Woodland carbon & Incentives for Climate Change Mitigation by the UK Forest Sector

Woodland carbon & Incentives for Climate Change Mitigation by the UK Forest Sector

Gregory ValatinForest Research

Centre for Human and Ecological SciencesRoslin

Scotland

LEF Workshop, 1st June 20122

Change of presentation focus

The ‘comprehensive title in the programme:Originally international cooperation on climate change

• Early results from game theory literature suggested:• a self-enforcing international environmental agreement

(IEA) may not exist (Barrett 1994)• where one does it is unlikely to:

• be signed by more than a few countries (Barrett 1997; Carraro and Siniscalco 2001)

• to significantly improve upon the non-cooperative equilibrium (Barrett 1997; Carraro (Ed.) 2003).

• Framing the problem as an issue of environmental security reverses these results• how we frame problems can drive the results we get!

Apologies for any disappointment due to change of focus!


Overview

1) Significance of UK woodland Carbon • UK National Ecosystem Assessment

• sequestration • storage

2) Cost-effectiveness of UK forestry for Climate Change Mitigation• Marginal Abatement Cost Curves• Other studies:

• Flood risk management: ‘Slowing the Flow’ at Pickering• Agroforestry / farm woodland: Ammonia abatement

3) Incentives for Carbon sequestration by UK woodlands• Regulatory frameworks

• EU Emissions Trading Scheme

• recent Forestry Commission led initiatives• Investigating potential for new financial instruments• Woodland Carbon Code

• Carbon Valuation, Discounting & Risk Management• Additionality of woodland carbon projects

4) Summary and Concluding remarks


Variety of UK Forest Ecosystem Services

NEA Woodlands Chapter:• Provisioning services

• 9 million tonnes of wood in 2009• Social & cultural services

• 250-300 million visits to UK woodlands a year

• Landscape amenity• Educational value

• Regulating services:• Detoxification/purification

• Water quality• Soil quality• Air quality

• Hazard reduction• Flood risk

• Carbon sequestration• Biodiversity

http://uknea.unep-wcmc.org


Carbon sequestration by UK woodlands

CEH / UK GHG inventory estimates (UK forests planted since 1921):

● annual net carbon sequestration rose from 2.4 MtCO2 in 1945 to a peak of 16.3 MtCO2 in 2004, falling back to 12.9 MtCO2 in 2009.

● mean net sequestration rates of 5.2tCO2/ha over 2001-2009.


Carbon sequestration by UK woodlandsUK NEA (CEH/UK GHG inventory data):

● Social value of net carbon sequestration by UK woodlands increased five-fold, from £124m in 1945, to £680m in 2009 assuming woodland carbon stock remains at least at current level in perpetuity and does not account for forestry establishment or management costs.

Figure 17 – Value of annual carbon sequestration by UK woodlands (at 2010 prices).

Note: based upon DECC (2010) social value of carbon central estimate of £53/tCO 2 in 2009.

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Future UK carbon sequestration?(1) UK NEA 2010-2050 BAU (‘business as usual’) scenario forecasts (based upon CEH estimates): ● indicate a drop of more than half in net carbon sequestration by UK woodlands from over 10 MtCO2 in 2010 to

under 4 MtCO2 in 2028. ● Forecast net carbon sequestration then falls further and becomes negative in the years 2030-2034 (as well as

in 2048) with UK woodlands becoming a carbon source rather than a sink. ● once the net carbon sequestered in harvested wood products (HWP) is added, total net sequestration remains

a carbon sink over the entire period.

Figure 19 – Net carbon sequestration by UK woodlands & HWP.

Note: based upon current woodland creation rates of 8,360ha per year and woodland removals of 1,128ha per year continue throughout .

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Figure 20 – Forecast values 2010-2050 (at 2010 prices). .

Due to increasing social value of carbon

● per hectare value of net carbon sequestration by UK woodlands projected to increase overall from £200/ha in 2010 to over £250/ha in 2050 (at 2010 prices).


