Carbon Emission Offsets

Gary BullFaculty of Forestry, University of British Columbia

Vancouver, Canada

September 19, 2005

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Carbon Sequestration

Carbon Markets 2004

Carbon Deals

Carbon Actors – Intermediaries

Challenges – People, Process

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Does Carbon Sequestration Matter?

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Carbon markets potential 2006

International Pre-

Compliance

Retail Marke

t

Regional Markets- EU

National Markets –Japan, Canada, Australia

US Market

SUB-NATIONAL MARKETS

MassachusettsNew HampshireNSW

National market DenmarkNational Market

United Kingdom

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Share of Emission Reduction

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Market Buyers

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Deals• Canada

• Belize

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Canada-Chile? Hog farm

Agricola Super Ltd, Chileo 400 thousand tonnes

annual reductiono 10 years - 4 million

tonnes credit

$20 million technology investment to reduce methane

Transalta, Canadao Releases 30 million

tonnes CO2E annually

o Not sure what its obligations are under Kyoto

o Purchased 1.75 million tonnes CO2E for 9 million $US

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Canada –voluntary market

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Belize – Reforestation - CDM

8000 ha planted

50 000 ha in total

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Belize

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Belize Project - Net Greenhouse Gas Removal by Sinks

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Belize Forest Nursery

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Belize – Carbon Ownership

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Actors

• International Institutions

• Governments

• Buyers

• Sellers

• Brokers

• Intermediaries– Transactions costs

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Intermediaries

• Lawyers

• Accountants

• Resource Consultants

• Insurers

• Engineers

• Researchers

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Transaction CostsSummary of the Mark-up on Product Pricing – Bamboo flooring

PlayerOriginal

CostAdded

Cost/MarkupSale Price Margin

Flooring Manufacturer

$15 - $17/m2

--- $18 – 20/m2 15 – 20%

Importer and Wholesaler

$18 – 20/m2

$2/m2 (handling)

$12 – 13/m2 (markup)

$32 – 35/m2 60 – 70%

Retailer $32 – 35/m2

$15 – 25/m2 (markup)

$47 – 60/m2 40 – 70%

Consumer $100/m2

Source: Bull 2004

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Types of Transaction Costs

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Transaction costs

Milne 1999 - CIFOR

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Projects examples

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Challenges

Process

People

• Manage the ‘mad’ scientists!

• Recognize the limits to bureaucratic intelligence!

• Beware of the lawyers, insurance salesman, consultants and accountants!

• Shady sellers and ignorant buyers

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Conclusions

• Forest and Agriculture need inclusion

• Deals are diverse - Wild West mentality

• Transaction costs will kill many deals

• People in the process can also kill deals

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Challenges

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Key challenges

Process

• Mixed motive problem

• Accounting tools

• Leakage, Baseline, Permanence

• Risks

• Learning curve

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Kinds of offsets

• Landfill gas, methane reduction, bioenergy, etc.

• Forest carbon sequestration– Afforestation, Reforestation, Deforestation (Article 3.3)– Management Intensification (Article 3.4)– Avoided losses - (Article 3.4)

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Key Questions

Why do we want forest carbon sequestration included in the current global dialogue on climate change?

To find money:• basic forest management – e.g. part of ftg costs• institutional reform costs – e.g. carbon pooling• mgmt plans• multiple objectives management strategy – e.g green-up• alleviate poverty ? - unknown

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What are the opportunities?

– Planting degraded or barren areas– Intensify management on existing forests– Conserving or manage differently forests

which have large carbon stock

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What are the challenges?

– Risks (fire, insect and disease)– Measurement tools (all the carbon pools)– Reluctance to allow sequestration to trade off

against emission reduction– Property rights are new– Transaction costs– Income distribution

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Solutions to the challenges

• Risk– Build risk models– Create carbon pools– Buy insurance

• Measurement– Use the best available science– Make sure the measurement is cost effective– Invest in new R and D.– Use biological models sensitive the marketplace

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Solutions to the challenges

Sequestration vs. Emission– Team up with the agriculturalist– Help people get the perspective e.g. fire– Use good science on the measurement side

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Kinds of offsets

• Landfill gas, methane reduction, bioenergy, etc.

