3 8 8 1 4 TARAMa 1 2008 2 3 3 3 1 2 2009 1 2 5 10 2010 2 SMARTb 2 Total 25* 19 14 17 11 16 * Twenty-five projects entered the BioCF portfolio; four faced prohibitive barriers and discontinued project development. a The Tool for Afforestation/Reforestation Approved Methodologies (TARAM ) facilitates the ex-ante estimation of carbon credits in A/R CDM projects (See www.biocarbonfund.org). It is described in detail in Chapter 4. b The Simplified Monitoring Afforestation and Reforestation Tool (SMART) facilitates the ex-post estimation of carbon credits. SMART is in the final stages of development. It is described in detail in Chapter 4. related to project developers’ difficulties in applying 2.11 Despite CDM EB guidance on GHG ac- the A/R CDM rules and complying with the proce- counting and tools, some project developers have en- dures to achieve carbon credit issuance. These difficul- countered challenges when applying the rules. These ties translate into delays in complying with each stage challenges are related to: of the project cycle and into increased transaction ■■ Choosing an appropriate methodology; costs. Although the most recent BioCF projects have ■■ Determining a baseline scenario; considerably reduced their time for preparation, vali- ■■ Demonstrating additionality; dation, and registration, the timelines have remained the same. Table 2.1 illustrates the length of time both ■■ Providing evidence of legal land tenure early starters and recently developed BioCF projects and carbon rights; have spent in each stage of the project cycle (from ■■ Demonstrating land eligibility; preparation to registration). While early project de- ■■ Delimiting project boundaries; and velopment started when no methodology existed, and ■■ Applying a GHG accounting methodology. early projects served as testers of the first versions of the methodologies, projects developed more recently 2.12 This chapter addresses some of the issues on (from 2007 onward) have benefited from significant this list. The land-related issues (tenure rights, eligibil- rules simplification. ity, and project boundary) and challenges related to GHG accounting are analyzed separately in Chapters 2.3.1 PDD Preparation 4 and 5 respectively. 2.10 Preparing a PDD has been a complex task for Choosing a Methodology most project developers in the BioCF portfolio. As previously stated, the challenges have been greatest for 2.13 Different methodologies are selected based projects that entered the portfolio before the CDM on “applicability conditions�10 which define their infrastructure was developed. Significant amounts of relevance to a particular project. Conditions include guidance and clarification by the CDM EB, as well as whether the land is in use as cropland, grassland, or tools to facilitate methodology application, have now been developed (Table 2.2). 10 Applicability conditions in a methodology refer to the list of characteris- tics that projects should comply with. 36 | Chapter 2: CDM Regulations degraded land prior to the project establishment; methodologies on the CDM Web site and under- the type of project activities proposed (e.g., assisted standing the implications of the changes in terms of natural regeneration (ANR), A/R, agroforestry, and so transaction costs and emission reductions. Changes forth); the type of activities that will be displaced as a incorporated in later versions may restrict project ac- result of project implementation; and the category of tivities, result in fewer emission reductions, or make carbon pools to be monitored. certain projects ineligible for use of the methodology. In addition, when starting the global stakeholder con- 2.14 Project developers have faced difficulties in sultation process, project developers have to use the selecting a suitable methodology for their projects. most updated version of PDD templates and the most Some applicability conditions appear to be overlap- recent versions of the CDM EB tools. Project develop- ping, and developers cannot easily understand the im- ers usually complete the PDD step by step; since this pact of their selection on the final amount of emission can take several years, by the time of finalization the reductions. In addition, assessing some applicability document templates and tools applicable early on may conditions requires time-intensive collection of pri- no longer be valid. mary data (see Chapter 5). The CDM EB has made efforts to solve some of these problems; for example, 2.17 The CDM EB’s efforts to simplify meth- it has consolidated five similar large-scale methodolo- odologies are relevant, but developers struggle with gies11 into two. A decision tool to guide in the selec- tracking the multiple changes to the rules that comes tion of a methodology would alleviate even further with the changes. Project developers need to ensure some of the difficulties associated with methodology that they use the latest version of relevant documents13 selection. in developing a PDD and avoid inconsistencies throughout while applying the changes. However, this Tracking Rule Changes is not an easy task for project developers. Although 2.15 Developers also struggle with adapting to a the CDM EB uses multiple resources to publish the new methodology. The CDM EB reviews methodolo- changes to the rules, and the CDM has facilitated gies as requested by project developers. If necessary, some procedures14 to alleviate these problems, the simplified versions of old methodologies are subse- resources are useful only to those familiar with the quently published. Since projects have to be registered CDM EB decision-making process—and A/R project with a valid methodology, once a revised methodol- developers typically are not. In addition, the CDM ogy is published developers have an 18-month grace EB in itself struggle with documenting such changes period to register their projects with the old version of in its multiple documents. Specific rules sometimes a methodology; otherwise they have to change to the change after the latest versions of relevant documents new version. Changing versions often reveals that pro- are published, leading to multiple interpretations of ject developers previously did unnecessary work. For the rules by project developers and validators. One example, one of the BioCF projects starting PDD de- example of this is with regards to the latest version of velopment in 2006 assessed leakage12 from fossil fuel the validation protocol as it requires DOEs to check combustion as requested in version 1 of the selected project developers’ demonstration of afforestation, ig- methodology—but this was no longer a requirement noring a previous decision of the CDM EB in which in version 4 of the methodology, which the project discrimination between reforestation and afforestation developer had to use for registration in 2008. is no longer a requirement. 2.16 Project developers spend significant time 2.18 There are some useful resources that help analyzing a methodology prior to its selection and project developers find the A/R CDM rules and track struggle both with finding the latest versions of the 11 For example, the CDM EB created the Afforestation Reforestation 13 Including the more recent PDD formats, versions of methodologies, CDM Approved Consolidated Methodology 0001 (AR-ACM0001) using EB tools, guidance, and clarifications of specific rules and procedures. Afforestation Reforestation Approved Methodology 0004 version 4 14 For example, the grace period to register projects with an expired meth- (AR-AMv4) and the new proposed Afforestation Reforestation New odology went from 8 weeks in 2006 to the 18 months in 2010 (see Methodology 00032 version 02 (AR-NM00032v2). In another case, it Annex 10 of the 27th meeting report, page 2, Paragraph 15 and Annex merged two existing methodologies. 3 of the 54th meeting report, page 6, Paragraph 36). The CDM EB has 12 Leakage refers to emissions happening outside the project boundary also improved the way it presents, on the CDM Web site, the decisions that are attributable to the project. See Chapter 4 for more information. taken by the CDM EB that affect project development. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 37 Without the BioCF A/R CDM projects, this pattern of land degradation would have continued in Moldova. Photo: Moldsilva CDM EB changes. The CDM Rulebook,15 published the carbon pools within the project boundary that by Baker and McKenzie, covers all CDM sectors and would have occurred in the absence of the proposed is useful to both users new to A/R CDM as well as A/R CDM (UNFCCC, 2006b). A project’s baseline those with more experience in the sector. Still, specific scenario has to be justified according to the provisions CDM EB or UNFCCC decisions are difficult to track. of the methodology. Challenges arise when selecting a Another important resource is the CDM Pipeline, a baseline scenario because doing this requires address- UNEP-RISØ Excel Data Sheet16 that contains infor- ing the interactions between the policies of several sec- mation on the overall progress of the CDM, including tors (e.g., agriculture, energy, and livestock) and re- methodology approval. Efforts like CDM in charts quires studies on land-use change (and the expertise to of Institution for Global Environmental Strategies develop them is still scarce in many developing coun- to document rule changes in the non-forestry CDM tries). Most existing methodologies, therefore, recom- have also proven useful in facilitating project develop- mend selecting the baseline scenario by applying a ment (IGES, 2011).17 historical approach18 under which land use and land cover maps are used to demonstrate that past land-use 2.19 Recently, in 2011, the CDM EB took an trends will continue in the future. Although this ap- important step to address both the A/R CDM stake- proach is often considered less difficult to apply,19 in holders’ challenges to track the rules and the fact that the absence of official records such land-use and land- early registered projects could not benefit from recent cover analysis is challenging. methodology simplification and consolidation. Early versions of methodologies applied in registered pro- 2.21 This problem has important implications for jects contain requirements that were withdrawn in project preparation and implementation. A poorly recent versions. The new guideline allows a registered chosen baseline scenario increases the risk of rejec- A/R CDM project to apply at the time of verification tion of the project as a CDM activity. At the same the improvements included in recent versions of the time, having a baseline that relies on weak land-use applied methodology (UNFCCC, 2011e). and land-use change assumptions also has major Determining the Baseline Scenario 18 Project developers can justify the appropriateness of their choice of a 2.20 The baseline net greenhouse removals by baseline scenario by applying one of three approaches that help them explain the future land-use trend. The three approaches are a) existing sinks is the sum of the changes in carbon stocks in or historic; (b) economically attractive course of action; or c) most likely at the time the project starts (e.g., because of the likely implementation of certain laws). 15 See http://www.cdmrulebook.org/home. 19 The other two approaches are economic and likely trends. Applying 16 This database is updated every three months by the Capacity them requires project developers to develop assess plans for land man- Development for the Clean Development Mechanism Project of UNEP- agement/investments during the project period. Identifying realistic fu- RISØ Centre. See http://cd4cdm.org/. ture land-use analysis is specially complex in projects involving multiple 17 Although it presents a brief information on A/R, it is not enough to farmers because their land-use decisions for at least 20 years highly guide project development. depend on market trends and other hard-to-predict variables. 38 | Chapter 2: CDM Regulations Box 2.1 Tool for Assessing the Additionality of A/R CDM Projects Step 0. Preliminary screening based on the starting date of the A/R project activity Y N Proposed Forestation is not A/R CDM project activity Step 1. Identification of alternative land-use scenarios to the proposed A/R CDM project activity List of land-use scenarios that are consistent with enforced mandatory applicable laws and regulations A stepwise approach for determination of the baseine land-use scenario as provided by the baseline methodology Step 2(i). Barrier analysis Step 2(ii). Investment analysis Y N N Y Proposed A/R CDM project activity is not additional Step 4. Common practice analysis Source: UNFCCC, 2007g. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 39 implications for project economics.20 As a result, de- Additionality in A/R Projects� (Box 2.1), which most termining the appropriate baseline scenario for a pro- A/R CDM methodologies have adopted. This tool ject is an important task—and one for which many allows for comparison between the proposed project project developers lack the right capacity. and credible land-use alternatives to demonstrate (i) that the alternative scenarios are not adversely affected 2.22 This problem is common to all CDM sectors, by the barriers that prevent the proposed forest pro- and the UNFCCC made a step in the right direction ject from happening, or (ii) that the proposed forest at the last COP in Cancún in 2010. A standardized project is unlikely to be financially viable. Projects baseline21 can enhance the objectivity, efficiency, and also have to confirm their additionality arguments by predictability of mitigation actions under the CDM explaining how forest projects occurring in the sur- and, as cited in the COP decision, “could be estab- rounding area are not similar to the proposed project lished for a Party or a group of Parties to facilitate the (UNFCCC, 2007g; UNFCCC, 2007h; UNFCCC, calculation of emission reductions and removals and/ 2009p).23 or determination of additionality for projects, while providing assistance for assuring environmental in- Documenting Financial and Other Barriers tegrity� (UNFCC, 2010a).22 Standardized baselines 2.25 Documenting evidence of barriers is difficult should be allowed in the A/R sector at the discretion and time-intensive. Project developers have to dem- of the DNAs of countries hosting CDM projects, and onstrate that the proposed project is in addition to the CDM EB should periodically review them. It is what would have happened in the business-as-usual worth mentioning that some A/R CDM methodol- scenario by presenting evidence of existing prohibitive ogies go a bit in this direction by using discounted barriers to the proposed project. Such barriers can be reforestation rates as a benchmark for additionality investment, financial, technological, ecological, insti- determination (e.g., ARAM0005). This should be fur- tutional, and/or cultural, among others. Because of- ther promoted and such discounts could be defined by ficial or published information is often not available the corresponding DNA. on cultural (e.g., traditions because of land users’ pref- erence to follow prevailing practices), institutional, Demonstrating Additionality capacity, and social barriers, most project developers 2.23 A CDM project is defined as additional if in the BioCF portfolio chose to document investment anthropogenic GHG emissions are reduced below barriers. There are two additional reasons for such a those that would have occurred in the absence of the preference. First, as CDM provides mainly a financial registered CDM project activity (UNFCCC, 2006a). incentive, the most obvious barrier it can help over- Since additionality is a central concept of the CDM, come is a financial barrier. Second, information col- it has important implications for the economics of lected from financial agencies, officials, and/or third- projects—and it ultimately determines the type of party agencies is relatively easier to obtain and is likely forest projects that are able to gain access to carbon to be accepted by DOEs during validation. In fact, finance. These economic implications are addressed in some DOEs frequently apply the investment guide- Chapter 6. This chapter only focuses on the challenges lines despite the CDM EB clarification that they are project developers have encountered when complying not mandatory for A/R CDM projects24 In addition, it with the additionality requirement. is difficult for DOEs to endorse unclear additionality 2.24 To ensure a systematic demonstration of ad- arguments based on poorly justified, non-investment ditionality, the CDM EB suggests project develop- barriers. ers apply the “Tool for Demonstrating and Assessing 20 Relying on weak land-use and land-use change assumptions directly 23 See http://cdm.unfccc.int/methodologies/ARmethodologies/tools/ impacts the calculation of emission reductions from projects and con- ar-am-tool-01-v2.pdf. stitutes the basis for land opportunity cost estimations, which are the starting point for designing effective carbon payment schemes that 24 There are several examples where the general CDM rules are applied to keep participating farmers interested in the project in the long run. the A/R sector, neglecting that this sector is different in many respects from the energy-related sectors. Examples of these are the requirement 21 The concept of standardized approaches is not new to the CDM. It has of coordinates of polygons as evidence of project location instead of already been introduced into a few CDM methodologies and tools in sample points (see Chapter 3) and the consideration of single years to sectors other than A/R. account for the cap in emission reductions for small-scale projects (see 22 See FCCC/KP/CMP/2010/12/Add.2. Chapter 6). 40 | Chapter 2: CDM Regulations Table 2 . 3 Issues Highlighted in DOE Requests for Clarification or Correction DOE Requests for Frequency Clarification or Explanation (n=11) Correctiona The information presented on the same topic in different sections of the PDD is sometimes inconsistent, which reflects the low capacity of project entities to under- Inconsistent information 45% stand the regulatory requirements and/or to synthesize relevant information from multiple sources. The CDM EB has approved several tools and guidance to facilitate the implementa- Recommended tools are 40% tion of regulatory requirements. Some project entities ignore or improperly apply the not properly applied tools and guidance; this then needs to be corrected during validation. Multiple interpretations The different interpretations of rules by project entities and DOEs can lead to mul- 35% of rules tiple iterative communications and delays in project validation. Incorrect versions of meth- Changes in the versions of approved methodologies, tools, and document formats odologies and document 72% require the project entities to track the changes and revise their project documenta- formats tion several times during validation. This contributes to delays. a Specific examples of DOE’s queries on land tenure, land eligibility, and GHG accounting are presented in Chapters 3 and 4. 2.26 However, evaluating financial indicators has (UNFCCC, 2007h). When applying this new tool, also proven to be subject to significant review because however, project developers must perform both barri- of poor argumentation or the use of low-quality data, er and investment analyses (Annex 2). Further simpli- resulting in CARs and CLRs that are often not easy fication of the combined tool is still needed to account to address. Therefore additionality in the A/R sector for the complexity of land-use issues26 and informa- should be simplified. The CDM EB should allow for tion constraints in developing country contexts and to an assessment of additionality against performance in- reduce the transaction costs for projects. dicators of the overall sector in the host countries, and The “Common Practice� Analysis benchmarks defined based on national forest plans should be allowed. Furthermore, since projects plant- 2.28 The common practice analysis step of the ing non-commercial native species often face obvious additionality assessment requires comparing the pro- challenges and prohibitive barriers that prevent them posed carbon project to similar activities being car- from happening, they should be considered automati- ried out in the project’s region. Through this step, the cally additional. CDM EB seeks to confirm the additionality demon- strated in previous steps; it is a plausibility check. In Linking Additionality and Baseline Determination the BioCF experience, developers encounter difficul- 2.27 Developers often have difficulty in under- ties in comparing the outcomes of proposed projects standing the link between assessing additionality and to other projects. This is because projects can differ determining the baseline scenario. Although both significantly in specific features (e.g., land tenure, steps require analyzing future land-use scenarios, they species planted, types of soils, rainfall pattern, and are treated separately in several25 methodologies. The others), making it difficult to collect evidence of all CDM EB sought to address this in 2007 by publish- of them to conclude that the proposed project activ- ing the “Combined Tool to Identify the Baseline Scenario ity differs from existing reforestation projects in the and Demonstrate Additionality in A/R CDM Project Activities.� This tool helps identify the baseline among 26 The combined tool to identify the baseline scenario and demonstrate additionality streamlines both processes, making it clearer for project a list of likely land-use scenarios and establish the ad- developers. However, it still requires significant amount of information ditionality of the project scenario. This new tool is as developers have to identify credible and realistic alternative land- use scenarios and analyze the barriers affecting them. In addition, in simpler as it allows project developers to determine the cases in which there are several land-use scenarios, including affores- baseline scenario based on qualitative analysis of the tation and/or reforestation, applying investment analysis is mandatory. Although project developers are allowed to select the baseline by car- emission reductions in alternative land-use scenarios rying out either a qualitative assessment of the emission reductions or an investment analysis in cases in which the list of alternative land uses 25 Most early versions of methodologies still have to apply the first version does not include afforestation and/or reforestation, there is no clear of the tool to demonstrate additionality. As early starters in the A/R criteria to help them to select the qualitative assessment. Moreover, the CDM, most BioCF projects apply early versions of methodologies. common practice is still needed to reconfirm additionality. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 41 project region. In addition, in many countries data DOEs with strong expertise in A/R CDM are scarce, shortage is a barrier in itself to undertaking the com- in part because accreditation of DOEs for the A/R mon practice analysis; statistics data on reforestation sector started late relative to other sectors. Moreover, are often incomplete or unavailable. The CDM EB once accredited, DOEs have to build their capac- should facilitate the common practice analysis by set- ity based on experience gained throughout validation ting criteria to help define an existing project as auto- (Table 2.2). matically different from the proposed project. 2.33 Because DOEs have little incentive to assess 2.29 The A/R Working Group continues making the application of A/R rules in light of host countries’ important efforts to simplify the additionality require- national circumstances, some DOEs adopt the most ment. Recently, in 2011, and following UNFCCC stringent interpretation of relatively vague rules.27 The guidance provided in Cancún in 2010 on seeking al- reason for such stringency is twofold: ambiguous rules ternative approaches to additionality, it recommended lead to multiple interpretations, and DOEs proceed to the CDM EB approve guidelines to simplify the with excessive caution to avoid losing their UNFCCC assessment of additionality in projects that produce accreditation. The CDM EB has made some effort to no financial benefits or insignificant benefits (i.e. not reduce ambiguity in A/R CDM rules. In 2008, for exceeding 10 percent of the CDM revenues), provided example, it published the Validation and Verification that developers demonstrate both that the proposed Manual (VVM) to facilitate a common understanding activity is not of common practice in the region and of the rules among DOEs and to promote quality and that there are no enforced mandatory applicable laws consistency of the documentation and procedures fol- and regulations leading to the establishment of the lowed in the validation and verification processes. The proposed type of forest activity (UNFCCC, 2010a; VVM is a guide for DOEs on how to assess the CDM UNFCCC, 2011d). This would help a number of requirements. In addition, guidance and clarifications projects for which profitability is not the main ration- are published by the CDM EB to address ambiguities ale (See Chapter 6). in the application of the A/R CDM rules. Although this is a step in the right direction, efforts are still 2.3.2 Validation needed to improve both the clarity of the rules and the 2.30 Problems in completing a PDD in an effec- communication between project entities, DOEs, and tive manner are reflected in validation. A low-quality the CDM EB (UNFCCC, 2009n). PDD and poor supporting documentation often de- Complementary Documentation lays validation, increases the demand for DOE servic- 2.34 DNAs and project entities’ poor management es, and leads to delays in obtaining letters of approvals capacity, along with bureaucratic procedures, delay the from DNAs. The delays in validation also lead to de- provision of the documentation essential for project lays in payments to local communities for protection validation and registration. In one of the BioCF pro- and maintenance of projects. The challenges related to jects, the DNAs delayed the issuance of the Letter of the quality and completeness of project documenta- Approval by eight months. In another project, it took tion are exemplified in the sections below. close to a year for a project entity to provide reliable Quality of Project Documentation evidence of the project starting date.28 In addition, the 2.31 Limited documented project-level informa- fact that some DNAs issue Letters of Approval only af- tion to complete the CDM requirements and project ter the draft validation report is issued leads to delays. entities’ low capacity to interpret the A/R CDM rules have affected BioCF projects. These problems have been evidenced in DOEs’ requests for clarification and corrections to PDDs. Table 2.3 summarizes the 27 For example, for DOEs only a few CDM requirements (i.e., forest defini- tion of host country) are country-specific; the remainder have to be issues highlighted in draft validation reports based on applied without considering national circumstances. 11 projects. 28 Because trees grow slowly to sequester a significant amount of carbon by the end of the first commitment period of the Kyoto Protocol, A/R 2.32 In addition to the time spent on validation projects usually start planting activity before project registration. This is accepted under the CDM as long as the project developer transparently and increased transaction costs, these problems also demonstrates that the benefits of the CDM were a decisive factor in the impact negatively on the overall availability of DOEs. decision to proceed with the project activity. 42 | Chapter 2: CDM Regulations 2.3.3 Registration of Projects review of projects by the CDM EB. To stress this, the 2.35 So far, the average time period for registra- World Bank report illustrated that, at the time of its tion of BioCF projects is more than twice the eight- 29 publication: week period envisioned in the Marrakesh Accords. ■■ About 50 percent of the registered projects had Overall, however, the time period for registration been the object of a request for review prior to might be reducing as a result of CDM EB improve- registration; ments in processes and project developers’ efforts to ■■ Thirty percent of projects registered in 2004 were provide high-quality documentation when submitting reviewed at registration, while in 2007 this figure their projects for registration. The first BioCF project reached 70 percent; registered30, in 2006, spent 14 weeks to obtain reg- ■■ Delays at registration were close to three months istration; however, projects registered between 2009 during 2005-2007, rising to seven months for pro- and 2010 increased their time—spending on average jects registered in 2008-2009. 24 weeks to get to registration; but one project regis- tered in 2011 spent only 11 weeks. Efforts are needed The CDM EB has made considerable efforts in 2010 to achieve registration within the originally envisioned to reduce the rate of projects reviewed at registration. eight-week period, especially given the high number The share of projects requesting registration and regis- of projects expecting to achieve registration by the end tered automatically increased from 66 percent in June of 2012. to 76 percent by the end of the year. 2.36 Insights from the BioCF’s registered projects 2.3.4 Project Implementation, indicate that half of the projects did not pass the com- Monitoring, Verification, and pleteness check because of issues such as (i) inconsist- Issuance of Credits ency in the technical information presented through- 2.39 The BioCF has limited experience in moni- out the PDD; (ii) use of the incorrect versions of tools, toring A/R CDM projects. Although all the projects PDD forms, and methodology templates; (iii) incon- have trained their teams on forest carbon monitoring, sistencies in the project name among the different at the time of writing only the 13 registered projects documents submitted; (iv) mistakes in the date of the are able to focus on this task.31 Five out of the 13 have global stakeholder process; and (v) lack of GIS files as evidence of project boundary delineation. 31 All projects have started monitoring since project implementation began. However, in practice, projects focusing on completing project preparation and validation often neglect monitoring; they start focusing 2.37 To reduce the chance of a project failing the on it once registration is achieved. completeness check, the BioCF has intensified its internal review of quality documentation. From this exercise, it has become clear that project developers Verification of the do not properly follow the reporting requirements in- Southern Nicaragua CDM Reforestation cluded in the VVM. Also, project developers often fail Project. to document changes in versions of PDDs generated while responding to CARs and CLRs, something that would be useful for DOEs at verification. 2.38 A similar trend can be observed in a bigger sample of projects. The World Bank report—10 years of Experience in Carbon Finance—illustrated the time to registration across all CDM sectors; the nine-week average time period to registration achieved in 2005 increased threefold in 2009 (World Bank, 2010b). The main cause of reported delays was the additional 29 Counted from the submission for registration onward. 30 The “Facilitating Reforestation for Guangxi Watershed Management in Pearl River Basin� Chinese project was the first BioCF project to achieve CDM registration (November 2006). BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 43 Figure 2 . 2 Mean Time for Issuance of CERs Each Month from 20 05 to 2011 450 400 350 300 250 200 150 100 50 0 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-09 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Source: CD4CDM, July 1, 2011 www.cd4cdm.org informally assessed the consistency between project that reflects the changes and request the approval of implementation and the PDD as well as the correct the CDM EB. implementation of the monitoring plan. 2.41 The early experience with monitoring also 2.40 Because of their dynamic nature, A/R projects reveals project developers difficulty in implementing are likely to deviate from the PDD at implementation. a monitoring plan. The reasons for this are twofold. This is particularly true in the case of projects involv- First, the PDD sometimes evolves substantially33 from ing multiple farmers who, for different reasons, may the original project design, and local stakeholders who neglect the agreed-upon land-use contract in favor of participated in the design become unfamiliar with the more desirable alternatives. Other unforeseen causes changes. Second, local stakeholders with poor forestry can also lead to deviation from the PDD. Deviation in experience lack the capacity to deal with forest inven- project implementation from the PDD can delay veri- tories, and most developers struggle with monitoring fication and credit issuance; A/R projects cannot af- emissions and leakage as these are completely new ford such delays because verification can happen only concepts for them. Efforts are needed to strengthen once every five years32 and there is uncertainty about local capacity on forest carbon monitoring and to the continuation of a second commitment period of simplify the monitoring requirements by reducing the the Kyoto Protocol. As in any other CDM sector, if number of variables to be monitored. Particular ef- such a deviation occurs, depending on the scale of forts are needed regarding the monitoring of leakage. changes, developers have to either report the changes (See Chapter 5 for early lessons on monitoring of A/R to the CDM EB or produce a revised monitoring plan CDM projects). 33 Project developers change the project design either to incorporate 32 In non-A/R sectors, there is no once-per-commitment period limit for changes in the rules introduced by the CDM EB or to adopt appropriate verification and issuance. rules for a project. 44 | Chapter 2: CDM Regulations 2.42 The credit issuance process itself is not free ■■ Facilitate the calculation of emission reductions from challenges. The experience of the World Bank by allowing for the determination of standardized shows that non-A/R CDM projects have undergone baselines established at the national or sub-national an additional review by the CDM EB at this stage. level, instead of in a project-by-project basis. A As in the registration stage, the CDM EB may put a standard baseline would be a single, standard es- request for issuance under review if at least three of its timation of green house gases that would not have members raise concerns about a project. The World been removed in a region if certain projects were Bank report on experience with carbon finance esti- not implemented, as a result of the current and pro- mates that projects without a request for review take jected land-use pattern (see Paragraphs 2.20–2.22). at minimum close to 14 weeks for issuance of CERs. ■■ Simplify additionality requirements where ad- A request for review only contributes to delaying the ditionality could be demonstrated at the sectoral issuance of credits (World Bank, 2010b). In fact, level by taking into account national circumstances CD4CDM reports that projects have spent on average as well as country or regional-wide afforestation / from 14 weeks (56 days) to close to 87 weeks (350 reforestation goals. In addition, projects facing dis- days) per issuance, with the highest time lags occur- proportionately large barriers should be automati- ring in 2010 and 2011 (Figure 2.2). cally additional. For example projects in countries with weak business environments, and planting 2.4 Recommendations lesser-known species for non-commercial pur- 2.43 Some recommendations for the COP/MOP poses should not have to prove additionality (see and the CDM EB are listed below. Best practices for Paragraphs 2.23–2.29). project developers and other stakeholders were collect- ■■ Continue to improve communication between ed based on the BioCF experience and are presented in project developers, DOEs, and the A/R Working Chapter 8. Group to avoid multiple interpretations of the Recommendations for the COP/MOP rules. Create a continuous and transparent forum ■■ Remove regulatory uncertainty. Much has been in- to stimulate the incorporation of feedback from vested in building the institutional framework to the ground, and provide an efficient mechanism support A/R projects, and project developers are for project developers to appeal against DOEs and still interested in undertaking and developing pro- CDM EB decisions (see Paragraphs 2.30–2.33). jects in many poor countries where these activities ■■ Streamline the CDM procedures to improve the can make a difference in living conditions. The pre- predictability of carbon revenues (see Paragraphs vailing uncertain regulatory environment, however, 2.9, 2.15–2.19, 2.35–2.38, and Chapter 6). is creating a dampening effect. Recommendations for the CDM EB ■■ Continue methodology consolidation in the short-term, develop a tool to facilitate methodol- ogy selection, and develop a periodical manual to facilitate tracking of rule changes (see Paragraphs 2.13–2.14). BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 45 Chapter Title Non-permanence 3.1 Introduction 3.1 One of the main concerns of the parties to the Kyoto Protocol regard- ing the inclusion of forestry into the CDM was the potential reversibility of the carbon stored in trees as a result of biotic or abiotic disturbances. The UNFCCC, therefore, decided to consider A/R as a technology that provides a temporary solution to climate change mitigation. As a result, A/R projects can generate temporary carbon credits1 that in time need to be replaced with permanent credits (UNFCCC, 2006b). 3.2 The temporary crediting approach to non-permanence adopted by the UNFCCC opened the door for the forestry sector to be one of the technologies to mitigate climate change. This has contributed to highlight the relevance of managing the risk of emission reductions reversal in projects. Temporary crediting has also served to test the type of assets buyers and sellers of forest carbon credits are willing to accept when trading carbon. 3.3 Despite these advantages, numerous challenges exist in applying temporary crediting. The need to replace forest carbon credits discourages carbon investors from acquiring forest credits (as they need to purchase both assets—a temporary CER and a permanent credit—to replace the tem- porary one). This has negative consequences for the economics of projects because applying the non- permanence rule results in lower-priced forest carbon credits, thereby limiting the potential for carbon 1 Emission reductions from avoided deforestation is not considered an eligible option under the Kyoto Protocol for the first commitment period, but is being discussed under the UNFCCC framework. 46 | BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects finance to help overcome traditional financial barriers 3.2.1 Types of Forestry Credits of forestry projects. It also discourages projects with 3.6 The modalities and procedures of the CDM long-term carbon sequestration goals. More impor- define two types of forest credits: temporary Certified tantly, the temporary crediting approach has reduced Emission Reductions (tCERs) and long-term Certified the demand for forestry carbon credits because they Emission Reductions (lCERs), each representing one are difficult to manage and transfer. tonne of carbon dioxide equivalent (tCO2e). While the amount of tCERs is equal to the tonnes of CO2e 3.4 This chapter presents an overview of the sequestered every verification, the amount of lCERs BioCF’s experience with the temporary crediting ap- is the carbon sequestered since the last verification proach and the challenges faced by project developers. (Figure 3.1). Section 3.2 introduces the rules related to the tem- porary crediting approach. Section 3.3 presents the 3.7 A key difference between the two types of BioCF project developers experience in selecting the credits is their term of expiration. While tCERs expire type of credits for use in their projects. Section 3.4 at the end of the commitment period of the Kyoto presents the challenges encountered by BioCF pro- Protocol following the one in which they were is- jects in applying the temporary crediting approach to sued, lCERs expire at the end of a project crediting non-permanence. Section 3.5 looks at relevant criteria period,4 provided that the carbon stocks are still in for designing alternative options for addressing non- place.5 Therefore, the expiration date of both tCERs permanence in an eventual Kyoto Protocol’s second and lCERs is an additional element in the credit serial commitment period. Finally, Section 3.6 presents rec- number (Figure 3.2). ommendations for policymakers, CDM negotiators, project developers, universities, and research centers. 3.8 At the time of PDD preparation, project de- velopers must select the type of temporary credits they 3.2 Temporary Crediting will use. This decision will remain fixed during the 3.5 The countries committed to emission reduc- project crediting period. Projects are expected to is- tions under the Kyoto Protocol2 can use temporary sue credits only once every commitment period of the credits to achieve no more than one percent of their Kyoto Protocol, and they are issued upon project veri- annual emission reduction targets (times five) dur- fication.6 Project developers choose the date of the first ing the first commitment period of the protocol.3 verification; subsequent verifications are automatically Parties using these temporary credits have to replace set every five years thereafter (UNFCCC, 2006b). them with permanent credits before their expiration (UNFCCC, 2006d). Temporary emission reductions, 3.2.2 The “Replacement Rule� Associated with Temporary Credits therefore, are seen by many as an opportunity for Annex B countries to gain time to develop the tech- 3.9 Before temporary credits expire, buyers have nologies required to effectively address climate change to replace each unit with a permanent credit to achieve mitigation. While still complying with their reduction full compliance with their commitments. According obligations, temporary credits represent a renting of to the modalities and procedures for A/R projects, reservoirs of temporary storage carbon as more expen- both tCERs and lCERs can be replaced with other sive strategies (i.e., research for technology develop- units, including Assigned Amount Units (AAU),7 ment and innovation) are developed. 4 The crediting period is the duration of time selected by the project participants during which the A/R CDM project activity will be imple- mented and GHG emission reductions will be generated and, therefore, tCERs and lCERs are issued. The time length of the crediting period for A/R projects can be 20-year renewed twice or a single 30-year period. 2 Annex B countries. 5 When a DOE’s certification report indicates a reversal of net anthropo- genic GHG removals by sinks since the previous certification, the project 3 As set out in Paragraph 14 of the Annex to decision 16/CMP.1: “For must replace an equivalent quantity of lCERs. the first commitment period, the total of additions to a Party’s assigned amount resulting from eligible land use, land-use change, and forestry 6 See Chapter 2 for more details on the verification process. project activities under Article 12 shall not exceed one percent of base 7 AAUs are units issued by parties to the Kyoto Protocol into their na- year emissions of that Party, times five.� Article 12 refers to the Clean tional registry up to their assigned amount, calculated by reference to Development Mechanism, and the eligible activities are afforestation their base year emissions and their quantified emission limitation and and reforestation. reduction commitment (expressed as a percentage). BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 47 Figure 3.1 Accounting of tCERs and lCERs Net tCERs Net lCERs tCO2e tCO2e n n+5 n+10 n+15 n n+5 n+10 n+15 Years Years Source: Pedroni, 2005 Figure 3. 2 Expiration of tCERs and lCERs Net tCERs Net ICERs tCO2e tCO2e 2012 2017 2022 2027 2032 Crediting Period Source: Pedroni, 2005 48 | Chapter 3: Non-permanence Figure 3. 3 Comparison of tCERs and Certified Emission Reductions (CER),8 Emission lCERs in T wo BioCF A / R CDM Reduction Units (ERU),9 and permanent Removal Projects Units (RMU).10 A tCER can also be replaced with another tCER—but not with an lCER. Finally, an Forest Restoration Project with Harvesting lCER can be used to replace another lCER only in cases of reversals of GHG removals since the previous 400 certification. 350 tCO2e (in thousands) 3.10 For each Kyoto Protocol commitment period, 300 each Annex B Party shall, therefore, include in its na- 250 tional registry a lCERs and/or tCERs replacement ac- count to register the replacement credits. The replaced 200 lCERs or tCERs are registered in a retirement ac- 150 count. Thus, the quantity of replacement credits and 100 tCERs transferred into the tCER replacement account for the commitment period shall be equal to the quan- 50 tity of tCERs that were retired or transferred to the replacement account for the previous commitment 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 period. Similarly, the quantity of replacement credits and lCERs transferred into the lCERs replacement ac- Year count for the commitment period shall be equal to the Forest Restoration Project without Harvesting quantity of lCERs that had to be replaced during that commitment period (UNFCCC, 2006b). 900 800 3.11 Annex B Kyoto Protocol Parties have less tCO2e (in thousands) flexibility when dealing with temporary forest carbon 700 credits in comparison with permanent CERs. For ex- 600 ample, temporary credits must be exclusively used to 500 comply with commitments for the Kyoto Protocol 400 commitment period in which they are issued. They 300 cannot be carried over to a subsequent commitment 200 period. In contrast, these countries can carry over up to 2.5 percent of their original allocation of AAUs 100 from the first to a subsequent commitment period (UNFCCC, 2006b). 