Future UK carbon sequestration?(2) UK NEA 2010-2050 (based upon Read Report scenarios):

Figure 19 – Net carbon sequestration by UK woodlands & HWP.

annual value of net carbon sequestered by UK woodlands under the enhanced afforestation scenario (EAS)

additional woodland creation of 23,000ha/yr under EAS could potentially rise by around £3,000m-£4,000m by 2060

at 2010 prices compared with the CEH BAU scenario (based upon valuing the additional net 12-15MtCO2 sequestered in 2060 at the DECC central value of £275/tCO2e recommended for that year).

Figure 22 – Impact of scenarios on projected net CO2 uptake compared to BAU scenario: a) woodlands only; (b) total including HWP and substitution effects.

Source: Adapted from Matthews & Broadmeadow (2009), p.148.


Significance of carbon sequestration

NEA finding:Estimated social value of net carbon sequestration per hectare of UK woodland (£239/ha/yr) was more than three times the market value of softwood produced (£66/ha/yr) in 2009.

(NB mean market value of the carbon sequestration in 2009 probably far below 1% of the market value of the timber).


Carbon storage by UK woodlands

UK / NEA estimates:

● 803 MtC carbon stored in UK woodlands in 1990.

● Social value (relative to permanent loss) of £11,000/ha - £59,000/ha at 2010 prices (range depends if only above- and below-round biomass included, or also soil carbon).

.


climate change mitigation cost-effectiveness?

Depends upon species planted, inclusion or exclusion of carbon substitution benefits, etc:

Read Report estimates (p.158)

Table 8.8: Cost-effectiveness of woodland creation and abatement over 100-year period

Forestry option Cost-effectiveness

(£/tCO2)

Cost-effectiveness

(£/tCO2) excluding traded carbon

value

Abatement (tCO2 per ha per year)

SRF GYC36 (Eucalyptus nitens) -60.8 24.8 15.1 SRC GYC20 willow

-50.3 58.6 3.7

SRF GYC16 (Eucalyptus nitens) -45.3 41.3 8.4 SRF GYC20 (Eucalyptus nitens) -30.6 44.6 9.5

GYC16 SS/DF

-17.3 -2.8 12.9

GYC12 SS (continuous cover) -11.2 -0.1 9.7 GYC12 SS/DF

-9.6 5.3 9.1

GYC12 SS/DF (continuous cover –selection)

-4.7 8.1 9.1

Mixed broadleaf/conifer: ACF (selection)

11.2 25.9 7.9

GYC4 native woodland SP

21.1 21.1 7.0

SRF GYC12 native species (SAB)

34.3 114.6 4.5

GYC4 native broadleaves 40.7 40.7 8.4 GYC6 broadleaf farm woodland 72.7 75.8 5.2

http://www.forestry.gov.uk/forestry/infd-7y4gn9

http://www.forestry.gov.uk/forestry/infd-7y4gn9


climate change mitigation cost-effectiveness?

Marginal Abatement Cost Curves (MACCs)

E.g. for households (url: http://www.theccc.org.uk spring 2010):

UK Marginal Abatement Cost Curves for renewable heat in 2022.

Carbon savings in 2022 (MtCO2)

Source: CCC (2011, p. 125).Notes: ASHP air source heat pumps; DH district heating; GSHP ground source heat pumps.Where a technology appears more than once in a curve, this reflects different applications.

Interpretation:

A single line segment (or bar) is used to represent each measure.

Its horizontal width represents the abatement potential and its vertical height the unit cost.

http://www.theccc.org.uk/

http://www.theccc.org.uk/


Climate change mitigation cost-effectiveness

Estimates from MACCs covering UK forestry measures

Radov et al (2007)

Moran et al (2008)

ADAS (forthcoming)

Time period(s) covered i) 2009-12 ii) 2009-17 iii) 2009-22

i) to 2022 ii) to 2050

i) to 2022 ii) to 2030 ii) to 2050

Baseline land use Arable Sheep Rough grazing / uncultivated

Carbon benefits covered Seq a) Seq b) SeqSbm c) SeqSbf

a) Seq b) SeqSbm

Tree species & yield class options considered

2 1 14

Rotation lengths for each option

1 2 1

Discount rate applied 7% 3.5% 3.5% Woodland creation cost-effectiveness (£/tCO2e)

~£20 to ~£40

a) -£7 b) -£6 to £12 c) -£2 to £1

a) similar to b) in most cases, but up to £103 b) -£60 to £73

Forestry management cost-effectiveness (£/tCO2e)

Not considered

b) £1 c) £12

c) -£52

Valatin G. (forthcoming, Tables 1 & 2): Marginal Abatement Cost Curves for UK Forestry: A review


Climate change mitigation cost-effectiveness

Forestry MACCs: importance of agricultural opportunity costs

* If annual agricultural opportunity costs converted at Treasury Green Book discount ratesCarbon pools covered: T: Tree; L: litter; S: Soil; HWP: harvested wood products.

