GHG and Ecosystem Markets – State of Affairs, Trends and Access to the Markets QUEST Workshop

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EcoSecurities Group Ltd. 2004 All Rights Reserved

GHG and Ecosystem Markets–

State of Affairs, Trends and Access to the Markets

QUEST WorkshopSustainable Forestry and Climate Mitigation

25 July 2005, Bristol

Robert Tippmann, EcoSecurities Ltd., UK

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Key Points

1. Why Investing in Carbon Forestry or Buying Carbon Credits - The Policy Framework

2. Other EcoSystem Services – Biodiversity and Watershed Protection Services

3. GHG Markets – Which Markets, State of Affairs and Trends

4. Other EcoSystem Markets - Which Markets, State of Affairs and Trends

5. Current Trends in the GHG Markets, Particularly in View of Carbon Credits from Land

Use, Land-Use Change and Forestry

6. Criteria for Projects to be (Most) Successful in the GHG Markets and in Attracting CER

Buyers

7. Steps in the Generation and Commercialisation of ERs

8. Food for Thoughts

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1. Why Investing in Carbon Forestry or Buying Carbon Credits- The Policy Framework -

The three flexible mechanisms of the Kyoto Protocol to the UNFCCC

• Emissions Trading (ET) under Art. 17: Exchange or trade of surplus emission reduction credits (AAUs) between Annex I countries or entities (industrialised countries or economies in transition).

• Joint Implementation (JI) under Art. 6: Annex I Party or entity invests in or buys emission reduction/removal credits (ERUs/RMUs) from an emission reduction/removal project in another Annex I country. Afforestation, reforestation, and forest and land-use management

activities.

• The Clean Development Mechanism (CDM) under Art. 12: An Annex I Party or entity invests in or buys emission reduction credits (CERs) from an emission reduction/removal project in a developing country (Non-Annex I country). Only afforestation and reforestation.

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Domestic activities or projects under the Kyoto Protocol:

• Art. 3.3 and 3.4: Generation of RMUs through an Annex I Party (or entity?). Afforestation, reforestation, or (avoided) deforestation, revegetation,

forest/cropland/grazing land management activities.

• National Projects in Annex I countries: Basically a unilateral JI project in an industrialized country or an economy in transition through Art. 3.3 or 3.4 activities that would generate NRUs/RMUs. Governments will have to decide approval of such project.

Non-Kyoto compliant or voluntary projects

• All projects that do not fit the (Kyoto-)bill but do comply with internationally agreed standards.

1. Why Investing in Carbon Forestry or Buying Carbon Credits- The Policy Framework -

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Watershed protection services:

• Water flow regulation;• water quality maintenance;• erosion and sedimentation control;• land salinization reduction/water table regulations;• maintenance of aquatic habitats.

Commodities

• Best management practice contracts, ecolotree plantings, salinity-friendly products, salinity credits, fish habitat or safe products related payments, stream flow reduction licenses, transpiration credits, water rights , water quality credits, watershed lease, watershed protection contract.

2. Other Ecosystem Services – Biodiversity and Watershed Protection Services

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Biodiversity protection services:

• Providing habitat conditions that support diverse wild plant, animal and microorganism populations of economic, subsistence or cultural value;

• maintaining ecosystem functioning;• conserving genetic and chemical information of potential future utility;• providing insurance against future change;• providing spiritual, aesthetic and cultural values;• ensuring the continued existence of wild organisms as legitimate

claimants on earth’s resources.

Commodities

• Purchase of high-value habitat/land, payment for biodiversity-conserving management, tradable rights, support biodiversity-conserving businesses.