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 8 CERs are units produced in projects using the Clean Development Year Mechanism of the Kyoto Protocol. CERs generated in CDM sectors other than the Afforestation and Reforestation sector can be used for ■ Amount of tCERs ■ Amount of ICERs replacement purposes. Sequestered carbon 9 ERUs are converted from either an AAU or an RMU and issued to project participants in joint implementation project activities. Joint implementa- tion projects are developed by an Annex B country. Note: A graph for their entire crediting periods is not presented 10 RMUs are issued by parties to the Kyoto Protocol for net removals by as the projects have still not contracted their post-2017 ex- sinks in activities covered by Article 3.3 and Article 3.4 of the Kyoto pected emission reductions. Protocol (in the land use, land-use change, and forestry sector). BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 49 3.3 tCERs vs. lCERs compared with $1.76 million for lCERs. Similarly, in project 2 the value of the contract with tCERs is $4.8 3.12 Temporary Certified Emission Reductions million compared to $3.8 million if using lCERs. This have a clear advantage on the cash flow front when is a hypothetical example which uses the same price compared with lCERs. All project developers of for the tCER and lCER; however, no market informa- BioCF projects have selected tCERs instead of tion exists for lCERs and it is uncertain that an lCER lCERs.11 Although both assets can be issued every would be the same as the price of a tCER. five years after the first verification, the carbon stock that generated tCERs in one crediting period (i.e., the 3.15 In addition to the income stream derived first vintage) can be reassessed once the tCERs have from the BioCF ERPA contract, when the 2012 vin- expired—and new credits issued in the next period. tage of tCERs expire after 2017 the project developer If this same first vintage is issued as lCERs, however, is free to issue new carbon credits and sell them to the credits would be committed from the certification another buyer (or the same, if applicable). In this date to the end of the project crediting period. This scenario, project 1 could accrue about $4 million af- means that developers would receive less money from ter 2017 from its stream of tCERs instead of $1.76 a stream of lCERs than tCERs.12 million from lCERs. Similarly project 2 could accrue $5.8 million after 2017 from its stream of tCERs in- 3.13 There are other challenges, as well, with us- stead of $3.8 million from lCERs. ing lCERs. First, purchasing these credits requires buyers and sellers to commit to the whole project crediting period. Second, the lack of certainty about 3.4 Challenges in Applying the a second commitment period of the Kyoto Protocol tCERs Accounting Method has also made lCERs less attractive to project devel- 3.16 Because the experience of the BioCF relates opers. Determining a price for lCERs requires buyers to tCERs, subsequent sections focus on issues related to have a clear understanding of both the project risk only to tCERs. In addition, the challenges highlighted profile (Dutschke, 2010) and future prices of perma- are particular to the strategies used by BioCF partici- nent carbon credits during the project crediting period pants to replace their temporary forest credits. and at the time of expiration of the lCERs (Lecocq and Couture, 2008). Establishing such a long-term 3.4.1 For Buyers liability, understanding the long-term project risk, 3.17 The concept of temporary crediting has been and predicting future prices of carbon credits are all difficult to apply mainly because it relies on the ex- difficult to achieve in an uncertain carbon market istence of subsequent Kyoto Protocol commitment environment. periods. For example, because of the “replacement rule� the price of a tCER was calculated as the dif- 3.14 Figure 3.3 illustrates the partial stream of ference between current prices of CERs and the dis- tCO2e for two BioCF projects with a 30-year crediting counted price of a CER to be generated post-2012. period. One is a reforestation project planting 4,000 Participants of the BioCF were only willing to acquire ha with a mixture of native and introduced species and forestry credits because the BioCF can package tCERs a first harvest happening at Year 10. The other is a for- with replacement credits for which information on est restoration project planting close to 14,000 ha of project risks is available. This was possible because the land with native species; no harvesting is planned. The BioCF is housed within the World Bank that man- figure also illustrates the amount of tCERs and lCERs ages other carbon funds, where credits from projects both projects would produce during the ERPA term. in other sectors are being generated and could be used Assuming a $5 price per tCO2e, the contract value un- as sources of replacement credits.14 Even so, this has til 201713 for tCERs in project 1 is about $2.8 million not been an easy task as estimation of future prices of CERs is highly speculative given the uncertainty of 11 One lCER ERPA was negotiated and signed, but the project developer the carbon market. subsequently changed it to a tCER contract. 12 This can also depend on the difference in price between the two types 14 BioCF participants have to acquire replacement credits generated in of assets. other World Bank CDM projects; acquiring them from projects gen- 13 The value of ERPAs until 2017 were discounted at a 10-percent rate for erated elsewhere would be costly as it would require assessing such the purpose of this exercise. projects against the World Bank’s safeguard policies. 50 | Chapter 3: Non-permanence 3.18 Another challenge in applying temporary crediting is that there is very little supply for replace- ment credits. Sellers of permanent CERs are willing to receive low prices for their future vintages of credits when they can benefit from this (e.g., by being paid in advance as a way to close their financing gap). This situation not only increases the risks for both buyers and sellers of replacement credits, but also the transac- tion costs. Natural 3.19 Indeed, involving the buyers of forestry cred- regeneration is its in risky forward purchases of replacement credits taking place on severely degraded negatively affects the demand for CDM forestry cred- lands in the its. To back up advance purchases of CERs, sellers Humbo Ethiopia have to secure a letter of guarantee. In one case, after Assisted Natural a thorough analysis of the risks involved, the BioCF’s Regeneration participants agreed to purchase forward CERs from Project with some a CDM non-forest project provided that the project supplemental planting. entity presented a letter of guarantee issued by a com- mercial bank to hedge against the under-delivery and to demonstrate their compliance with such policies, noncompliance risks. Local commercial banks, how- which would have added transaction costs. ever, refused to issue a letter of guarantee for a seven- year forward purchase transaction15 because the time 3.4.2 For Sellers of Forest Carbon Credits span of the transaction exceeded their standard.16 In addition, the seller of the carbon credits was unwill- 3.21 Carbon finance is intended to help forest pro- ing to cover the cost of such a guarantee, which for jects overcome prohibitive investment and financial just a four-year transaction would have represented barriers; the reduced prices of forest credits resulting two percent of the guaranteed amount. This would from the “replacement rule,� however, limit such po- have reduced even further the earnings from the sale tential. The time span between verifications, which of credits and eventually discouraged the seller from relates to non-permanence as each project is expected entering into the agreement. to have only one verification every commitment pe- riod of the Kyoto Protocol, also limits the impact that 3.20 BioCF participants decided to acquire the carbon finance can have on forestry projects The first replacement credits as soon as possible and only verification usually starts when projects have seques- used CDM projects as sources of replacement cred- tered enough carbon to collect at least enough carbon its. Their motivation for this was to minimize their revenues to cover the transaction costs of meeting the risks and to benefit as much as possible from the rela- CDM requirements; subsequent verification will oc- tive maturity of the CER markets. Notwithstanding cur at a five-year interval. Since the projects receive this, both the BioCF and sellers of credits have had carbon revenues upon certification, carbon finance difficulty in agreeing on future prices of CERs and does not contribute to covering the high upfront in- discount rates for forward purchases of credits. The vestment required in forestry projects17 and the main- BioCF participants’ options were also bound by the tenance costs do not materialize for a number of years. need for projects generating CERs to comply with the World Bank’s environmental and social safeguard poli- 3.22 Allowing flexibility in verification timing and cies. Acquiring CERs from projects outside the World intervals could benefit projects that can afford the Bank portfolio would have required project developers costs associated with more frequent verifications. This would also reduce the under-delivery risk of projects involving multiple farmers, as timely carbon payments 15 The purchase had to be done in 2010 for vintages of CERs to be deliv- ered from 2013 to 2017. 17 Carbon credits, however, can help secure debt financing backed by fu- 16 Another reason for this may have been that the local commercial bank ture carbon flows to inject as upfront financing. See Chapter 6 for more was not equipped to understand CDM risks. discussion on challenges to achieve this. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 51 would increase their interest in maintaining the trees replaced with other tCERs offers a window of op- in the long run. In the absence of such an option, the portunity to increase the demand for tCERs by de- BioCF participants and other buyers of forestry cred- velopers of these projects. In practice, however, buy- its have to make upfront investments to cover project ers of forestry credits (i.e., the BioCF’s participants) preparation costs as a way to recognize the difficulty have not been willing to use tCERs for replacement of a cash flow limited to once every five years and af- purposes mainly because of their interest in bringing ter verification. For example, the BioCF included in forward the “final� replacement in order to avoid the its ERPA contracts a provision that allows for annual greater uncertainty associated with acquiring replace- payments to projects based on successful project vali- ment credits.19 dation (and other conditions as defined on a project- by-project basis). Unlike most buyers, however, the 3.26 Had BioCF’s participants selected tCERs as BioCF’s participants take on the risk of converting the sources of replacement credits, their projects would validated emission reductions into tCERs. not have been able to supply tCERs in a continuous manner as temporary credits cannot be renewed be- 3.4.3 Price of Temporary Credits and yond the final project crediting period. For example, Cost of Carbon Sequestration even when a project planting for environmental pur- 3.23 Low prices for forest credits may not cover poses could supply tCERs over a number of commit- the cost of sequestering carbon in different types of ment periods (provided that the carbon remains se- projects. As stated before, prices for credits generated questered), once the crediting period ends the Annex in forestry CDM projects are low because they are B country would stop buying credits from the project discounted from prices of credits generated in other and replace the tCERs with permanent assets (e.g., CDM projects (see Paragraph 3.17). This makes the CERs, AAUs, ERUs, and RMUs) or with tCERs from viability of forest carbon projects highly dependent another project. This rule could perversely encourage upon scale and species type, discouraging small-scale18 the carbon sequestered in trees to be released into the projects and those planting slow-growing species. The atmosphere immediately after the end of the crediting revenues from the sale of carbon might not be suf- period. ficient to cover all project costs as there are also addi- 3.4.5 Fungibility of Forestry Credits tional environmental services that might be provided, yet carbon cash flows are the only revenue. In projects 3.27 The lack of fungibility of tCERs with of a more commercial nature, however, the total costs units generated via other mechanisms of the Kyoto of the projects may be offset by the revenues from tim- Protocol limits the demand for this type of credit. The ber or other products. European Union’s provisions regarding forestry CDM credits exemplify this; European private companies are 3.24 Overall, with low carbon prices, carbon fi- not allowed to use forestry CDM credits to achieve nance is doing little to help forest projects overcome their emission reduction commitments. The lack of the disproportionately large financial barriers to in- fungibility of forestry credits with other CERs and vestment they usually face in developing countries European Union Allowances, along with difficulties (See Chapter 6). As a result of the “replacement rule,� in addressing the liability of replacements, have been prices paid by the BioCF per validated tCO2e are low, important reasons for excluding forestry credits from ranging between $4-5 per unit. the European Union Emissions Trading Scheme20 3.4.4 Temporary Crediting and 19 Other buyers, however, may find attractive the option of using tCERs as Long-term Carbon Sequestration source of replacement credits. 20 In 2005 the European Union established its Emissions Trading Scheme, 3.25 The accounting methods for forestry credits a cap-and-trade system to limit the GHG emissions of companies from do not provide appropriate incentives for long-term the electric power industry and certain industrial sectors of its country members’ economies. Under ETS, EU member states determined the carbon sequestration. The fact that tCERs can be total amount of allowances and distributed them among their own fa- cilities. These facilities were then enabled to trade allowances. The first 18 Although the UNFCCC defined simplified modalities and procedures for trading period was from 2005-2007; the second one is running from small-scale projects, four BioCF small-scale projects have proven that 2008-2012. The EU-ETS created the “linking directive� to allow the this has not contributed to reducing transaction costs in a significant companies to use credits from the CDM and joint implementation to manner. See Chapter 6, Finance, for more information on transaction comply with their commitments. The companies were allowed to use costs. credits from all CDM sectors except A/R for compliance. 52 | Chapter 3: Non-permanence Box 3.1 The Forest Carbon Market LULUCF assets continue to be a marginal piece of the CDM carbon market. They represent only ten percent of the volume transacted in 2010 in the CDM (World Bank, 2010a). The greatest forestry activity is still in the vol- untary market, with 73.3 million tCO2e (equivalent to $297.8 million) transacted as of today, of which close to 40 percent in volume and 44 in value was transacted in 2010 only (Diaz et al., 2011). Overall, 2010 was a record year for activity in the voluntary carbon markets; while the volumes remain low (e.g., less than 0.3 percent of the global carbon markets), transaction volumes increased 28 percent between 2009 and 2010 (World Bank, 2011). Table 3.1 Volume and Value of the Forest C arbon Market Volume (million tCO2e) Value (million $) Markets Historical Total 2010 Historical Total 2010 Voluntary Over the Counter 58.7 27.3 243.0 124.5 Chicago Climate Exchange 2.9 0.1 5.2 0.2 Total Voluntary Market 61.6 27.4 253.3 124.7 A/R CDM 7.8 1.4 32.2 6.3 New South Wales 3.1 1.1 11.8 0.0 New Zealand ETS 0.8 0.2 5.7 0.2 Total Regulated Market 11.7 2.7 49.6 6.4 Total Global Market 73.3 30.1 297.8 131.1 The greatest forestry activity is in the voluntary over-the-counter market (driven without any sort of emission cap), with 80 percent of the historical value transacted to date. In comparison to the overall carbon market for forestry assets, the A/R CDM market represents 0.14 percent of the value of transactions to date. This low proportion is primarily due to the fact that there are no tCERs issued in the market thus far. A large proportion of the CDM A/R transactions represent direct payments made to BioCF projects in the form of advanced annual ERPA payments (Hamilton et al., 2010). While the historical volume-weighted average price for forest carbon credits is around $6/tCO2e, the State of the Forest Carbon Markets 2011 also reveals some interesting differences in prices across markets, reflecting the different nature of forest carbon assets. Average historical prices for A/R credits were reported as $4.27/ ton, a similar value if compared with REDD credits ($5/ton) and credits ($6/ton) generated from Improved Forest Management projects (Peters-Stanley, M. et al., 2011). (Dutschke, 2010).21 Because the EU-ETS became the have barely acquired any of them. This is reflected in most important market for CERs, such exclusion re- the composition of BioCF participants.22 sulted in a severe reduction in the demand for for- estry credits during the first commitment period of 3.28 The result of these linking issues is that no the Kyoto Protocol. Even governments, which have other crediting programs in operation use these tem- the ability to use a limited amount of LULUCF assets, porary credits. In addition, concerns about perma- nence of reductions, accuracy of monitoring, and 21 In analyzing the possibility of allowing credits from forest projects into “flooding of the market� continue to keep LULUCF the EU-ETS, the European Commission concluded that the fact that assets outside most emission trading schemes (e.g., forest projects cannot deliver permanent emission reductions could undermine the environmental integrity of the system. The commission EU-ETS and the New Zealand Emission Trading considered that insufficient solutions have been developed to deal with uncertainties, non-permanence, and leakage arising from this type of project. The EC concluded that the temporary and reversible nature of 22 The BioCF includes six governmental entities and 12 private companies. such activities would pose considerable risks to the EU-ETS and impose Five of the governments are European and the Government of Canada. greater liability risks on member states (European Commission, 2008). Eight of the private companies are Japanese and four are global. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 53 Scheme). All this negatively affects the attractiveness Body for Scientific and Technological Advice initiate of forestry credits for buyers and reduces market li- a work program “to consider as appropriate, develop, quidity (Dutschke and Schlamadinger, 2003; Lecocq and recommend modalities and procedures for alter- and Couture 2008). The impact of the low demand native approaches to addressing the risk of non-per- in the forest carbon market is illustrated in Box 3.1. manence with a view of forwarding a draft decision on These assets might enjoy a new relevance and value this matter to the COP17.�25 should they be accepted into future emission trading schemes (World Bank, 2010a). 3.31 Project developers, negotiators, and organi- zations involved in LULUCF projects are working to 3.5 Other Approaches to improve their understanding of the implications, ad- Non-permanence vantages, and disadvantages of alternative approaches to non-permanence.26 While some of these approaches 3.29 Non-permanence has been intensively debat- are already being tested in the voluntary carbon mar- ed, and the debate did not stop with the UNFCCC’s ket (i.e., the buffer approach) and in LULUCF joint decision to adopt the “expiring� credit approach. implementation projects (i.e., host party taking re- Many, for example, have argued that the emission re- sponsibility for reversals), others have only been men- ductions originating from some energy projects (e.g., tioned in the forest carbon literature as interesting avoidance of fossil fuel use) should also be considered options. Examples of criteria often used to assess the temporary if the non-extracted fossil fuel were to be different possible approaches are listed below: used in the future with subsequent GHG emissions releases (see, for example, Noble et al., 2000; Pedroni, ■■ Scope (e.g., type of actual GHG emissions, and 2005). Alternatively, to maintain consistency among may include harvest wood products); all types of credits, forest carbon credits should also be ■■ Simplicity (e.g., simple to estimate the risk, and the considered permanent. Others recognize the tempo- resulting units can be easily transacted); rary nature of forest carbon credits but consider that ■■ Cost efficiency (e.g., administrative costs and risk- developers should be allowed to select the most suit- mitigation costs); able approach to non-permanence for their projects. ■■ Dependence on enforceability of relevant na- 3.30 As the discussions on the rules for LULUCF tional policies (e.g., due to non-payment of risk activities are ongoing in the UNFCCC, negotiators premium); from developing countries are analyzing new propos- ■■ Type of coverage provided (e.g., ability to cover a als for consideration in the negotiations of the Kyoto large number of projects); Protocol’s next commitment period.23 Negotiators on ■■ Guarantees to sovereignty (e.g., allow host coun- the Ad Hoc Working Group on further commitments tries to develop and implement their own solutions for Annex B Parties under the Kyoto Protocol suggest- to non-permanence); ed24 alternative approaches in 2009 that allow for the ■■ Consistency with the approach for managing rever- issuance of permanent carbon credits from LULUCF sals for LULUCF activities in Annex B countries projects. These approaches involve the host country and in joint implementation projects; taking responsibility for reversals, insurance, buffers ■■ Level of protection to compensate in the event of and credit reserves, exceptions for low-risk activities, non-permanence; and accounting for emissions from harvesting of for- ests. The text approved in COP16 in Cancún includes ■■ Assurance that host countries will have the financial in brackets the following statement: “Alternative ap- means to compensate for eventual reversals; and proaches to addressing the risk of non-permanence ■■ Availability (e.g., availability of policy insurance may apply in accordance with any further decision of than can be purchased by project developers). the COP.� The COP also requested that the Subsidiary 23 FCCC/KP/AWG/2010/18/Add.1. For example, negotiators have high- lighted the need to indentify approaches that simplify the accounting rules (FCCC/KP/AWG/2008/3). Others still consider that the temporary crediting approach should be an available option (FCCC/KP/AWG/2009/ INF.2). 25 FCCC/KP/AWG/2010/18/Add.1. 24 FCCC/KP/AWG/2009/INF.2. 26 See for example Lecocq and Couture, 2008; Scholz and Jung, 2008. 54 | Chapter 3: Non-permanence 3.6 Recommendations For Market Players 3.32 Below are some recommendations that should ■■ Developed countries committed to reducing emis- be considered by policymakers and the CDM EB. sions should support the A/R CDM by ensuring a Risk management measures and best practices to re- demand for credits, recognizing that: duce the risk of reversal and project non-permanence — —A/R CDM projects contribute to climate are presented in chapter 8. mitigation as well as to improving rural livelihoods; For the CMP — —Credits from A/R CDM project activities are ■■ Allow A/R CDM projects to select from a variety produced in a rigorous manner, as they are of approaches to non-permanence in addition to based on conventional forest inventory tech- the temporary crediting approach. Some of these niques, which are independently audited; are being tested in the voluntary carbon market, and lessons can be learned from this experience — —Projects apply safeguards to avoid, mini- (see Paragraphs 3.29–3.31). The new approach(es) mize, and/or mitigate potential risks to the to non-permanence should avoid putting forestry local environments and to communities’ credits at a disadvantage. They should be designed livelihoods. Some projects go even further— bearing in mind that complex credits that are not certifying their project designs as a way to en- fungible with other carbon assets lead to a lack of sure the delivery of positive net co-benefits; demand for forestry credits (see Paragraphs 3.27– and that 3.28) and to low prices, which negatively affects — stakeholders continue to make efforts to —All project viability, reducing the carbon finance’s po- improve the A/R CDM and realize the emis- tential to support forest projects (see Paragraphs sion reduction potential of A/R projects (see 3.23–3.24 and Chapter 6). Paragraphs 3.27–3.28 and Box 3.1). ■■ In designing a new approach to non-permanence for forestry credits, consider flexibility in the num- ber of verifications per commitment period and al- lowing projects with a high volume of credits to use shorter periods so that carbon revenues can help improve the cash flowing into projects (see Paragraphs 3.21–3.22). ■■ Change crediting rules to encourage long-term carbon sequestration by considering renewal of credits beyond the crediting period. This will favor projects reforesting for conservation purposes (see Paragraph 3.25). BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 55 Chapter TitleIssues Land-related 4.1 Introduction 4.1 Land eligibility, project boundary, and land tenure rules are part of the Afforestation and Reforestation (A/R) Clean Development Mechanism CDM’s regulatory framework. Overall, the BioCF experience demonstrates that the A/R CDM land-related rules need to be more pragmatic to accommodate the reality on-the-ground. The objective of this chapter is to provide insights into project developers’ challenges in applying the A/R CDM land-related rules. 4.2 The project boundary and land eligibility rules have increased transaction costs and delayed project implementation. There are two main reasons for this: (i) In many developing countries, there is little or no reliable data to prove that the project land was not forested on December 31, 1989; and (ii) project developers often lack the capacity to interpret satellite imagery and delineate project boundaries. The project boundary and land eligibility rules need to be reformed. As of now, these rules exclude many areas with important carbon sequestration potential from participating in the CDM and lead to fragmented projects with lower environmental benefits, greater risks for social con- flicts, and increased costs. The Executive Board (EB) of the CDM should consider changing the land eligibility and project boundary rules to address these issues while maintaining the environmental integrity of A/R projects and avoiding perverse incentives. 4.3 With the right institutional mechanisms in place, projects in areas with different land tenure situations can ensure the permanence of the forest carbon activity. There is evidence of this in some BioCF projects. The right institutional instruments are agreements that regulate land use changes and clarify land tenure rights and the legal transferability of the carbon asset. Carbon finance can 56 | BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects therefore be an important instrument to trigger land and land cover in the project area depend on whether tenure changes on the ground. This process neverthe- the project is planning to afforest or reforest the lands. less comes at a cost. Afforestation activities are implemented on lands that have been unstocked for at least 50 years from the 4.4 These findings are explained in detail in this project starting date, while reforestation activities are chapter. Section 4.2 focuses on the rules for land eli- implemented on non-forested lands that did not have gibility, project boundary, and control over the land. forests on December 31, 1989 (UNFCCC, 2006d). Section 4.3 examines the CDM land tenure require- ments and the BioCF experience implementing pro- 4.7 The information required to demonstrate jects in areas with different land tenure circumstances. land eligibility includes aerial photography or satel- Finally, Section 4.4 offers some recommendations. lite imagery complemented by ground reference data, land use or cover information from ground-based 4.2 Land Eligibility and Project surveys (including registers), and written testimonies Boundary produced by following a participatory rural appraisal 4.5 The UNFCCC published definitions, mo- whenever remote sensing and surveys are not available dalities, rules, and guidelines relating to land use, or applicable (UNFCCC, 2005a). land-use change and forestry activities under the Kyoto Protocol (UNFCCC, 2006d). The definitions 4.2.2 Project Boundary relevant for land eligibility and project boundary are 4.8 The project boundary rule, refers to the geo- presented in the sections below. graphic delineation of lands controlled by the project developer. The project boundary can be one sin- 4.2.1 Land Eligibility gle area or the sum of several discrete areas, each of 4.6 The land eligibility and project boundary which has to have a unique identification (UNFCCC, rules determine the areas where A/R projects can be 2006b). Verifiable boundary demarcation is used to implemented during the crediting period.1 The land clearly identify project sites at validation and verifi- eligibility rule requires project developers to demon- cation. At validation, project developers have to pro- strate that when the project start and on December vide delineation of the entire project area. The fact 31, 1989, the project areas do not qualify as forests that project developers must provide evidence of their (UNFCCC, 2006d).2 Project developers must assess control over at least two-thirds of the afforestation/ vegetation against crown cover, tree height, and mini- reforestation activity by the validation date is usually mum area indicators according to the definition of a known as the “control over the project� rule. The term forest communicated by the respective DNAs3 to the “control over the project activity� is not explicitly de- UNFCCC. They must also demonstrate that non- fined by the CDM EB, but it is usually interpreted by forest lands are not temporarily unstocked and that, project developers in legal or financial terms (ITTO, without human intervention, existing young vegeta- 2006). Thus, at validation, project developers usually tion or plantations do not have the potential to be- provide land-use contracts between the project entity come forests (UNFCCC, 2005a). The dates of the and landowners as evidence of their right to collect existing materials that serve as evidence of the land use the CERs from the project land areas; the contracts to prove control over the remainder of the project is 1 The crediting period for A/R CDM projects can be either 30-year single provided at verification, and thus control over total or 20-year renewable twice. project is fixed (UNFCCC, 2008a). 2 “Forest� is a minimum area of land of 0.05–1.0 hectare with tree crown cover (or equivalent stocking level) of more than 10–30 percent with trees with the potential to reach a minimum height of 2–5 meters at 4.2.3 Land Eligibility and Project maturity in situ. A forest may consist either of closed forest formations Boundary in the BioCF Portfolio where trees of various storey and undergrowth cover a high proportion of the ground or open forest. Young natural stands and all plantations 4.9 In the BioCF, land eligibility has been a key which have yet to reach a crown density of 10–30 percent or tree height criterion for project selection. Project developers are of 2–5 meters are included under forest, as are areas normally forming part of the forest area which are temporarily unstocked as a result of required to present a first assessment of the land sta- human intervention (such as harvesting or natural causes) but which are tus and land use in the baseline. For many projects expected to revert to forest. developed between 2004 and 2007, the land eligibil- 3 See Chapter 2 for a description of DNAs, as well as http://cdm.unfccc .int. ity analysis was at first poorly done or did not reflect BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 57 Box 4.1 Project Boundary and Land Eligibility Assessment in the Moldova Soil Conservation Project Moldsilva, the national forest agency of the Republic of Moldova, is implementing the Moldova Soil Conservation project through 23 forest enterprises. Forty percent of the land involved in this project is owned by Moldsilva; the remainder is owned by 384 local councils representing local communities. Through this project, Moldsilva has reforested around 20,000 ha of multiple-purpose forests established on degraded lands in the northern, central, and southern regions of the country. This project addresses a severe environmental problem affecting the Republic of Moldova. Over past decades the country has undergone a severe soil erosion that has affected land productivity and caused an estimated $1.5 billion in economic losses. The project will restore the productivity of degraded lands, glades, and aban- doned arable lands. By doing this, it will enhance forest product supplies to local communities, protect threat- ened species, improve the ecological succession, and restore the habitats of endangered flora and fauna. Most areas are planted with a mix of native and naturalized locally adaptive species.1 The Moldova Soil Conservation project was designed in 2002 when CDM rules did not exist. This project was part of the World Bank Prototype Carbon Fund and the BioCarbon Fund, and was one of the world’s first for- est carbon projects. It adopted the CDM rules in 2003 and adjusted to all rule changes up to 2008, when it was validated. In early 2009, the project became the second A/R project ever to be registered in the CDM. The project expects to sequester more than 3.5 million tCO2e over 20 years (2002-2022). La n d El ig ibi l it y Compliance with the definition of A/R: The developer demonstrated that project land areas had been degraded and not planted for the past 50 years, confirming the project’s compliance with the definition of afforestation. Land cover/use assessment: Official land-use records and land administration documentation from 1989 were used to demonstrate that the degraded status of the lands prevents its vegetation from reaching the forest thresholds as defined by the Republic of Moldova.2 This documentation was complemented with ground refer- ence data. Land cover values for intermediate years (1995 and 2005) were provided based on analysis of land productivity. Such analysis drew from information available in land-use plans and other local registers (e.g., cadastre, land-use, or land-management registers, and so forth). The results of this analysis confirmed that the productivity of the lands had decreased over time. P ro je ct Boun dari es As a result of the land eligibility analysis, the project boundaries were defined to cover all the districts of the country except for the eastern region of Transnistria. It is spread over 2,421 sites with a size ranging from 0.25 to more than 50 ha. About half of the total area is represented by planting sites that are under 15 ha. The pro- ject used standard forestry practices combined with the Global Positioning System (GPS) to delineate project boundaries and to verify its planting sites. GPS coordinates were recorded and archived in a database. 1 Native species are, for example, English oak (Quercus robur), European ash (Fraxinus excelsior), white willow (Salix alba), white poplar (Populus alba), and black poplar (Populus nigra), etc. Non-native species include black locust (Robinia pseudoacacia), honey locust (Gleditschia triachantos), Japanese pagoda trees (Sophora japonica), Russian olive trees (Elaeagnus angustifolia), and Austrian pine (Pinus nigra), among others. 2 Minimum tree crown cover: 30 percent; minimum land area: 0.25 ha; minimum tree height: 5 m. the most updated rules. By 2011, almost half of the project developers understand whether the project has projects in the BioCF portfolio had finalized their been implemented within the projected boundaries land eligibility assessments and defined the project and demonstrate control over the entire project land boundary (Box 4.1). Some projects are undertaking area (see Chapter 4). monitoring of the project boundary, which will help 58 | Chapter 4: Land-Related Issues Figure 4 .1 Change in Area in Eight BioCF Projects 18 16 14 12 Hectares (thousands) 10 48% 8 6 40% 4 41% 44% 2 21% 18% 10% 13% 0 1 2 3 4 5 6 7 8 ■ Initial Area ■ Current Area (2011) Projects 4.2.4 Challenges Related to the to reflect the latest versions of the rules in their PDDs. Land Eligibility and Project Second, project developers’ low local technical capac- Boundary Rules ity both for gathering and analyzing satellite imagery 4.10 Many BioCF projects have struggled with and for reporting and following guidelines, combined undertaking a comprehensive land eligibility analysis with technology constraints, resulted in poor land and determining their boundaries. As a result of these eligibility analysis and project boundary delimitation. challenges, some projects have not only changed their Third, the rules are often incompatible with the real- envisioned plot locations but have also significantly ity on the ground. These three reasons are discussed reduced the total area. Figure 4.1 illustrates this situa- below. tion for eight projects. Changes in Land Eligibility and 4.11 For some projects, getting land assessments Project Boundary Rules approved at validation has not been a straightforward 4.13 The CDM EB has introduced several chang- task. Project developers with projects currently under es to the land eligibility and project boundary rules. validation have had intense communications with For example, between 2005 and 2008 the CDM EB validators around land eligibility and project bounda- published three versions of procedures, two guidance ries. An analysis of the CARs presented by DOEs for notes, and one clarification related to the land eligibil- 11 BioCF projects reveals the types of problems that ity rule (see Paragraph 2.10). The first two versions developers typically face (Table 4.1). of procedures were designed in great detail, then later simplified at the request of project developers and the 4.12 There are three main reasons why understand- COP. For example, in 2006 the CDM EB requested ing and consistently applying the land eligibility and that project developers provide evidence of land cover/ project boundary rules have been a great challenge for use for at least four representative years to show com- project developers. First, the CDM EB has changed pliance with the afforestation definition (UNFCCC, the rules several times over time, making it difficult 2005a; UNFCCC, 2006e; UNFCCC, 2006g; for project developers to follow the modifications and UNFCCC, 2007i). This procedure was simplified BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 59 Table 4 .1 Frequent Problems Project Developers Face at Validation on L and - related Issues Frequency Type of Problem Examples (n=11) 9% The land eligibility analysis was done based on two specific time periods. This was considered insufficient evidence by the validator. 27% The land eligibility assessment was not done at the level of the minimum area Differences in interpretation as per the forest definition of the host country. of rules and requirements between validators and 100% The process of identification of eligible areas was not documented in a project developers transparent manner in the PDD. Some validators do not accept statements in the PDD that documentation is available upon request. Often, the validator requires that high quality maps, lists of discrete areas, and Geographic Infor- mation System (GIS) files be included in the PDD. 18% The size of discrete parcels is cited differently in the forest management plan and the GIS maps. Inconsistencies throughout 27% Areas within the project boundary were not consistent with national forest the PDD definitions. 37% Calculated areas in the PDD were not the same as those presented in the GIS. 18% GPS has low accuracy. Technology constraints 27% Satellite images have low resolution, which make it difficult to assess the vegetation against indicators of a particular forest definition. 55% Individual plots were not properly identified. 18% The developer used an outdated version of the procedure for land eligibility assessment. 27% No evidence was provided to demonstrate that lands were not forested on the project start date. Poor understanding of the rules 27% Temporary unstocked examination to prove that the land would not revert to forest was not done on a discrete site basis. 9% There was a poor description of current land use to document pressure on existing land cover. 18% Assessment of vegetation status between the available image date and 1990 was not provided. in 2008 as the CDM EB revoked the requirement to 4.15 Project development can be smoother now differentiate between afforestation and reforestation because the land-eligibility-related rules are sim- (UNFCCC, 2008a). Similarly, changes were intro- pler; BioCF projects that started their development duced to reduce the level of stringency required to ap- from 2009 onward have benefited from the CDM prove the remote sensing analysis so that evidence of EB improvements. Still, projects in tropical climates the consistency of the remote sensing assessment is no face challenges in demonstrating land eligibility (see longer required. Paragraphs 4.22). 4.14 An important change to the project bound- Low Local Capacity and ary rule happened in 2008. This change was driven by Technology Constraints requests from developers of multi-stakeholder projects 4.16 Both changes in rules and the lack of local who highlighted their challenges in identifying, by the capacity have affected project developers’ ability to validation date, the total amount of land for a viable understand the land eligibility and project boundary activity. To address this issue, the CDM EB reduced procedures and resulted in discrepancies in the inter- the minimum area that must be geographically deline- pretation of the requirements. In the early days of the ated by the time of validation to two-thirds of the pro- A/R CDM, developers struggled with understanding ject’s total area (UNFCCC, 2008i). While this change the concept of a project boundary. Although it was to the project boundary rules is essential, it came too clear in the rules that the project boundary refer to late for some early projects (See Paragraph 6.18). the sum of discrete planting areas, project developers 60 | Chapter 4: Land-Related Issues accounted for carbon sequestered outside of the pro- validators wanted all the information included in the ject boundaries, thus overestimating their project’s early stages of PDD assessment. emission reductions. For many of them, the very no- tion of GHG accounting and discrete parcels was dif- 4.18 The lack of local technical training, combined ficult to understand. The CDM EB had to clarify this with technology constraints, have also greatly affected issue in 2006 (UNFCCC, 2006g; UNFCCC, 2007c). project developers’ ability to comply effectively with Similarly, because of the lack of understanding of the the project boundary and land eligibility rules. The rules, many early project developers made their land- CARs for some BioCF projects reported issues such as use assessments without considering their CDM na- a discrepancy among areas accounted for in the GPS tional forest definition. map, the land cadastre, the PDD, and the land man- agement plan. Other projects faced technology prob- 4.17 The land eligibility rule also highlighted dis- lems where, for example, the GIS maps and satellite crepancies in rule interpretation between validators images did not line up due to differences in quality or and project developers. In many BioCF projects, the issues of granularity (Table 4.1). This meant that the validators considered that the information and evi- land eligibility analysis, which includes closer exami- dence provided by the project developers was not suf- nation through field visits, had to be redone several ficient to satisfy the CDM project boundary and land times. This significantly increased transaction costs eligibility requirements. While project developers un- and, in some cases, reduced a project’s size. derstood that discrimination between forest and non- forest land should be done at the discrete area level, in 4.19 Although the A/R CDM rules also allow for many cases validators requested that they make their the use of participatory rural appraisal techniques assessments according to the parameters included in to report on land use/cover, project developers have the national forest definition. Similarly, project devel- found it difficult to make reliable assessments of past opers struggled with getting adequate information on land uses. The land eligibility rule should be reformu- the land-related rules at the start of validation; most of lated to recognize the lack of official (reliable) data them considered that additional information could be on land use/cover in developing countries, GIS tech- provided at the request of the validator if needed—but nology limitations, and project developers’ difficulty in presenting reliable data obtained via participatory Project boundaries in the Assisted Natural Regenera- tion of Degraded Lands in Albania Project. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 61 Box 4.2 Land Eligibility Challenges in the San Nicolas Project, Colombia The San Nicolas Carbon Sink and Arboreal Species Recovery project planned to reforest about 1,000 ha of de- graded, unmanaged pasture lands. The project entity, “Corporación Mas Bosques,� is a public-private nonprofit organization created specifically to manage the CDM project. La n d El ig ibi l it y Ch allenge: T e mp o rari ly St oc k e d A r ea s Because of land eligibility issues the project postponed its implementation for 2-3 years in areas where contracts had already been signed between farmers and the project entity. It was extremely difficult for Mas Bosques to find enough areas that satisfied the land eligibility rule to make the project feasible. By the time the planting ac- tivities were supposed to start, the vegetation in some of the areas that had been previously identified naturally regenerated to the extent that the areas reached the threshold of the Colombian forestry definition. Another group of farmers had to leave the project and the implementation was delayed even further. The project area continued to change due to eligibility issues and, in 2009, after a new land eligibility study, the project entity started yet another campaign to convince potential farmers to sign up. The new areas are remotely located, which will increase implementation and supervision costs and negatively impact project fea- sibility. Besides incurring extra costs searching for new areas, the project spent a lot of time building capacity in areas that were later excluded from the project. processes. These issues make the land eligibility assess- climates. Areas that have surpassed the forest thresh- ment costly. old by the time of validation are sometimes in a fallow period and will, sooner or later, be used by multiple 4.20 In addition, the “1989 land eligibility� rule individuals to address their urgent need for fuel wood, excludes areas where deforestation has happened after grazing, and planting of agricultural products. The 1990. In some cases, areas neighboring the projects BioCF San Nicolas project in Colombia exemplifies are excluded from participating because of this rule, this situation (Box 4.2). negatively affecting social, ecological, and financial as- pects of projects. As long as safeguards are in place to 4.22 Because of this issue, projects in tropical cli- ensure the ecological integrity of A/R CDM projects, mates are not fully benefiting from the CDM EB sim- efforts to reforest lands deforested after 1989 should plification on project boundary introduced in 2008 be supported. A possible alternative to this would be (see Paragraph 4.14). Projects struggling with finding to demand proof that the area has been deforested for eligible lands lack the evidence of control over two- at least 10 years before the beginning of the project, as thirds of the project that has to be provided at valida- this is already required by some standards in the vol- tion, delaying project implementation. In some cases, untary carbon market. Flexibility could also be added finding eligible lands turned out to be a long jour- with regards to the nature of deforestation. Lands de- ney (e.g., 2-4 years). Validation is delayed as project forested due to natural causes should be eligible for developers have to provide delineation of the com- deforestation regardless the deforestation date. plete project boundary. The project planning stage becomes inconsistent with participant landholders’ Exclusion of Temporarily Stocked Areas dynamic land-use decisions; eligible landholders that 4.21 The land eligibility rule assumes that any veg- have committed to the project usually cannot wait for etation that has reached the forest threshold by the the implementation of the A/R CDM project and use validation date4 will remain forested in the long run their lands for other purposes. This is especially true regardless of land-use pressures. This is not necessar- for projects planting in competitive lands (as opposed ily the case. This assumption has negatively affected to projects located in severely degraded barren lands) projects on degraded agricultural areas and in tropical and/or struggling with providing reliable evidence 4 Or any later date. 62 | Chapter 4: Land-Related Issues of clear legal land tenure, a requisite of A/R CDM 4.3.1 Land Tenure in the BioCF projects. 4.25 BioCF participants are willing to invest in projects in areas with a lower level of land tenure se- 4.3 Land Tenure curity as long as adequate institutional mechanisms 4.23 A/R CDM projects must provide in the PDD are put in place to ensure emission reductions perma- “a description of the legal title to the land, rights of ac- nence and legal transferability of the carbon rights. cess to the sequestered carbon, [and] current land ten- The BioCF experience shows that the integrity of the ure and land use� (UNFCCC, 2006b). This is com- carbon asset and the permanence of the forest carbon monly referred to as the “land tenure rule.� The rule project can also be assured by institutional and con- encompasses concerns with the integrity of the carbon tractual instruments that clarify carbon ownership and asset and with the non-permanence of the emission ensure adequate project implementation. These insti- reductions, and is often associated with lower levels tutional arrangements−Emission Reductions Purchase of land tenure security.5 Some experts argue that in Agreements, Carbon Transfer Subsidiary Agreements, areas with higher levels of land tenure security, farmers land-use agreements, and benefit-sharing arrange- have more incentives to make long-term investments ments−take into consideration both customary and on land; this contributes to project success in terms of statutory land rights. This gives the BioCF the flex- biomass growth and tree survival rates. Furthermore, ibility to operate under different tenure conditions clear land tenure is also often linked to clear carbon (Aquino et al., 2011). The details on how these insti- ownership, which reduces the risk that the carbon as- tutional and contractual agreements are created and set may be legally disputed. how they function are discussed in Chapter 7. 4.24 Land tenure is defined by FAO as the bundle 4.26 As a result of meeting the CDM requirements of rights over natural resources that defines the rela- on land tenure, some BioCF projects manage to a) im- tionship among individuals and groups with respect to prove land tenure security; b) clarify carbon owner- land (FAO, 2002). Land rights are social conventions, ship rights; and c) ensure adequate project implemen- protected by the government (statutory rights) or the tation. These three achievements are explained in the community (customary rights), that allow individu- sections below. als or groups to benefit from different land revenue streams (Bruce and Migot-Adholla, 1994). There are Improved Land Tenure Security different components of land tenure security. These 4.27 Of the 21 BioCF projects, 11 were imple- include the scope of rights included in the bundle mented in areas owned by the government and seven (e.g., rights to use, rent, mortgage, sell, give, exchange, in areas owned by individuals who hold the legal titles modify, or bequeath the land), the legality (e.g., if cus- to the land. Land ownership in most projects areas has tomary or statutory), the robustness of the rights, and remained the same. Four projects were implemented their duration. The importance given to each compo- on a mix of lands that are owned by the government nent varies according to local realities. In this section, and private entities, including individually titled land the impact of forest carbon finance on land tenure se- and community-titled land. In these projects, individ- curity is examined in the context of changes in land ual and communities that had only the customary (if ownership and land-use right in BioCF projects. any) recognition of their user rights now have the for- mal recognition of their usufruct rights to these areas. 4.28 Carbon finance has prompted a positive change in land tenure security in the project areas. 5 Land tenure security is defined as the individual’s confidence that In some cases, these areas were traditionally used by his/her rights will be recognized by others and protected when chal- lenged, as well as the ability of the individual to reap the benefits of individuals and/or communities for years without labor and capital invested in that land (Bruce and Migot-Adholla, 1994; being formally recognized by the titular landowners FAO, 2002). Land tenure insecurity arises from the individual’s sense of “lacking� in single rights, combination of rights, duration of rights, (government and individuals). The prospect of de- or certainty of retaining rights, from the actual or risk of dispute over veloping a forest carbon project brought about new rights, or the risk of expropriation, among others (Place, 2009). The incentives and resources for the formal recognition of CDM requires a description of the legal title to the land, rights of access to the sequestered carbon, as well as current land tenure and land use; but it does not define land tenure. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 63 Table 4 . 2 L and Tenure Changes in Some BioCF Projects Community Land Individual Land Titled Land— Project Statutory Full Ownership Statutory Customary Customary Recognition of Recognition of User Rights User Rights User Rights User Rights Before: Government After: Statutory Before: Government land customarily used recognition of com- After: Government 1 by local communities munities’ customary user rights Before: Public land After: Forest licenses Before: Government under the control of granted by the After: Government the national forest national forest service 2 service to community forest associations, recog- nizing community user rights Before: Government Before: Untitled pri- After: Privately 3 After: Government vate land (customarily titled land used by an individual) Before: Vacant and After: Rural conces- Before: Government Before: Untitled pri- After: Privately classified forest lands sions, and statutory After: Government vate land (customarily titled land 4 recognition of cus- and Individuals used by individuals) tomary user rights *Note: The communities in project number two did not have customary user rights over the project areas before the project. These areas were public lands under the control and administration of the national forest service. The communities gained the statutory right to use the government land for the implementation of the BioCF project. the customary user rights of these individuals and/or prospect of developing a forest carbon project brought communities. about new incentives and resources for the formal rec- ognition of the customary user rights of these individ- 4.29 It is important to note that broad incentives uals and/or communities. Box 4.3 presents a detailed for the recognition of land-use rights in project areas example of the BioCF project in Niger. may also be in place in other development projects. What is unique to forest carbon projects is the intro- 4.31 Securing land tenure may also be achieved duction of a new incentive, the right to carbon, in through other means, including recognition of rights the bundle of land rights. Rights to carbon are well by the community (social recognition), the govern- defined from the beginning of the project. They also ment (political recognition), and formal legal sys- influence other user rights to the land, therefore con- tems (such as legal titles and contracts). In BioCF tributing to the overall process of securing land tenure. projects, processes to secure land tenure are triggered Four BioCF projects exemplify this situation. In pro- by the institutional arrangements used to clarify ject number two (see Table 4.2), the government also the carbon ownership and ensure adequate project granted user rights in the project areas to local partici- implementation. pants but, unlike the other projects, these individuals did not customarily use the areas before the project. Clarification of Carbon Ownership Rights 4.30 Carbon finance has prompted a positive 4.32 Clarifying carbon ownership rights allows change in land tenure security in the project areas. buyers and sellers to trade carbon as a commodity. In some cases, these areas were traditionally used by Since most countries currently do not have national individuals and/or communities for years before the legislation defining carbon ownership, projects rely project without being formally recognized by the titu- on private contracts and other project-level mecha- lar landowners (government and individuals). The nisms to determine ownership. Project entities make 64 | Chapter 4: Land-Related Issues Box 4.3 Evidence of Increased Land Tenure Security in the Niger Acacia Senegal Plantation Project This project aims to reforest over 8,000 ha of Acacia senegal on communal degraded land spread throughout the country. This project is expected to produce Arabic gum, sequester carbon, and have other local environmental benefits. The initiative is led by a local private company, Achats Service International, in partnership with the Ministry of Agriculture and Livestock and with support from the Ministry of Water, the Environment, and the Fight against Desertification. La n d Tenu re i n the P r oje ct A r e a The pre- and post-project land tenure situation is presented in the charts below. Before project preparation, there were three main types of land tenure in the project area: ■■ Untitled private land: Individual property recognized by the customary leaders but not formally titled accord- ing to statutory law. These lands are usually used as croplands. ■■ Vacant land: A communal area used by local farmers and other peasants where no proof of property rights can be established. These lands belong to the government. Nobody, including the government, has exercised ownership rights. ■■ Classified forests: These are lands formally titled to the government and managed by the forest department. These areas are protected areas in use mainly for conservation purposes. Figure 4 . 2 L and Tenure Situation Before and After Project Implementation ( 26 project sites ) Every site in the project area has gone through some level of change in its tenure status. There are two main trends: Privately Owned Land with Untitled State Land Recognized Private Land with Customary 29% Vacant Land Recognized Community 56% Customary User Rights Community 32% User Rights Classified 68% Forest 5% Classified Forests and Vacant Land and Untitled Private Land Untitled Private Land 3% 7% ■■ In untitled private lands (cropland), the process of statutory recognition of customary rights began as the individual’s private property right was assigned initially by customary leaders based on customary laws. ■■ In vacant lands and classified forests (community and government land), contracts were issued by the govern- ment to give community groups the right to exploit the land for a given renewable period of time defined by a management plan agreed to by the parties. Source: Adapted from Aquino et al., 2011. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 65 a full assessment of the land tenure situation in the represent their interests, they can mount efforts to project areas during the design phase, gathering the clarify land tenure. In addition, in many countries legal information that is available and consulting with where BioCF projects have been implemented, the local individuals to identify project participants and creation of community user groups and their registra- prepare the contractual agreements. The process of tion with the government is a requirement for grant- discussions and negotiations around designing these ing user rights on government land. In one project in contracts can create a forum where conflicts are re- Africa, for instance, the forest law requires individuals solved and the land tenure rights of the participants to organize community forest associations in order to is recognized by their peers and the government (see receive user rights concessions. These associations fa- Chapter 7 for more information). cilitate the decision-making process among the mem- bers of the community and contribute to clarifying 4.33 The institutional mechanisms put in place and securing land tenure in the project areas. to assert carbon ownership can support the broader process of clarifying land tenure. One project in 4.3.2 Challenges Related to the Africa exemplifies this situation. The project entity Land Tenure Rule used community participatory principles throughout 4.36 The BioCF projects have encountered three project design and implementation. Individuals from types of challenges in meeting the CDM requirements local communities in the project areas came together on land tenure. These issues are: a) poor registry sys- to discuss the opportunities that forest carbon finance tems to clarify the legal land tenure rights in an effec- presented and received guidance from the project enti- tive manner; b) lack of institutional capacity to put in ties on how to pursue carbon rights. The project enti- place the institutional instruments that help increase ties also facilitated the process of securing land tenure land tenure rights security; and c) conflicts over the by bridging the gap between the user groups (seven land tenure rights in the project area. These challenges cooperative societies) and the government. The direct are explained below. participation of government agencies and representa- tives from the beginning not only ensured that there Poor Registry Systems of Land were no conflicts between the project activity and the Tenure Rights national legislation but also provided for recognition 4.37 Poor cadastre systems can delay the clarifica- by the national government of the land tenure changes tion of legal land tenure rights. During the preparation on the ground.6 The government designated the pro- stage, BioCF projects go through an extensive assess- ject areas as communal holdings and recognized the ment of the land tenure situation in the project area user rights−including the right to carbon−of the seven to verify and clarify land ownership and user rights. cooperative societies that participate in the project. The For some projects, this is a straightforward process emphasis on participation, along with a formal process that merely entails the prospective project participant for communication among the cooperatives and with presenting their land ownership title. In projects that the government, have contributed to increased land involve multiple stakeholders in countries with pre- tenure security and the success of the project. carious land registry systems, however, clarifying land ownership and user rights can be a challenging task. Adequate Project Implementation In some areas, there are either no formal land titles 4.34 In forest carbon projects, adequate imple- or the type of titles presented by prospective project mentation requires measures to minimize tree mor- participants have been insufficient to prove security of tality and maximize growth rates. These goals can tenure. be achieved by creating or strengthening local com- munity organizations and involving the national land 4.38 In some cases, there have been conflicting agencies in project implementation. claims and multiple legal titles to the same piece of land. In one project in Central America, for example, 4.35 The impact of these actions can extend a poor land cadastre/registry system showed overlap- far. Once local people have stronger institutions to ping ownership in areas that were under consideration to be part of a BioCF project. To address this issue, the 6 LoA and approval is compensating for remaining uncertainty on carbon rights; this is an advantage compared to verified emission reductions in project developer was required to conduct an in-depth which there is no such endorsement. 66 | Chapter 4: Land-Related Issues A mosaic of land use in Ethiopia. legal review of these titles to ensure that there was meeting land tenure requirements have reduced the enough tenure clarity and security for project imple- feasibility of some projects. Delays in completing the mentation. Some areas had to be excluded from the land tenure clarification and security process have in project as it was impossible to determine with certain- some cases discouraged farmers from participating. ty who was the owner and/or user of the land. This Farmers with lower levels of land tenure security may process was time-intensive, costly, and considerably in the end opt for land-use activities that provide more reduced the project’s expected emission reductions. immediate returns. This is happening in some of the BioCF projects that are still going through user rights 4.39 Problems with the land records have led to recognition for some of their land areas. Therefore, the an extended clarification process and, in some cases, full extent of this challenge remains to be determined. a search for new lands. These challenges delayed pro- ject implementation and increased preparation costs. 4.42 Land tenure securitization also comes at a In some projects, carbon rights claims exacerbated the cost. It is not yet clear if investors mainly interested conflicts between the government/jurisdiction keep- in carbon emission reductions will be willing to take ing land registries and those claiming customary land on the risks and invest in mechanisms to increase land tenure. tenure security in project areas. For project entities with social and development objectives that go be- Weak Institutional Capacity yond carbon, developing forest carbon projects could 4.40 The land tenure rule can exclude farmers with be an opportunity to increase the land tenure security no formal land title from participating in A/R CDM of local populations while contributing to improving projects. This can happen in situations in which the their livelihoods and diversifying local sources of in- project entity and farmers (if involved in projects) lack come. (See Chapter 1 for more information.) the capacity to put in place, in an effective manner, all the institutional instruments that can lead to an Conflicts over the Land Tenure Rights increased level of land tenure security. For example, 4.43 As project areas become more productive and small farmers in developing countries often do not carbon revenues starts to flow, there is a risk that for- hold formal title to the land and are not able to satisfy est carbon projects could lead to land speculation and the CDM land tenure requirements. conflicts over the land and its resources. Since most BioCF projects are still at an early stage of implemen- 4.41 This poor institutional capacity can reduce tation, it is impossible at this point to determine the the potential benefit of the CDM to increase land full extent of this risk. In one project in Asia − where tenure security in projects where participant farmers the trees are partially grown, land is more produc- lack legal land tenure recognition. Complications in tive, and carbon revenues has started to flow—about BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 67 four percent of the total project land area became the For the CDM EB and/or the UNFCCC object of land tenure disputes. During implementa- ■■ Simplify the ¨1990 rule¨ by using more flexible cri- tion, farmers in the vicinity of the project who did teria regarding the date and nature of deforestation. not express interest during preparation subsequently A/R CDM rules should not exclude areas where de- claimed land tenure over lands legally owned by farm- forestation has happened after 1990 as long as safe- ers who were participating in the project. Because of guards are in place to ensure the integrity of these these challenges, these areas were dropped from the activities (see Paragraphs 4.11–4.21). project. It is yet to be determined whether or not oth- ■■ Facilitate the development of projects on agricul- er project areas in other countries will face this same ture lands in tropical climates by simplifying guid- problem. ance for the eligibility of temporary stocked lands facing long-term threats, such as slash-and-burn 4.44 To avoid this risk, the project entity for a pro- type of pattern (see Paragraphs 4.22–4.23). ject in Africa has actively worked to include all the members of the local communities in the project— ■■ Increase the flexibility of the project boundary rule and the benefits accrued from this initiative are shared and consider accepting evidence other than con- by the community as a whole. The revenues from the tracts signed by the participating farmers in two- project is reinvested in local development projects thirds of the project area before validation to prove with widespread benefits for the whole community. In that the project area is controlled by the project en- addition, all members of the community who pay a tity (see Paragraph 4.23 and Box 4.2). small fee for harvesting have access to fodder and grass in the project areas. 4.4 Recommendations 4.45 Below are recommendations that should be considered by the CDM EB/UNFCCC, policymak- ers, and climate change negotiators. Best practices for land eligibility and land tenure assessment at the due diligence and PDD preparation stages can be found in Chapter 8. 68 | Chapter 4: Land-Related Issues Greenhouse Gas Accounting 5.1 Introduction 5.1 The methodologies and guidance approved by the CDM EB form the basis for implementing climate change mitigation projects in each of the 15 sec- tors. A key element of the guidance is greenhouse gas (GHG) accounting—the rules and procedures that quantify emission reductions from project activities. 5.2 Accounting for GHG emission reductions in A/R projects was extremely challenging in the early days of the CDM. The first versions of the baselines and monitoring methodologies were too detailed and cumbersome. Only a few, highly skilled consultants were able to apply them, which sig- nificantly increased project preparation costs. The CDM EB has made significant efforts to simplify the methodologies, and the most recent versions are easier to follow. The BioCF has also contributed to these improvements by developing tools and providing feedback to the CDM EB on the applica- tion of the GHG accounting rules. 5.3 Additional simplification of the rules and further capacity building is needed to promote the A/R CDM in some countries and to scale it up significantly. Early registered projects still have to cope with the time-intensive and costly procedures of the first versions of the methodologies, including accounting for insignificant sources of emissions and leakage. Furthermore, some project developers lack the capacity to apply even the most simplified versions of the methodologies and the tools devel- oped to facilitate their application and to follow the most recent CDM EB guidelines and clarifica- tions. Projects located in countries with weak forestry sectors also lack the data needed to fulfill the requirements of the methodologies. 5.4 This chapter provides an overview of the implementation of GHG accounting procedures in BioCF projects and presents the main challenges project developers have encountered in doing BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 69 this. Section 5.2 describes the procedures for GHG by subtracting the GHG removals of the baseline and accounting. Section 5.3 outlines the challenges faced leakage emissions from the actual net GHG remov- by BioCF project developers when implementing the als by sinks from the project.3 The following sections GHG accounting procedures. Section 5.4 presents the present the steps required for these calculations in de- tools developed by the CDM EB, the BioCF, and oth- tail and discuss the challenges project developers have ers to facilitate GHG accounting. Finally, Section 5.5 faced in addressing them. Projects that started their offers recommendations for improvements. development recently (e.g., in the latest two years) may not face the challenges documented in this chap- 5.2 GHG Accounting ter. As early starters (i.e., before 2007), BioCF projects 5.5 The A/R CDM methodologies allow for have tested the first, highly-complex versions of A/R emission reductions accounting in a wide range of CDM methodologies. These projects have provided situations where non-forest lands can be converted feedback to the CDM EB for methodology consolida- to forest lands. At the time of writing, the CDM EB tion and simplification. To stress the relevance of such had approved 14 A/R CDM methodologies for large- improvements and make the lessons learned useful for scale projects and generated seven methodologies for new project developers, the simplifications done to small-scale projects.1 Most methodologies have more overcome particular challenges are highlighted where than one version.2 The BioCF has experience with applicable. In addition, a summary of CDM EB guid- eight methodologies for large-scale projects and two ance, tools, and clarifications published up to August for small-scale projects. 2011 are presented in Annex 3. 5.6 The methodologies provide procedures to 5.2.1 Stratification and Sampling account for GHG emissions in the baseline (ex-ante for GHG Estimation estimations) and in the project scenario (ex-post); they 5.8 Project areas are usually heterogeneous in contain provisions for developing and implementing terms of micro-climate, soil condition, and vegetation a monitoring plan. More specifically, the GHG ac- cover; they can also differ in tree species, forest age, counting rules in A/R projects allow for estimating: and other characteristics. Stratification is an important ■■ Carbon stock and changes in stock in the baseline procedure that supports GHG accounting by taking scenario; into account the factors that influence forest growth. ■■ Carbon stock and changes in stock in the project Stratification is capable of improving the accuracy and scenario; precision of carbon estimations by ensuring that the areas of an A/R project with common characteristics, ■■ GHG emissions into the atmosphere that re- such as site productivity, species, land use changes, sult from activities undertaken as part of project and management measures, are grouped together. implementation; ■■ Leakage, which refers to increases in GHG emis- 5.9 The carbon stocks for large forest areas are sions outside the project boundary that are measur- usually estimated from measurements in permanent able and attributable to the project. sample plots. Sampling is a key procedure for cost- effective and accurate estimation of the carbon con- 5.7 The “net anthropogenic greenhouse gas re- tent in different strata. More sample plots are needed movals by sinks� resulting from a project are estimated for projects with high variability, but the number of sample plots can potentially be reduced through strat- 1 Small-scale projects are those reducing less than 16,000 tCO2e per year. ification. Because of the lower variance within each Developers are allowed to apply simplified methodologies. The CDM EB generates small-scale methodologies based on the large-scale ones, homogeneous unit, stratification helps either increase taking into account the CDM modalities and procedures for small-scale the measuring precision with minimal cost increment projects (see Chapter 6). The CDM EB merged three approved large- or reduce the monitoring cost without reducing meas- scale methodologies along with a new proposed methodology, forming two consolidated methodologies. uring precision. The CDM requires projects to com- 2 For example 11 out of the 21 approved methodologies have at least ply with a specified precision level for carbon stocks 3 versions. One methodology for small-scale projects has 6 versions. A version of a methodology expires when a new version is approved. Since projects have to be submitted for registration with a valid meth- 3 “Actual net greenhouse gas removals by sinks� is the sum of the verifi­ odologies, developers have to be aware of changes in versions of meth- able changes in the carbon pools within the project boundary, minus the odologies while preparing projects. increase in emissions as a result of the implementation of the project. 70 | Chapter 5: Greenhouse Gas Accounting estimation and to provide guidance on sampling that Above-ground and Below-ground Biomass is consistent with the Intergovernmental Panel on 5.13 The above-ground5 carbon pool corresponds Climate Change’s (IPCC) Good Practice Guidance. to vegetation (e.g., stems, branches, and leaves that are above the ground); the below ground carbon pool 5.10 Project developers may undertake ex-ante and corresponds to roots. Together these pools account ex-post stratification as per the methodology guidance. for more than 80 percent of total carbon in a forest Ex-ante stratification aims to estimate the carbon and, because of their relevance, they are measured and stock changes that are presented in the PDD. Ex-post monitored in all BioCF projects. stratification allows project developers to address the possible changes in project variables in comparison to 5.14 Procedures for estimating changes in bio- the project design and to account for likely changes mass6 are based on forestry inventory methods. For in carbon stocks during project implementation. This the ex-ante estimation of biomass prior to project takes into account data from the monitoring of the implementation, project developers usually use data A/R CDM project activity and variations in carbon available on species and forest types from a proxy pro- stock changes in each stratum from the previous mon- ject or literature. The appropriateness of the estimates itoring event. is reviewed as part of project validation. The ex-post biomass estimates are based on measurements taken 5.11 In May 2007, the CDM EB published the from sample project plots, following the procedures first version of the tool for calculating the number of the monitoring methodology.7 These measurements of sample plots for measurements within A/R CDM are subsequently reviewed by independent auditors as projects (UNFCCC, 2007a). In 2009, it published a part of project verification. second version as a way to provide guidance on loca- tion of permanent sample plots for data collection and 5.15 The ex-ante estimation of changes in the also to clarify some formulae with respect to the first above-ground and below-ground biomass can be ac- version (UNFCCC, 2009e). More recently, in 2010, complished using two methods: the biomass expan- the CDM EB published a third version of the tool in sion factor method8 and the allometric method. When which a simplified method to calculate the number the biomass expansion factor method is used, project of sample plots is presented; this version introduces a developers use data on tree diameter and height from simplified equation that applies in cases of small sam- forestry inventory to calculate the tree volume in cubic pling fractions and streamlines the general presenta- meters or biomass in tonnes at each verification inter- tion of the tool to be consistent with other CDM EB val. The difference in the values of the two verification tools (UNFCCC, 2010e). intervals is used to assess the mean annual increment, and appropriate expansion factors are used to extrapo- 5.2.2 Carbon Stock Changes late from stem volume or biomass to the biomass of 5.12 Similar to the estimation of forest growth, branches, leaves, and roots. While some BioCF pro- the estimation of carbon stock changes is based on jects have access to biomass expansion factors from forest inventory data. Changes in carbon stocks are their national forest inventory, wood density and measured in five carbon pools: above-ground, below- carbon fraction are usually taken from IPCC’s Good ground, deadwood, litter, and soil. Methodologies Practice Guidance. When using the allometric method, specify which carbon pools need to be accounted project developers use growth models of species or for- for,4 and project developers can choose a methodol- est stands published in the literature, or they develop ogy that excludes a carbon pool that is not of interest. their own growth models from harvesting, drying, and Neglecting a carbon pool, however, requires project developers to demonstrate that the pool in question 5 The above-ground biomass involves trees and non-tree (herbaceous) will not become a source of GHG emissions attrib- vegetation. uted to project implementation. 6 Estimating changes in biomass involves assessment of biomass in tonnes based on the wood volume in cubic meters estimated from the forest inventory. The biomass estimated is converted into carbon, which varies among species and is about 50 percent of the biomass. 4 As an example, Annex 4 of this report presents a summary of the car- 7 Monitoring is a central part of both a CDM methodology and a PDD. bon pools that must be accounted for under recent versions of the A/R 8 The Biomass Expansion Factor is used for estimating trees’ aerial part; methodologies. the Root-to-Shoot Factor is used for estimating the roots. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 71 weighing a small number of trees representing all di- 5.19 The CDM EB has also provided guidance to ameter classes. facilitate the conservative choice and application of default data in estimation of net GHG anthropogenic 5.16 About half of the BioCF projects apply both removals by sinks. In this guidance, the CDM EB the biomass expansion and allometric equation meth- provided some approaches for the conservative choice ods for forest growth estimation in the project scenar- of default data. In the most recent version of this io. This is because these projects plant some portion of guidance, also published in 2009, the CDM EB pro- their lands with commonly planted species for which vided two additional approaches (UNFCCC, 2009b; allometric equations exist. Projects mainly planting UNFCCC, 2009d; UNFCCC, 2009j). native species, however, apply the biomass expansion factor method as no specific allometric equations are 5.20 In addition, the CDM EB has provided guid- available. The two assisted natural regeneration BioCF ance to facilitate accounting of the changes in carbon projects estimate the forest growth by using published stocks of existing trees. In 2009, it published both data on the particular type of forest being regenerated guidelines to assess whether these changes in carbon (e.g., from IPCC databases).9 stocks may be deemed insignificant and a tool to fa- cilitate the estimation of changes in the carbon stocks 5.17 The CDM EB has introduced several simpli- of existing trees and shrubs in case they are significant fications, clarifications, and guidance with respect to (UNFCCC, 2009c; UNFCCC, 2009h). the estimation of carbon stock changes. For example, in 2009 the CDM EB published the first version of a Minor Carbon Pools tool that facilitate the estimation of changes in the car- 5.21 Minor carbon pools (e.g., litter, deadwood, bon stocks of existing trees and shrubs within the pro- and soil carbon) account for about 20 percent of the ject boundary (UNFCCC, 2009a). A second version carbon in a forest. Some methodologies require pro- of this tool was published in 2010 to incorporate sev- ject developers to provide evidence of the degrada- eral simplifications, including: (i) applicability to both tion status of the project lands and demonstrate that the baseline and the project scenario; (ii) adoption of the carbon content in the minor pools will decrease a default approach to estimate carbon in shrubs based or increase less in the absence of the proposed A/R on fraction of forest biomass; (iii) presentation of a CDM project; developers applying these methodolo- streamlined mathematical notation and equations for gies don’t have to account for minor carbon pools. In estimations; and (v) introduction of changes in carbon methodologies in which the carbon content of these stocks, rather than the carbon stocks themselves as in pools is expected to increase as a result of project im- the first version of the tool (UNFCCC, 2010c). plementation, project developers can decide whether or not to account for these pools. 5.18 More recently, in 2011, the CDM EB amend- ed the second version of the tool to make the follow- 5.22 Soil carbon can significantly increase within a ing changes: (i) include the estimation of the means few years of tree planting as a result of project imple- and variances of tree biomass at stratum level and at mentation. The changes in soil organic carbon depend project level; (ii) allow for tree biomass estimation on upon the type, depth, and bulk density of the soil and a per hectare basis, so that plotless sampling methods the type of vegetation on the site. The assessment of can be applied; (iii) add an approach for estimating soil organic carbon can be done through empirical changes in biomass based on a successive measurement methods, based on research and published data that of sample plots; (iv) update entries in data and param- compares the non-forested and forested lands in the eter tables as a way to provide clearer guidance in com- project area, or by conducting sample studies to es- monly encountered field situations; and (iv) propose timate the soil organic matter in sample plots at two bark corrections to facilitate estimations in cases where points in time (e.g., prior to the start of the project a volume table based on under-bark volume is used in and subsequent to the project implementation after conjunction with biomass expansion factor based on a 5- or 10-year interval). The CDM EB published a over-bark volume, or vice versa (UNFCCC, 2011c). tool10 in 2010, based on a method proposed by the 9 To be conservative and to address lack of data issues, projects planting a group of species often estimate the biomass growth of the entire group 10 Tool for Estimation of Change in Soil Organic Carbon Stocks due to the based on some main species. Implementation of A/R CDM Project Activities. 72 | Chapter 5: Greenhouse Gas Accounting IPCC, to assist project developers in applying a default method to es- timate changes in soil organic carbon. By us- ing this approach, pro- ject developers can avoid the cost of monitoring the soil carbon pool. Considering the small size of these minor pools and the transaction costs of monitoring and Measuring the litter measuring them, only carbon pool during forest monitoring four of the 21 projects training in Kenya. in the BioCF portfolio account for soil carbon; two account for litter and deadwood. 5.23 In addition to the guidance included in methodologies to ac- Photo: Abdulla Diku count for minor carbon pools, the CDM EB has published tools to fa- cilitate estimations. On deadwood, for example, in 2008 it published a in the baseline and is clearer than the previous version tool to facilitate the estimation of carbon stocks, re- as it introduces editorial changes and corrections in movals, and emissions from the dead organic matter the parameters used for calculations. In addition, in carbon pool (UNFCCC, 2008d). A revised version of the same year, the CDM EB published a spreadsheet this tool was published in 2010 to incorporates several to facilitate the calculation of changes in soil organic simplifications, including: (i) a streamlined tool that carbon stock (UNFCCC, 2011b). reflects only procedures that are relevant for the dead wood carbon pool; (ii) simplified methods to estimate 5.2.3 Project Emissions at carbon stocks in some components of dead wood; and Implementation (iii) the option to estimate deadwood and litter based 5.25 Emissions of greenhouse gases into the at- on default factors (UNFCCC, 2010d). mosphere result from activities undertaken as part of project implementation (e.g., site preparation, bio- 5.24 With regards to the soil organic carbon pool, mass burning, use of nitrogenous fertilizers, and use the CDM EB published in 2007 procedures to deter- of fossil fuels in equipment, machinery, and vehicles). mine the significance of this carbon pool and to en- Early versions of methodologies included all sources able developers to neglect insignificant carbon pools. of emissions in the project implementation. In 2007 (UNFCCC, 2007e). In 2010, it published a tool to fa- and 2008, the CDM EB approved guidance to ignore cilitate the estimation of changes in soil carbon stocks insignificant emissions. In more recent versions of the due to the implementation of the project. A revised methodologies, GHG emissions associated with clear- version of this tool was published in 2011. This new ance of herbaceous vegetation, fossil fuel combustion, version restricts the application of the tool to land sub- emissions from nitrogenous fertilizers, and emissions jected to certain land uses and management practices of nitrous oxide from decomposition of litter and BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 73 fine roots of nitrogen-fixing trees are considered in- 5.2.4 Leakage significant and can be ignored (UNFCCC, 2007b; 5.30 Leakage includes the use of fossil fuels in UNFCCC, 2008e; UNFCCC, 2008g; UNFCCC, the transport of products and personnel to and from 2008h). Furthermore, small-scale A/R projects do not project sites, collection of wood from non-renewable have to estimate and measure emissions from project sources for fencing posts, and displacement of activi- implementation thanks to the simplified modalities ties that lead outside the project area to conversion and procedures. of forests to land uses such as cropland, grazing, and the collection of fuel wood. The CDM EB approved 5.26 The most frequent source of emissions in the guidance in 2008 to ignore certain sources of leak- BioCF portfolio is biomass burning resulting mainly age, including fossil fuels used in transport and the from site preparation activities. More than 70 percent use of wood for fencing posts (UNFCCC, 2008g; of the projects in the portfolio account for this source UNFCCC, 2008h).11 As part of the applicability con- of emissions and 40 percent account for the burning ditions, some methodologies do not allow for leakage of fossil fuels. caused by activity displacement, meaning that the 5.27 Until recently, projects registered with early A/R project has to ensure at least the same amount of versions of the methodologies had to account for goods and services as was produced pre-project. sources of emissions later deemed insignificant by 5.31 The CDM EB has been very active in pub- the CDM EB (i.e., in 2007 and 2008). Developers of lishing guidance and tools to facilitate leakage estima- these projects had to apply the CDM EB tool devel- tion. For example, in 2006 the CDM EB published oped to facilitate the estimation of emissions from fos- guidelines to neglect market leakage. In 2007, it pub- sil fuels and fertilizers (UNFCCC, 2007d; UNFCCC, lished the first version of a tool to facilitate the estima- 2007f ). In 2011, however, the CDM EB published tion of emissions related to grazing displacement; this guidelines under which recent version of methodolo- tool included very detailed and complex procedures gies can be applied at monitoring by registered pro- for the calculation of leakage. The second version of jects (UNFCCC, 2011e). this tool, published in 2008, was even more detailed, 5.28 Similarly, the CDM EB published a tool to including leakage due to biomass loss resulting from facilitate the estimation of emissions from biomass livestock units and/or fodder displaced to perennial burning. The first version of this tool, published in croplands. 