• Forest carbon sequestration– Afforestation, Reforestation, Deforestation (Article 3.3)– Management Intensification (Article 3.4)– Avoided losses - (Article 3.4)

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Key Questions

Why do we want forest carbon sequestration included in the current global dialogue on climate change?

To find money:• basic forest management – e.g. part of ftg costs• institutional reform costs – e.g. carbon pooling• mgmt plans• multiple objectives management strategy – e.g green-up• alleviate poverty ? - unknown

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What are the opportunities?

– Planting degraded or barren areas– Intensify management on existing forests– Conserving or manage differently forests

which have large carbon stock

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What are the challenges?

– Risks (fire, insect and disease)– Measurement tools (all the carbon pools)– Reluctance to allow sequestration to trade off

against emission reduction– Property rights are new– Transaction costs– Income distribution

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Solutions to the challenges

• Risk– Build risk models– Create carbon pools– Buy insurance

• Measurement– Use the best available science– Make sure the measurement is cost effective– Invest in new R and D.– Use biological models sensitive the marketplace

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Solutions to the challenges

Sequestration vs. Emission– Team up with the agriculturalist– Help people get the perspective e.g. fire– Use good science on the measurement side

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Solutions to the challenges

Developing new markets– Clarify ownership– Strengthen the weak institutions– Deal with the specifics – leakage, contract

period, permanence– Experiment– Make sure you deal with the distribution of

income issue

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Solutions to the challenges

Research

1. Transaction costsa. Efficient regulatory frameworkb. Efficient markets

2. Income distributiona. Collect data – householdb. Analyze

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Carbon activities

• Article 3.3 – CDM project proposals in Belize, China and Uganda– Non spatial and spatial forest risk models– Transaction costs analysis– Institutional analysis for small farmers

• Article 3.4– Fertilization impact assessment– Develop new forest planning model– Carbon conservation in Canadian old growth ~

avoided deforestation in other context

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Other activities

• Biodiversity measurement in the Kootenays

• ISO 14064

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Carbon Emission Offsets

• Payment systems

• Actors

• Deals

• Challenges

• Links to poverty reduction

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Tools for creating deals

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Area:

610 000 ha (1 549 400 acres)

Current Harvest:

900 000 m3

Biogeoclimatic Zones: AT, BG, ESSF, ICH, IDF, MS, SBPS, SBS

Major Tree Species: Black Cottonwood, Trembling Aspen, Douglas-fir, Sub-alpine Fir, White Birch, Lodgepole Pine, Engelmann Spruce

Red-listed Species: American White Pelican, Peregrine Falcon, Prairie Falcon, Brewer’s Sparrow, Yellow Breasted Sparrow, Lake Whitefish, Giant Pygmy Whitefish

Lignum IFPALignum IFPAProject AreaProject Area

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Carbon Balance

50000000

55000000

60000000

65000000

70000000 Baseline

Treatment

125,000 Polygons

Age

Operability

AreaForest Cover

>200 Layers Defining Management Objectives

Roads …

>2,000 Yield Curves

Block Size Targets

Patch Size Targets

FORECAST Carbon Curves

FSOS

Carbon Storage by Pool

-5000000

5000000

15000000

25000000

35000000Total Biomass

Litter

Soil

Timber Flows

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

0 40 80 120 160 200

Years

Volu

me

(m3/

yr)

Base CaseProposed Option

Caribou Habitat

0

20

40

60

80

100

0 40 80 120 160 200Years

%>1

00

years

Actual

Target

Old Growth -IDF

0

10

20

30

0 40 80 120 160 200

Years

%>

250 y

ears

Actual

Target

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Financial AnalysisFinancial AnalysisScenario 4: No Discounting

Value of Additional Carbon

-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

0 50 100 150 200 250

Year

Rev

enu

e (

$)