2. Other Ecosystem Services – Biodiversity and Watershed Protection Services

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Kyoto compliant trading schemes or initiatives• EU Emissions Trading System• National trading systems (e.g., UK, Denmark, others within the EU)• Canada and Japan

Non-Kyoto compliant or voluntary trading schemes or initiatives• US schemes, state and city (Seattle, Oregon, Massachusetts, Chicago

Climate Exchange) levels• Canada• Australia – New South Wales

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Project-based emissions reduction trading (1998-2012)

Source: World Bank 2005

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Project-based emission reductions - Distribution among regions and project categories (PDD database)

Other Asia22%

India23%

China3%

Brazil11%

Africa6%

Europe24%

Other Central & South America

11%

30%

23%19%

10%

7%

3%3%

2% 2%

1%

renewable power

waste

fertilizer production

HFC-22 production

industry

mining

electricity

energy

fuel switch to NG

other

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Methodological status: share of total emission reductions and PDDs

3%

47%

2%13%

11%

1%

23%

6%

48%

1%10%

14%

2%

19%

Registered Project

Approved Methodology

Methodology with b status

Methodological status not sure

Submitted New Methodology

Sink

JI

Share of total PDDs

Share of total emission reductions

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State of affairs regarding the approval of AR-CDM methodologies

• 11 baseline and monitoring methodologies have been submitted so far (five submission rounds until July 2005):

Out of these 11 two projects resubmitted new methodologies; 3 methodologies have been rejected (recommendations by the AR-CDM Working Group); 2 methodologies have been sent back for further

clarifications (recommendations by the AR-CDM Working Group); and

4 more methodologies have been submitted in round four which will be assessed after 20 July 2005.

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Location of emission reduction projects (share of volume supplied)

Brazil

12%

Rest of Latin America

23%

India

26%

Rest of Asia

17%

OECD

10%

Transition Economies

9%

Africa

3%Brazil

13%

Rest of Latin America

22%

India

31%

Rest of Asia

14%

OECD

14%

Transition Economies

6%

Africa

0%


January 2003-December 2004 January 2004-April 2005

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Market buyers (share of volumes of ERs purchased)

Japan

29%

Gov.Netherlands

22%UK

6%

Other EU

30%

New Zealand

3%

Canada

6%

Australia

1%

USA

3%

Japan

21%

Gov.Netherlands

16%

UK

12%

Other EU

32%

New Zealand

7%

Canada

5%

Australia

3%USA

4%

January 2003-December 2004 January 2004-April 2005


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Observed prices for project-based emission reductions (until 2004)


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4. Other EcoSystem Markets – Which Markets, State of Affairsand Trends

• Markets for biodiversity and watershed protection services less developed or rather consist of dispersed and less regulated niche markets

• Watershed markets or services are rather locally based whereas biodiversity services are much more suited to international trading.

• More direct deals with less governmental intervention or approval procedures with less clear transaction structures and more variable prices than for carbon credits.

• International regulatory framework for biodiversity offsets or efforts to link existing national or regional frameworks in the future is speculative at the moment.

• First experiences with voluntary offsets with a number of companies developing technical expertise, building institutional support and making the business case.

• There are already mandatory offsets that could eventually be part of an emerging market in tradable “offset credits”.

• Other hybrid approaches between voluntary and mandatory offsets.

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5. Current Trends in the GHG Markets, Particularly in View of Carbon Credits from Land use,

Land-Use Change and Forestry

Current trends in the GHG markets

• EU Emissions Trading System (ETS) started in 2005.

Utilisation of land use, land-use change, and forestry (LULUCF) credits to be decided during review in 2006. However, certain governments can and will buy LULUCF credits independently from this decision.

• Canada and Japan are about or have introduced emission reduction measures and policies.

• Voluntary, non-Kyoto compliant markets have emerged in the US and Australia.

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Where are the known foci for LULUCF activities and credits on the demand and supply side?

• Canada;

• Japanese Government plus private sector;

• Italy;

• Further EU members that are far behind their targets such as Spain or Portugal (Greece?);

• Countries with a traditionally strong forestry sector (e.g., in Scandinavia), plus others when demand for credits (CERs/ERUs) is expected to further increase later on.

