Harnessing the carbon market to sustain ecosystems and alleviate poverty

BioCarbon Fund Experience Insights from A/R CDM

Host Country Committee meeting, BarcelonaMay 2011

Table of contents

I. The BioCarbon Fund experience in carbon finance in Afforestation and Reforestation (A/R) – Lessons learned

II. Recommendations

III. Looking ahead

Promoting several aspects of the forest carbon market

The BioCF: promotes carbon markets for land-based projects$90M mobilized to conserve and sequester carbon in forest- and agro-ecosystems

Linking buyers and sellers

The BioCarbon Fund

Buyers: BioCF Participants 6 governments and12 private companies Investments in exchange for carbon credits Investments in ‘infrastructure’ Some seek credits to comply with regulations

and others for voluntary purposes As a trustee, the BioCF invests in projects to

generate carbon credits

Sellers: Project developers They sign an ERPA with the BioCF BioCF covers a portion of project

development costs – subsequently deducted from emission reductions payments

BioCF pays emission reductions on-delivery upon validation completion and based on project implementation reports

Developing methodologies and tools to support project preparation

Producing training material on forest carbon to facilitate project preparation and implementation

Generating lessons learned

Facilitating communication between UNFCCC bodies and project developers

Strengthening capacity and supporting negotiators for A/R and the inclusion of other land-based activities in the Kyoto Protocol

Forest carbon marketsA/R CDM: a small portion of forest carbon markets

A/R CDM credits have an important niche in the voluntary carbon market

Volume and value of forest carbon markets (2009, US$ million)

Transaction volume by project type, ( OTC, 2009)

Historical total

2008 Historical total

2008

MtCO2e M$

0

20

40

60

80

100

120

140

160

Kyoto (AAU)

New Zealand ETS

A/R CDM

New South Wales

Chicago Climate Exchange

Voluntary over the counter

31%

10%

8%7%

7%

4%

4%

4%

3%

3%

3%

3%2%1%1%1%

7%

Chart Title

Landfill A/R WindRun-of-river Avoid. Def LivestockEE&Fuelswitch Coal mine Geo-seqForest Magmt Allowance Agr. SoilRE - all others Wastewater AgroforestryRemaining-all others Not specified

The BioCarbon Fund

Tackling an inequitable distribution: BioCF is largely supporting projects in sub-Saharan Africa compared to the CDM overall…

…and is also bringing the carbon market to rural communities

The BioCarbon Fund

Mitigating climate change through a variety of land use activities – examples Assisted Natural RegenerationEthiopia Humbo – farmer managed natural regeneration on severe degraded community landsAlbania – assisted natural regeneration of degraded lands

Afforestation / ReforestationDRC Ibi Bateke – agroforestry on degraded savannah, and charcoal & fuelwood production

Kenya Greenbelt – restoration of degraded forests and community lands

Madagascar – biodiversity conservation on degraded lands subject to shifting cultivation

Niger – restoration of vegetative cover and production of Arabic gum with multiple farmers

Uganda – timber production on degraded lands involving multiple farmers

Chile – timber production on severely degraded lands

REDD+Madagascar – creation of a sustainable use protected area, with local conservation and management activities

Sustainable Land ManagementKenya – adoption of sustainable agricultural land management practices by small-holder farmer groups to increase crop yields, farm productivity and soil carbon sequestration

A/R CDM a powerful tool for sustainable rural development

Lessons learned

GHG emission reductions from A/R projects can be measurable, verifiable and reportable

Carbon finance catalyzes underlying investment by improving project viability

Additional socio-economic and environmental benefits from projects are substantial: Poverty alleviation Local good governance and land tenure security promotion Land restoration and biodiversity conservation Opportunities to improve forest project performance

But some barriers need to be removed to scale up from pilots to common practiceGenerally observed opportunities

Generally observed challenges

Complex rules for project development and low local capacity to apply them

Lack of data availability and technology constraints Forest credits: low price and low demand due to the approach

to non-permanence Lack of innovative financing to support projects in covering

upfront costs

Forest growth from natural assisted regeneration has been exceptional

Besides some small bush, Humbo was devoid of any trees before this project

Pre-2005

2010

Lessons learnedIdentifying challenges and good practices in key topics

1

2

3

4

5

7

8

6

CDM regulations

The challenge of pursuing forest carbon credits with environmental integrity, efficiency, and effectiveness

Challenges and opportunitiesLand-related issues

The rigor and practicality ImbalanceGHG accounting

The temporary crediting approach to non-permanence, a narrow window of opportunity for A/R

Nonpermanence

Catalyzing underlying investment for forest projects Finance

Taking advantage from early lessons on project development and implementation

Under-deliveryrisk

An opportunity for creating synergies – significant potential

Co-benefits

A key success factor for effective project development and implementation

Institutional framework

Lessons learnedThe challenge of pursuing forest carbon credits with environmental integrity, efficiency, and effectiveness (contd.)CDM

regulations

Validation PDD quality determines the cost and time spent on validation Designated Operational Entities (DOEs) with relevant experience in the sector still scarce:

The accreditation of entities started late relative to other sectors Once accredited DOEs have to build their own expertise based on experience gained through validation

DNAs and project entities’ delay the provision of the documentation essential for project validation – due to poor coordinating capacities and/or bureaucratic procedures

Registration Most projects have failed completeness checks because project developers:

disregard the importance of presenting required documentation to succeed in registration get overwhelmed with validation completion; and have low capacity to track the changes introduced by the CDM EB in documentation and formats

Delays at registration are expected to be significant due to stringent scrutiny by the CDM EB → projects will reduce their chance of getting CERs before the end of the first commitment period of the Kyoto Protocol

Lessons learnedThe challenge of pursuing forest carbon credits with environmental integrity, efficiency, and effectiveness (contd.)CDM

regulations

Verification Project developers and field teams often disregard the importance of

strictly following the PDD at implementation This is compounded by the live nature of A/R projects, and sometimes,

the fact that project developers and field teams are not involved in the preparation of the PDD

Monitoring is also complex as it requires to assess many variables Significant deviation from the PDD at project implementation will

increase the number of formal processes since a revised monitoring plan must be approved by the CDM EB

Deviation from the PDD is happening in projects. The CDM EB must decide criteria to consider when deviation can be addressed by re-stratification

To overcome this challenge it is important to further simplify monitoring rules and increase local capacities

Lessons learned

Land related issues: Challenges and opportunitiesLand issues

2

Land eligibility and project boundary Complying with these rules is a challenging task for project developers

Demands human and technical capacity to interpret satellite imagery and resources to invest in technologies

The 1990 rule excludes areas with significant potential for A/R and results in scattered planting plots The challenge is greater in projects in tropical climates where vegetation quickly (and temporarily)

reaches the country’s forest definition and validators classify the land as ineligible Developers struggle with demonstrating the temporary nature of such re-vegetation (complex studies) Selecting eligible lands can be an iterative long process, complicating the integration of farmers to the

project → costly, socially difficult to implement and can have ecological implications The “control over two-thirds of the land” rule helped to a certain extent, but it has

to be further simplified to support this projects and to allow A/R CDM be an tool for REDD+

The CDM EB has introduced too many changes to the land eligibility rule, creating ambiguity, confusion, and generating different interpretation of the rules by validators and project developers

Lessons learned

Land related issues: Challenges and opportunitiesLand issues

Land tenure The land tenure rule can exclude farmers with no formal land title

from participating in CDM A/R BioCF Participants were willing to invest in projects in areas with

a lower level of land tenure security as long as adequate institutional mechanisms are put in place to ensure emission reductions permanence and legal transferability of carbon rights

There is evidence of carbon finance contributing to increasing land tenure security in a number of projects

However, complications with land tenure requirements have reduced the feasibility of some projects. Delays in completing land tenure clarification and security processes have in some cases discouraged farmers from participating in projects; the process also can be costly

A strong relationship between the project entity and the government facilitates this process

Vacant Land56%

Untitled Private

Land29%

Classified Forests

5%Classified Forests

and Untitled Private

Land3%

Vacant Land and Untitled Private

Land7%

State land with

recognized customary community user rights

68%

Privately owned land

with recognized customary community user rights

Increased land tenure security in an African BioCF project

Before

After

Lessons learned

The rigor and practicality imbalanceGHG accounting

3

The level of complexity of early methodologies made them less accessible to project developers

Training of project developers is required to strengthen their capacity for GHG accounting

Lack of available data on native species negatively affects projects with a biodiversity focus

Estimation of activity-shifting leakage is time and information intensive

Practical challenges arise in monitoring biomass growth

Year

Number of Projects

entering the BioCF

Portfolio

Number of A/R CDM

Methodologies approved by

CDM EB

Number of Tools

Published by CDM

EB

Number of Guidance Statement Published by CDM

EB

Number of Clarifications

to Methodologies Published by

CDM EB

Tools Elaborated on by the

BioCF

DOEs Accredited

2004 9 2005 8 1 1 1 3 2006 3 4 7 3 1 2007 3 8 8 1 4 TARAM 1 2008 2 3 3 3 1 2 2009 1 2 5 10 2010 2 SMART 2 Total 25* 19 14 17 11 16

Lessons learned

The temporary crediting approach to non-permanence,a narrow window of opportunity for A/R

Non- permanence

4

tCERs are more flexible commodities than lCERs; they also provide a greater stream of revenues for project developers

The replacement credit rule increases the risks for buyers of forest credits The non-permanence approach results in delayed carbon revenue Temporary crediting as an approach to address non-permanence of A/R

projects has limited effectiveness and reduces the demand for forest credits (e.g., banned from largest EU-ETS market)

Lessons learned from A/R CDM projects can be enriched with experiences from the voluntary carbon market where other approaches to non-permanenceare used

p1 p2

tCERs lCERs tCO2e

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

tCO

2e

Year

BioCF projects preferred tCERs over lCERs

Lessons learned

Catalyzing underlying investment for forest projects The role of carbon finance

5

Transaction costs of meeting CDM requirements were high in most BioCF projects

Project developers’ capacity to develop, implement, and manage a forest carbon project strongly determines project viability