2007, accounted for emissions from clearing, burning, 5.32 In May 2008, the CDM EB published a tool and decay of existing vegetation (UNFCCC, 2007k). to facilitate the calculation of leakage from increased A revised version was published to reflect the guid- use of non-renewable woody biomass12 and deemed ance that the CDM EB previously provided regard- insignificant emissions from the use of fossil fuel due ing the insignificance of emissions from removals of to transportation (outside and within the project herbaceous vegetation (UNFCCC, 2008f ). In 2009, boundary). The most recent guidance on leakage was the CDM EB split the information provided in the published in 2009, covering conditions under which second version of the tool among several documents leakage from pre-project grazing and crop cultivation in order to allow for their separate application. This can be deemed insignificant (and therefore not count- resulted in the publication of a third version of the ed) . It also published a tool to estimate leakage from tool, which is the most recent at the time of writing pre-project agricultural activities, which covers both (UNFCCC, 2009i). 5.29 In addition, in 2009, the CDM EB went 11 Previously, in 2006, the CDM EB allowed project developers to neglect further by publishing guidance to neglect emissions market impacts attributable to the A/R CDM project from the sources of leakage. Market leakage includes effects on the price, supply, or de- from the removal of existing vegetation due to site mand of goods. One example is the manufacture and sale of wood- preparation (UNFCCC, 2009h). It also published a based products produced from wood harvested from the CDM A/R newer version (3.1.0), to provide guidance solely on project activity (UNFCCC, 2006f). 12 In June 2011, the CDM EB approved methodology ARAM0014, estimation of non-CO2 emissions from biomass burn- “Afforestation and Reforestation of Degraded Mangrove Habitats,� ing (UNFCCC, 2011a). which applies a simplified procedure to estimate leakage due to dis- placement of fuel wood collection, unless it is demonstrated that there is no fuel wood collection in pre-project conditions. 74 | Chapter 5: Greenhouse Gas Accounting Box 5.1 GHG Accounting in the Humbo Assisted Natural Regeneration Project, Ethiopia The Humbo project is the first large-scale A/R CDM project registered in Africa. The project is undertaken on 2,728 ha of land in the vicinity of Humbo District in southwestern Ethiopia. The project entity is World Vision Australia/Ethiopia, which works in close collaboration with local communities and the Ethiopian government’s Environment Protection Authority. The project was initiated on December 1, 2006, and according to the PDD expects to sequester 880,000 metric tonnes of CO2e over 30 years. The project addresses the severe threat of an unsustainable use of land that would likely lead to desertification. Ethiopia has in recent decades had severe soil erosion that has affected land productivity and the livelihood of poverty-stricken rural communities. Prior to the project, the forest was in a degraded state because of unsus- tainable charcoal production, fuel wood collection, and grazing. The project helped to end these unsustainable land-use practices by implementing measures to assist in the natural regeneration of the degraded forest stock. Communities were encouraged to set aside degraded lands to allow for natural regeneration. They implement- ed the farmer-managed natural regeneration approach to support the regeneration of more than 45 native tree species. This approach involves protecting and managing trees and shrub root stock, planting of native tree species, and establishing live fences. The project also supports surplus grass, allowing farmers to cut and carry fodder from the lands set aside; it generates fuel wood from pruning and plantations of fast-growing species. GHG A cc oun ti ng The project applies the Afforestation/Reforestation Approved Methodology # 3 Version 4 (AR-AM0003 v4). This methodology requires developers to demonstrate that, in the baseline scenario, the project land is overgrazed and degraded as a result of clearance for fuel wood purposes. The methodology accounts for above-ground and below-ground carbon pools. Ch a nges i n A b ove- a nd Belo w - g r o u n d C arb o n Po o l s In the absence of the project, the land and vegetation were expected to degrade under continued anthropo- genic pressures. For this reason, net changes in GHG removals by sinks in the baseline are considered zero. While the project interventions led to the establishment of the forest and contribute to increasing all carbon pools, the project only accounts for changes in above-ground and below-ground carbon pools. The project does not account for increases in soil organic carbon, deadwood, and litter carbon pools. This is conservative considering that these pools would have decreased further in the absence of the project. P roje ct Emi ss ions The project emissions are considered zero. The reasons for this are several: (i) the project did not practice bio- mass burning; (ii) it used manual methods of site preparation and transport, avoiding the use of fossil fuels for machinery and transport; and (iii) its share of nitrogenous species is insignificant. L e a k a ge The project uses live hedges for fencing; it therefore does not require wood for fencing. The project uses manual methods to transport seedlings and therefore does not use fossil fuels for transport. The project also produces more fodder and fuel wood relative to the baseline. There is also adequate grazing land outside the project. For these reasons, leakage from displacement of grazing and fuel wood collection activities are considered zero. The project will, however, monitor grazing and fuel wood collection activities for five years until the first verification to demonstrate that leakage is not expected to occur during the project period. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 75 pre-project grazing and crop-cultivation displacement. 5.35 Box 5.1 presents an example of ex-ante es- This last tool supersede the tool to estimate leakage timation of GHG emissions in a large-scale BioCF from pre-project grazing displacement previously pub- project. lished in 2008. (UNFCCC, 2006f; UNFCCC, 2007j; UNFCCC, 2008b; UNFCCC, 2008c; UNFCCC, 5.2.5 Monitoring 2009k; UNFCCC, 2009l; UNFCCC, 2009m; 5.36 Monitoring requires collecting and archiving UNFCCC, 2009q; UNFCCC, 2009r). data needed to calculate the actual net GHG removals by sinks during the crediting period. The monitoring 5.33 Leakage in small-scale projects receives special plan, which is part of the PDD, describes techniques treatment. Estimating leakage is not required if pro- and methods for sampling and measuring carbon ject developers can demonstrate that their activities do stock changes in the carbon pools, emissions from not result in displacements of people or activities (i.e., project implementation, and leakage. These meth- agriculture, fuel wood collection, and cattle raising, ods should reflect commonly accepted principles and among others) that generate loss of carbon outside the criteria concerning forest inventory. Small-scale pro- project boundary. Where required, project developers jects apply simplified procedures for monitoring. The can apply default factors for leakage estimation. For methodologies state the level of accuracy that project example, if certain parameters13 are under 10 percent, developers must meet when measuring carbon pools leakage can be considered insignificant. If the value of during project monitoring, and project developers these parameters is greater than 10 percent and less have to explain how they achieved such a level. than or equal to 50 percent with respect to the ex-ante estimation of GHG emission reductions, then the av- 5.37 At verification, the project developer must erage annual leakage can be calculated as 15 percent of submit to the DOE a monitoring report that shows the annual GHG emission reductions from the pro- the calculation of GHG removals from the project ject. Most of the small-scale BioCF projects applied and its monitoring. The DOE will then assess the the default method to estimate leakage as they found calculations and compliance of the monitoring with the value of the parameters exceeded the 10-percent the monitoring plan and the applied methodology. threshold. The project developer, therefore, must ensure in the monitoring report that appropriate statistical methods 5.34 In the BioCF portfolio, projects estimate and were used to (i) address uncertainties in the measure- measure the different sources of leakage. Until recent- ments and estimates of carbon stocks and emissions in ly, early projects had to account for the sources of leak- an effective manner; (ii) report on and justify changes age that were deemed insignificant in 2007 and 2008. in circumstances within the project boundary (e.g., As stated above, in September 2011 the CDM EB changes in legal title to the land or rights of access to allowed registered project developers to apply recent the carbon pools); and (iii) report on the procedures versions of methodologies at verification. For example, applied during monitoring implementation to assure two early projects still measure leakage from fossil fuel the quality of the monitoring process (UNFCCC, displacement and four projects estimate leakage from 2006b). In one of the BioCF projects, for example, using posts for fencing. In five projects, it is still un- the project developer is required to report on the certain whether leakage from transportation and use implementation status of its more than 250 discrete of posts must be accounted for since these source of parcels by comparing among plans in the PDD, what leakage are inconsistently mentioned throughout the was achieved by verification, and what remains to be methodology. Other BioCF projects account for leak- finished. For each of the sites, the project developer age from activity displacement. For example, about 70 should include in the monitoring report such infor- percent of the projects account for grazing displace- mation as the date of implementation, planting den- ment, 44 percent account for agricultural displace- sity, number of seedlings, species planted, survival rate ment, and 45 percent account for displacement of fuel of plantings, disturbances, and boundaries, as well as wood collection. specific interventions and management activities (e.g. pruning, coppicing, and planting). 13 For example: the crop area displaced in relation to the total project area; the number of animals displaced in relation to the total average grazing capacity; and the average number of domesticated roaming animals displaced. 76 | Chapter 5: Greenhouse Gas Accounting 5.38 To assess the accuracy of the reported emission It also has allowed registered projects to apply specific reductions, DOEs not only undertake desk reviews of versions of methodologies at verification in order for the monitoring plans but also check the quality of a them to take advantage of recent rule simplification sample of the data collected to confirm that the re- and consolidation (UNFCCC, 2011e). ported numbers are free of errors, omissions, and mis- statements. The lower the confidence of a DOE in the 5.40 The monitoring plan also describes the project monitoring system, the larger the sample they Quality Assurance/Quality Control (QA/QC) pro- will need to take; this then increases verification costs. cess the project developer must undertake to ensure The DOE also requests evidence of status of project reliable field measurements. Respecting the QA/QC implementation and supervises all field measurement procedures is key to ensuring good quality project steps. While some problems and uncertainties can be monitoring data; if these are followed, then there addressed during the verification process, if the prob- should not be any problem at verification. Projects lems are too numerous the DOE might conclude that differ in the type of QA/QC measures proposed. the reported certified emission reductions cannot be Some propose applying good practices used in tradi- confirmed with any reasonable level of assurance. This tional forest inventory; others go beyond this. Some might lead to loss of CERs or—in the worst case sce- of the measures proposed by BioCF projects are pre- nario—no request for issuance of CERs. sented in Table 5.1. 5.39 At verification the DOE will identify and 5.3 Challenges inform the project participants of any concerns re- 5.41 In the BioCF experience, the major chal- lated to the deviation from the PDD at project imple- lenges project developers face when applying GHG mentation. In determining whether the changes raise accounting methodologies are complex and unclear concerns, the DOE shall assess whether the changes accounting procedures, limited data and information impact the additionality of the project, the scale, and on forest growth parameters, and low technical capac- the applicability and application of an approved meth- ity of implementing entities. The gap between project odology (UNFCCC, 2009f ). If the identified changes developers’ capacity to implement GHG accounting are major the DOE should notify and seek guidance procedures and the methodological requirements is re- from the CDM EB on their acceptability. It must also flected in the CARs and CLRs generated by the DOEs submit a request for approval of the monitoring plan during validation of BioCF projects (Table 5.2). (UNFCCC, 2009g). The CDM EB has recently pub- lished guidelines on assessment of different types of 5.42 The challenges encountered by project devel- changes as a way to assist DOEs in the identification opers in addressing the different steps of the GHG of situations that raise concerns (UNFCCC, 2011f ). accounting rules are presented below. Table 5.1 Measures for Qualit y Assurance and Qualit y Control of the Monitoring Process proposed in BioCF Projects Steps of the Quality Assurance and Quality Control Measures Monitoring Plan Data collection ■■ Applying standard operational procedures for each step of the field measurements ■■ Training field staff on forest carbon monitoring, including data entry, analysis, and archiving ■■ Re-measuring of sampling plots by external collaborators (e.g., local universities) ■■ Checking that all parameters have been measured and reported with correct frequency Data handling and storage ■■ Checking some of the data in the database against raw field data ■■ Observing process and quality checks to determine the possibility of errors being introduced Calculations ■■ Rechecking calculations Preparation of the monitor- ■■ Checking completeness of the variables measured and the estimations ing report BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 77 5.3.1 Applicability Conditions of process. For example, some methodologies are condi- Methodologies tional on having evidence of degradation status in the 5.43 As stated in Chapter 2, project developers baseline scenario and/or demonstrating the level of consider methodology selection a complex task. One soil disturbance caused by site preparation. The chal- reason for this is that assessing some applicability con- lenges to apply these two applicability conditions are ditions requires undertaking a time-and-data intensive discussed below. Table 5. 2 Issues Highlighted in the Validation of BioCF A / R CDM Projects Type of Problem Frequency Example Tools incorrectly applied or ignored when: ■■ Selecting the baseline scenario Tools not followed or 81% ■■ Calculating emissions and leakage, including their significance incorrectly applied ■■ Calculating the number of sampling plots ■■ Discarding carbon pools Lack of evidence for: Lack of appropriate 64% ■■ Justifying that a carbon pool can be neglected evidence ■■ Using default parameters instead of local data Poor understanding ■■ Lack of general information on the project 55% of CDM requirements ■■ Inconsistency between the PDD and the management plan Lack of data for: ■■ Estimating native species growth ■■ Calculating emissions and leakage Problems with data 55% ■■ Justifying the selection of sources of leakage ■■ Justifying baseline stratification ■■ Lack of parameters such as Biomass Expansion Factor, Root to Shoot, Mean Annual Increment, and Current Annual Increment for certain species included in the project Inconsistencies related to: ■■ Species ■■ Parameters used for calculations Inconsistency ■■ Sources of leakage 55% throughout the PDD ■■ Stratification criteria ■■ Crediting period ■■ Project management characteristics ■■ Monitoring parameters Lack of references in: ■■ Calculations ■■ Default parameters for calculations Lack of references 27% ■■ Participatory Rural Appraisal ■■ Land degradation status assessment ■■ Criteria applied for stratification Weak explanations for: Weak explanation of ■■ Estimating carbon stocks and stock changes in baselines and project scenario 27% uncertainties ■■ Estimating leakage ■■ Calculating the number of sampling plots Application of conservativeness for: Weak consideration ■■ Selecting parameters for estimating baseline and projects carbon stock changes of the conservative- 27% ■■ Selecting certain species as representative of a group of species (especially in ANR ness principlea projects) Issues poorly justified in the PDD: ■■ Procedures for calculation of emission reductions Lack of transparency 27% ■■ Procedures for stratification ■■ Project planning, including planting schedule a The principle of conservativeness requires developers to be cautious when using non-site specific information by applying data that usually results less favorably for projects. 78 | Chapter 5: Greenhouse Gas Accounting Assisted Natural Regeneration of Degraded Lands in Albania Project. 5.44 Demonstrating land degradation has been a woody vegetation resulting from such activities, at a frequent challenge in the BioCF portfolio as most of set of randomly selected points. The CDM EB rec- the projects are on degraded lands. Project develop- ommends sampling on a fixed grid place with a ran- ers were not only challenged to assess the degradation dom start point, with measurement of all trees within status of individual parcels of lands but also to demon- some specified radius of a grid point. The guidance strate that the lands are still degrading. Some projects goes even further, indicating the number of trees and managed to provide documented evidence14 of this shrubs these measurement parcels should have. by using official data on soil degradation. In coun- tries where such research has not been done, however, 5.46 Although such a tool allows project develop- meeting this requirement remains a challenge. ers to use visual observation, through participatory rural assessment, of selected degradation indicators16 5.45 The CDM EB published a decision tool to when documented land degradation classification17 is facilitate the identification of degrading or degraded not available, early projects have found it challenging lands. Problems arise, however, in cases where the to apply this guidance (UNFCCC, 2008f ). early versions of the methodology also prescribe indi- cators of soil degradation15 as it is difficult for project 16 For example, lands can be deemed degraded if one of the following developers to determine which indicators have to be indicators are observed: (i) reductions in topsoil depth; gully, sheet or demonstrated. One example is the type of evidence rill erosion, landslides, or other forms of mass-movement erosion; (ii) decline in organic matter content and/or recession of vegetation cover of land degradation requested in the CDM EB’s guid- as shown by reduction in plant cover or productivity due to overgraz- ance on conditions under which the change in carbon ing or other land management practices, thinning of topsoil organic stocks in existing live woody vegetation are insignifi- layer, scarcity of topsoil litter and debris; (iii) presence of plant species locally known to be related to the condition of degradation of the land cant. The guidance suggests that developers provide or field/lab tests showing nutrient depletion, salinity or alkalinity, toxic photographic evidence of the intensity/severity/fre- compounds, and heavy metals; and (iv) a reduction in plant cover or productivity due to overgrazing or other land management practices quency of the activities, and/or the state of existing 17 Classification can be from a verifiable local, regional, national, or inter- national land classification system or peer-review study, participatory ru- 14 Alternatively, project developers can demonstrate land degrada- ral appraisal, satellite imagery, and/or photographic evidence in the last tion through a comparative study of the proposed project area with 10 years. If the land degradation classification is older than 10 years, reference degraded lands. developers must provide evidence either that land degradation drivers 15 For example, see the most recent version of methodology ARAM0004 are still present or that there are not sufficient management interven- v4. tions to revert to degradation (UNFCCC, 2008f). BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 79 5.47 Similarly, demonstrating the level of soil dis- emission reductions results, to be able to neglect those turbance caused by site preparation is difficult to do that are insignificant. This would also reduce transac- as project developers need to prove that the rate of tion costs. loss of carbon stocks in mineral soils due to erosion will not permanently increase above baseline rates— 5.3.2 Stratification and Sampling Design thus enabling them to conservatively neglect the soil 5.49 Stratification requires efficient data collection carbon pool.18 Some methodologies require project on land use and vegetation and, therefore, a good un- developers to demonstrate that soil preparation will derstanding of stratification procedures. This is some- not cause long-term net decreases in soil organic car- thing that most project developers do not have. Project bon stocks or increase non-CO2 emissions from soil. developers struggle with understanding the fact that Some methodologies do not allow for practices that A/R projects require stratification in several steps of drain soils, and limit soil preparation for planting to the GHG accounting process.19 In fact, more than half no more than 10 percent of the project area. This ap- of the 11 projects reviewed received CARs and CLRs plicability condition has also challenged project de- addressing (i) poor definition of critical variables de- velopers seeking to plant agricultural crops within the termining the carbon stock changes in different strata; tree rows as a way to improve their cash flow. From (ii) stratification criteria not properly applied when an environmental point of view, this condition may defining strata; (iii) stand models not clearly defined also limit long-term GHG removals from projects as in the PDD; and (iv) project developers not following it prevents developers from (i) using tillage measures the stepwise approach to stratification suggested in the to break sub-surface soil pans and other site-specific methodologies. factors that hinder tree growth, and (ii) applying inter- cropping practices, which can conserve moisture and 5.50 In addition, project developers often required improve long-term nutrient cycling. assistance from the BioCF’s methodology team for the ex-ante determination of the number of sample 5.48 Some of the applicability conditions also plots. The CDM EB published a tool in 2007 to fa- overlap other A/R CDM requirements, creating con- cilitate this calculation, and a simplified procedure fusion for project developers and leading to repetition was published in November 2010. The BioCF, along of arguments within the PDDs. For example, apply- with Winrock International, also published an Excel- ing certain methodologies requires project developers based tool, Winrock Terrestrial Sampling Calculator, to to demonstrate the low natural regeneration potential present this procedure in a user-friendly Excel-based of the baseline scenario because of ecological barriers, spreadsheet (Walker, 2007). Still, these tools are not technological limitations, or anthropogenic pressure. a substitute for project developers’ capacity on forest This is also required in the land eligibility assessment, inventory. Project entities with little forest experience, in the determination of baseline, and in the demon- in particular, are challenged in applying the CDM stration of additionality. The CDM EB, therefore, EB guidance on stratification and sampling design should make efforts to streamline the applicability because this requires a very specific knowledge niche conditions of methodologies and continue with con- that cannot be easily developed. solidation of similar methodologies. It should, for ex- ample, engage research institutions to assess the signif- 5.3.3 Forest Growth icance of certain applicability conditions in terms of 5.51 The data and information required for esti- mating biomass growth are difficult to obtain in devel- 18 Other conditions shall be met in order to demonstrate that the rate of oping country contexts, particularly for native species. loss of carbon stocks in mineral soils due to erosion is not permanently increased above the baseline. These are: (i) removals of existing biomass For most projects, site-specific information on forest not occurring on more than 10 percent of the project area (unless it can be demonstrated that slash and burn is a common practice, and that the rate of loss of carbon stocks in mineral soils is not increased above 19 For example, a first stratification is required for efficient estimation of the baseline rates for more than five years after project start), and (ii) the biomass in the baseline. The ex-ante stratification is another layer that if ploughing/ripping/scarification is used for project preparation, of stratification that incorporates the variability of the baseline and the it shall follow the project contour. However, there are two additional stand models of the project scenario. The ex-post stratification is an requirements that project developers must meet in order to be able to update of the ex-ante stratification to incorporate further variability neglect the soil carbon pool: (i) soils do not include organic matter (e.g., in carbon stocks. Project developers have to update the stratification peat lands) and are not wetlands, and (ii) fine litter shall remain onsite and sampling design before the monitoring period implementation in (UNFCCC, 2008f). preparation for each verification event. 80 | Chapter 5: Greenhouse Gas Accounting Box 5.2 Challenges to Determining Tree Biomass Stock and Increment in the Himachal Pradesh Reforestation Project— Improving Livelihoods and Watersheds The Himachal Pradesh project in India is reforesting about 4,000 ha of degraded lands in the watersheds of the Mid-Himalayan region. The project is being developed under the framework of the World Bank Mid-Himalayan Watershed Development Project. The objectives of the project include improving the productive potential of the project lands, improving the watershed catchment capacity, and improving local livelihoods. The project encompasses three components: restoration of highly vulnerable lands, reforestation of degraded community lands, and reforestation of private lands. The project targets about 45 native and locally preferred tree species with several growth rates, including fast, medium, and slow-growing species. The project spent close to 15 months under validation. During this process, the DOE raised several issues in the CARs and CLRs, one of which was the inaccurate estimation of tree biomass stock and growth in both the baseline and the project scenario. As a result, the project developer had to re-estimate the biomass growth in the baseline to reflect the use of a more suitable sampling size (the project land area was reduced previously to reflect a conservative approach to the land eligibility assessment). This was challenging because the project developer faced a lack of information to estimate the mean annual increment for the vegetation in the region. The project developer also lacked information to support the biomass growth estimates for certain tree spe- cies involved in the project scenario. Since the project is planting a large number of native species for which no allometric equations are available, the project developer used main annual increment data and applied expan- sion factors to complete the calculations. The project developer still faced challenges, however, in providing full references for these parameters for each species of each stand model. Correcting this issue was a time-consuming task. The project developer ended up dropping some species for which data were unavailable. The project developer was also asked to provide current annual increment data whenever the validator thought it could be found, and to avoid using data generated in plantations as this could lead to biomass growth overestimation. growth is scarce. This has been a frequent challenge in when proxy and default data are not available, project the BioCF portfolio, as close to 80 percent of projects proponents may change the project design to include plant native species. In projects where data are avail- species for which data and information are available. able, the data mostly pertain to commercial timber. Such a change in project design may impact some This only partially represents the stem biomass, forc- original project objectives, including community or ing project developers to use proxy regional or global biodiversity benefits (Box 5.2). values.20 The conservative application of default data on forest growth and selection of expansion factors of- 5.52 Determining all components of tree and ten results in the over-estimation of the baseline and shrub biomass by constructing allometric equations under-estimation of the project scenario. Furthermore, can also be a challenge for developers because develop- ing growth models of tree species requires additional resources (money) and technical expertise. 20 The IPCC publishes systematized information on biomass growth for several world regions; this is one among several reliable sources of in- 5.53 In addition to the data-related challenges, formation. See, for example, the 2003 IPCC Good Practice Guidance for Land Use, Land-Use Change, and Forestry and the 2006 IPCC guidelines project developers’ poor forestry capacity has proven for National Greenhouse Inventories (volume 4) for Agriculture, Forestry to be a significant obstacle for effective GHG account- and Other Land Use (http://www.ipcc-nggip.iges.or.jp/public/2006gl/ vol4.html). Some data are also available in the FAO’s 2010 Forest Resource ing. Sometimes, the problem is having the technical Assessment and the Global Planted Forest Thematic Study (http:// expertise to find the information and data. While in www.fao.org/forestry/12139-03441d093f070ea7d7c4e3ec3f306507 some cases a quick Internet search by the DOE reveals .pdf). BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 81 the existence of relevant data, project developers of- is a time-intensive effort for project developers who, at ten encounter challenges in searching for and apply- a minimum, have to demonstrate the insignificance of ing the data to estimate forest growth. For example, these sources of leakage. This minimum requirement frequent CARs and CLRs by DOEs address: (i) an involves collecting intensive household and field sur- unclear relationship between the stand models and veys to provide documentary evidence of agriculture, species described in the PDD; and (ii) the fact that the grazing, and fuel wood collection in the vicinity of the allometric equations, biomass expansion factors, and project. As such information is not generally docu- wood densities provided are not specific to the species mented in most developing countries, the monitoring considered in the project. of leakage emissions often involves significant transac- tion costs. 5.3.4 Understanding of the Minor Carbon Pools 5.58 The amount and quality of data required to make these estimations can overwhelm project devel- 5.54 Most project developers neglect to account opers. For example, leakage assessment in a large-scale for litter and deadwood carbon pools because of BioCF assisted natural regeneration project involved their low carbon content and high monitoring costs. searching livestock census data, estimating available Providing evidence for why they are not accounting land to relocate displaced grazing, and ensuring that for these minor carbon pools, however, is a challenge the identified lands would meet the required livestock for project developers. Often, they provide theoretical consumption during the project lifetime. In another evidence from non-site-specific studies—generating example, getting livestock census data per village CARs and CLRs from DOEs. turned out to be prohibitive for a project in India that 5.55 With respect to soil organic carbon, most de- involves more than 500 widely scattered villages. At velopers of early BioCF projects excluded this carbon validation, the project developer was asked to improve pool to avoid investing significant time and resources the leakage estimation by using village-level livestock in field work and laboratory analysis. The recent adop- census and land-use data instead of district-level data. tion by the CDM EB of the default method to ac- Although using site-specific data would have increased count for yearly changes is a step in the right direction the accuracy of the overall project emission reduction that can encourage project developers to account for estimations, the project developer could not afford the soil carbon. This change came late, however, and does cost and time required to complete this task. This strict not benefit early projects. In fact, only two of the most requirement of ex-ante estimation of leakage will delay recent21 BioCF projects are benefiting from the default validation, registration, and verification—impacting approach to soil carbon monitoring. project feasibility. In fact, because of the absence of expected carbon payments, the farmers started har- 5.3.5 Accounting for Project Emissions vesting the trees to collect timber incomes.22 5.56 Early projects still have to account for sources 5.59 The amount and quality of data required for of emissions that today are considered insignificant. leakage estimation is expected to be a relatively mi- For example, two BioCF projects still have to account nor challenge for most small-scale projects as simpli- for direct nitrous oxide emissions from nitrogen ferti- fied rules for these projects include the application of lization. In addition, it remains unclear whether some a discount factor if leakage is considered significant. projects need to account for fertilization as there is a Assessing significance, however, implies certain assess- lack of consistency throughout the methodology with ments of leakage—and this has proven to be problem- regard to the inclusion of this source of emissions. atic in three African small-scale BioCF projects. 5.3.6 Accounting for Project Leakage 5.60 Projects that started project preparation in 5.57 The most complex issue regarding leakage 2009 are able to neglect leakage estimation based on emissions is the assessment of activity displacement at- an assessment of the significance of leakage in their tributable to the project. Ex-ante estimation of leakage projects. Assessing such significance, however, may be time- and-data intensive. For example, some BioCF 21 Recent projects are those that entered the portfolio in 2007 as part of the BioCF’s second tranche. 22 See more discussion on this in Chapter 7. 82 | Chapter 5: Greenhouse Gas Accounting Verification of the Moldova Soil Conservation Project. Photo: Moldsilva projects in tropical climates have struggled with dem- ■■ Project boundary: Five out of nine registered pro- onstrating the land-use pattern as evidence of enough jects have changed or are anticipating changes to lands to accommodate the displaced crops in the pro- the project boundary due to reductions in project ject vicinity areas. Similarly, some projects have had area. Reasons for the reductions include poor site difficulty in providing documented evidence of the conditions, land tenure conflicts, and withdrawal animal capacity in the neighboring lands to demon- of landholders. In general, the nature of A/R CDM strate that additional land will not be needed to ac- projects makes it very difficult to arrange for parcels commodate pre-project grazing activity.23 The latest of land in advance of projects being proposed. tool for leakage estimation represents a great simpli- ■■ Planting schedule: Eight out of nine registered fication to the extent that leakage can be estimated projects are behind their planting schedules. The by applying a factor that reflects the land cover in the reasons are diverse, and are usually not under the project’s surrounding areas. control of the project developers. Examples of the challenges include: 5.3.7 Implementation of the ——Technical: lack of detailed knowledge on Monitoring Plan suitable species and their growing conditions, 5.61 Although to date there is little experience with availability of planting stock, and the seasonal the actual monitoring and verification of CDM A/R aspects of planting; projects, initial signs indicate that project developers ——Local capacity-related: difficulties in operat- will face challenges in implementing the monitoring ing nurseries and the timely arrangement of plan set forth in the PDD. The most common dif- nursery stock for planting; ficulties observed have led to changes related to pro- ject boundary, planting schedule, species composition, ——Institutional-related: constraints and delays stocking density, and biomass estimation methods. associated with land tenure agreements; Examples of deviations are provided in the list below; ——Financial and social: landholder withdraw- these derive from the results of an initial assessment ing from the project; and of the implementation of nine out of 13 BioCF regis- ——Natural disasters: droughts, floods, and nat- tered projects. ural conditions in the field. ■■ Species composition: Three out of nine projects 23 According to this guidance, project developers can consider leakage have faced the need to change the species composi- insignificant by assessing several indicators. For example, leakage can tion. The main reasons for this are difficulties in be considered insignificant if the area expected to be displaced is less propagation of planned species, lack of nursery than five percent of the project area or less than 50 hectare of land. If it can be demonstrated that area that will receive the crops have stock, low survival rates of species, changes in com- been cropped during one year within the latest five years (from project munity preferences for species, and a change in the start), the previous thresholds can be exceeded and leakage can still be deemed insignificant. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 83 relevance of species to a project in the face of natu- 5.62 Should the changes listed above be consid- ral events (e.g., droughts and floods). ered deviations from the PDD, the project developer ■■ Stock density: One of the projects implemented would have to review the monitoring plan and submit as assisted natural regeneration required planting a a revised monitoring plan for CDM EB approval. This higher seedling density in about 10 percent of the extra step would delay project verification and credit land parcels relative to what was proposed in the issuance, and involve higher transaction costs. PDD. In assisted natural regeneration, however, 5.63 Recently in September 2011 the CDM EB supplemental planting is dependent upon existing published guidance that allow to identify whether any natural regeneration, its distribution over project of the issues presented in the examples above will trig- sites, and field efforts required to support regenera- ger either notification or revision of the monitoring tion on respective sites. Therefore planting density plan (UNFCCC, 2011f ). The following changes may variation is not relevant for assisted natural regen- be deemed minor: eration projects. Planting density variation is also of limited relevance for plantation projects as increas- ■■ Changes in year-wise areas planted, possibly result- es in stock density are mostly intended to insure ing in a part of the project area not being planted. plantations against low survival rates due to adverse ■■ Changes in species composition, if the changes are field conditions. demonstrated at verification to be consistent with ■■ Biomass estimation methods: Five out of nine the baseline identification and additionality dem- projects anticipate changes with regard to the use onstration made at the validation stage. of biomass expansion factors and/or allometric ■■ Changes in stock density, if the changes are dem- equations. The reasons for this are mostly related to onstrated at verification to be consistent with the availability of the latest location specific data subse- baseline identification and additionality demon- quent to project registration. In addition, projects stration made at the validation stage. make changes to measurement approaches to suit ■■ Changes in timing and choice of silvicultural the requirements of the growth data (e.g., volume operations. tables/equations or allometric equations) applicable to the project. For example, in the early stages of a ■■ Changes in timing of harvest occurring before the project, measurements may be required on collar third verification. diameters instead of measurements at diameter at ■■ Changes related to collection of non-timber forest breast height, to suit the requirements of location products. specific allometric equations (which are based on ■■ Changes in tree/shrubs propagation method. collar diameter). ■■ Changes in post-harvest replanting/regeneration ■■ Quality/Assurance and Quality Control: Most methods. projects struggle with following the QA/QC meas- ■■ Changes in technology employed. ures for data collection and archival presented in the PDD. Overly heavy QA/QC requirements in ■■ Changes in inputs (e.g., fertilizers, certified seeds, the monitoring plan can pose challenges to imple- watering). mentation. In one of the BioCF projects, for exam- ■■ Changes in stratification for sampling. ple, the monitoring process included provisions for ■■ Changes in type of sample plots (e.g., temporary, having a team member not involved in the meas- permanent, point sampling plot). urements cross-check a certain percentage of the ■■ Changes in number of sampling plots and their al- sample plots by doing re-measurements and having location to strata. field staff collecting data go through classroom and field training—and pass an examination to be able ■■ Changes in the project boundary (limited to reduc- to collect data. Moreover, the DOE may require tion in project area), if the changes are demonstrat- evidence of the implementation of these measures ed at verification to be consistent with the baseline at verification. identification and additionality demonstration made at the validation stage. 84 | Chapter 5: Greenhouse Gas Accounting ■■ Changes in QA/QC procedures, where it can be ■■ Changes in planting densities and silvicultural demonstrated that the changed QA/QC procedures measures, including method of establishment (e.g., are used by the National Forestry Inventory or were planting vs. assisted natural regeneration). applied in another registered A/R CDM project ■■ Different measurement approaches for parameters activity. based on practices from later revisions of the meth- ■■ Changes in parameters, equations, or methods odology (e.g., tree height and preference for data used in tree biomass estimation, if the applicabil- sources). ity of the changed parameters, equations, or meth- ■■ Update of data to be monitored, when better data ods is demonstrated at verification using the Tool become available (e.g., changes in default factors for Demonstration of Applicability of Allometric because of the availability of species-specific data af- Equations and Volume Equations in A/R CDM ter project implementation). In addition, the use of Project Activities, or if the changed parameters, both biomass expansion factor and allometric equa- equations, or methods do not result in a decrease in tions methods depending on availability of species. precision of the estimate of tree biomass. ■■ Changes in quality assurance/quality control ■■ Changes from provisions regarding shifting or pre- procedures. project activities, if the related emissions are esti- ■■ Timing of verification event. mated at verification using the tool Estimation of the Increase in GHG Emissions Attributable to ■■ Changes in source of financing and revenues. Displacement of Pre-project Agricultural Activities in A/R CDM Project Activity and are accounted 5.4 Tools to Facilitate GHG for as leakage. Accounting ■■ Changes in use of fire in site preparation, if the re- 5.64 Early projects in the BioCF were subject to lated emissions are estimated at verification using long delays in project preparation because of complex the tool Estimation of Non-CO2 GHG Emissions and unclear rules for GHG accounting. As stated in Resulting from Burning of Biomass Attributable to an the previous sections, the CDM EB has been develop- A/R CDM Project Activity and are accounted for as ing tools, clarification to methodologies, and specific project emissions. guidance to respond to project developers’ requests for clarification. These actions have helped reduce the ■■ Changes in extent of soil disturbance in site prepa- size of the methodologies from more than 100 pages ration, if the related emissions are estimated at veri- to around 30, bringing them in line with methodolo- fication using Equation 2 of the Tool for Estimation gies applicable to other CDM sectors. In addition, the of Changes in Soil Organic Carbon Stocks Due to CDM EB recently published Methodology Booklets,24 the Implementation of A/R CDM Project Activities which summarizes the main characteristic of every and are accounted for as project emissions. methodology thus facilitating to a certain extent ■■ Changes in methods of estimation of changes in methodology selection. any carbon pool, if the method applied at verifica- tion uses the latest version of the relevant approved 5.4.1 Ex-ante Estimation of GHG tool and the applicability conditions of the meth- Emission Reductions odology applied are consistent with the applicabil- 5.65 The BioCF, along with other partners, devel- ity conditions of the tool. oped two tools to facilitate the ex-ante estimation of ■■ Re-stratification and recalculation of sample plots emission reductions. One is a tool for calculating the (including permanent vs. temporary) should not be sample size to ensure reliable measurements of carbon an issue if project area is appropriately represented stocks and changes in stock.25 The second, the Tool for and the method of selection of sample plots remain Afforestation/Reforestation Approved Methodologies the same. ■■ Changes in measurement approach to better match 24 See http://cdm.unfccc.int/methodologies/documentation/meth_booklet project reality (e.g., plot size, sample design meth- .pdf#III. od, minimum DBH, measurement of collar diame- 25 See http://wbcarbonfinance.org/Router.cfm?Page=BioCF&FID=9708&It ter vs. DBH, and project boundary, among others). emID=9708&ft=LULUCF. This tool was developed jointly by the BioCF and Winrock International. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 85 Figure 5.1 Expected Emission Reductions from Some BioCF Projects : Estimations With and Without Applying TAR AM 1,800 1,600 1,400 Thousands tCO2e 1,200 1,000 800 600 400 200 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 June 2008 June 2010 (before TARAM) (with TARAM) (TARAM),26 is an Excel-based spreadsheet that fa- understanding of the project context and circumstanc- cilitates the estimation of ex-ante emission reductions es (e.g. data availability constraints). Empowered local (tCERs or lCERs) according to the steps prescribed project developers also facilitate farmers/communities’ in the A/R methodologies. The tool contains most participation in carbon accounting, which promotes a of the existing large-scale and small-scale methodolo- greater level of project ownership. gies, and its reliability has been checked by an external auditor. 5.4.2 Ex-post Estimation of GHG Emission Reductions 5.66 TARAM not only contributed to facilitating 5.67 The Simplified Monitoring Afforestation/ project preparation but also to increasing the certainty Reforestation Tool (SMART)27 was developed by the of emission reductions at the portfolio level (Figure BioCF in anticipation of the challenges projects may 5.1). More recent projects have reduced their prepara- face in monitoring emission reductions; the aim is to tion time and have been able to produce more accu- ensure high quality monitoring and verification pro- rate estimations of emission reductions at the project cesses. SMART facilitates the application of monitor- idea note stage because of TARAM. DOEs have also ing methodologies and was developed to complement taken advantage of TARAM as it allows for a consist- TARAM. ent examination of the data used by project develop- ers when estimating ex-ante emission reductions. In 5.68 SMART is a tool complemented with teach- addition, the use of TARAM has improved local pro- ing material to support project entities’ monitoring ject developers’ access to the A/R CDM significantly. capacity. For example, it provides customized formats Before TARAM, the access to methodologies was re- (paper- and electronic-based) applicable to specific stricted to highly specialized (often non-local) consult- methodologies to ensure that the required data are ants, which increased project transaction costs. Local collected. In addition, SMART contains the equa- project developers involvement in GHG accounting tions required to automatically calculate the actual directly improves project performance as technical net GHG removals from projects; it also supports in- decisions during GHG accounting benefit from their formation system software that facilitates geographic identification of project areas. The users of the tool 26 This tool was jointly developed by the BioCF, the Tropical Agriculture Research and Higher Education Center, CATIE in Costa Rica, and CIFOR in Indonesia. 27 The SMART tool covers methodologies used by BioCF projects. 86 | Chapter 5: Greenhouse Gas Accounting Figure 5. 2 CDM Requirements on Project Monitoring and Elements of the BioCF’s SMART Tool CDM monitoring CDM documents template CDM methodology PDD monitoring plan Data collection Prepare for all parameters Data handing Perform monitoring in the PDD as and storage calculations report being monitored CDM monitoring handbook BioCF tools CDM operational plan SMART forms iSMART can also access information on project implementa- project developers comply with the A/R CDM moni- tion and monitoring over the Internet. toring requirements in an effective manner. 5.69 Furthermore, anticipating the need to sustain 5.71 Important lessons regarding tools’ reliability project capacity on forest monitoring in the long run, and capacity to apply them can be drawn from the SMART also includes training materials that pro- BioCF experience developing tools for GHG account- ject entities can use to train new staff. As long-term ing. Ensuring the reliability of tools has been challeng- endeavors forestry projects usually face high staffing ing and costly because of the frequent and multiple turnover and training new staff may be challenging changes introduced to the A/R rules by the CDM as monitoring of emissions and leakage is quite a EB. Tools need to be validated several times to ensure novel know-how that not even forestry professionals incorporation of CDM EB changes Collecting these fully manage yet. SMART training materials includes changes in a reliable manner is a challenge in itself as PowerPoint presentations, multimedia presentations they are published in multiple documents and it is (e.g., e-Learning), and a CDM monitoring hand- difficult to track them. For the same reason, auditors book for forest projects which contains easy-to-follow take a lot of time to assess the reliability of the tool. standard operating procedures for each of the compo- The experience developing and applying TARAM and nents of the monitoring plan. SMART has also highlighted that although tools have an important role in improving the access to method- 5.70 As the ERPA contracts signed by the BioCF ologies, they are not a substitute for capacity building. projects contain provisions related to monitoring, de- In countries with limited forestry experience, project velopers have to design a CDM operational plan and developers may not only face information and data report on its fulfillment. As seen in Figure 5.2, this constraints to use a tool, but also adequate human ca- instrument, along with SMART, is expected to help pacity to understand its requirements. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 87 5.5 Recommendations ■■ Facilitate leakage estimates for example by adopting conservative default values as for leakage assessment 5.72 Below are recommendations for the CDM (see Paragraphs 5.56–5.59). EB on GHG accounting. See recommendations and best practices for project development and implemen- ■■ Lower the burden of monitoring. This can be tation in Chapter 8. achieved by (i) allowing for certain level of de- viations from PDD at implementation, recogniz- ■■ Make efforts to facilitate project developers’ access ing the dynamic nature of forest carbon projects; to A/R CDM rules and guidance. Measures may (ii) developing clear guidance for DOEs to assess include (i) translating the CDM EB tools and guid- projects’ deviation from PDD at implementation; ance into more languages to promote the involve- and (iii) simplifying monitoring methodologies by ment of local consultants; (ii) illustrating existing allowing a mix of measurements and defaults values tools with concrete and real examples and explain- on trees count, combined with some other proxy ing the rationale behind requirements and calcu- parameters (see Paragraphs 5.60-5.62). lations; (iii) developing tools whenever possible ■■ Promote a two-pronged approach to bridge the gap to facilitate GHG accounting; (iv) and carefully between rule complexity and low in-host-country reviewing methodologies to ensure that they are capacity to comply with requirements: (i) estab- consistent with the recent CDM EB decisions (see lishing capacity-building programs to enhance the Paragraphs 5.42–5.49 and 5.63–5.69). capacity of beneficiaries and project implementers; ■■ Permit the use of growth parameters such as bio- and (ii) continuing rule and procedure simplifica- mass expansion and root-to-shoot factors based on tions from the CDM EB (see Paragraph 5.40). the expert opinion of the published data in scien- tific forestry publications (see Paragraph 5.50). 88 | Chapter 5: Greenhouse Gas Accounting Finance 6.1 Introduction 6.1 Carbon finance encourages climate change mitigation by providing addi- tional revenues to low-carbon activities in Afforestation and Reforestation (A/R) and several other Clean Development Mechanism (CDM) sectors. CDM projects produce emission reductions that can be sold in the carbon market to gener- ate “carbon� revenues. Because of the non-permanence rule, the emission re- ductions achieved by A/R projects are considered temporal; consequently, these projects produce temporary Certified Emission Reductions (CERs), which in turn have consequences on projects’ finance. 6.2 The BioCF experience suggests that the CDM has had little effect on overcoming the dis- proportionately large investment barriers A/R projects face in most developing countries. The reasons for this include: (i) as trees grow slowly, projects produce low volumes of emission reductions; (ii) the length of Emission Reductions Purchase Agreement (ERPA) contracts is usually short, reflecting the uncertainty associated with the continuation of the Kyoto Protocol; (iii) the transaction costs of meeting the CDM requirements are usually high due to local stakeholders’ limited capacity for pro- ject development and implementation; (iv) the United Nations Framework Convention on Climate Change’s (UNFCCC) approach to non-permanence leads to low-priced forestry credits and limits their demand; and (v) unpredictable carbon revenues due to the long approval process associated with carbon certification. Furthermore, leveraging financing has not been an easy task. Financing institu- tions and banks do not understand carbon finance or perceive it as highly risky; in countries with unfavorable business environments, scaling up A/R CDM is an even-greater challenge. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 89 6.3 Reforms are needed to scale up the A/R CDM. 21 A/R CDM projects since 2005 through over $30 From the finance perspective, urgent reforms include million in contract values. The leverage factor is 1:7, developing innovative approaches to non-perma- reflecting the amount of investment that was catalyzed nence, creating rules specially tailored for developing by each dollar of carbon finance in order to make pro- countries (to reduce transaction costs), and increasing jects achievable. Fifty percent of the underlying invest- the limits on emission reductions for small-scale pro- ment is from private sources, 47 percent from public jects. In addition to changes to the rules, innovative sources, and three percent from nonprofit organiza- instruments are needed to facilitate projects’ access to tions (Figure 6.1). frontloaded financing, such as policy measures (e.g., national budget allocations) and concessional finance. 6.2.1 Different Sources of Investment in the BioCF Portfolio 6.4 This chapter presents the BioCF experience 6.6 Projects across the BioCF portfolio differ ac- testing carbon finance in different types of forest pro- cording to the type of investment sources they use and jects. Section 6.2 explores the role of CDM in cata- this is closely related to their purpose. Projects in the lyzing underlying investment in projects. Section 6.3 BioCF portfolio fall into three broad categories accord- analyzes the relevance of carbon finance in the A/R ing to their investment source: (i) government, public sector. Section 6.4 summarizes recommendations for entity, and NGO-led projects, largely supported by improvements. public (domestic and foreign) financing; (ii) private sector-led projects mainly supported by domestic pri- 6.2 CDM Catalyzing Investment for vate investment, but with some support from foreign Afforestation and Reforestation private capital; and (iii) public-private initiatives that 6.5 The CDM has played a role in catalyzing combine different types and sources of investment. underlying investment in A/R projects from different sources. In the BioCF, about $227 million of underly- 6.7 Carbon finance has played a small role in ing investment will benefit from CDM ERPA con- catalyzing underlying investment in the first two types tracts, if projects are implemented as expected. The of projects. Most of the project entities have financed BioCF has contracted over nine million tCO2e from a large portion of the project costs through equity investment; carbon finance has helped them mainly overcome institutional and country risk-related barri- Figure 6.1 Sources of Underlying Investment in the BioCF ers. For example, because of the incentive from carbon Portfolio finance, some project entities have been able to estab- lish land tenure arrangements with private landowners and communities that facilitate the creation of sound, Non-governmental legally-binding land-use contracts. Carbon finance has Organizations also stimulated other projects to test reforestation in 3% countries with higher investment risk compared with Public business-as-usual places. However, in public-private investment partnerships, carbon finance has had a major catalytic totals Foreign role. Examples of projects within each group are pre- public 47% 10% Domestic sented in the sections below. private 42% Domestic Government, Public Entity, and NGO-led public 37% Projects 6.8 These projects usually aim to enhance public goods and services1 and have mainly catalyzed grants Foreign private 8% 1 These projects typically seek to achieve socioeconomic (e.g., improv- Private ing livelihoods of small- and medium-sized farmers) and environmen- investment tal (e.g., land restoration, water source protection, forest and wetland totals restoration, and biodiversity conservation) goals. Since many of these 50% benefits do not have a market value, closing the investment gap is a challenge. 90 | Chapter 6: Finance Box 6.1 Financing of the Moldova Soil Conservation Project S ou rc e s o f F i na nci ng To achieve its objectives, the project developer (Moldsilva) is blending two types of financing to cover the pro- ject costs for the first 10 years: (i) $18.74 million from Moldsilva; (ii) and $2 million from two Japanese PHRD grants. The project is expected to receive about $6 million from the sale of emission reductions to two World Bank carbon funds and to the voluntary carbon market. F in a n ci ng Me c ha n i sm Resources from Moldsilva are being used to cover the costs of forest establishment, operations, and ongoing maintenance. Resources from the Japanese grants have been used to provide alternative livelihoods, develop the capacity of communities involved in the project, help the project improve forest management, promote nat- ural regeneration in areas that were previously destroyed by illegal logging, and improve community pastures. The project started planting in 2001, started receiving payments from the sale of emission reduction credits from the World Bank in 2005, and started receiving revenues from the sale of forest and non-timber products in 2010. The Role o f C arb on F i n a nc e Carbon finance helped this project overcome initial investment barriers. Moldsilva was unable to get a loan from a local financial institution. The role of carbon finance in improving the viability of this project is clear, and the benefit is being spread out over 40 years. Without carbon finance the project was not financially viable at Moldova’s 15-percent bank lending rates. Carbon finance motivated the local council to establish legally binding institutional arrangements with Moldsilva and participate in the project. from public foreign sources.2 The financing models investment by a nonprofit organization which was of these projects are simple, with the project entities created to be the project entity. contributing a large portion of the investment (e.g., ■■ Projects mostly financed by nonprofit organiza- 80 percent of equity on average). A few projects in tions. These projects also rely on grants and use this category have also catalyzed concessional finance. carbon finance to cover maintenance costs and Sixty-two percent of the BioCF portfolio present this farmers’ compensation for the land-use change. type of financing model (see Annex 1). Examples are ■■ Projects relying on financing from foreign financ- presented below: ing sources, in the form of grants and loans from ■■ Projects financed largely by a national government multilateral development organizations. Where entity using grants from international donors and World Bank concessional loans are available, the carbon finance to cover project preparation, imple- carbon sequestration project is a sub-component of mentation, and operating costs (Box 6.1). a wider project financed through the loan. While ■■ Projects largely supported by a regional govern- the carbon project benefits from the institutional ment, but raising funding from grants and small arrangements implemented by the wider project, amounts from farmers associations and other na- this also supports the testing of carbon finance as tional institutions A small variant of this model an instrument for improving the performance of is the contribution of a small amount of equity A/R projects. Private Sector-led Projects 2 Most projects have received grants from the Government of Japan, 6.9 The main objective of these projects is com- through the Policy and Human Resources Development (PHRD), and mercial (e.g., sale of timber and other products). Most the Government of Norway, through the Norwegian Trust Fund (NTF). These grants are administered by the World Bank and are available to of them, however, also pursue social and biodiversity- projects on a competitive basis. The governments contributing to these related secondary objectives. Private sector-led pro- grants do not purchase the project emission reductions to meet their compliance requirements under the Kyoto Protocol. Project developers jects are financed mainly by equity from private forest use these resources to strengthen local managerial capacity, to con- companies. Twenty-four percent of the BioCF portfo- duct finance studies for project preparation, and to support leakage prevention activities (e.g., livestock improvement). lio present this type of financing model. Three types BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 91 of private companies can be identified in the BioCF ■■ A private-public project entity created for the portfolio: purpose of the A/R CDM project to assure par- ■■ Private companies with adequate investment capac- ticipating landholders’ access to difficult-to-access ity and timber as their main product. They plant subsidies for afforestation and to promote the par- selected species in high densities on lands with ticipation of private forestry enterprises in the A/R clear property rights that are close to markets. This CDM project. Through the participation of these project entity seeks to use carbon revenues to com- private forest enterprises, the project entity not pensate for country-related risk3 and other risks only ensured a market for the timber produced by stemming from changes to their business-as-usual the landholders but also guaranteed an attractive scenario (e.g., planting on less degraded lands in and flexible cash flow for farmers. relatively more stable countries). ■■ Private companies with adequate investment capac- 6.3 Relevance of Carbon Finance ity that incorporate farmers in their timber supply in the A/R Sector chain. The project entity seeks to use carbon rev- 6.11 Although some BioCF projects are replicating enues to compensate farmers for the new land use their first carbon finance experience,4 the potential to (forestry) and maintain their interest in participat- scale up in the A/R CDM is limited and diminishes as ing in the project. 2012 approaches. Replication is happening at a slow pace and only takes place where champion5 project ■■ Private companies with adequate investment ca- entities are involved; most projects are still completing pacity engaging in forest projects for conservation their first A/R CDM project. This is true in all CDM purposes. Such as afforestation to compensate for sectors,6 but the A/R projects are at a distinct disad- forest loss in flooded areas and to improve biodiver- vantage due to the following limiting factors. sity. Carbon finance to finance project maintenance costs). 6.3.1 Disproportionately Large ■■ Private companies without adequate investment Investment Barriers capacity that have created alliances with foreign 6.12 Forestry sectors in developing countries usual- private companies to secure needed investments. In ly face strong investment barriers. About 90 percent of this case, the contribution from the private compa- the BioCF projects confirmed the absence of long-term nies is contingent on the project achieving CDM financing for forestry-type investments from financial validation, and the carbon revenues are used to cov- institutions in their countries. Most projects were un- er tree maintenance and operation costs. attractive to private investors because of their poor Public-private Initiatives rates of return on investment and a high perceived risk ― particularly due to natural disasters and under-deliv- 6.10 Public-private entities blend investment fi- ery risk associated with unproven technologies (e.g., nance from public and private sources to achieve com- slow-growing species), unproven business models (e.g., mercial, social, and environmental objectives. They risky counterpart, and highly degraded soils). have catalyzed investment finance from both foreign and domestic sources. There are two types of public- 6.13 The investment barriers affecting A/R CDM private initiatives in the BioCF portfolio: projects also reflect the fact that domestic banks are ■■ A private company and a regional government constrained by the country’s sovereign risk. This lim- involving poor farmers in timber production and its their access to external funding and is reflected land-restoration. The government agency facili- in the commercial conditions they offer to potential tated project financing by securing low-cost loans borrowers (e.g., high interest rates and fees, short ten- from commercial local banks and foreign public ors, strong guarantees, collateral requirements, and financing institutions (Box 6.2). In these projects, stringent covenants). Overall, the commercial banks’ carbon finance increased the internal rate of return by 5-6 percentage points. 4 See Paragraphs 1.60 to 1.63. 5 Champion project developers are those with the capacity to successfully undertake projects even in unfavorable business environments. 3 The company started planting in a country that would not have been 6 See the 2010 World Bank report 10 Years of Experience in Carbon selected in the business-as-usual scenario. Finance. 92 | Chapter 6: Finance Box 6.2 Financing of the Reforestation on Degraded Lands in Northwest Guangxi BioCF Project This project aims to reforest around 8,000 ha of multiple-purpose forests on degraded lands in Northwest Guangxi. Due to high precipitation, frequent storms, steep slopes, and poor watershed management, the area along the Pearl River is subject to severe soil and water erosion. The project is contributing to controlling soil and water erosion as well as to restoring degraded lands. Most tree species planted are native to the region (includ- ing a mix of birch, China fir, Chinese red pine, and sweet gum), and some area is planted with Eucalyptus to meet small timber and fuel wood needs. The project entity is the Guangxi Longlin Forestry Development Company Ltd. The project was registered on September 15, 2010. S ou rc e s o f F i na nci ng The project blends four types of financing: (i) a $5.15 million World Bank loan; (ii) $12.9 million in loans from local commercial banks; (iii) $19.1 million in equity from the Guangxi Zhuang Autonomous Region (local gov- ernment) and the Guangxi Longlin Forestry Development Company, and (iv) farmers’ contributions. The project has also managed to enhance its cash flow by the sale of carbon credits to the BioCF, expected at $2.2 million as emission reductions are delivered. F in a n ci ng Me c ha n i sm Project establishment costs are covered with resources from the World Bank loan and funding from the local government, while operating and maintenance costs are covered with a combination of equity, commercial bank loans, and carbon credits. The Role o f C arb on F i n a nc e The revenues from carbon credits serve as a stable source of income up to 2017 that contributes to the repay- ment of commercial bank loans in the short-term, helping to bridge the gap before revenues from timber harvesting are produced. Carbon finance is helping improve the economic attractiveness of the project, by in- creasing its internal rate of return to 10.6% (from 6% without the revenues from carbon credits). By making the project more economically attractive and increasing the confidence of stakeholders for providing equity, carbon finance is promoting public-private initiatives that is still not typical in forestry—a private company and farmers, the local government, and a local commercial bank are all participating. conditions and all-in cost of loans do not match pro- financing procedures, administrative lags in disburse- jects’ cash flows needs (Kossoy, 2010). ment of loans and grants, and political instabilities in a host country preventing timely availability of project 6.14 Project entities’ capacity also plays a role in finances. securing investment. From the financing perspec- tive, managerial, and technical capacity are enabling 6.3.2 CDM Not Overcoming conditions for securing investment. Some projects Investment Barriers with strong potential were delayed in being accepted 6.15 In the BioCF experience there are three indi- into the BioCF portfolio because the project entities cators of carbon finance’s low capability to stimulate struggled with closing the financial gap as they lacked A/R in developing countries. First, the higher8 lever- the managerial capacity to do so.7 These delays nega- age ratio of forest projects relative to projects in other tively impacted project implementation and delayed CDM sectors reveals that the incremental carbon fi- project preparation (and, therefore, credit issuance). nance internal return rate is not substantial (World In the BioCF experience, the reasons for these delays Bank, 2010a). Second, projects mainly rely on pro- include low capacity of project entities to meet their ject entities’ equity contribution, exposing developers’ 7 A number of project idea notes have been submitted to the BioCF, but a large portion could not be considered because of a lack of a credible 8 E.g., 1:7 in the A/R sector vs. 1:4 in other World Bank CDM projects, financing plan. respectively BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 93 difficulty in mobilizing debt.9 Third, carbon finance most countries have unfavorable business environ- has removed financial barriers to investment in a few ments that prevent projects from frontloading carbon cases and carbon revenues only makes a small contri- finance to cover the required high upfront investment. bution to projects’ viability. All these factors explain In essence, while projects having commercial purposes the difficulties of this sector to grow. as a main rationale struggle with complying with ad- ditionality, very few projects with environmental and 6.16 These indicators reveal structural problems social goals had internal return rates higher than 6-7 with the A/R CDM. The combined effect of com- percent without carbon.10 All these issues are discussed plex rules, project developers’ low capacity for project in the sections below. development and implementation, and perception of high risk have led to high transaction costs, low Low Volumes and Short Contracts prices of forestry credits, and a limited demand. This 6.17 A/R CDM projects are highly limited by their is compounded by the fact that these projects deliver low volume of emission reductions. Registered pro- low volumes of emission reductions per year and that jects expect to reduce on average 40,000 tCO2e/year, a low value compared with projects in other sectors. (See 9 The equity contribution of project entities is on average 80 percent of Figure 6.2. Also refer to Chapter 1.) This value may the total investment. In government, public entities, and nongovern- vary across projects, depending on site natural condi- mental organization-led projects grants from multilateral organizations tions. In the BioCF portfolio, for example, projects’ and developed countries as well as concessional loans have been the second most important source of financing for these projects. In private sector-led projects small in-kind contribution from participant farmers, 10 Carbon finance has contributed to increasing the internal return rate of if any are the most frequent source of investment. Interestingly, projects some projects by 5-6 percent; in most developing countries, reforesta- in some other sectors present a reverse split, with roughly a 20–30 per- tion projects are expected to result in internal return rates from 10–12 cent equity and remainder 70 to 80 percent debt. percent. More examples of this are provided later. Figure 6. 2 Expected Average Annual Emission Reductions in Different T ypes of Registered CDM Projects Energy Service CO2 Usage Solar Energy Industry Methane Avoidance Afforestation and Reforestation Energy Household Biomass Energy Transport Hydro Wind Landfill Energy Own Generation Cement Geothermal Tidal Energy Supply Side PFCs and SF6 Coal Bed/Mine Methane Fossil Fuel Switch Energy Distribution Fugitive Gasses N 2O HFC 0 500 1000 1500 2000 2500 3000 3500 4000 KtCO2e/year Source: CD4CDM 94 | Chapter 6: Finance Box 6.3 Eligibility Criteria for Applying the A/R CDM Simplified Modalities and Procedures Small-scale projects can apply simplified baseline and monitoring methodologies and simplified procedures de- fined by the UNFCCC. With this, the UNFCCC aims to reduce transaction costs per unit in order to promote small- scale projects (UNFCCC, 2006c). The simplified rules and procedures applicable for A/R projects are extensive; those discussed here are only the most relevant for volume of ERs. There are two eligibility requirements A/R projects have to fulfill to be considered small scale: (i) they must be developed or implemented by low-income communities and individuals; and (ii) they must result in greenhouse gas removals of less than 16,000 tonnes of CO2e per year (UNFCCC, 2008j). The UNFCCC allows project developers to bundle small-scale projects as a way to have a single validation and certification report for all the projects. The projects can be registered with single monitoring plan, which has to be implemented so as to cover all the bundled activities (UNFCCC, 2007c). In addition, a bundle of A/R CDM small-scale project activities can exceed the limit of net anthropogenic greenhouse gas removals provided in the modalities and procedures for small scale A/R projects (UNFCCC, 2006b). Therefore, a large-scale project can be a bundle of small-scale projects—provided that it complies with defined requirements. potential for carbon sequestration ranges from 3 to 23 when planting on severely degraded lands for the tCO2e/ha/year, reflecting variances in types of ecosys- first time; overestimation of carbon credits have oc- tems, project areas, forest management, tree species, curred in this type of project in spite of a thorough level of soil degradation, among others. Such variances selection of conservative tree growth rates. The BioCF highlight the relevance of project entities’ objectives in constantly assesses projects’ under-delivery risk and projects’ emission reductions. Projects pursuing envi- amends ERPA contracts accordingly to produce rea- ronmental purposes usually garner the lowest produc- sonable estimates of expected contract delivery. So tivity as they plant slow-growing native species in low far, a number of ERPA contracts have been amended densities. Small-scale projects have a built-in revenues downwards with projects’ original expectations being ceiling as they cannot exceed 16,000 tonnes of CO2e reduced by up to 60 percent from the original con- per year (Box 6.3). Four out of the 21 BioCF projects tracted emission reductions.13 are small-scale.11 6.19 In addition to low volume of emission reduc- 6.18 Projects’ expectations regarding emission re- tions, credit buyers are only willing to enter into short- ductions may be reduced due to several factors. Some term credit purchase agreements. This is due to the BioCF projects, for example, have delayed their plant- prevailing uncertainty about a second Kyoto Protocol ing for 3 to 4 years because of difficulties in complying commitment period. However, BioCF participants with the A/R CDM rules.12 Land areas can also be have contracted to purchase emission reductions from reduced due to unforeseen factors (e.g., operational is- vintages up to 2017 from most of the projects. With sues, adverse climate conditions). Some projects have ERPA contracts lasting about eight years, the BioCF reduced their carbon revenue expectations because is entirely taking on the eligibility risk of post-2012 of overestimation of tree growth at project planning. assets. As a result, other market players less able to run This problem is frequent in projects planting non- such a risk may offer even shorter ERPA contracts to commercial native species due to a lack of informa- carbon credit sellers. Although the excess of emission tion on tree growth rates. But even projects planting well-known species may face overestimation problems 13 An important reason for ERPA amendments in early projects was dif- ficulties in getting accurate estimations of ex-ante emission reduc- tions. The volume of emission reductions in many of the ERPAs were 11 See Section 6.6 for more discussion of small-scale projects. established based on a percentage of projects’ preliminary emission 12 Projects that are seriously lagging behind their implementation sched- reductions. The ERPA contracts of some projects have, however, been ule (e.g., 3 to 4 years) are those having poor land tenure registries and amended upward, reflecting over-performance and, sometimes, under- located in tropical climates and competitive lands. estimation of emission reductions. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 95 Table 6.1 Transaction Costs in BioCF A / R CDM Projects by Stage Cost US$ Stage of the Project Cycle Large-scale Small-scale Project Preparation 170,000–400,000 150,000–300,000 Validation 16,500–45,000 16,750–28,200 Registration Feea 16,500–48,000 — Verification 14,300–53,200 — Totalb 217,300–546,200 — a The registration fee for tCERs is calculated based on the difference between the tCERs for which issuance is requested for a given verification period and the highest tCERs previously issued. If this number is positive, the registration fee is $0.10 per the first 15,000 tCERs based on the annual emission reduc- tions produced over the crediting period of a project, plus $0.20 per tCER produced in excess of 15,000 tCO2e (UNFCCC, 2010b). Small-scale A/R CDM projects do not pay registration fees. (The CDM EB stated in 2010 that no registration fee has to be paid for proposed project activities with expected average annual emission reductions over the crediting period below 15,000 tCO2e.) b The total figure for small-scale projects is still incomplete as none of the four BioCF small-scale projects has gone through the verification process. reductions14 (i.e., emission reductions not contracted have completed the first three stages of the cycle. Few with the BioCF) may appear attractive for projects in projects have gone through verification. the long run, not having a longer-term carbon con- tract is negatively affecting their short-term viability. 6.22 The wide range in transaction costs mostly Poor cash flows increase the non-permanence risk of reflects differences in project developers’ capacity to projects, especially for those expecting to use carbon comply with the A/R CDM rules and procedures. revenues to cover tree maintenance costs. High preparation costs are evidence of the fact that early projects incurred costs for developing new meth- 6.20 The voluntary carbon market is starting to odologies16 and that project developers have had to play a role in projects’ cash flows. As projects advance outsource services to specialized international con- in the CDM project cycle (e.g., registered projects), sultants to apply the complex early versions of GHG they gain the confidence to approach other markets accounting methodologies. On average, transaction for the sale of future vintages of CERs. This has hap- costs17 for small-scale BioCF projects are 30 percent pened in two BioCF projects, one of which managed lower than for large-scale projects. This is because to contract emission reductions for a value that repre- small-scale projects are allowed to apply simplified sents 20 percent of the funding required for effective baseline and monitoring methodologies and proce- project implementation. The voluntary forest carbon dures. The significance of such a reduction, however, markets may open opportunities for the sale of excess has to be analyzed in light of the potential carbon rev- emission reductions produced by A/R projects, with enues from these projects.18 the market for REDD+ credits increasing in recent years.15 6.23 Cost variations in validation and verification reflect differences in project sizes and locations, the High Transaction Costs quality of project documentation, as well as DOEs’ ex- 6.21 The transaction costs of meeting the A/R perience in the A/R sector. Validation contracts negoti- CDM requirements are high. Transaction costs in- ated in recent years are more costly than early contracts clude PDD preparation, validation, project registra- because DOEs have improved their estimations of the tion, monitoring, verification of emission reductions workload required for desk reviews and site visits. Cost on the ground, and issuance of credits. Table 6.1 il- increases also reflect the increased scrutiny by DOEs lustrates this for the BioCF projects, most of which to projects since 2009 as a result of the CDM EB’s 16 The cost of developing a methodology for A/R projects was 15 percent 14 Depending on the starting date and length of the crediting period, higher than for projects in other CDM sectors, reflecting the need for emission reductions from 9 to 24 years have not been contracted in primary data collection and the scarcity of specialized capacity for meth- BioCF projects. odology development. 15 Many BioCF projects are contributing to reducing the pressure over 17 Including preparation, validation, and registration costs. primary forests through reforestation, forest restoration, and assisted 18 See Section 6.3.3 for more discussion on the viability of small-scale natural regeneration. projects. 96 | Chapter 6: Finance Figure 6. 3 Variation of Validation Costs in CDM Projects Developed in the BioCF Note: The prices identified in the figure are validation costs incurred by some BioCF A/R CDM projects. $45,000 $43,538 $40,000 $38,033 $35,000 $30,957 $30,000 $27,028 $28,060 $26,957 $25,000 $24,396 $24,641 $24,081 $23,348 $20,000 $18,725 $16,750 $15,000 $10,000 $5,000 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Large-scale projects Linear (Large-scale projects) Small-scale projects Linear (Small-scale projects) Figure 6.4 Project Development Cost by Technology ( $/tCO 2 e ) — Weighted Average Industrial Gases Hydropower Methane Avoidance Landfill Gas Biomass Energy Wind Forestry 0.00 0.25 0.50 0.75 1.00 1.25 1.50 US$ Note: Transaction costs included in this figure are project preparation, validation, and monitoring costs up to July 2011. The figure does not include methodology preparation costs, and it only reflects World Bank costs—excluding other transaction costs incurred by the project entity. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 97 stricter evaluation of DOEs’ assessments of projects.19 the price of emission reductions as opposed to other Figure 6.3 illustrates the validation costs of projects de- project types).22 veloped in the World Bank and indicates some costs for validation of A/R projects. The trend lines for both Low Prices and Low Demand small- and large-scale projects show that the prices for 6.27 Current prices of credits are too low to en- validation have moved upward over time. hance A/R CDM project’s cash flows. Because of the UNFCCC’s approach to non-permanence, the prices 6.24 Compared with other sectors, the costs of de- of these credits are lower than prices of credits from veloping A/R CDM projects rank highest. As shown projects in other CDM sectors. A/R CDM credits are in Figure 6.4, the average cost per tCO2e contracted in considered temporary and have a limited useful life. forest projects exceeds $1.00, higher than the average Thus, Kyoto Protocol’s Annex B parties using cred- cost per tCO2e of carbon for projects in other sectors. its from A/R CDM projects to meet their emission These costs could decrease marginally with improved reduction commitments have to replace them with local capacity and the availability of methodologies permanent credits before their expiration.23 Since A/R applicable to the project context. For example, in a credits expire in future commitment periods,24 their second A/R project implemented in China by the current price depends on actual and future prices of same project entity, the preparation costs were about other Kyoto Protocol’s assets25 as well as on discount 30 percent lower. rates. To ensure a financially sound transaction, the price of a tCER26 added to the price of a (forward) 6.25 There are differences across projects when replacement credit27 should be comparable to the cur- analyzing project development costs per tCO2e.20 rent price of a permanent carbon credit; as a conse- While costs range from $0.40 to $3.70, early projects quence, the BioCF’s price range for emission reduc- with low capacity for project development have had tions is $4–5 per ER. the highest cost per tonne.21 On the other hand, pro- jects with the lowest cost are those that started their 6.28 In addition to the negative effect on prices, development more recently (e.g., 2009) and therefore the UNFCCC´s approach to non-permanence nega- are greatly benefiting from CDM EB rule simplifica- tively affects the demand for A/R CDM credits. tions. These projects also have good capacity for pro- Temporary credits are not attractive for current cap- ject development and implementation, reflecting the and-trade systems because of their lack of fungibility BioCF’s improved project screening process. Projects with other Kyoto Protocol’s assets. For example, A/R planting on scattered and disperse areas tend to have CDM credits have been banned under the European high monitoring costs. Union Emissions Trading Scheme (EU-ETS), so far 6.26 The significance of the transaction costs can be understood when comparing them with the total 22 Transaction costs beyond those of meeting the CDM requirements have to be considered when estimating the cost of sequestering a tonne of investment and the expected carbon revenues. While CO2e. These include business development, legal, due diligence, project the transaction costs for BioCF projects are on aver- planning, institutional arrangements, and project management. (See Pagiola et al., 2004, and World Bank, 2011, for more information on age six percent of the total investment, this figure methods for calculating the cost of carbon sequestration.) varies widely (from 0.5 to 20 percent) depending 23 There are two types of forestry credits: temporary CERs (tCERs) and upon the project size and total investment. When long-term CERs (lCERs). Annex B parties of the Kyoto Protocol can use them to meet their compliance for the commitment period they were comparing transaction costs per unit with expected issued. TCERs expire at the end of the commitment period subsequent carbon revenues, they are much higher (one-third of to the commitment period they were issued; LCERs expire at the end of the project’s crediting period. 24 The BioCF pays projects for their annual emission reductions upon validation, receipt of annual reports, and other conditions defined on a project-by-project basis. See Section 6.6.2 for further discussion on this 19 DOEs can lose their accreditation if their assessment of projects at topic. validation and verification is not carried out according to the CDM 25 Annex B parties can replace tCERs with assets such as AAUs, CERs, ERU, standards. RMUs, or tCERs. They can replace lCERs with AAUs, CERs, lCERs, ERUs, 20 Including only the costs incurred by the World Bank. or RMUs. See Chapter 5 for more discussion on non-permanence. 