5. Current Trends in the GHG Markets, Particularly in View of Carbon Credits from Land Use,


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5. Current Trends in the GHG Markets, Particularly in View of Carbon Credits from Land Use,


• Carbon Finance Group of the World Bank (in particular the BioCarbon Fund and the Community Development Carbon Fund);

• US;

• Australia;

• There is a strong interest in developing countries in CDM/carbon forestry projects in the land use and forestry sector, as well as the first ones are already underway.

• In Russia and some other countries in Central and Eastern Europe and Asia is also a strong interest in generating and selling carbon credits from forestry activities.

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Institutional framework and support for best results Kyoto Protocol ratified; DNA established to approve CDM projects; DNA should coordinate the agencies responsible for setting

sustainability policies, environmental and investment regulations, and the organisations involved in CDM project development;

Sustainable development policies, plans and control systems developed;

National and regional policies developed and integrated; Priorities and opportunities for projects identified; Promotion of investment into LULUCF CDM projects; Capacity and infrastructure for project implementation built; In-country understanding of carbon flows and data availability in the

land-use sector developed; Legal landscape for carbon ownership defined.

6. Criteria for Projects to Be (Most) Successful in the Market and in Attracting CER Buyers

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Project-level design aspects

• Good/best practice CDM project development standards (e.g., IPCC LULUCF GPG, CCBA standards);

• Sustainability criteria, indicators and standards;

• Good forest management principles and criteria (e.g. FSC);

• Criteria and indicators for sustainable land use and agriculture or complex systems including agroforestry (e.g. IFOAM);

• Regulations and guidelines existing on country-level (e.g. biodiversity indicators);

• Environmental and social impact assessments and forest certification.


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Project-level development criteria• Accurate baseline and project scenario determination and

prove of additionality;• Assessment of risks and uncertainties;• Assessment and accounting for leakage;• Consideration of transaction costs;• Positive environmental and socio-economic impacts;• Early stakeholder involvement and consultation;• Consider local, regional, and national requirements for project

development;• Overall contribution to the sustainable development goals of

the host country.


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forest products - wood and non-wood

forestryinvestment

carbon storage

biodiversity

watershed protection

scenic beauty

socio-economic benefits


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Additionally, buyers ask to fulfil certain criteria• Projects with defined implementation plans and clear

starting dates;• Financing secured (or close to be secured);

• Minimum annual volume of tCO2e;

• Kyoto and relevant emissions trading system rules apply;• Only certain project types/interested in LULUCF or not;• Country/regional priorities;• Delivery of emission reductions/removals rather sooner

than later;• Risk management strategy in place.


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PIN

PCN

LOI + LOE

PDD + LOA

ERPA

Payment

Project Idea Note

Project Concept Note

Letter of Intent + Letter of Endorsement

Project Design Document+ Letter of Approval

Emission ReductionPurchase Agreement

Validation

Verification, registration and transfer

7. Steps in the Generation and Commercialisation of ERs

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8. Food for Thoughts

• Can we come back to where we started before Kyoto by including avoided deforestation into a post-2012 regime? Can (methodological) problems on the supply side be solved? Do we

need climate mitigation projects to solve the deforestation problem? Can this be part of a solution to bring the US back on board? Who else will buy the credits – demand side? Links to implementing the CBD?

• How can we ensure that the share of LULUCF projects in the post-2012 market will be increased? What is needed to support project developers in getting better access to

the market? Combined (biomass) energy LULUCF projects?• What role can/will play other ecosystem services in the future regarding land

use and forestry based activities?• What can projects/initiatives do from now on up 2012 to prepare for a post-

2012 trading regime? Include other non AR-activities? Biodiversity/watershed protection

services? What about the inclusion on HWP?

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For further information please contact:

Robert Tippmann, 21 Beaumont Street, OX1 2NH Oxford, UK - [email protected] - +44-1865-297488

www.ecosecurities.com

EcoSecurities Group Ltd.

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GHG and Ecosystem Markets – State of Affairs, Trends and Access to the Markets QUEST Workshop

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