Radov et al. (2007)

Moran et al. (2008)

ADAS (forthcoming)

Carbon pools covered T,S T,L and S T,L,S and HWP

Opportunity cost (£/ha/yr)

Present Value over 100 yrs (*)

£120–£148

£3578–£4412

£141

£4204

£50–£350

£1491–£10434

Loss in land value (£/ha) £2500–£7500 Not included separately

Not included separately

Establishment cost(s) (£/ha)

£1250–£3000 £1250 £1310–£5400

Timber price profile n.a. 2.5% pa increase

2% pa increase

Value of carbon substitution in electricity generation

Not included Not valued separately

£21 per tCO2e (2009) – £200 per tCO2e (2050)


Cost-effectiveness including other ES

Forestry measures at project level: (1) ‘Slowing the Flow’:

indicative cost-effectiveness estimates for floodplain, riparian farm woodland creation for flood risk management:-£61.61 to £2.85/tCO2 (central estimate -£28.83/tCO2).

http://www.forestry.gov.uk/fr/INFD-7ZUCQY#final1

(2) ‘SAMBA’:

indicative cost-effectiveness estimates for woodland creation for ammonia abatement:-£608 to £23/tCO2(DECC cost-effectiveness comparator: £44/tCO2 to £46/tCO2).


Cost-effectiveness: summary

UK Forestry measures generally highly cost-effective:

● recent results draw upon current UK guidance including:

● DECC social values of carbon

● central estimate £53/tCO2 in 2012 (2009 prices, non ETS)

● rising to £469/tCO2 in 2100

● Treasury Green Book discounting protocol

● decline from 3.5% (0-30yrs) to 1% (>301 yrs)

● results also dependent upon wider feasibility considerations

● e.g. landowners’ motivations & land availability

● cost-effectiveness estimates are sensitive to approach adopted:

● e.g. discounting protocol & assumed social values

● whether discounted social values of carbon rise

● inclusion of wider benefits

● standardising methodology across studies (& countries) would aid comparability


Incentives (Payments for Ecosystem Services)

Q: How to ensure the social value of carbon sequestration (and other benefits) of woodlands are taken account in practice? (especially in an era of limited public finance)

US 2007 study visit:• Wetland Mitigation:

• Clean Water Act 1977 (section 404):• ‘No net loss of wetlands’• Mitigation banks emerged in the 1990s

• Conservation Banking:• Endangered Species Act 1973 (Section 10)

requirements for a Habitat Conservation Plan• Requirements to avoid, minimise and

compensate• Conservation banks established in 1990s

• Water Quality Trading:• Clean Water Act 1977

• Carbon Trading:• Regional initiatives


EU Emissions Trading Scheme

UK woodland carbon is not currently covered by regulatory (e.g. cap-and-trade) schemes.

E.G EU ETS (a “cornerstone” of the EU's policy to combat climate change): • does not currently cover forest carbon due to:

• Focus as technological driver for emission abatement by energy and industrial sources • potential impacts on incentives to reduce emissions • permanence• leakage• quantification, monitoring and verification• high transaction and administrative costs• added complexity

• temporary nature of some forestry credits (CDM)• potential liability issues for Member States

• potential for future inclusion of forestry remains a discussion point• EU ETS could be a potential funding source for forestry projects

• ≥50% of government proceeds from auctioning EU allowances earmarked for nine activities• these include forestry carbon sequestration

COST E51: Ciccarese, L., Elsasser, P., Horattas, A., Pettenella, D. and Valatin, G. 2011. Innovative market opportunities related to carbon sequestration in European forests?, Chapter 9 of Weiss, G. et al (eds) Innovation in Forestry, CABI, Wallingford.