21 Projects located in tropical climates where the vegetation reach the 26 The BioCF´s project entities decided to sell tCERs instead of lCERs to the national CDM forest definition thresholds and with weak land tenure BioCarbon Fund. (see Chapter 3) registry systems have the highest transaction costs, reflecting the many 27 The BioCF´s participants decided to use only tCERs as replacement cred- efforts they have made to identify appropriate lands and landholders. its (See Chapter 3) 98 | Chapter 6: Finance Nursery of the AES- Tietê Afforestation/ Reforestation Project in the State of São Paulo in Brazil. the most important market for CERs.28 The persistent are normally made upon delivery, carbon revenues lack of demand is discouraging new project and mak- may not be adequate to meet all projects’ management ing current CDM EB’s efforts to facilitate project de- and/or land opportunity costs; the timing of carbon velopment appear to be a waste of time. payments may also be critical for achieving expected cash flows. As explained in Chapter 3, A/R CDM pro- 6.29 Long-term carbon price signals are funda- jects are allowed to verify carbon credits only once eve- mental to positioning A/R CDM projects in the mar- ry Kyoto Protocol commitment period. More flexible ket. New windows of opportunities could be opened approaches to non-permanence, relative to temporary for LULUCF credits, but they remain uncertain. It crediting, (e.g., a buffer approach, credit reserve, or was clear in COP 16 that the A/R CDM will contin- project insurance) could allow developers to select the ue to be an eligible activity under an eventual Kyoto most convenient number of verifications for their cash Protocol second commitment period. Furthermore, flow needs. Box 6.4 illustrates the relevance of carbon the whole LULUCF sector could be promoted as revenues in the cash flow of two BioCF projects differ- negotiations under the Ad Hoc Working Group on ing in their objectives and the need and size of upfront Further Commitments for Annex B Parties under the investments. Kyoto Protocol broadened the scope of LULUCF ac- tivities toward a land-based approach to emission re- 6.31 The project developers’ technical and mana- ductions. In addition, the growing voluntary carbon gerial capacity also plays a role in projects’ viability. market for REDD+ credits also represents an oppor- One-third of the BioCF projects were at risk because tunity to increase the demand for A/R project devel- of issues related to technical and managerial capacity. opers, although the role of A/R within the REDD+ In one case, for example, the lack of managerial ca- framework is still unclear. pacity was reflected in the project entity’s decision to hold onto the underlying investment instead of tak- Small Contribution to Project’s Underlying ing key early actions (e.g., hiring staff, undertaking Cash Flow timely planting in the rainy season). In other cases, the 6.30 The combined effect of the previously ex- lack of technical capacity to prepare and implement a plained challenges (e.g., low ER volumes, short con- PDD led project entities to misinterpret the land eli- tracts, high transaction costs, and low credit prices) gibility analysis29 and plant on ineligible lands, which leads to a small contribution of carbon revenues to a led to severe reductions in project size.30 The feasibility project’s underlying cash flow. Since carbon payments 28 There are other reasons (e.g., concerns about project developers’ ability to 29 As discussed in Chapter 3, the major causes of such misinterpretation are produce measurable, verifiable, and reportable credits) explaining the EU- project developers’ low capacity and the ambiguity of the land-related rules. ETS’s policy associated with forest temporary credits, but lack of fungibility 30 In one project alone, the area was reduced by 90 percent of its original is one of the main ones. size. (See Chapter 4.) BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 99 Box 6.4 Illustration of Cash Flow up to 2018 in Two Types of BioCF Projects The figures below illustrate the relatively marginal impact of carbon revenues in the cash flow of two BioCF projects.1 In one of the projects, carbon is only a sub-product (Figure 6.5); in the other, carbon is the only source of revenues (Figure 6.6). Because of the BioCF business model, these projects receive annual carbon revenues, upon succesful completion of validation . Multip urp ose Pr oject This multipurpose project plans to reforest about 9,000 ha of severely degraded lands with native and intro- duced species. The main rationale for the project is to achieve profitability by producing timber, resin, and carbon credits; it also aims, however, to promote biodiversity conservation as well as to improve the livehood of impoverished people that live in remote degraded lands. The potential for carbon sequestration is about 10 tCO2e/ha/year over the first 20-year crediting period. The project has contracted with the BioCF for about 70 percent of its expected emission reductions from 2009-2017. Figure 6.5 Partial C ash Flow of a Project with Multiple Purposes 4 3 2 1 Million US$ 0 -1 -2 -3 -4 -5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ■ Operation and Harvesting Costs ■ Establishment Costs ■ Income Other Products (Resin) ■ Incomes 2nd Forestry Product ■ Incomes 1st Forestry Product ■ Carbon Incomes Carbon revenues helped the project developer increase its internal return rate by about five percentage points. The impact of carbon revenues in the cash flow is minor relative to revenues from other products (e.g., timber and resin). Carbon revenues are also low relative to the project’s operational costs (e.g., about seven percent) and to the landholders’ cash flows. The project entity plans to use 40 percent of the carbon credits to pay back a loan; the remaining 60 percent will be shared among the local communities and the project entity. Project 1 The relevance of the carbon revenues in projects against the cost of sequestering a tonne of carbon need to be further analyzed considering both the total ERs expected during the crediting period and all project costs. 100 | Chapter 6: Finance Box 6.4 (continued) participants’ share of carbon revenues is, consequently, low, but they will also share benefits from other prod- ucts. (See Chapter 7 for more discussion on benefit sharing.) Ass is te d Nat u ra l Regene rati o n P r o j e ct The carbon revenues look better in the cash flow of an assisted natural regeneration project, the main goals of which are to recover the vegetation of severely degraded lands and to promote sustainable development in local communities. The potential for carbon sequestration in this 3,000 ha assisted natural regeneration project is about 11 tCO2e/ha/year for a 30-year crediting period. Carbon credits are the only benefits with market value in this project. With an ERPA contract that represent half of the project’s expected emission reductions for 2009- 2017, the carbon revenues are enough to cover the project implementation costs for the first 12 years. Figure 6.6 Partial C ash Flow of an Assisted Natural Regeneration Project 100 50 0 Thousands US$ -50 -100 -150 -200 -250 -300 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ■ Establishment Costs ■ Implementation Costs ■ Capacity-building Costs ■ Transaction CDM Costs ■ Carbon Incomes of these projects is now at risk and is contingent on BioCF small-scale projects are 30-percent lower than selling the carbon credits from CDM-ineligible areas for large-scale projects; however, World Bank project in the voluntary carbon market. development costs in three of them are as costly as some large-scale projects—with project development 6.3.3 Small-scale Projects Are Not Viable costs31 exceeding the average cost of $1.50 per tCO2e. 6.32 The viability of small-scale A/R CDM pro- Therefore, with the 16,000-tonne of CO2e per year jects is further challenged due to the cap on emission limit and current credit prices, these projects struggle reductions. As explained in Box 6.3, small-scale pro- to achieve viability. jects have a cap in annual emission reductions im- 6.33 Figure 6.7 illustrates the stream of transac- posed by the UNFCCC as a way to limit the type of tion costs and discounted carbon revenues for two projects that can benefit from simplified modalities BioCF small-scale projects. In the first project, a and procedures developed to reduce transaction costs. As stated before, the transaction costs for the four 31 One out of the three projects is still under preparation. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 101 Figure 6.7 Transaction Costs and C arbon Revenues Expected 80,000 in T wo BioCF Small-scale Projects Project 1 70,000 60,000 80,000 50,000 70,000 40,000 60,000 30,000 50,000 20,000 40,000 10,000 30,000 0 20,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10,000 Expected revenues Transaction costs of meeting the A/R CDM requirements 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Expected revenues Transaction costs of meeting the A/R CDM requirements Project 2 100,000 90,000 80,000 100,000 70,000 90,000 60,000 80,000 50,000 70,000 40,000 60,000 30,000 50,000 20,000 40,000 10,000 30,000 0 20,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10,000 Expected revenues Transaction costs of meeting the A/R CDM requirements 0 2006 Note: Transaction 2007 World costs include 2008 2009 preparation Bank project 2010 2011 2012 and costs, validation, 2013 2014 verification. 2015 2016 2017 Expected revenues Transaction costs of meeting the A/R CDM requirements 102 | Chapter 6: Finance governmental agency expects to bundle five small- procedures have little effect on improving the viabil- scale projects planting introduced species on about ity of small-scale projects. The reduction in transac- 2,000 ha of degraded pasture lands, with a credit- tion costs achieved by these projects is minimal, their ing period of 20 years renewable twice. The second potential for carbon revenues is capped, and the rule project involves a private-company-led project with a requiring the involvement of low-income communities 30-year non-renewable crediting period that planted can further increase transaction costs where capacity is about 800 ha of introduced and native32 tree species. low. The modalities should be further simplified and the cap on emission reductions should be increased to 6.34 Taking a narrow view33 of these projects, the facilitate small-scale projects. An increase of the price difference between the discounted carbon revenues of credits is also required for the simplified modalities and transaction costs of meeting the CDM require- and procedures to have an effect on small-scale partici- ments is slightly positive for project 1 and negative pation in the A/R CDM (Locatelli and Pedroni, 2006). for project 2.34 Viability would be less if these pro- jects were outside of the BioCF portfolio as the carbon 6.3.4 Frontloading Future Carbon incomes would flow only upon credit issuance.35 The Revenues Remains a Challenge transaction costs of meeting the CDM requirements 6.37 In the early days of the carbon market, many are close to $200,000 in these projects, which is as expected that carbon finance could serve as an instru- high as the lower end of the range36 for transaction ment to raise frontloaded capital and to enhance a costs in large-scale projects. Overall viability would project’s cash flow. Carbon finance, however, was not be less favorable for the other two small-scale BioCF fully understood and ERPAs were too new to be fac- projects (not shown in Figure 6.7) as carbon payments tored into bank financing. In addition, it has taken are likely to be delayed longer because the projects are time in the overall CDM for some financial institu- planting only slow-growing native species in scattered tions to offer services that leverage ERPA values. The patches of land. situation is less favorable now as lenders may no longer 6.35 In addition, the effectiveness of project bun- be willing to account for prospective CDM cash flows dling as a strategy to promote economies of scale is in debt sizing because of the current high eligibility also limited. Project developers struggle with securing risk of Kyoto Protocol assets. In addition, as the post- and managing information from multiple projects. In 2012 market refocuses toward least developed coun- project 1, for example, preparing the PDDs for the tries, potential project developers and sponsors may be envisioned five projects has been a time-consuming considered less creditworthy (World Bank, 2011). and costly task. In fact, five years after starting project 6.38 Innovative financing is required to help pro- preparation, only two of the five projects have been jects secure debt with sufficient maturity to cover the registered under the CDM. The project entity has high upfront cost of forest projects. In the BioCF ex- struggled with providing evidence of project starting perience, projects with good capacity have received dates for some of the small-scale projects and manag- the first carbon payments only three years after initial ing the validation requirements for the others. In addi- planting; therefore, developers had to provide resourc- tion, bundled projects usually entail higher monitor- es to cover after-planting costs. Bridging this cash flow ing costs as DOEs have to undertake field assessments gap is critical to reducing the under-delivery risk of in widely scattered land areas. credits. The BioCF, taking on the entire risk of not 6.36 With transaction costs as high as those getting credit certification, pays projects based upon of large-scale projects, simplified modalities and CDM validation completion and according to the most accurate estimation of carbon sequestration.37 32 Native species are planted on about six percent of the project area. Still, this measure is in most cases not enough to sup- 33 The analysis only considers the ERPA period and carbon revenues. port projects with significant delays in preparation and 34 In p1, the difference between discounted costs and benefits is one per- a lack of financial resources to cover annual tree main- cent of the total investment if applying a 10-percent discount rate and close to five percent if applying a 5-percent discount rate. In p2, the tenance costs. Notwithstanding, one project developer result is negative if applying five, eight, or 10-percent discount rates. in a country with a robust forestry sector has managed 35 As previously stated, the BioCF pays for emission reductions achieved by projects upon validation and submission of monitoring reports. 36 See Table 6.3. 37 This may not be an option for other carbon aggregators. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 103 Box 6.5 Innovative Financial Mechanism in a BioCF Project in Chile The Fundación Chile’s carbon sequestration project has afforested about 2,900 hectares in regions VII and VIII of Chile. The project has planted 1,300 hectares of Radiata pine and 1,600 hectares of Eucalyptus globulus on marginal agricultural lands, expecting to sequester over 1 million tCO2e by 2020. In addition to carbon seques- tration, the project will deliver additional benefits: erosion control, land regeneration, and improvements in both biodiversity and local landholders’ well-being. Land regeneration is important in the project region as soils are extremely compacted, which prevents vegetation regeneration and water infiltration. Financing limitations and other barriers had deterred small and medium farmers in these two regions from con- verting their land-use from marginal agriculture to higher-value forestry. To implement the project, Fundación Chile developed an innovative financial model that enabled these marginally productive lands to be afforested to produce social and environmental benefits. The project was financed through several sources of investment: (i) an initial contribution from Fundación Chile and the Ministry of Agriculture (10 percent of the total invest- ment); (ii) the issuance of a “forest-backed� securitized instrument in the Chilean capital market that was sup- ported by the net revenues from the harvest and the commercialization of forestry assets (28 percent); (iii) subsidies (27 percent); and carbon finance (35 percent). The Fundación Chile project operates by entering into land-use contracts with small and medium landowners to use their land for a defined period of time. Land ownership remains with the original owner. In exchange for the use of their property, landowners receive $40/ha/year and 10 percent of the revenues at the time of harvest. The farmers do not assume the costs and risks associated with ongoing forest management, and Fundación Chile will replant the lands upon harvest. One of the major forestry companies in Chile, Forestal Mininco, participates in this project by guaranteeing minimum harvest volumes and planting maintenance in return for a fixed ad- ministrative fee and a variable incentive. Acknowledgment: Cerda and Baldovino from Fundación Chile. to introduce innovation into their project financing 6.40 The World Bank is also developing a struc- by issuing forest-backed bonds in the domestic capital tured carbon bond. This instrument utilizes the market (Box 6.5). Although this experience set a good World Bank’s AAA status to raise funds and is targeted precedent for forest carbon projects, it remains to be at investors interested in the potential upside of car- replicated more widely. bon credits without risking their principal. The bond principal is not used to support the underlying for- 6.39 Certain instruments and insurance initiatives est carbon project; rather, it is used in regular World are starting to become available to project entities. Bank lending operations and is essentially guaranteed However, these may not be enough—and certainly to be returned to the investor. The cash flows arising there is room for more innovative finance mecha- from interest payments over time from the underly- nisms. Innovative instruments are vital for garnering ing World Bank lending operation which ordinarily upfront investment support, and they are likely to de- funds the bond coupon are instead swapped for the velop as the carbon market grows. There is also room present value. This provides a lump sum which can be to factor in revenues from environmental services invested in a project in return for a share of the carbon other than carbon and official development assistance. credits generated by the project. These carbon credits A/R CDM projects produce several environmental are then sold into the market and generate a variable and socioeconomic benefits to local communities. financial return or coupon for the bond investor. Some markets are emerging for environmental services (other than carbon) and synergy should be promoted. 104 | Chapter 6: Finance 6.41 There are many variations on this theme but, ■■ Simplify the A/R CDM requirements to reduce essentially, for a 10-year bond life, about 20 percent transaction costs. Simplified modalities and pro- of the bond principal value can be made available as cedures should be even further simplified (see a lump sum from the swap transaction, depending on Paragraphs 6.21-6.26 and 6.28, and Chapter 5); and prevailing market rates. This approach could work similarly, non-permanence should be approached well for A/R projects, as the upfront investment costs through options that allow more flexibility in terms are typically lower than for an energy-related project. of number of verifications per commitment period to improve a projects’ cash flows. 6.4 Recommendations ■■ Increase the current threshold of 16,000 tCO2e 6.42 Some recommendation are presented below annually for small-scale projects and revisit the re- for the UNFCCC, CDM EB and CMP. Best practices quirement that low-income communities should collected based on the BioCF experience regarding develop or be involved in these projects. In line project financing can be found in Chapter 8. with regulations for projects in other CDM sec- tors, participation of low-income communities in For the UNFCCC and the CDM EB and CMP A/R CDM projects should be promoted, but not ■■ Streamline the CDM procedures to improve the required (see Paragraphs 6.32–6.36). predictability of carbon revenues (see Paragraphs 6.2, 6.21 and 6.37, and Chapter 2). BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 105 Institutions Photo: HP Mid-Himalayan Watershed Development Project 7.1 Introduction 7.1 Good governance is essential for the development of effective forest car- bon initiatives. Governance is a broad concept that encompasses the mecha- nisms, processes, and institutions through which individuals and organizations articulate their interests, exercise their legal rights, meet their obligations, and mediate their differences (UNDP, 2005). This chapter focuses on one key aspect of governance: the set of rules, procedures, and instruments used to strengthen forest carbon initiatives. 7.2 The design and implementation of forest carbon projects are complex endeavors that require a wide range of local expertise and the long-term commitment of all parties involved. The analysis of the BioCF portfolio shows that effective institutional arrangements are essential to defining the rights and responsibilities of all project participants clearly. The effectiveness of these arrangements, however, depends on the process through which they are created as well as their perceived legitimacy. This chapter examines these institutional issues with a special focus on projects involving collabora- tive partnerships. 7.3 The majority of the BioCF portfolio’s projects involve multiple partners. In such projects, it is important that there be a lead entity among the partners. One of the insights from the BioCF experience is that the leading entity’s technical expertise is not as important as its capacity to coor- dinate, lead, and anticipate potential risks and challenges. This entity must also ensure the flow of capital throughout the project cycle to cover both operational and maintenance costs and payments to participating local communities. 106 | BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects 7.4 In projects involving local communities and initiatives. Context influences institutional arrange- individual farmers, it is essential that project entities ments, risks, transaction costs, feasibility, and dura- invest in strengthening local institutions and fostering bility (World Bank, 2009). In the BioCF portfolio, local stakeholders’ participation throughout the pro- 30 percent of the projects were developed as added cess. This will enable local communities to take over components to larger projects. These projects had not the project in the future and continue the sustainable intended to invest in carbon sequestration; they were forestry activities in the long run. motivated to do so, however, by the potential addi- tional income from carbon revenues. In most of these 7.5 This chapter is divided into three main sec- projects, the existing institutional framework served as tions. Section 7.2 describes the legal and institutional the basis for the development of the forest carbon pro- framework in place for the development of BioCF ject. This reduced the upfront costs. In addition, pro- projects, the partners involved, the structure of the ject entities’ backgrounds in the area and established partnerships, and the institutional arrangements in legitimacy with local communities helped to optimize place to ensure effective implementation. Section 7.3 the implementation of the forest carbon projects. examines institutional challenges. Finally, Section 7.4 contains recommendations for project developers and 7.2.2 Structure of Partnerships national governments. 7.9 Project participants have different incentives for getting involved in forest carbon projects. Some 7.2 Legal and Institutional are attracted mainly by the potential revenues from Framework the sale of carbon credits. Others expect benefits like 7.6 Institutional issues are a key factor in the suc- those of traditional forestry projects, including im- cess or failure of forest carbon projects. A supportive provement of local livelihoods, increases in land pro- national framework and effective legal and institu- ductivity, and jobs (World Bank, 2009). Participants tional arrangements at the project level often enable in BioCF projects include governmental entities, projects to overcome many of the technical and regu- NGOs, research centers, private companies, local or- latory challenges faced by CDM forest initiatives. ganizations and communities, and individual farmers. In the majority of the projects, the project entity is 7.2.1 National and Local Circumstances either the government or a private sector company. In 7.7 Projects must rely on a supportive national the BioCF, project ideas are generally conceptualized framework to achieve their goals. Even when the gov- by the same project entity that is responsible for man- ernment is not directly involved in forest carbon ini- aging the project (Table 7.1). tiatives, government support is crucial for the develop- ment of A/R projects. This is true not only because the 7.10 Forest carbon projects may be developed by CDM requires the approval of the DNA but also due a single project entity or by multiple partners. In the to the broad interaction between activities developed BioCF portfolio, fewer than 20 percent of the projects locally and national policies and regulations. On the were developed by a single project entity and without one hand, these interactions can facilitate the imple- the direct participation of local farmers. When multi- mentation of forest carbon projects. For example, in ple project entities and farmers are involved, it is com- BioCF projects that went through a process of secur- mon for projects to form partnerships. To be consid- ing land tenure, the active engagement of national ered a partner, one must be actively involved in project land agencies in project preparation increased the design, implementation, management, funding, and/ certainty of the statutory recognition of local farmers’ or decision making (Harvey et al., 2010). user rights to the land (see Chapter 4 for more de- 7.11 Partnerships in BioCF projects adopt a wide tails). On the other hand, potential incompatibilities range of institutional structures with varying degrees with some national policies, and limited governmental of complexity. Figure 7.1 describes the Costa Rica capacity and resources, can delay the development of project, which is an example of a simple partnership A/R projects. with only a few partners and layers of interactions. 7.8 The context in which forest carbon pro- Figure 7.2 describes the Caribbean Savannah project jects are developed is crucial to the success of these in Colombia. It shows the structure of a more complex BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 107 Table 7.1 Ex amples of T ypes of Partnerships in the BioCF Portfolio Project Entities Landholders Other Partnersa Public-Private Communities Number Government Government Landholders Corporation Association Institutions Institution Individual Company Company Research Research Farmers of Private Private NGO NGO Projects 4 4 2 1 1 1 1 1 1 1 1 1 1 a Other partners are organizations and/or associations that are actively involved in design, implementation, management, and/or decision making but are not a core project partner. The core partners are the project entities listed in the PDD and the local participants (communities and/or individual landholders). Figure 7.1 Simple Partnership Structure — COOPEAGRI Project in Costa Rica FONAFIFO— The National Forest Financing Fund $$ COOPEAGRI— Cooperative of Farmers (PE that manages the project) ce an g ist rin ss ito lA on $/ha/yea ca M ni ch d an Te ts pu In Individual Farmers— Associated with COOPEAGRI (n=267) 108 | Chapter 7: Institutions Figure 7. 2 Complex Partnership Structure — C aribbean Savannah Project in Colombia Corporación Colombiana de Investigación Agropecuaria Corporación Autónoma Regional de los Valles del Centro Internacional de (CORPOICA) Agricultura Tropical (CIAT) Sinú y del San Jorge (CVS) Implements the silvopastoral Developed the PDD component and monitors all Covers all investment costs and the project sites coordination Financial Emission Emission and Reductions Reductions Technical (ERs) (ERs) Committees* Asociación de Cultivadores Uresanos (ASOCUR) Farmers’ association Consorcio Bosque Tropical that supports CBT Contracted to implement the project Indigenous Medium Small and Communities Farmers Medium Farmers Silvopastoral component Reforestation component Rubber component *There are three committees that oversee the activities within this partnership. A financial committee monitors project spending, a technical committee supervises project implementation, and an operational committee oversees the relationship between CORPOICA and CVS with respect to the silvopastoral component. These committees include members from the three project entities, representa- tives from the local communities, and outside forestry engineers and university experts. partnership, where different project entities interact recognized by the national government. These groups with multiple farmers and communities across differ- are the legal entities that obtain user rights, implement ent components of the project. the project, and, in some cases, receive the proceeds from the sale of the emission reductions. 7.12 All BioCF project entities have some experi- ence in the project areas. Most have worked locally for 7.13 In one of the projects, for example, the es- years and have strong relationships with the commu- tablishment of a Community Forest Association is nities in these areas. In over 70 percent of the BioCF a requirement for receiving forest licenses from the projects, either local communities or farmers are a National Forest Service. There is also a requirement to primary partner. In 13 of the 18 projects where local prepare a governing agreement of the associations and farmers participate as partners, they are organized in a site management plan. Even when not required by communities or cooperatives regulated by bylaws and national legislation, local community groups usually BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 109 create their own bylaws with the active participation 7.17 The main agreements that form the insti- of all members in order to avoid potential conflicts tutional framework for the development of BioCF and to facilitate the successful implementation of the projects define (i) carbon ownership, (ii) land use in project. The project entity often provides assistance in project areas, and (iii) benefit sharing. All BioCF pro- this process through investments in capacity building jects have instruments that define land use and carbon and legal advisors. ownership; benefit-sharing agreements are only signed in cases where local farmers and/or communities par- 7.14 Where local communities are not partners in ticipate as project partners or beneficiaries. forest carbon initiatives, they can still benefit both di- rectly and indirectly from the development of these Carbon Ownership Agreements projects. In one BioCF project, for example, local 7.18 Carbon ownership is a key element of all car- communities from outside the project boundary will bon finance transactions. Investors in forest carbon benefit indirectly from the carbon revenues via invest- projects need the assurance that the emission reduc- ments made by the project entity in local infrastruc- tions they are purchasing can be legally transferred to ture. This project has agreed in the ERPA contract to them without restrictions. To address this issue, BioCF invest 12 percent of the carbon revenues in commu- projects go through a legal due diligence process dur- nity development; this investment is monitored by the ing project appraisal to determine who owns the land, BioCF. the trees, and the carbon. This process includes an as- sessment of the host country’s national legal frame- 7.2.3 Project Legal and Institutional work and the project’s land tenure situation. Arrangements 7.15 The agreements that form forest carbon pro- 7.19 Carbon is considered a natural resource in jects’ legal and institutional frameworks include the some countries and the property of the government. In contracts signed by the participants, management other countries, carbon is considered a part of the tree plans, certifications, community groups’ bylaws, ben- and the property of the person who owns or is entitled efit-sharing agreements, and other instruments used to harvest the trees. Most countries, however, do not to record governing rules. Forest carbon project agree- to date have national legislation that defines carbon ments must observe host countries’ national laws and ownership. As a result, forest carbon projects rely on policies, satisfy CDM requirements, accommodate project-level institutional arrangements. Carbon rights the needs of project participants, and have the ulti- agreements are important instruments for reducing the mate objective of delivering carbon sequestration. delivery risks for outside buyers by clarifying carbon ownership rights in forest carbon projects. In projects 7.16 In projects with a large number of partici- that involve local farmers and communities, the defini- pants, creating tailored agreements can be costly and tion of carbon ownership is done at two levels. time intensive and lead to high transaction costs Emission Reductions Purchase Agreements (Gong et al., 2010). Using a standardized agreement can be a solution—as long as the agreement follows 7.20 An ERPA is a special form of purchase and good governance principles (including participation, sale agreement for the acquisition of emission reduc- equity, transparency, accountability, and fairness).1 tions (Carr and Rosembuj, 2007). This legally bind- These framework agreements must be well under- ing contract includes among its terms the volume of stood by all the parties, including local farmers and emission reductions being transacted, the price, and communities, and must include fair grievance mecha- the delivery schedule of emission reductions and pay- nisms. Forest carbon project agreements should also ments. The contract also includes terms related to be flexible enough to accommodate projects’ changing land use and permanence of the planted trees for the circumstances, and they should include strategic ac- duration of the contract. The ERPA also describes tions plans for dealing with foreseeable risks (World remedies in the case of project failure. Bank, 2009). 7.21 ERPAs are created between project entities and the BioCF, and they set forth the rights and re- 1 In some cases, projects have found it convenient to sign individual con- sponsibilities of the parties to the carbon transaction. tracts with landholders. These easy-to-follow and short contracts are part of a larger framework contract. When a project has multiple partners, the project 110 | Chapter 7: Institutions Table 7. 2 Ex amples of Project Benefit Distribution Schemes in the BioCF Portfolio Number Farmer or Community Benefits Project Entity Benefits of Non-Timber Other Forest Projects Carbon Timber Carbon Forest Products Goods 3 3 2 2 2 1 1 1 1 1 entity represents the partnership as the carbon aggre- an integral and legally binding part of the subsidiary gator and the BioCF represents its participants. agreement. Carbon Transfer Subsidiary Agreements Defining Land Use in Project Areas 7.22 Most projects that have local communities 7.24 Allowable land uses are specified in many or farmers as partners sign a subsidiary agreement BioCF project agreements, including in forest man- transferring to a carbon aggregator the legal right to agement plans, contracts, subsidiary agreements, and transact emission reductions on their behalf. Carbon carbon ownership agreements. In projects with mul- transfer subsidiary agreements were signed in approxi- tiple partners, agreements that clearly determine all mately 80 percent of the BioCF projects that have lo- partners’ land-use rights and obligations are essential cal communities or farmers as partners. In most of the to avoid conflicts over resources and to ensure the sus- cases where farmers signed carbon transfer subsidiary tainability of the forest carbon initiative. Agreements agreements, they will receive all or part of the carbon defining land tenure often also determine land use in revenues in exchange for their participation in the the project area. project. In one BioCF project in Africa, for example, community associations that are part of the partner- 7.25 In many BioCF projects, the land itself is part ship have the license to use public forest land—which of farmers’ equity contribution to forest carbon ini- includes entitlement to the carbon. The NGO that is tiatives, and farmers who dedicate part of their land the project entity and the carbon aggregator has the to the project in exchange receive revenues from the tradable rights to the carbon asserted through the sub- sale of carbon and/or other forest products. In other sidiary agreement. The communities will receive part BioCF projects, land-use rights in project areas are de- of the carbon revenues and revenues from non-timber fined by leasing agreements. In one Latin American forest products through a benefit-sharing mechanism project, the project entity signed leasing contracts with that also includes compensation per surviving tree private landowners to rent their land for the duration planted. of the project in exchange for annual payments per forested hectare. During the contract term, participat- 7.23 Carbon transfer subsidiary agreements also ing landowners voluntarily restrict their land use to include various land-use terms and conditions, such as the development of the project. After the project, the protection of the project area from illegal logging and land is returned to them reforested. fire. The forest management plan is a separate docu- ment in some BioCF projects, but it is still considered BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 111 Figure 7. 3 Carbon Revenues and Forest Products Distribution in BioCF Projects Number of projects Number of projects (n=8) (n=7) (n=5) (n=4) (n=4) (n=4) (n=1) (n=1) 0% 1–59% 60–99% 100% 0% 1–59% 60–99% 100% % of carbon revenue received by local farmers/communities % of total forest products assigned to local farmers/communities Note: Both figures include projects where the benefit-sharing arrangements are still under discussion. As a result, these numbers could change. The forest products represented in the figure are timber, rubber, and Arabic gum. Forest products with low or no commercial value are not part of this analysis. Benefit-sharing Mechanisms to 100 percent of the revenues from timber and other 7.26 BioCF benefit-sharing agreements define forest products. In one project, the farmers are entitled the flow of monetary and non-monetary benefits to 100 percent of both emission reductions and tim- from emission reduction transactions and other for- ber because the project entity’s main goal is to improve est products to local participants (Table 7.2). Issues local livelihoods. to be agreed upon include what benefits farmers and 7.29 The benefit-sharing arrangements incorporat- communities will receive, with what frequency, how ed into BioCF projects are designed on a project-by- (through the local community or directly to individu- project basis based on discussions with local partners al farmers), and by what payment method (in-kind or and the financial structure of the project. Risks associ- cash). Most BioCF projects use participatory methods ated with these are discussed in Chapter 8.The diverse to identify local beneficiaries and to define the right nature of benefit-sharing arrangements is exemplified incentives to ensure their commitment to the project. by the first three projects in the BioCF portfolio where 7.27 All BioCF projects that involve local com- carbon payments were made. In one project, the car- munities or farmers have defined at least part of their bon revenues are being used to cover project costs, and benefit-sharing agreements. ERPA payments are not the communities are entitled to all the revenues from triggered until the projects both define and formal- forest products; in another, the revenues from carbon ize their benefit-sharing arrangements and go through are being reinvested in infrastructure and develop- validation. ment projects identified as priority areas by the local communities. The third project, meanwhile, makes 7.28 The share of emission reductions and forest cash payments to participating farmers. products (timber and non-timber) that local benefi- ciaries are entitled to has been defined in 17 BioCF 7.30 Creating benefit-sharing plans can increase projects (Figure 7.3). In some projects, the benefit- the social capital of communities as it requires com- sharing arrangement reflects a tradeoff between car- munity members to work together to define a strategy bon revenues and timber. For example, when the pro- for distributing resources (see Annex 4 for details on ject entity uses 100 percent of the carbon revenues to creating a benefit-sharing arrangement). The increase cover its upfront investments, the farmers are entitled in social capital contributes to resolving past disputes and to strengthening local organizations that, in many 112 | Chapter 7: Institutions Box 7.1 Benefit-sharing Mechanism in the Humbo Assisted Natural Regeneration Project in Ethiopia I ns tit u ti on a l A rra nge m en t s Seven cooperative societies have been created in the Humbo area for the development of this project, and par- ticipation in a cooperative is open to all interested community members. Before establishing the cooperatives, there were consultations with the government and community members. The majority of local farmers are part of a cooperative, and membership continues to grow. The coopera- tives were recognized under Ethiopian law and granted land-use rights in the project areas. These groups are responsible for managing the project area with the technical assistance of World Vision Ethiopia. Subsidiary agreements between World Vision Australia, World Vision Ethiopia, and all the cooperatives have been signed to transfer the carbon trading rights from the cooperatives to the project entities. This allowed World Vision Australia and World Vision Ethiopia to enter into an ERPA with the BioCarbon Fund to sell part of the expected carbon emission reductions, therefore ensuring some upfront financing for the project. Figure 7.4 Benefit-sharing Arrangement in the Ethiopia Humbo Assisted Natural Regeneration Project World Vision World Vision Ethiopia COORDINATION Australia (WVE) WVE passes on 100% of carbon revenues to the local cooperatives in the form of investments in areas identified by the local communities (e.g., grain store construction and flour mill installation) Abella Hobicha Shoya Bada kebele Kebele Hobicha Bossa Bongota Wanche Kebele Bolla Abella Kebele Wanche Longenna Kebele Abella Kebele Gefetta Kebele Bene fit S h ari ng Carbon revenues started flowing to this project in 2010. Decisions regarding the use of carbon revenues were made by the cooperatives. They prioritized several areas for investment: the construction of a grain store, installation of a flour mill, and creation of microcredit for livestock and trade. A series of financial safeguards was put in place to ensure that the cooperatives receive the revenues assigned to them, including external auditing of the bank accounts through which the carbon revenues flow. The coopera- tives are also entitled to all forest products, including timber. (Source: Tefera, H.. et al., 2010.) BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 113 cases, will be the lead entities managing the projects in or communities participating in the project. Getting the long run. In the case of one project in Africa, the local commitment for these projects was a major chal- very process of defining the benefit-sharing agreement lenge, although it was eased somewhat in cases where was crucial to improving social cohesion within the the project entity was trusted by local farmers. community since it gave local farmers the chance to reflect collectively on how to use the carbon revenues 7.35 The long-term success of these multi-stake- and the income from the sale of Arabic gum. holder projects relies on local partners’ incentives to stay committed. Local farmers, however, often do not 7.31 Benefit-sharing arrangements in BioCF pro- have enough information about the schedule of car- jects often include financial and social measures to en- bon payments—and thus expect early payments. In sure that there is no elite capture and that the invest- some BioCF projects, where the benefit-sharing plan ments made by user groups do in fact reflect the needs is not yet fully defined, ensuring an optimal cash flow of local participants. Mitigation measures include ac- at the project level to keep participants incentivized is tively involving local communities in the discussions a challenge. Some projects have overcome this chal- and making user groups accountable for the invest- lenge by creating other short-term incentives for farm- ments. It is often important for the project entity, as ers, such as labor opportunities and providing access in the Ethiopia project (Box 7.1), to play an advisory to other forest products (see Chapter 1). role in assisting user groups in making their decisions. 7.3.2 Weak Local Capacity 7.32 When payments are made in cash, financial 7.36 When these projects were initiated, only 30 measures are put in place to promote transparency. percent of the project entities in the BioCF portfo- One project in Asia created a monitoring committee, lio had technical expertise in forestry; none had ex- composed of representatives from the two project en- perience developing forest carbon projects. The gap tities, to ensure that a share of the benefits from the in technical expertise was in most cases overcome by sale of carbon credits goes to the farmers. This pro- contracting with consulting companies to develop the ject also opened a joint escrow account for the carbon carbon component of the project. The BioCF also revenues that contains instructions that dictate how, provided extensive guidance in this area, including when, and to whom payments will be made. developing methodologies and assisting project enti- ties and other partners with the completion of project 7.3 Challenges documents (see Chapter 5). 7.33 BioCF projects that involve numerous part- ners have faced more institutional challenges than 7.37 Poor capacity leads to poor project documen- those implemented by a single project entity. These tation, which in turn affects the management of the challenges arise from the constraints placed on part- project and the ability of the project to achieve valida- nerships by the complexity of the A/R CDM rules and tion in an effective manner. Weak local capacity also procedures, the lack of resources, and low local capac- affects project entities’ ability to staff their manage- ity (Table 7.3). Some of these BioCF projects have ment teams and to hire the right individuals to assist overcome these challenges to become success stories. with the implementation and monitoring of the pro- Other projects are still in the process of addressing ject. The lack of local capacity when a project was ini- these issues. tiated was often aggravated by low or no investments in capacity building. At least 20 percent of the projects 7.3.1 Actively Involving Local Partners faced difficulties in fulfilling the requirements for pro- 7.34 Actively involving local participants in pro- curing a grant for capacity building; in other cases, ject design and implementation was a challenge in even after the project entity received this money they 20 percent of the BioCF projects. This challenge did not disburse it at the early stages of the project. In stemmed from difficulties in identifying local par- some projects, there were no significant investments in ticipants, getting them to commit to the project, and capacity building at the preparation phase because of a keeping a constant flow of communication. At least lack of resources and/or difficulties in identifying local seven BioCF projects have over 1,000 local individuals participants. 114 | Chapter 7: Institutions Table 7. 