Small-scale projects struggle with achieving project viability

One of the most important contributions of carbon finance to A/R projects is its role in catalyzing underlying investment

BioCF ratio of ERPA value to total underlying investment is 1:7.4 It helped improve the IRR of some projects by 5-6 percentage points

Carbon revenue, depending on amount and timely delivery, can positively impact project viability

0.00 0.25 0.50 0.75 1.00 1.25 1.50

Forestry

Wind

Biomass energy

Landfill gas

Methane avoidance

Hydro

Industrial gases

US$

World Band project development costs by technology ($/tCO2e) –Weighted average

The price of permanent CDM credits determines the price of credits from A/R projects, which limits the potential of carbon finance to support project viability

Lessons learned

A key success factor for effective project development and implementation

Institutional framework

6

The integrity of the carbon asset and the permanence of the forest carbon project can also be assured by institutional and contractual instruments as they help clarify carbon ownership and ensure adequate project implementation: Emission Reductions Purchase Agreement Subsidiary agreements Land-use agreements, and Benefit sharing agreements

Designing and creating equitable benefit-sharing schemes that effectively improve local livelihoods is essential for the long-term success of forest carbon projects

Private-public partnerships with clear responsibilities for each partner seem to work best

Investing in and sustaining local capacities can ensure the permanence of forest carbon initiatives

(n=5)

(n=4)

(n=7)

(n=1)

0% 1- 59% 60-99% 100%

% of carbon revenue received by local farmers/ communities

# projects

Example: where project entity uses 100% of carbon revenues to cover its upfront costs, farmers are entitled to 100% of revenues from timber.

(n=4) (n=4)

(n=1)

(n=8)

0% 1- 59% 60-99% 100%

% of total forest products assigned to local farmers/ communities

# projects

Complex partnerships demand higher coordination and managerial capacities

Lessons learned

An opportunity for creating synergiesCo-benefits8

All types of A/R projects have environmental, economic,

social, and institutional co-benefits Co-benefits are an important incentive for local

participation in forest carbon projects. Forest carbon projects also contribute to climate change

adaptation by increasing the resilience of local environments and communities

There is great potential for synergies between forest carbon projects and other development initiatives

RecommendationsRegulatory

Remove regulatory uncertainty. The uncertain regulatory environment that exists until UNFCCC negotiations are done is creating a dampening effect. In addition, where market signals have been given for post-2012 (as from the EU-ETS), A/R credits from the CDM remain disadvantaged despite significant livelihood implications

Improve the fungibility of forest project credits by addressing the non-permanence of forest carbon in a broader way and allowing A/R projects to use alternative approaches to temporary crediting

Further simplify rules and procedures for baseline determination and additionality demonstration

Increase the current threshold of 16,000 tCO2e for small-scale projects and revisit the rule that low-income people that must be involved in this type of project

RecommendationsFinance

Innovative ways to finance activities

Carbon finance is a payment on delivery, and yet the upfront investments needed for A/R projects are significant

Economies of scale are not easily attained Forestry investments are long term and deemed high-risk in many developing

countries Institutional arrangements for financial intermediation, recognition of carbon credits

as part of credit options for agriculture and rural development, and ex-ante payments based on meeting performance benchmarks are highly needed

Financial compensation for other benefits The BioCarbon Fund experience has shown that A/R projects encompass both

mitigation, through removal of CO2 from the atmosphere, and adaptation as they build up the resilience of the environment and communities to harsh environmental conditions

Projects show an amelioration of living conditions, but the significant additional environmental and social benefits (besides carbon) are not rewarded

RecommendationsStrengthening Capacity

Strengthening capacity at the local level is needed to ensure successful forest carbon initiatives. The fact that A/R projects are useful tools to promote both adaptation and mitigation should be harnessed to build-up capacity and to strengthen programs in an integrated manner

Looking ahead

Many of the lessons learned from A/R could be helpful in the development of REDD+ in

order to avoid the same bottlenecks The interactions between different land uses need to be addressed; policymakers will need

to address the interface of all land use activities (e.g., A/R, REDD+, and agriculture) in an integrated approach

There is also a need to bring in the biomass-energy dimension The application of an approach that integrates land-use and energy sectors at a landscape

level would be more practical and cost effective The BioCF will continue its support to land-use interventions and is planning to build on the

experience to-date in A/R through scaled-up programs and exploring new areas. All of this is in line with the World Bank’s triple-win-for-farmers strategy in which the

forestry, agriculture, and rural energy sectors are treated in a integrated way to: Increase food security Improve the rural poor resilience to cope with the impacts of climate change; and Mitigate climate change

Additional Resources

WB Carbon Finance Unit: www.carbonfinance.org

Lessons Learned from 10 years of Carbon Finance Brochure on CDM reformState and Trends of the Carbon Market

BioCarbon Fund: www.biocarbonfund.orgSummary of all BioCF projectsLinks to some key papers on carbon projects – See “Useful Resources”How-to guides

Thanks