3 Institutional Challenges in the BioCF Portfolio Frequency in the Type of BioCF Portfolio Examples Problems (n = 19) ■■ Too much time spent preparing beneficiaries who, in the end, were not eligible to participate in the project because their lands did not satisfy the CDM requirements ■■ Difficulty in getting individuals to commit to the project at the preparation stage Involving Local since many prospective participants did not fully grasp the concept of carbon and 21% Participants the potential benefits of the initiative ■■ Project delays due to the lack of a defined benefit-sharing plan ■■ Payment delays removed incentives for farmers to participate ■■ Lack of investment in capacity building ■■ Difficulties in identifying project participants delayed training Weak Local 42% ■■ Poor capacity meant poor documentation of project activities, which in turn af- Capacity fected the validation process ■■ Weak local human capacity affected the ability to put a management team together ■■ Inability to manage risks and react accordingly ■■ Lack of responsibility for the project ■■ No project “champion� to lead the project Lack of ■■ Lack of planning ahead and building local capacity to support multiple activities and Management 31% multiple sites Capacity ■■ Lack of accountability and transparency in reporting financial flows ■■ Reluctance to make early investments in the project ■■ Inability to oversee and monitor the performance of technical consultants ■■ The management team had to be changed Staffing Issues 31% ■■ Staff turnover and challenges in replacing them was a time-consuming process ■■ High turnover of the monitoring field team ■■ Lack of clarity on the lead entity led to conflicts over project ownership Lack of Clear ■■ Lack of agreement on management set up Roles and 21% ■■ Overlapping roles resulted in no action as each partner expected the other one to Responsibilities act ■■ The project entity wasn’t accepted by the participants ■■ Disagreement at the local level over the objectives of the project ■■ Disagreement at the local level over how to implement the project Communication/ ■■ Communication and coordination difficulties attributed to the remoteness of some Coordination 21% project areas as project entity personnel reached out to some participants only once Issues a year ■■ Each partner was in a different part of the country or in different countries, making coordination among partners difficult ■■ Political instability in the host country ■■ Delay in the process of getting DNA approval Context 16% ■■ Institutional weaknesses at the national level ■■ Lack of capacity of governmental officials involved in the project Note: The categories of institutional challenges represented in Table 7.3 are outlined for presentation purposes. These challenges are interdependent, with crosscutting issues which make them difficult to separate out. 7.3.3 Staffing Issues addition, maintaining staff over the long run and re- 7.38 Finding individuals at the local level with the placing key staffers were challenges in approximately capacity to develop these projects is not the only staff- 30 percent of the BioCF projects. In one case, the ing challenge that the BioCF projects face. Timing is project stagnated after the project coordinator left. In another big problem. Governmental project entities, another case, the project was on hold after a key staff in particular, may need months to bring new hires on member from the management team took a leave of board due to bureaucratic processes and politics. In absence. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 115 Training on project monitoring in the Democratic Republic of Congo. 7.3.4 Lack of Clear Roles and distance between the project areas and the headquar- Responsibilities ters of project entities. This challenge was overcome 7.39 The lack of clarity over the roles and respon- in one project by setting up a technical group with sibilities of various partners has impacted 20 percent representatives from each entity to meet regularly to of the BioCF projects. These challenges have includ- discuss issues related to the project. ed a lack of leadership from the core project entity; overlapping partners’ roles from the inception of the 7.3.6 National and Local Circumstances partnership; no management or investment responsi- 7.42 Some projects with strong institutional bilities assigned to the project entity; the core partner frameworks have been negatively affected by changes was identified but did not act as a project leader; two in policy at the national level. Other projects, how- project entities disagreed over the ownership of the ever, have been positively affected by the national and project; and the lack of legitimacy of the project en- local circumstances in which they were developed. tity with local partners resulting in the rejection of the Projects with complex partnerships implemented in partner as the project leader. countries with a background in centralized govern- ance had good rates of success. Possible explanations 7.3.5 Communication/Coordination include bottom-up management experience and the Issues sense of working for the common good. 7.40 Communication and coordination can be 7.43 National political instability has affected a challenge, especially in partnerships with multiple four BioCF projects developed in countries that went participants from different sectors and various lay- through a coup d’état during the project preparation ers of interactions from the management to the field and/or implementation phases. Even though this is a level. Having a lead partner responsible for coordinat- situation that project entities cannot control, it can ing with participants and ensuring an open channel of have an effect on project risks and influence investors’ communication with all partners is crucial. and potential buyers’ decisions with respect to the 7.41 Communication and coordination challeng- project. es in some BioCF projects can be attributed to the 116 | Chapter 7: Institutions 7.4 Recommendations ■■ In larger and more scattered projects, project devel- opers should consider investing in training materi- 7.44 Below are recommendations for project de- als to build capacity. These materials may consist of velopers and national governments. videos in the local language that include training on For Project Developers implementation and monitoring. Project entities ■■ When implementing projects in partnership with should also invest in strategies to keep in constant local communities or farmers, it is important for communication with participating communities project entities to invest in building a trusting re- (see Paragraphs 7.36–7.38). lationship from the beginning. When the project For Governments entity does not have expertise in social issues, es- ■■ Governments should consider investing in legisla- tablishing partnerships with local organizations tive reforms to create a supportive legal framework trusted by local farmers may facilitate the process. for the development of forest carbon projects. The costs for this work should be fully budgeted Having a national legal framework that supports along with other project costs (see Paragraphs 7.12, the granting of user rights to project participants 7.34, and 7.35). could reduce the risks of non-permanence and cre- ■■ Whenever possible, project developers should try to ate more incentives for participation. Countries keep partnerships and institutional arrangements should also consider legislation to clarify carbon for project design and implementation as simple ownership at the national level. This would also as possible. The contracts signed with local partici- reduce project transaction costs and generate in- pants should use plain language. This is especially centives for more participation by farmers. This important to ensure that the roles and responsi- framework should also include incentives for pri- bilities of all participants are well understood (see vate-sector investments in reforestation and forest Paragraphs 7.11 and 7.39–7.41). restoration activities (see Paragraphs 7.7–7.8 and ■■ Project developers should consider getting the 7.42–7.43). government involved in the implementation of the project to avoid potential conflicts between the project’s institutional agreements and national legislation. At a minimum, national governments should be continuously updated (see Paragraphs 7.7–7.8 and 7.42–7.43). BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 117 Measuring Under-delivery Risk 8.1 Introduction 8.1 Creating carbon credits from A/R projects involves risks. These risks can be put into two categories: (i) those stemming from the physical implementation of the A/R project activity (similar to a traditional project), and (ii) the risks pertain- ing to the creation of the carbon asset under the CDM’s regulatory framework. 8.2 Since inception, the BioCF has been monitoring the performance of its forest carbon pro- jects. The BioCF must manage the risks of not achieving the expected emission reductions contracted in the ERPAs as the Fund´s participants rely on these credits to partially comply with their Kyoto Protocol commitments. Through the continuous assessment of under-delivery risk, the BioCF has found that: (i) risks can be measured, managed, minimized, and mitigated; (ii) risks can be reduced with increased experience; and (iii) risks are closely related to project developers’ forestry and CDM capacity. 8.3 This chapter briefly describes the methodology applied by the BioCF to measure the under- delivery risk of getting carbon credits. Section 8.2 describes the methodology and goes through all the categories of risk assessed. When describing the more frequent risks in the BioCF portfolio, this section makes reference to the challenges presented in previous chapters. Section 8.3 summarizes the measures taken at the portfolio level to manage the under-delivery risk. Finally, Section 8.4 lists good practices for reducing the under-delivery risk of carbon credits. 8.2 Methodology for Assessing the Under-delivery Risk 8.4 The BioCF has been monitoring the under-delivery risk of its projects since 2007. In 2010, with increasing data, an update of the first risk assessment methodology was done to incorporate both 118 | BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects Table 8.1 C ycles of Risk Assessment Undertaken in the BioCF Portfolio Cycle Risk Category Assessments During the Cycle ■■ Before due diligence ■■ After due diligence and before planting Operational Social and Environmental ■■ After planting and before the first issuance of emission reductions ■■ After the first issuance of emission reductions ■■ Before ERPA signature Financing Financing ■■ After ERPA signature Operational ■■ Before due diligence ■■ After due diligence and before project commissioning Operational Host Country Political ■■ After planting and before the first issuance of emission reductions ■■ After the first issuance of emission reductions Methodology, Monitoring, and ■■ Before due diligence Verification ■■ After due diligence and before the PDD is sent to the validator Additionality ■■ After the PDD has been sent to the validator but before validation is complete ■■ After validation has been completed but before registration Regulatory ■■ After registration has been completed but before the first issuance of emission reductions Host Country Regulatory ■■ After the first emission reductions have been issued but before the project is near to the renewal of the first crediting period ■■ Near the first crediting period the BioCF experience accompanying project develop- throughout project implementation.2 Several situ- ers and existing knowledge on credit issuance in differ- ations can trigger the World Bank´s environmental ent CDM technologies.1 The new methodology con- safeguard policies. On the environmental side these tains simplified risk categories and allows the BioCF’s include (i) neglecting best forest operational practices; operational team to register the progress of projects (ii) stressing water resources in the project region; and before and after the critical stages of the financing, op- (iii) negatively impacting natural habitats. Examples erational, and regulatory cycles (Table 8.1). of measures implemented by some BioCF projects to avoid or mitigate environmental risks include: 8.5 As a result of the risk assessment, BioCF pro- ■■ Ensuring the implementation of a comprehensive ject managers score projects as having low, medium, forest management plan that includes provisions high, or no risk. They also identify bottlenecks, and to protect and enhance local and regional environ- then analyze them with the project entities to design mental quality; appropriate corrective actions. These actions are in- corporated into project supervision plans, which are ■■ Monitoring indicators related to groundwater monitored on a monthly basis by the BioCF’s manage- availability, especially in projects planting for fast- ment. The main risk categories monitored in BioCF growing species; projects are explained below. ■■ Elaborating a water resources management plan, in line with national legislation, for projects involving 8.2.1 Environmental and Social Risks irrigation practices; and 8.6 One of the first due diligence assessments un- ■■ Undertaking ecological monitoring to track endan- dertaken in every BioCF project is the project’s po- gered species and species that are indicators of high tential to cause social and environmental risk to local conservation value criteria, especially for projects in people and their environment. This is assessed prior to biodiversity hotspots. acceptance into the BioCF portfolio and is monitored 1 The delivery risk includes the probability that projects using certain tech- 2 Potential impacts from projects on local communities and their environ- nologies will gain certification. It uses a proxy of what can be expected ment are assessed according to the World Bank’s environmental and from different types of projects, based on data on issuance success col- social safeguard policies. See http://www.worldbank.org/ for more lected in the carbon market. information. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 119 8.7 Several situations can also trigger the World 7), and some are in the process of strengthening the Bank´s social safeguard policies. These include general terms of their original proposals. (i) threatening the rights of indigenous people; (ii) causing social conflicts as a result of involuntary re- 8.11 There are two early lessons from the BioCF settlement practices; and (iii) promoting unequal dis- projects with regards to benefit sharing. First, in line tribution of benefits. If safeguards are triggered, pro- with the dynamic nature of forest carbon projects and jects have to propose mitigation measures. Examples evolving stakeholder needs, the designing effective sub- of measures proposed by BioCF projects to avoid so- sidiary agreements is an adaptive process. Corrective ac- cial risks include: tions to subsidiary agreements may be required during the project lifetime; effective communication between ■■ Ensuring that local communities, including indig- partners is therefore a must to avoid social conflicts. enous peoples, are voluntarily participating in pro- Second, appropriate grievance mechanisms may be jects and that people´s rights are fully respected; required to facilitate farmers’/communities’ effective ■■ Establishing a participatory plan to anticipate and communication of their views and concerns regarding manage land-use conflicts; the implementation of the benefit-sharing agreement. ■■ Establishing institutional instruments, including The BioCF will continue to monitor and document subsidiary agreements and locally developed frame- emerging issues associated with benefit-sharing agree- works, to govern the proposed land-use agree- ments and the measures designed to avoid or mitigate ments; and them in different project contexts. ■■ Carrying out a socially respectful and adaptive pro- Beyond World Bank Safeguards ject planning process. 8.12 In addition to applying the World Bank’s en- 8.8 BioCF projects planting fast-growing spe- vironmental and social safeguard policies, BioCF pro- cies usually guarantee the sustainability of their jects have to meet the CDM requirements on socioec- forest management, including the adoption of best onomic3 and environmental impact assessments.4 A/R social and environmental practices. Some projects have CDM projects must carry out appropriate analyses achieved Forest Stewardship Council certification. and public consultations with involved stakeholders to identify any negative impacts inside and outside the Risks Related to Unequal Benefit Sharing project boundary that may be attributable to the pro- 8.9 Unequal distribution of project benefits is a posed project. Where significant negative impacts are concern of forest carbon projects’ stakeholders and ob- identified, developers have to undertake an impact as- servers. To address this, subsidiary agreements in most sessment and propose a monitoring plan with relevant BioCF projects have been elaborated in the project risk mitigation measures. At verification, third-party preparation stage; they will be subsequently refined to auditors check the elements of the monitoring plan take into account a project’s final design. These agree- related to socioeconomic and environmental impacts, ments include clear benefit-sharing arrangements and including the implementation of proposed risk miti- avoid false expectations with respect to carbon rev- gation measures (UNFCCC, 2006b). enues. Project entities are responsible for ensuring a fair distribution of carbon revenues among partners 8.13 Designated National Authorities assess the throughout the project lifetime. To be effective, sub- projects to determine whether they contribute to fur- sidiary agreements should follow best practices (see thering the country’s sustainable development goals.5 Chapter 7 and Annex 4). Each country applies its own criteria for determining 8.10 Recognizing that both the quality and appro- 3 Socioeconomic impacts may include impacts on local communities, indigenous peoples, land tenure, local employment, food production, priate implementation of subsidiary agreements can cultural and religious sites, and access to fuel wood and other forest impact the under-delivery of projects, and that all forest products (UNFCCC, 2006b). carbon project stakeholders are on a learning curve with 4 Environmental impacts include impacts on biodiversity and natural eco- systems inside and outside the project boundary (UNFCCC, 2006b). regards to benefit sharing, the BioCF has been provid- 5 The UNFCCC does not provide a definition of sustainable development ing social and legal expertise to improve the quality of in the context of the CDM. Sustainable development is defined in gen- subsidiary agreements. Most BioCF projects are in early eral terms as “development that meets the needs of the present with- out compromising the ability of future generations to meet their own stages of subsidiary agreement refinement (see Chapter needs� (Brundtland, 1987). 120 | Chapter 8: Measuring Under-Delivery Risk if a project contributes to sustainable development. implementation plan, and the project entity’s experi- In doing such an assessment, some DNAs focus on ence and commitment to implementing the project. At projects’ risks to the local communities and their en- advanced stages (i.e., after planting) they assess overall vironment. DNAs have to provide letters of approval project performance, survival planting rates, non-per- to project participants, which is a requisite for vali- manence risk, and the project entities’ capacity to con- dation. As explained in Chapter 1, some projects go tinue implementing the forest management plan. further by voluntarily certifying their project design to assure that risks to the local communities and their 8.17 Some of the more frequent operational risks environment are avoided and that the project will lead identified in the BioCF portfolio relate to the use to net positive benefits. Challenges exist, however, to of lesser-known tree species. Over 80 percent of the monitoring net-positive projects’ associated benefits.6 project areas in the BioCF portfolio are planted with lesser-known native species or with a mix of native 8.2.2 Financing Risk and exotic species (see Chapter 1). Another frequent source of risk involves project developers’ weak for- 8.14 A project is not accepted into the BioCF port- estry experience, poor management and coordinating folio unless a large portion of the needed capital has capacity, high staff turnover, and project develop- been secured. This is the main risk category that project ers’ weak capacity to address non-permanence (see managers assess during the commercial project cycle.7 Chapter 7). The lack of coordinating capacity triggers Project managers assess issues such as credit from mul- operational risk in multi-stakeholder projects and in tilateral institutions and funds, equity from the project projects having complex partnerships (see Chapter 7). entity, loan agreements, commitments from financial institutions to fill any gaps in financing, as well as 8.18 A frequent source of risk in projects is the projects’ cash flow through implementation and op- delay of implementation due to developers’ difficulty eration stages. The most frequent sources of financing in finding eligible lands (see Chapter 4). This is of- risk identified in BioCF projects relate to such issues ten related to changes in land opportunity costs and as developers’ inability to secure investment financing, compounded by unclear land tenure rights. Achieving delays in disbursement, and developers’ poor manage- clarity on land tenure rights may be time and resource rial capacity (see Chapter 6). intensive where land rights registry systems are poor, institutional capacity within the project is weak, and 8.2.3 Operational Risk there are conflicts over land tenure rights. 8.15 Risks related to carbon sequestration tech- nology and project implementation are assessed at 8.2.4 Methodology, Monitoring, and three stages: (i) after and before due diligence, (ii) af- Verification Risks ter planting, and (iii) after the issuance of first emis- 8.19 The risks related to methodology, monitor- sion reductions (Table 8.1). When assessing this risk, ing, and verification refer to the probability of not BioCF project managers analyze several characteristics complying with these stages of the CDM project cy- of projects, including the tree planting scheme, the cle. BioCF project managers assess the evolution of implementation plan, the project developer’s capacity, projects around six stages of the project cycle (Table project entities’ commitment, available resources to 8.1). A large number of the regulatory risks have been implement the plan, and the non-permanence risk. described in previous chapters. These include selec- tion of a valid methodology and issues at validation 8.16 The project characteristics assessed vary at (see Chapters 1 and 2); national forest definition and each stage of the operational cycle. In early stages of land issues (see Chapter 4); as well as estimation of project development (i.e., before and after due dili- emission reductions, project developers’ limited ca- gence) project managers assess the planting scheme, the pacity for project monitoring, and deviation from the PDD at implementation (see Chapter 5). 6 Projects usually get overwhelmed with the ex-ante and ex-post GHG ac- counting, and this reduces their willingness to engage in monitoring of associated benefits. It is necessary to develop simple yet reliable meth- 8.2.5 Additionality Risk odologies for monitoring the co-benefits of A/R projects. 7 Legal due diligence on carbon, land, and tree ownership, and World 8.20 The additionality risk in the BioCF portfo- Bank Safeguard Policies, are undertaken by different Bank units to avoid lio is assessed at two stages of the project CDM cycle conflicts of interest. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 121 (Table 8.1). As explained in Chapter 2, in order to comply with the CDM additionality require- ment project develop- ers have to demonstrate that projects would not have happened with- out carbon finance. However, since changes in a project may impact additionality, the BioCF monitors the risk that a project may become non-additional across the project risks, the BioCF can free capital in a timely manner to crediting period. In addition, in addressing projects’ reallocate it to projects with a higher probability of ER deviations from the PDD at implementation, the delivery. The BioCF applies risk mitigation measures CDM EB has published guidelines that require pro- both at the project and portfolio level. Through these ject developers to assess the impact of some of the pos- measures, the BioCF helps project developers address sible changes in projects’ additionality at verification financial, technical, and managerial challenges. (see Chapter 5). To avoid this risk, project develop- ers should properly implement the monitoring plan, 8.3.1 Capacity Building identify and communicate deviations from the PDD, 8.24 The BioCF has undertaken several meas- and design and implement timely corrective actions ures to support not only the capacity of the projects (see Chapter 2 ). within its portfolio but also the land-based mitiga- tion sector (e.g., soil carbon and REDD+ projects). 8.2.6 Host Country Regulatory Risk At the project level, for example, the BioCF has mo- 8.21 This risk category reflects challenges in ob- bilized grant resources to support government- and taining the country approvals needed to complete the NGO-led projects with little capacity to develop their CDM cycle as well as changes in governments that af- PDDs. Through these grants, projects have improved fect the project delivery of tCERs. This risk is assessed their capacity to solve technical issues and increased at all stages of the project cycle (Table 8.1). their managerial skills (see Chapter 6). Some projects are also enhancing their organizational skills and re- 8.22 The problems encountered in the BioCF port- inforcing their social capacity to ensure the design folio in relation to host country risk are twofold. First, and implementation of appropriate benefit-sharing getting approval letters issued has been time consum- agreements. The BioCF has also developed training ing8, delaying the final validation report. Second, some materials and held training sessions on PDD devel- host countries have experienced political instability, opment and forest carbon monitoring. In addition, it causing delays in project implementation and problems has organized international workshops with LULUCF in attracting investment. In some cases, projects have negotiators to try to increase their awareness and help had to remove certain land areas that became inacces- them understand the issues affecting land-based car- sible due to armed conflicts (see Chapter 7). bon mitigation options (see Chapters 1 and 5). 8.3 BioCF Risk Mitigation 8.3.2 Enhancing Communication Among Measures at the Portfolio Level A/R CDM Stakeholders 8.23 The BioCF seeks to allocate the resources of 8.25 Having witnessed the bottlenecks caused by its investors to projects with manageable under-de- lack of communication between the A/R Working livery risk. By monitoring and understanding project Group, DOEs, and project developers at validation, the BioCF has organized some roundtables to discuss the is- 8 In some cases the letters were incorrectly issued due to spelling mistakes sues at validation and verification. These meetings have in the project name. proven efficient ways to provide feedback to the A/R 122 | Chapter 8: Measuring Under-Delivery Risk Working Group on the application of the rules. For ex- of investment, taking into consideration the time ample, one of the more recent roundtables resulted in these projects take to mature. Plan ahead for all A/R Working Group suggestions to the CDM EB to budgetary requirements to ensure effective project approve a number of guidelines that will facilitate the implementation. Consider alliances with relevant assessment of projects’ deviations from PDDs. organizations to develop and implement financing measures, including facilitating the frontloading of 8.3.3 Tools for GHG Accounting investment finance to cover project upfront invest- 8.26 The BioCF has contributed to overcoming ment needs. technical barriers for GHG accounting by creating ■■ Undertake a comprehensive legal assessment of tools to facilitate the ex-ante estimation of emission land tenure and carbon rights. Analyze the work- reductions (e.g., TARAM), the calculation of the sam- load and time required for securing land titles. ple size needed for carbon estimation, and the ex-post ■■ Build multi-landholder projects upon strong and estimation of emission reductions (e.g., SMART). longstanding relationships between landholders These tools have removed a stumbling block affecting and project entities/coordinators. the A/R CDM in its early years. The positive experi- ■■ Be aware of the wide range of capacity required to ence with these tools reflects project developers’ ap- develop an A/R CDM project and assess the need preciation of easy-to-apply methodologies. to outsource services. 8.3.4 Financing Measures ■■ Developers of multi-stakeholder projects should carefully design financial incentives that accom- 8.27 Although the BioCF cannot provide project modate landholders’ short-term needs. In addition, entities with assistance in meeting their underlying in- ensure a participatory project planning process to vestment needs, it does provide validated projects with reduce the risk of raising false expectations with advance annual payments based on their reports on car- regards to carbon revenues among participant land- bon sequestration achieved in projects. The BioCF also holders. Make it clear that programs/projects also advances resources to cover PDD development costs. produce other benefits. 8.3.5 Close Supervision of Projects ■■ Make a conservative ex-ante estimation of the 8.28 The overall under-delivery risk at the portfo- emission reductions achievable in the project. Be lio level is regularly updated via the regular supervi- aware that the project’s main objective (e.g., timber, sion of projects. This process serves to alert the project fuel wood, or environmental restoration) strongly developer and BioCF team to problems and the need determines the amount of emission reductions to put in place appropriate corrective actions. In addi- achieved and the degree to which the project can tion, this information is used by BioCF participants to rely on carbon revenues to cover project mainte- decide how to allocate their resources efficiently. nance costs. In addition, be aware of data availabil- ity for the selected tree species. 8.4 Good Practices for Reducing ■■ Keep informed about the evolution of forest car- the Under-delivery Risk of bon markets as well as markets for environmental Carbon Credits services other than carbon. 8.29 A summary of good practices for effective pro- ■■ Consider applying standards that reflect projects’ ject development and implementation of A/R CDM co-benefits (e.g., CCBA and others) to show that projects is presented below. This is a compilation of the project will deliver the expected co-benefits. the recommendations for project developers presented in individual chapters of this document. 8.4.2 Project Design Document Development 8.4.1 Initial Due Diligence and ■■ Be aware of the potential challenges in applying the Project Design land eligibility and project boundary rules, includ- ■■ Undertake comprehensive due diligence to en- ing the availability of evidence of land use/cover for sure that projects’ financial risks are minimal the dates indicated in the A/R CDM rules and evi- and manageable. Ensure sufficient secure sources dence of control over the project. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 123 ■■ Select the baseline and monitoring methodology 8.4.3 Validation and Registration that fits the project context and circumstances, in- ■■ Project developers should contact the Designated cluding data availability constraints. In selecting National Authority upfront to understand their a methodology, assess the applicability condition requirements when assessing the project’s contribu- of all the existing methodologies approved by the tion to the country’s sustainable development goals. CDM EB. Be aware that methodologies evolve as a ■■ DNAs should understand their role in the approval result of revisions and simplification; new versions cycle and that projects benefit from a supportive en- are published and similar methodologies may be vironment. DNAs should facilitate the assessment merged. CDM EB decisions regarding retroactive of projects’ contribution to national development application of guidance to early versions of meth- goals by establishing clear and easy-to-assess criteria odologies may apply. as well as clear and less burdensome procedures. ■■ Reassess project expectations in terms of emis- ■■ Project developers should contact Designated sion reductions due to changes in the area plant- Operative Entities in a timely manner to conduct ed. The area planted may change due to difficulties validation and verification of projects. Approach in applying the land eligibility rule or for unfore- several DOEs for quotes on their services. seen reasons (e.g., adverse soil conditions and land tenure claims). Communicate clearly the changes 8.4.4 Project Implementation, to the involved landholders to manage their carbon Monitoring, and Verification revenue expectations. ■■ Be aware of the need to implement the project ac- ■■ When designing a project, take into consideration cording to the PDD registered under the CDM that leakage may create a significant discount in rules. Deviations from the PDD can increase the emission reductions achieved by the project. Plan number of regulatory procedures before credit to establish activities to prevent leakage and, when- issuance. ever possible, establish alliances with other projects ■■ Put in place a solid framework for project moni- promoting activities that could serve the purpose toring and supervision. In addition, plan ahead to of leakage prevention in the surrounding project anticipate staff turnover and to sustain the pro- region. ject’s forest monitoring capacity. ■■ Undertake realistic ex-ante estimation of the emis- ■■ Collaborate with universities, research centers, and sion reductions to be achieved by the project. other entities that are developing land-use-related ■■ Be consistent with the data and information pre- projects in order to collect growth data for the tree sented throughout the PDD. species planted in the project and to generate new ■■ Consider alliances with universities and research information to be used in future projects. institutions to generate and collect the data re- ■■ Keep in mind that project delays at implementa- quired for A/R CDM project design. tion can negatively impact the transaction costs of ■■ Be aware that rules evolve and keep up-to-date with meeting the CDM requirements, cash flow, and changes approved by the CDM EB. Also note the project feasibility. Avoid delays by hiring a knowl- changes in versions of CDM EB methodologies, edgeable project manager who understands both tools, and document formats (e.g., PDD) and en- forestry and CDM requirements. sure that you use the latest versions when submit- ting your documents for approvals, as per CDM EB requirements. 124 | Chapter 8: Measuring Under-Delivery Risk Conclusions and Looking Ahead 9.1 The BioCF experience shows that A/R CDM projects can produce high-qual- ity measurable, reportable, and verifiable carbon credits. The rigor of the CDM process promotes a significant discipline in entities undertaking these projects. The result-based approach underlying carbon projects has the potential of improving considerably the performance of forestry projects. Forest carbon projects also de- liver significant environment and socioeconomic benefits to local communities; contribute to building the resilience of local communities to the adverse impacts of climate change; and provide opportunities for landscape management. 9.2 One of the main lessons learned from the BioCF experience is that some enabling conditions have to be in place for forest projects to be able to benefit from carbon finance through A/R CDM. The minimal conditions are adequate local governance, access to financing, availability of required information, and strong capacity for effective project preparation, management, and implementation. The BioCF experience shows that even projects with complex designs (e.g., involving multiple farmers, planting several species on degraded lands, and with unclear land tenure situations at the project start) can succeed in the CDM when these factors are in place. In their absence, however, a champion project entity becomes a critical factor for success. 9.3 The combination of complex rules and a project developers’ low capacity to apply these results in high transaction costs and discourages project developers and investors from participating in A/R CDM projects. The CDM EB’s efforts to simplify the early complex rules and procedures enabled some replica- tion of projects. Scaling up the A/R CDM to a significant scale, however, requires regulators to remove still-existing barriers while maintaining environmental integrity. The non-permanence-related rules act BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 125 Use of fuel wood in Madagascar. as such a barrier as they put A/R projects at a disadvan- Regulatory Improvements tage, resulting in limited and delayed carbon revenues, ■■ Remove regulatory uncertainty. Much has been low prices for forestry credits, and a limited demand for invested in building the institutional framework to credits, and negatively impacting revenue contribution support A/R projects, and project developers are and, possibly, projects’ viability. These restrictions are still interested in undertaking and developing pro- exacerbated in small-scale projects, which are further jects in many poor countries where these activities disadvantaged by low caps on their carbon sequestra- can make a difference in living conditions. The un- tion potential. certain regulatory environment, however, is creat- ing a dampening effect. 9.4 Some rules highlight the lack of readiness ■■ Make the regulatory process more accessible of some countries for developing A/R CDM carbon and predictable by streamlining procedures projects. The rules associated with baseline determina- and following strict timelines. Finding the CDM tion and additionality demonstration are an example. EB’s latest decisions, guidelines, and versions of Justifying the barriers that prevent projects from hap- tools, as well as PDDs and methodology formats, pening is a complex exercise requiring considerable is challenging for most developers and favors spe- capacity and know-how. Similarly, land-related rules cialized professionals. Following strict timelines (e.g., land eligibility, project boundary, and land ten- for registration and issuance will help increase the ure) are difficult to implement in the absence of high- predictability of credit issuance. In addition, simpli- quality official data on land use/land cover and in situ- fying the A/R CDM requirements to reduce trans- ations of unclear legal land rights. Likewise, even with action costs will enhance a projects’ viability. less complex methodologies, developers may struggle with GHG accounting because of data availability ■■ Further simplify the rules and procedures for restrictions. baseline determination and additionality dem- onstration. This could include allowing develop- 9.5 The A/R CDM rules and procedures need ers to use standardized baselines established at the to be simplified for four key reasons: (i) the A/R sec- national or sub-national level. Simplifying addi- tor strongly supports the sustainable development of tionality requirements without compromising envi- impoverished rural areas; (ii) the rules are excessively ronmental integrity is also important. Additionality complex relative to those for projects in other sectors; could be demonstrated at the sectoral level by tak- (iii) it is necessary to recognize that the capacity of ing into account national circumstances as well as poor rural peoples (to whom these projects are geared) country or region-wide afforestation/reforestation is usually limited; and (iv) projects in low-income goals. Projects in countries with weak business countries with great potential for carbon sequestration environments and facing disproportionately large and subsequent poverty alleviation face fundamental investment barriers should be automatically ad- challenges to success in the CDM. Based on the les- ditional until certain reforestation goals are met. sons drawn from the BioCF portfolio, the following Projects involving low-income communities with actions are recommended. 126 | Chapter 9: Conclusions and Looking Ahead minimal capacity will greatly benefit from such a project developers with less access to sophisticated simplification. technology and/or lower institutional capacity. ■■ Improve the fungibility of forest project cred- ■■ Increase the current threshold of 16,000 tCO2e its by addressing the non-permanence of for- annually for small-scale projects and revisit the est carbon in a broader way and allowing A/R rule that limits the type of people that must projects to use alternative approaches to tem- be involved in small-scale A/R CDM projects. porary crediting. This has already been recognized Since projects involving low-income communi- by UNFCCC negotiators proposing alternatives ties usually have limited capacity to develop and alongside current tCERs and lCERs. A decision implement A/R CDM projects, their transaction on this issue is urgently needed. Allow A/R CDM costs in meeting the CDM requirements are high projects to select from a variety of approaches to and their emission reductions volume low, mak- non-permanence in addition to the temporary ing the projects unviable. Similarly, developers of crediting approach. The approach(es) to non-per- these projects usually lack the managerial capacity manence should avoid putting forestry projects at required to bundle projects, making it difficult to a disadvantage. In designing new approaches, also benefit from economies of scale. The above men- consider flexibility in the number of verifications tioned threshold must be increased for these types permitted per commitment period so that periodic of projects to be viable and benefit low-income carbon revenues during the commitment period communities. In addition, to be consistent with can improve the cash flow to projects. the CDM rules for projects in other sectors, the ■■ Simplify the land eligibility requirements by low-income requirement for small-scale A/R CDM using more flexible criteria to eliminate in- projects should be removed. centives for deforesting and subsequently ■■ Recognize the contribution of A/R CDM projects reforesting lands. As the BioCF experience has to the dual objectives of the UNFCCC: sustain- shown, the current land eligibility requirements in able development and climate change mitiga- the CDM tend to be socially impractical and can tion. Policymakers should consider increasing the create tensions in regions where neighboring farm- eligible land activities to cover croplands, grass- ers may be excluded. This rule also leads to frag- lands, wetlands, and sustainable forest management mented CDM project areas, which are impractical given their roles in environmental restoration and from both a project development and an ecological poverty alleviation. standpoint. In addition, it would help to facilitate Access to Finance the development of projects on agriculture lands in ■■ Innovative ways to finance activities are need- tropical climates by simplifying guidance for accept- ed. Carbon finance is a payment on delivery, and ing the eligibility of lands with temporary stocking and long-term threats, if the project region is under yet the upfront investments needed for A/R pro- a slash-and-burn type of pattern. Similarly, increas- jects are significant and economies of scale are ing the flexibility of the project boundary rule and not easily attained. Forestry investments are long considering accepting evidence other than contracts term and deemed high-risk in many developing signed by the participating farmers in two-thirds of countries. Institutional arrangements for financial the project area before validation to prove that the intermediation, an understanding by financial in- project area is controlled by the project entity would stitutions of the role of carbon credits in financ- be helpful. ing agriculture and rural development, and some up-front payments based on meeting performance ■■ Continue the simplification and consolidation benchmarks are needed. of large-scale methodologies, including allowing ■■ Financial compensation for other benefits project developers to use default values for estima- should be considered. The BioCarbon Fund ex- tion of leakage (in line with the simplifications re- cently made for soil organic carbon) and facilitating perience has shown that A/R projects encompass the project monitoring process. Appropriate dis- both mitigation, through removal of CO2 from the counting should be allowed at the project level for atmosphere, and adaptation as they build up the resilience of the environment and communities to BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 127 harsh environmental conditions. Projects improve unclear project approval criteria. Similarly, many living conditions, but the significant additional en- Designated Operational Entities lack the neces- vironmental and social benefits (besides carbon) are sary expertise for an effective assessment of projects not rewarded. In addition, given that co-benefits at validation and verification and few of these are are a strong incentive for local participation and for based in developing countries. Local companies improving projects’ performance, alternative non- could be trained to provide this expertise. In addi- permanence approaches that factor in the role of tion, research institutions are not fully playing their co-benefits in ensuring the permanence of forest role in helping projects overcome data- and-infor- carbon should be explored. mation availability constraints for effective project preparation and monitoring. All these actors not Strengthen Capacity only need to strengthen their individual capacity, ■■ Building and strengthening capacity at the but also need to come together along with regu- local level is critically needed to ensure suc- lators to ensure both a common understanding of cessful forest carbon initiatives. The fact that the A/R CDM requirements and a timely provision A/R projects are useful tools for promoting both of feedback from the ground on the application of adaptation and mitigation should be harnessed by the rules. Furthermore, the land-use sector of de- building up capacity and strengthening programs veloping countries need support in strengthening in an integrated manner. Local capacity to monitor, negotiators’ capacity on forestry and carbon to be verify, and report the project emission reductions able to influence the rules for land-based projects are successful factors for credit issuance. There is a and programs being proposed under UNFCCC. need to use official development assistance for pro- Developed countries can play a role in helping de- jects to build and strengthen such capacity where veloping countries fill these capacity-related gaps. needed. Increase Demand ■■ Strengthen the capacity of DNAs and DOEs to ensure a smooth validation process. ■■ Developed countries committed to reducing Understanding the rules for A/R CDM projects GHG emissions should stop banning credits is not an easy task for a newcomer, and the chal- from A/R CDM projects in their bilateral/multi- lenge is compounded by the fact that the CDM lateral emission trading schemes. Where market EB changes the rules quite frequently to allow for signals have been given for post-2012 (as from the their improvement and simplification. Since these EU ETS), A/R credits from the CDM remain dis- changes are not retroactive for registered projects, advantaged. Market players should recognize the DOEs and DNAs need to be aware of the differ- substantial efforts the CDM’s stakeholders have ent sets of rules governing different projects in or- taken to demonstrate that credits from A/R pro- der to support each one effectively. There is a need jects are measurable, verifiable, and reportable. In for an easy-to-follow manual for A/R CDM to be addition, they should recognize that projects apply published periodically, in line with the Institute several safeguard instruments to avoid, minimize, for Global Environmental Strategies’ publication, and/or mitigate any potential risk to the local com- CDM in Charts. munities’ livelihood and environment, as well as the under-delivery risk of emission reductions. It is also ■■ Developed countries committed to reducing worth noting that some projects go even further in emissions should continue to support develop- guaranteeing the significant delivery of positive net ing countries in removing the capacity-related co-benefits by attaining additional certification of barriers hindering A/R CDM. Several capacity-re- their project design. Moreover some A/R CDM’s lated constrains prevent developing countries from stakeholders are proposing changes to the non-per- tapping into the opportunities that come with A/R manence rules so that forestry projects deliver cred- CDM. A wide range of actors need to be involved its fungible with other carbon assets generated in the in A/R CDM project development and implemen- market. Strengthening the overall supply of forest tation, but they usually lack the capacity to sup- carbon credits may be fruitless without a significant port projects effectively. For example, Designated demand for these credits from developed countries. National Authorities’ role in approving projects is usually week due to bureaucratic procedures and 128 | Chapter 9: Conclusions and Looking Ahead Box 9.1 Regulatory Lessons for Other Land-based Climate Change Market Mitigation Mechanisms The main BioCF lessons learned for other land-based climate mitigation mechanism are summarized below in the form of recommendations. These recommendations should be considered by parties when discussing a po- tential work programme for SBSTA on possible additional LULUCF activities under the CDM. ■■ Ensure simple and clear procedures and predictable timelines to achieve credit certification. Lack of predictable carbon revenues deters the carbon finance potential to leverage investment financing from private investors and to significantly impact projects’ cash flow. ■■ Define a simple approach to non-permanence that ensures the fungibility of LULUCF credits with other credits in the market. Lack of fungibility has limited the demand for A/R CDM credits. The temporary credit approach produces less-favorable assets difficult to understand and handle by both buyers and sellers. This approach has also led to a reduced price, which severely limits the impact of carbon revenues in projects’ cash flows. Several other options to address non-permanence exist and developers of LULUCF activities should be allowed to choose the most convenient option. ■■ Simplify additionality demonstration and baseline determination as much as possible. Modalities and procedures should provide for additionality to be shown at the sector level to diminish the burden on individual projects. Existing unenforced national forestry development plans could be considered sufficient evidence of barriers limiting forest activity at a relevant scale. Similarly, a country’s forest conservation, pro- tection, and revegetation goals could serve as a basis for setting a threshold over which individual initiatives may be considered automatically additional. An expanded LULUCF mechanism should avoid disincentives to early movers on payments for environmental services, who have struggled to demonstrate additionality in the A/R CDM context. ■■ Develop easy-to-follow rules for ex-ante estimation of GHG accounting and allow for progres- sive adoption of detailed methodologies. Complex methodologies are time- and- resource intensive, cause confusion, and discourage project developers and investors from participating in LULUCF initiatives. Excessively detailed and complex methodologies should be avoided at least at the onset of the mechanism as developers usually lack the capacity to apply them. Carbon accounting in LULUCF projects should progressive- ly move from simple to refined rules. One alternative could be to allow projects to apply a tiered approach to GHG accounting—in line with IPCC’s Good Practice Guidance for National Inventory of Greenhouse Gases. More detailed methodologies should be developed based on experience from the ground and countries’ ad- vancements in removing data availability and human capacity constraints. Nevertheless, easy-to-follow tools (e.g., Excel-based tools) should be published to facilitate the application of methodologies. ■■ Develop easy to follow monitoring methodologies. Local stakeholders’ involvement in carbon moni- toring tends to increase project/program ownership, an important under-delivery risk mitigation measure. However, too complex methodologies usually prevent local stakeholders from participating in these tasks. There is room to develop simple yet rigorous monitoring methodologies. In addition, it is important to bear in mind that because of their dynamic nature, land-use-based carbon initiatives may deviate from the original design at implementation. Modalities and procedures should therefore allow for certain level of changes, and easy-to-assess thresholds should be developed to account for permissible changes at implementation. ■■ Avoid restricting the type of people that must be involved in small-scale projects and carefully de- cide the cap in emission reductions imposed on this type of project. The participation of low-income people must be promoted through measures such as simple GHG accounting and by removing regulatory and financial barriers rather than enforcing through rules the involvement of low-income communities. This would bring land-based carbon projects/programs into alignment with other CDM sectors. In addition, define a relevant cap for small-scale projects based on technical, social, and financial studies of existing land- based projects, to ensure their viability. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 129 Looking ahead consider both the relevance of establishing agreements 9.6 In this section the A/R CDM experience is an- that clarify roles, rights, responsibilities, and benefit alyzed in light of three ongoing policy developments: sharing and the need for sustained capacity to achieve (i) land-based climate change mitigation mechanisms effective stakeholder participation in the design, im- being discussed under CDM; (ii) REDD+; and (iii) plementation, and adaptation of these agreements. the landscape management approach to climate Managing expectations is a continuous task in forest change mitigation in rural areas. carbon initiatives and all partners should be aware of this. REDD+ regulators, implementers, and other 9.7 As the UNFCCC negotiations evolve, parties practitioners should interact to advance practical and to the UNFCCC negotiations are currently discussing effective rules and financing mechanisms that facili- further commitments for Annex B parties under the tate developers’ efforts to secure underlying invest- Kyoto Protocol. One of the activities being discussed ment and carbon finance to contribute significantly to as part of this is to request that the Subsidiary Body covering the costs of REDD+. for Scientific and Technological Advice (SBSTA) initi- ate a work programme to consider and, as appropriate, 9.11 Important lessons have also been drawn from develop and recommend modalities and procedures the A/R CDM experience with regards to negative for possible additional land use, land-use change and impacts from projects on local communities and their forestry (LULUCF) activities under the CDM. To environment, a major concern of forest carbon’s stake- make such a potential expansion of LULUCF un- holders. REDD+ stakeholders should be underpinned der the CDM successful, the early lessons from the by thorough assessments of the impacts of REDD+ A/R CDM should be incorporated in order to avoid interventions to avoid and/or mitigate risk. It is worth some of the obstacles that have hindered the A/R noting, however, that some developers of forest carbon CDM (See Box 9.1). In addition, because of the many initiatives go beyond the requirements of carbon stand- interactions between different land uses, policymak- ards and certify projects’ positive net contribution to ers will need to address the interface of all land-use local communities and their environment. The unique activities in an integrated manner. The application co-benefits forest carbon initiatives produce are, fre- of a landscape approach that integrates the land-use quently, an incentive for developers to undertake them. and rural energy sectors on the ground would be more Many developers also recognize that avoiding social and practical and cost-effective. environmental impacts is a smart strategy to reduce the under-delivery risk of emission reductions. 9.8 Lessons for REDD+ are difficult to draw from a project-based mechanism such as the A/R 9.12 The BioCarbon Fund will continue to sup- CDM. Only if REDD+ evolved in the direction of a port land-use interventions and is planning to project-based mechanism would the lessons learned build on the experience to date in A/R through presented in this document be applicable. The follow- scaled-up programs. The BioCF will work on areas ing are some general lessons that may be useful for not yet fully explored (e.g., croplands). Such pilots are consideration in the current REDD+ discussions. invaluable for showing the opportunities and chal- lenges that can arise in the application of regulatory 9.9 One relevant lesson is that resources should rules for climate change projects. The BioCF is also be devoted from the onset to addressing any existing examining where improvements to existing method- gap between rigorousness of rules/procedures and lo- ologies can be made and is developing new method- cal developers’ capacity to follow them. Regulators ologies in areas not yet developed. The latter includes should also avoid applying approaches to non-perma- undertaking methodologies and pilots in landscapes nence that, compounded with other factors, translate where various sectors (e.g., land use, energy) should into weak incentives for landholders to adopt sustain- be considered as a whole. All of this is in line with the able land uses (such as temporary crediting as defined World Bank’s triple-win strategy in which the forestry, in existing A/R CDM modalities and procedures). agriculture, and rural energy sectors are treated in an integrated way to increase food security, improve the 9.10 With regards to institutions, considering that rural poor’s resilience to cope with the impacts of cli- forest carbon projects are usually multi-partner en- mate change, and to mitigate climate change. deavors, implementers of REDD+ strategies should 130 | Chapter 9: Conclusions and Looking Ahead BioCF A/R CDM Active Projects Table A BioCF Government and Nonprofit- led Projects Country Name / Main Purpose Area (ha)* Assisted Natural Regeneration of Degraded Lands in Albania Albania ■■ Restoration of severely degraded forest through assisted natural regeneration 6,300 involving multiple farmers San Nicolas CDM Reforestation Project Colombia ■■ Establishment of agroforestry systems on degraded pasture lands involving 1,100 multiple farmers Reforestation of Degraded/Degrading Land in the Caribbean Savannah of Colombia Colombia 2,200 ■■ Establishment of silvopastoral systems, and production of rubber and timber on degraded pasture lands involving multiple farmers Carbon Sequestration in Small and Medium Farms in the Brunca Region (Coopeagri) Costa Rica 900 ■■ Improvement of environmental services on agricultural lands involving mul- tiple farmers ANNEX Humbo Ethiopia Assisted Natural Regeneration Project Ethiopia ■■ Assisted natural regeneration on severely degraded lands involving multiple 2,700 farmers Himachal Pradesh Reforestation Project—Improving Livelihoods and India Watersheds 4,000 ■■ Watershed protection on degraded forest and community lands Aberdare Range/Mt. Kenya Small-Scale Reforestation Kenya ■■ Restoration of degraded forest and community lands through community 1,600 involvement. The Vohidrazana-Mantadia Corridor Restoration and Conservation Car- bon Project Madagascar** 400 ■■ Biodiversity conservation on degraded lands subject to shifting cultivation, involving multiple farmers Niger Acacia senegalensis Plantation Project Niger ■■ Restoration of vegetative cover and production of Arabic gum involving 8,000 multiple farmers Moldova Soil Conservation Project Moldova 20,300 ■■ Restoration of severely degraded public lands Moldova Community Forestry Development Project Moldova 10,600 ■■ Restoration of severely degraded public lands Trinidad and Nariva Wetland Reforestation Project 1,200 Tobago ■■ Restoration of wetlands through community involvement Uganda Nile Basin Reforestation Project Uganda 2,000 ■■ Timber production on degraded lands involving multiple farmers Note: Twenty-five projects entered the BioCF portfolio. Four faced prohibitive barriers and discontinued project develop- ment. *Areas are rounded up, and this table only reflects CDM eligible land areas. Any ineligible areas planted by the project entity are not included here. **Because of its small size, the Madagascar project may decide not to pursue CDM certification. The project, however, may pursue certification through other standards (for which CDM-ineligible lands are eligible). BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 131 Table B BioCF Private-sector- led Projects Country Name / Main Purpose Area (ha)* Reforestation as Renewable Source of Wood Supplies for Industrial Use in Brazil Brazil 11,700 ■■ Biomass production as a substitute for fossil fuel in the iron industry on degraded pasture lands AES Tiete Afforestation/Reforestation Project in the State of Sao Paulo Brazil 13,900 ■■ Forest restoration on degraded pasture lands Facilitating Reforestation for Guangxi Watershed Management in the Pearl River Basin China 4,000 ■■ Timber production and land restoration on severely degraded lands involving multiple farmers Reforestation on Degraded Lands in Northwest Guangxi China ■■ Timber production and land restoration on severely degraded lands involving 8,000 multiple farmers Afforestation and Reforestation in Central Chile Chile ■■ Timber production on severely degraded lands involving small- and medium- 2,900 holding farmers Democratic Ibi Batéké Degraded Savannah Afforestation Project for Fuel Wood Republic of Production 4,200 ■■ Charcoal production to decrease the pressure on native forests on degraded Congo savannahs Improving Rural Livelihoods Through Carbon Sequestration by Adopting Environmentally Friendly Technology-based Agroforestry Practices India 1,600 ■■ Timber production on degraded agricultural lands involving small- and medium-holding farmers Southern Nicaragua Reforestation Project Nicaragua 813 ■■ Timber production on degraded pasture lands *Areas are rounded up, and this table only reflects CDM eligible land areas. Any ineligible areas planted by the project entity are not included here. 132 | Annexes Indicative Flowchart of the Combined Tool to Identify the Baseline Scenario and Demonstrate Additionality in A/R CDM Project Activities Step 1. Identification of alternative land-use scenarios to the proposed A/R CDM project activity Step 2. Barrier Analysis ANNEX List of land-use scenarios that are not prevented by any barrior Is forestation performed without being registered as the A/R CDM project activity among the land-use scenarios that are included in the list of land use scenarios that are not prevented by any barrier? N Y Baseline is the Y Does the list Does the list Y Proposed A/R CDM remaining land-use contain only one contain only one project activity is not scenario land-use scenario? land-use scenario? additional N N Baseline is the Through Baseline is the land-use which allows qualitative analysis land-use which allows for the highest assess the removals for the highest baseline GHG by sinks for each baseline GHG removals by sinks scenario removals by sinks Baseline is the most Baseline is the most economically or Step 3. Step 3. economically or financially attractive Investment Investment financially attractive alternative land-use Analysis Analysis alternative land-use scenario scenario Baseline is the Baseline is the continuation of the continuation of the project land-use project land-use Step 4. Common Practice Analysis Proposed A/R CDM project activity Proposed A/R CDM project activity is not additional is not additional BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 133 Simplification of the A/R CDM Rules for GHG Accounting (as of November 2011) Below guidance, clarification, and tools in various topics published by the CDM EB to facilitate the application of A/R CDM methodologies. Year CDM EB Meeting Simplification Project Start 2005 EB 21, Paragraph 64 Projects Starting After 1 January 2000 (prompt start). http://cdm.unfccc.int/ EB/021/eb21rep.pdf Methodologies 2005 EB 21, Annex 20 Clarification on Ex-ante Estimation of Actual Net GHG Removals by Sinks and Identification of Most Likely Scenario. ANNEX http://cdm.unfccc.int/EB/021/eb21repan20.pdf 2005 EB 22, Annex 15 Clarification Regarding Methodologies for A/R CDM Projects. http://cdm.unfccc.int/EB/022/eb22_repan15.pdf 2007 EB 31, Paragraph 43 Clarification on when to Request Revision, Clarification to an Approved Methodology, or a Deviation for Project Participants. http://cdm.unfccc.int/EB/031/eb31rep.pdf Applicability Conditions 2008 EB 41, Annex 15 Tool to Identify Degraded Lands for Consideration in Implementing a Project. http://cdm.unfccc.int/EB/041/eb41_repan15.pdf Baseline Determination 2006 EB 23, Annex 19 Guidance on National and or Sectoral Policies and Circumstances in the Baseline Scenario. http://cdm.unfccc.int/EB/023/eb23_repan19.pdf 2006 EB 24, Annex 19 Clarification on A/R in the baseline of a project. http://cdm.unfccc.int/EB/024/eb24_repan19.pdf Sampling and Survey 2007 EB 31, Annex 15 Tool for the Calculation of the Number of Sample Plots for Measurements Within A/R CDM Projects. Version 1. http://cdm.unfccc.int/EB/031/eb31_repan15.pdf 2009 EB 46, Annex 19 Tool for the Calculation of the Number of Sample Plots for Measurements Within A/R CDM Projects. Version 2. http://cdm.unfccc.int/EB/046/eb46_repan19.pdf 2009 EB 50, Annex 30 Guidelines for Sampling and Survey for Small-Scale CDM Project Activities. Version 01. http://cdm.unfccc.int/EB/050/eb50_repan30.pdf 2010 EB 59, Annex 15 Tool for the Calculation of the Number of Sample Plots for Measurements Within A/R CDM Projects. Version 3. http://cdm.unfccc.int/UserManagement/FileStorage/ W7Y3MRFZ6DP51OQSEXH9KJVIGL0BNT Estimation of Carbon Stocks 2005 EB 20, Annex 8 Clarification on the Definition of Biomass and Consideration of Changes in Carbon Pools. http://cdm.unfccc.int/EB/020/eb20repan08.pdf 2006 EB 24 Paragraph 56 Guidelines on Size of Losses of Carbon due to the Construction of Access Roads. http://cdm.unfccc.int/EB/024/eb24rep.pdf 2007 EB 31 Paragraph 45 Clarification on the Application of the A/R CDM Definition of Forest to Stands with Several Stores of Tees Differing in Height. http://cdm.unfccc.int/EB/031/eb31rep.pdf 2007 EB 32 Paragraph 44 Further Clarification on Application of the A/R CDM Forest Definition of Forest to Stands with Several Stores of Trees Differing in Height. http://cdm.unfccc.int/EB/032/eb32rep.pdf Note: To avoid presenting long Web links that usually do not work, some documents in the tables above are linked to the corresponding CDM EB meeting instead of to the pdf document directly. Using the link provided, the documents can then be tracked using the number of the annex or paragraph indicated in the second column. 134 | BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects Year CDM EB Meeting Simplification 2007 EB 33, Annex 15 Tool: Procedures to Determine When Accounting for the Soil Organic Carbon May Be Neglected http://cdm.unfccc.int/EB/033/eb33_repan15.pdf 2008 EB 41, Annex 14 Tool for the Estimation of Carbon Stocks, Removals, and Emissions from the Dead Organic Matter Pools. Version 1. http://cdm.unfccc.int/EB/041/eb41_repan14.pdf 2009 EB 46, Annex 18 Tool for the Estimation of Changes in the Carbon Stocks of Existing Trees and Shrubs Within the Project Boundary. Version 01. http://cdm.unfccc.int/methodologies/ARmethodologies/tools/ ar-am-tool-03-v2.1.0.pdf 2009 EB 46, Annex 17 Guidance on the Conservative Choice and Application of Default Data in Estimation of Net GHG Anthropogenic Removals by Sinks. V1. http://cdm.unfccc.int/EB/046/eb46_repan17.pdf 2009 EB 46, Annex 16 Guidance on Conditions Under which the Changes in Carbon Stocks in Existing Live Woody Vegetation are Insignificant. Version 1. http://cdm.unfccc.int/EB/046/eb46_repan16.pdf 2009 EB 48, Annex 66 Guidance on Procedures for Notifying and Requesting Approval of Changes from the Project Activity as Described in the Registered Project Design Document. http://cdm.unfccc.int/EB/048/eb48_repan66.pdf 2009 EB 48, Annex 67 Procedures for Notifying and Requesting Approval of Changes from the Project Activity as Described in the Registered Project Design Document. http://cdm.unfccc.int/EB/048/eb48_repan67.pdf 2009 EB 50, Annex 23 Guidance for the Conservative Choice and Application of Default Data in Estimation of Net GHG Anthropogenic Removals by Sinks. V 2. http://cdm.unfccc.int/EB/050/eb50_repan23.pdf 2010 EB 55, Annex 21 Tool for the Estimation of Changes in Soil Organic Carbon Stocks due to the Implementation of Projects. Version 1.1.1. http://cdm.unfccc.int/Meetings/MeetingInfo/DB/N6H2D51YTQSVOAP/view. 2010 EB 56, Annex 13 Tool for the Estimation of Carbon Stocks and Changes in Carbon Stocks of Trees and Shrubs. Version 2. http://cdm.unfccc.int/Meetings/MeetingInfo/DB/TEF0GPX12MLY7RQ/view. 2010 EB 58, Annex 14 Tool for the Estimation of Carbon Stocks and Changes in Carbon Stocks in Deadwood and Litter. Version 1.1.0. http://cdm.unfccc.int/Meetings/MeetingInfo/DB/K592CXOW1YI3F4U/view. 2011 EB 60, Annex 13 Tool for the Estimation of Carbon Stocks and Changes in Carbon Stocks of Trees and Shrubs. Version 2.1.0. http://cdm.unfccc.int/Meetings/MeetingInfo/DB/AGMVUQ5YSJ41X93/view. 2011 EB 60, Annex 12 Tool for the Estimation of Changes in Soil Organic Carbon Stocks due to the Implementation of Projects. Version 1. http://cdm.unfccc.int/Meetings/MeetingInfo/DB/AGMVUQ5YSJ41X93/view. 2011 EB 60, Annex 12 The Approved Spreadsheet to Facilitate the Calculation of Changes in Soil Organic Carbon Stocks. Emissions 2006 EB 23, Annex 18 Clarification on the Definition of Renewable Biomass. http://cdm.unfccc.int/EB/023/eb23_repan18.pdf 2006 EB 25, Paragraph 38 Guidance on Avoiding Double Counting of Emission Sources. http://cdm.unfccc.int/EB/025/eb25rep.pdf 2006 EB 28, Paragraphs 31 Guidance on Pre-project Emissions in Methodologies that Apply Baseline and 32 Scenarios Corresponding to the Approach 22(b). http://cdm.unfccc.int/Reference/Guidclarif/ar/methAR_guid13_v01.pdf 2007 EB 31, Annex 16 Tool for Testing Significance of GHG Emissions in A/R CDM Project Activities. Version 1. http://cdm.unfccc.int/EB/031/eb31_repan16.pdf 2007 EB 33, Annex 14 Tool for the Estimation of Fossil Fuel Emissions. Version 1. http://cdm.unfccc.int/EB/033/eb33_repan14.pdf Note: To avoid presenting long Web links that usually do not work, some documents in the tables above are linked to the corresponding CDM EB meeting instead of to the pdf document directly. Using the link provided, the documents can then be tracked using the number of the annex or paragraph indicated in the second column. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 135 Year CDM EB Meeting Simplification 2007 EB 33, Annex 16 Tool for the Estimation of Direct Nitrous Oxide Emissions from Nitrogen Fertilization. Version 1. http://cdm.unfccc.int/EB/033/eb33_repan16.pdf 2008 EB 42, Paragraph 35 Tool for the Estimation of GHG Emissions from Clearing, Burning, and Decay of Existing Vegetation. Version 2. http://cdm.unfccc.int/EB/042/eb42rep.pdf 2008 EB 42, Paragraph 35 Guidance on Accounting for GHG Emissions in A/R CDM Project Activities. Part I. http://cdm.unfccc.int/Reference/Guidclarif/ar/methAR_guid21.pdf 2008 EB 44, Paragraph 37 Guidance on Accounting for GHG Emissions in A/R CDM Project Activities. Part II. http://cdm.unfccc.int/Reference/Guidclarif/ar/methAR_guid23.pdf 2009 EB 50, Annex 22 Tool for the Estimation of GHG Emissions from Clearing, Burning, and Decay of Existing Vegetation. Version 3. http://cdm.unfccc.int/EB/050/eb50_repan22.pdf 2009 EB 50, Annex 21 Guidance on Conditions under which Increases in GHG Emissions from Removal of Existing Vegetation due to Site Preparation are Insignificant. Version 01. http://cdm.unfccc.int/EB/050/eb50_repan21.pdf 2011 EB 60, Annex 11 Tool for the Estimation of Non-CO2 Emissions from Burning of Biomass. Version 3.1.0. http://cdm.unfccc.int/Meetings/MeetingInfo/DB/AGMVUQ5YSJ41X93/view. Leakage 2006 EB 28, Paragraph 33 Guidance on Market Leakage. http://cdm.unfccc.int/EB/028/eb28rep.pdf 2007 EB 36, Annex 19 Tool for the Estimation of GHG Emissions Related to Displacement of Grazing Activities in A/R CDM Project Activity. http://cdm.unfccc.int/EB/036/eb36_repan19.pdf 2008 EB 39, Annex 12 Tool for the Estimation of GHG emissions Related to Displacement of Grazing Activities in A/R CDM Project Activity. Version 02. http://cdm.unfccc.int/EB/039/index.html. 2008 EB 39, Annex 11 Tool for the Calculation of GHG Emissions due to Leakage from Increased Use of Non-renewable Woody Biomass Attributable to an A/R CDM Project Activity. http://cdm.unfccc.int/EB/039/eb39_repan11.pdf 2009 EB 51, Annex 15 Tool for the Estimation of the Increase in GHG Emissions Attributable to Displacement of Pre-project Agricultural Activities. http://cdm.unfccc.int/EB/051/eb51_repan15.pdf 2009 EB 51, Annex 14 Guidance on conditions under which the increase in GHG emissions attributable to displacement of pre-project cultivation is insignificant. Version 1. http://cdm.unfccc.int/EB/051/eb51_repan14.pdf 2009 EB 51, Annex 13 Guidance on conditions under which the increase in GHG emissions attributable to displacement of pre-project grazing activity is insignificant. Version 1. http://cdm.unfccc.int/EB/051/eb51_repan13.pdf Verification 2011 EB 63, Annex 26 Guidelines on Application of Specified Versions of A/R CDM Methodologies in Verification of Registered A/R CDM Project Activities. Version 01.0. http://cdm.unfccc.int/EB/archives/meetings_10.html#62. 2011 EB 63, Annex 27 Guidelines on Accounting of Specified Types of Changes in A/R CDM Project Activities from the Description in Registered Project Design Documents. (Version 01.0). http://cdm.unfccc.int/EB/archives/meetings_10.html#62. Note: To avoid presenting long Web links that usually do not work, some documents in the tables above are linked to the corresponding CDM EB meeting instead of to the pdf document directly. Using the link provided, the documents can then be tracked using the number of the annex or paragraph indicated in the second column. 136 | Annexes Steps for Setting Up a Benefit-sharing Plan Preparation Phase ■■ Start this process at the early stages of the project. ■■ Identify beneficiaries using participatory methods (e.g., Participatory Rural Appraisal). ■■ Identify and/or create user groups and cooperatives to represent potential participants. ■■ Assess local needs and expectations. ■■ Learn the history of the community and consult with participants to determine what type of pay- ments for environmental services are appropriate (i.e., in some cases it may be better to have in- kind payments rather than cash payments). ■■ Build trust relationships with local farmers and community organizations. Design Phase ■■ Decide, in a participatory fashion, the best way to distribute project revenues and outcomes ANNEX (e.g., direct payment, setting up a community fund to foster more investments in the area). ■■ Enable the communities to discuss project terms by managing, as much as possible, the power relationships within the community (e.g., providing women with a separate discussion forum). ■■ Identify, if necessary, an institution to provide the promised services. ■■ Design a flexible agreement to establish the benefit-sharing plan. Use plain language and make sure all the terms and conditions are clearly understood by the communities and the farmers. Implementation Phase ■■ Implement a pilot phase to test the plan through the distribution of early benefits. This will at the same time provide incentives for the community to commit to the project and serve as a test for the plan. ■■ Ensure that the plan is flexible enough to accommodate changes. ■■ Ensure that the efficiency of the plan is continuously evaluated. ■■ Make changes along the way if necessary. Sources: World Bank (2009) Rethinking Forest Partnerships and Benefit Sharing (http://go.worldbank.org/4V8KFNXZ51) and interviews with BioCF project managers. BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 137 Glossary Adaptation: The Intergovernmental Panel on Kingdom of Great Britain and Northern Ireland, Climate Change (2002) defines adaptation as the and the United States of America. All but Turkey adjustment in natural or human systems, in re- are listed in Annex B of the Kyoto Protocol. sponse to actual or expected climatic stimuli and Annex B (Parties): The 39 industrialized coun- their impacts on natural and socioeconomic sys- tries (including the European Union) listed in tems, which moderates harm or exploits benefi- Annex B to the Kyoto Protocol have committed cial opportunities. to country-specific targets to collectively reduce Additionality: A project activity is additional their greenhouse gas emissions by at least 5.2 per- if anthropogenic greenhouse gas emissions are cent below 1990 levels from 2008–2012. lower than those that would have occurred in the Assigned Amount Unit (AAU): One AAU repre- absence of the project activity. sents the right to emit one tCO2e. Annex I parties Actual Net Greenhouse Gas Removals by are issued AAUs up to the level of their assigned ANNEX Sinks: The sum of the verifiable changes in car- amount. The number of AAUs issued corresponds bon stocks in the carbon pools within the project to the quantity of greenhouse gases they can re- boundary, minus the increase in emissions of the lease in accordance with the Kyoto Protocol dur- greenhouse gas that are increased as a result of ing the first commitment period (2008–2012). the implementation of the A/R project, while Baseline Net Greenhouse Gas Removals by avoiding double counting. Sinks: The sum of the verifiable changes in car- Afforestation: The process of establishing and bon stocks in the carbon pools within the project growing forest on lands which have not been for- boundary that would have occurred in the ab- ested in the last fifty years. sence of the A/R CDM project. Agriculture, Forestry, and Other Land Use BioCarbon Fund Participants: BioCF partici- (AFOLU): The 1996 IPCC guidelines for National pants in this report refers to the six governmen- Greenhouse Inventories evolved in 2003 from tal entities and 12 private companies taking part Land Use Change and Forestry into the Good in Tranche 1 (Windows 1 and 2) and Tranche Practice Guidance on Land Use, Land-use Change 2 (Windows 1 and 2). The BioCarbon Fund par- and Forestry. It further evolved into AFOLU in ticipants provide funds for both Afforestation 2006. AFOLU integrates agriculture as a way to and Reforestation (A/R) Clean Development resolve inconsistencies, avoid double counting, Mechanism (CDM) projects and for other land- remove arbitrary distinctions between previously based projects currently excluded from the CDM considered land-use categories, and ensure a con- (e.g., Reducing Emissions from Deforestation and sistent treatment of greenhouse gases in all land Forest Degradation-Plus (REDD+) and sustain- uses. able agricultural land management). Most of the BioCF resources (about 80 percent) have been Annex I Parties: The Annex I parties include the earmarked to A/R CDM projects (first windows of industrialized countries that were members of each tranche); the remainder has been allocated the Organization for Economic Co-operation and to REDD+ and sustainable land management pro- Development in 1992, plus countries with econo- jects (second windows). The emission reductions mies in transition. Current Annex I parties include generated by these projects are purchased by the Australia, Austria, Belarus, Belgium, Bulgaria, BioCF on behalf of its participants and are subse- Canada, Croatia, Czech Republic, Denmark, quently transferred to them pro rata their finan- Estonia, European Union, Finland, France, cial participation in the Fund. Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Biodiversity: The variability among living organ- Luxemburg, Monaco, the Netherlands, New isms and the ecological complexes of which they Zealand, Norway, Poland, Portugal, Romania, are part, including the diversity within species, be- Russian Federation, Slovakia, Slovenia, Spain, tween species, and of ecosystems (UNCBD, 1992). Sweden, Switzerland, Turkey, Ukraine, United 138 | BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects Carbon Asset: The potential greenhouse gas emission Designated Operational Entity (DOE): Independent reductions that a project is able to generate and sell. auditors that assess whether a potential project meets all the eligibility requirements of the CDM (validation) Carbon Finance: Resources provided to activities and whether the project has achieved GHG reductions generating (or expected to generate) GHG emission (verification and certification). reductions. Emission Reductions (ERs): The measurable removal, Carbon Dioxide Equivalent (CO2e): The universal unit limitation, reduction, avoidance, sequestration, or limi- of measurement used to indicate the global warming tation of GHG emissions from a specified activity in a potential of each of the six greenhouse gases regulated specified period of time. under the Kyoto Protocol. Carbon dioxide—a naturally occurring gas that is a byproduct of burning fossil fu- Emission Reductions Purchase Agreement (ERPA): els and biomass, land-use changes, and other industrial A purchase and sale agreement for the acquisition of processes—is the reference gas against which the other emission reductions. greenhouse gases are measured. Emission Reduction Units (ERUs): A unit of emission Carbon Pools: The carbon reservoirs that are formal- reductions issued pursuant to Joint Implementation ly recognized by the A/R CDM. These include above- (one of the flexible mechanisms of the Kyoto Protocol). ground biomass, below-ground biomass, litter, dead- One ERU represents a reduction of one metric tonne of wood, and soil organic carbon. Different methodologies carbon dioxide equivalent. account for different carbon pools. European Union Allowances (EUAs): Allowances Certified Emission Reductions (CERs): A unit of GHG used under the EU-ETS. An EUA unit is equal to one emission reductions issued pursuant to the CDM and tCO2e. measured in metric tonnes of carbon dioxide equiva- European Union Emission Trading Scheme (EU- lent. One CER represents one tCO2e reduction in GHG ETS): The EU-ETS was launched in January 2005 as a emissions. cornerstone of the EU’s climate policy toward meeting Clean Development Mechanism (CDM): A mecha- its Kyoto commitments. Through the EU-ETS, member nism provided for under Article 12 of the Kyoto Protocol, states allocate part of the efforts toward their Kyoto the CDM is designed to assist developing countries in targets to private sector emission sources (mostly utili- achieving sustainable development by allowing coun- ties). During 2008-2012, emissions from mandated in- tries taking part in Annex B of the protocol to partici- stallations (about 40 percent of all EU emissions) are pate in low carbon projects in developing countries and capped on average at six percent below 2005 levels. obtain CERs in return. Participants can reduce emissions, purchase EUAs, or ac- quire CERs and ERUs. Temporary CERs are excluded. The CDM Executive Board (CDM EB): A 10-member pan- EU-ETS will continue beyond 2012 to promote further el, elected at the Conference of the Parties, which su- cuts in emissions. pervises the CDM. First Commitment Period: The five-year period, from Conference of the Parties (COP): The supreme body 2008–2012, during which industrialized countries com- of the UNFCCC, the COP meets annually to review the mitted under the Kyoto Protocol to collectively reduce progress of the parties in meeting their treaty obliga- their greenhouse gas emissions by an average of 5.2 tions and to assess progress in meeting the goals of the percent from 1990 levels. convention. Flexible Mechanisms: Three procedures (the CDM, Crediting Period: The duration of time during which International Emissions Trading, and Joint Implemen- a registered project can generate emission reductions. tation) were established under the Kyoto Protocol to The crediting period for A/R CDM projects can be 20 increase the flexibility to make and reduce the cost of years renewable twice or 30 years non-renewable. making cuts in greenhouse gas emissions. Designated National Authority (DNA): An office, Greenhouse Gases (GHGs): Gases that absorb and ministry, or other official entity appointed by a party to emit radiation within the infrared range, trapping heat the Kyoto Protocol to review and give national approval in the atmosphere and therefore contributing to main- to projects proposed under the CDM. taining the Earth surface’s temperature at a level that can sustain life. The main greenhouse gases are water vapor (H2O), carbon dioxide (CO2), nitrous oxide (N2O), BioCarbon Fund Experience: Insights from Afforestation and Reforestation Clean Development Mechanism Projects | 139 methane (CH4), and ozone (O3). Greenhouse gases are settlement pattern that delimits some coherence of emitted from both natural and anthropogenic sources. natural, historical, and cultural processes and activities. According to the IPCC, the increase in global average Landscape Management Approach: A strategy for temperatures since the mid-20th century is very likely the integrated management of land, water, and living due to the increase in anthropogenic GHG emissions resources that promotes conservation and sustainable from such activities as burning fossil fuels and defor- use in an equitable way. This approach recognizes that estation. The Kyoto Protocol regulates six greenhouse humans, with their cultural diversity, are an integral gases: carbon dioxide (CO2), methane (CH4), nitrous component of many ecosystems (UNCBD, 1998). oxide (N2O), hydro fluorocarbons (HFCs), per fluorocar- bons (PCFs), and sulfur hexafluoride (SF6). Leakage: The increase in greenhouse gas emissions by sources outside the boundary of an A/R CDM project Global Warming Potential: An index representing which is measurable and attributable to the A/R project. the combined effect of the differing times greenhouse gases remain in the atmosphere and their relative effec- Livelihood: The livelihood of an individual or house- tiveness in absorbing outgoing infrared radiation. hold comprises the assets (natural, physical, human, financial, and social capital), and the access to these Internal Rate of Return: The annual return that assets (mediated by institutional and social relations). makes the present value of future cash flows from an Together these elements determine the living gained by investment (including its residual market value) equal the individual or household (Sunderlin et al., 2005). to the current market price of the investment. In other words, the discount rate at which an investment has Long-term CER (lCER): A CER issued for an A/R CDM zero net present value. project which expires at the end of the crediting period for which it was issued. Joint Implementation: A market-based implemen- tation mechanism, defined in Article 6 of the Kyoto Monitoring Plan: A set of requirements for monitor- Protocol, which allows Annex I countries and/or compa- ing and verification of the emission reductions achieved nies from these countries to implement projects jointly by a project. to limit or reduce emissions or enhance sinks—and to share the emission reduction units. Net Anthropogenic Greenhouse Gas Removals by Sinks: The actual net greenhouse gas removals minus Kyoto Protocol: Adopted at the Third Conference of both the baseline net greenhouse gas removals and the Parties to the United Nations Convention on Climate leakage. Change in Kyoto, Japan, in December 1997, the Kyoto Protocol commits industrialized country signatories to Project Boundary: The geographic delineation of the collectively reduce their greenhouse gas emissions by A/R project activity. The project boundary encompasses at least 5.2 percent below 1990 levels on average from the discrete areas of land where carbon storage is ex- 2008-2012. Developing country signatories can partici- pected and managed during the project crediting pe- pate voluntarily in emissions trading through the CDM. riod. The project developer has control over the lands The Kyoto Protocol entered into force in February 2005. within the project boundary. Land Degradation: Reduction or loss of the biologi- Project Design Document (PDD): The PDD details the cal or economic productivity of land as a result of an- project activity (including environmental impacts and thropogenic and natural causes (Convention to Combat stakeholder consultations), the baseline methodology, Desertification). project additionality, and the monitoring plan. Land Use, Land-Use Change and Forestry (LULUCF): Project Developer: The project developer is usually A set of activities, including human-induced land use, an external PDD writing consultant. In cases in which land-use change and forestry activities, which lead to no consultant is hired, the project entity is the project both emissions and removals of greenhouse gases from developer. This report refers to project developers in the atmosphere. LULUCF is a category used in reporting the chapters related to PDD preparation and to project greenhouse gas inventories. entities in chapters related to project management, representation of the project before the UNFCCC, and Landscape: A mosaic where a cluster of local ecosys- the entity that aggregates landowners in a multi-farmer tems is repeated in similar form over a kilometers-wide project. area. A landscape is characterized by a particular con- figuration of topography, vegetation, land use, and 140 | Annexes Project Entity: The entity that represents the project Verified Emission Reductions: A unit of greenhouse before the UNFCCC and that usually aggregates land- gas emission reductions that has been verified by an owners in a multi-farmer project. In many cases the pro- independent auditor. VERs are typically traded on the ject entity is also the project manager. voluntary carbon market. Project Idea Note: A note prepared by a project pro- Verification: The review and ex-post determination by ponent that briefly outlines the project activity (e.g., an independent third party of the monitored reductions sector, location, financials, and estimated levels of ERs). in emissions generated by a registered CDM project dur- ing the verification period. REDD-plus (REDD+): All activities that reduce emis- sions from deforestation and forest degradation, and Voluntary Carbon Market: The voluntary market ca- contribute to conservation, sustainable forest manage- ters to the needs of those entities that voluntarily de- ment, and the enhancement of forest carbon stocks. cide to reduce their carbon footprint using offsets. The regulatory vacuum in some countries, and the anticipa- Reforestation: The process of increasing the capacity tion of imminent legislation on greenhouse gas emis- of the land to sequester carbon by replanting forest bio- sions, also motivates some pre-compliance activity. mass in areas where forests were previously harvested. Watershed: An area that supplies water by surface or Registration: The formal acceptance by the CDM EB of sub-surface flow to a given drainage system or body of a validated project as a CDM project activity. water, be it a stream, river, wetland, lake, or ocean. The terms watershed, basin, and catchment are often used Removal Unit (RMU): Issued by parties to the Kyoto interchangeably in the literature. Protocol to account for net removals by sinks from ac- tivities in the Land Use, Land-Use Change and Forestry sector in accordance with Articles 3(3) and 3(4) of the Kyoto Protocol. Sequestration: The capture of carbon dioxide, for a specified period of time, in a manner that prevents it from being released into the atmosphere. Small-scale A/R CDM Projects: Projects expected to result in net anthropogenic greenhouse gas removals by sinks of less than 16 kilotonnes of CO2 per year and developed or implemented by low-income communities and individuals as determined by the host country. If a small-scale project results in greenhouse gas removals by sinks greater than 16 kilotonnes of CO2 per year, the excess removals will not be eligible for tCERs or lCERs. Temporary CER (tCER): A CER issued for an A/R CDM project which expires at the end of the commitment pe- riod following the one during which it was issued. United Nations Framework Convention on Climate Change (UNFCCC): The international legal framework adopted in June 1992 at the Rio Earth Summit to ad- dress climate change. 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