Forestry Commission initiatives (1)

Investigating new business models & financial instruments for funding woodland creation

• ‘forest bonds’• Potential models:

• community bonds (e.g. renewable energy retailer issue of bonds to customers)

• charity bonds (low risk social housing projects, with donation to charity dependent upon investor’s chosen level of return).

• social impact bonds (public sector commissioners pay if/when outcome specific milestones met for defined population)

• examples for woodland creation in other countries include:

• Bamboo bond launched in by EcoPlanet Bamboo (UK) Ltd in 2011 aimed at establishing 1,800 ha of Guadua Bamboo plantation in central America

• Forest Bonds offered by Planting Empowerment based in Washington DC

• Investor view that funding potential for woodland creation in England too small?

• Potential for wider base forestry bonds (e.g. European)?

• equity investment in community shares• may be preferred by local communities as does not

put land purchased for woodland creation at risk

NB equity is an unsecured investment so that if enterprise fails, investors stand to lose entire investment whereas bonds are generally secured against some form of collateral such as the land purchased

http://http://www.forestry.gov.uk/forestry/INFD-8FPHL8


Forestry Commission initiatives (2)

Woodland Carbon Code aims to:

• help underpin emerging market for UK forestry carbon sequestration • not ‘offsets’

• help meet government climate change mitigation targets

http://www.forestry.gov.uk/carboncode


Non-permanence risk management

Approaches to non-permanence risk:• (i) Discounting

• E.g. future carbon benefits with a risk of x% that they fail to materialise may be valued at (100-x)% of a benefit that is certain by a risk-neutral decision-maker

• (ii) Maintaining a Buffer• Credit issuers withhold proportion of credits to cover risks • akin to discounting but increases rather than decreases

value of a credit

• (iii) Temporary crediting • Excludes benefits accruing beyond specified time • eliminates need to consider some more distant risks

• (iv) Ex-post (rather than ex-ante) crediting

• Reduces/eliminates need to consider future risks

• (v) Insurance• (vi) Portfolio management

http://www.forestry.gov.uk/fr/INFD-7WTDFQ


Carbon Additionality

Meaning• Positive ‘net benefits’ compared to

• baseline (‘business-as-usual’)• Climate change context:

• GHG savings above those expected anyway • within specified project boundary

• Distinguished from ‘leakage’ and ‘displacement’

Rationale• avoid carbon credits being issued for

benefits that would have arisen anyway • avoid purchasers paying for activities

providing no extra savings

• Key determinant of quality of carbon units


Additionality: a multi-faceted concept

Legal, Regulatory & institutional: 1) Barrier: Overcomes implementation barrier 2) Compliance: Exceeds statutory requirements 3) Date: Occurs after a particular date 4) Incentive: exceeds benefits associated with incentives provided by regulatory

framework5) Institutional: Independent of statutory targets 6) Jurisdiction: specific location/communities or social groups 7) Practice: not common practice8) Reporting: national GHG accounting/reporting rules9) Technology: specific technology used

Financial & Investment:10) Financial: would not be financed without sale of carbon units (type of barrier) 11) Investment: not viable /most financially attractive without sale of carbon units

12) Sales: Income from sale of carbon a decisive factor in decision to proceed Environmental: 13) GHG: Positive impact on GHG balances 14) Unit: Emissions per unit below specified level 15) Project: e.g. forests unable to establish themselves in the absence of planned activities

or project


Additionality: summary

transaction costs: influence of trade-offs between cost and precisiondetermining additionality is an imprecise art for many aspects

• comparing hypothetical scenarios (e.g. BAU determination)• variety of methodologies (e.g. investment additionality)

Aspects seldom covered by additionality tests can be significant:• Institutional additionality

• precipitous drop in the total EU voluntary carbon units sold from 2.3 mtCO2e in 2007 to 0.2 mtCO2e in 2008 due partly to concerns of double-counting associated with reductions being covered by national reporting under the Kyoto Protocol (Hamilton et al, 2009)

Additionality tests can provide perverse incentives in some cases:• Classic example often focused upon:

• trifluoromethane (HCF-23) destruction projects under the CDM• Incomplete coverage of climate change mitigation or wider

woodlands benefits may provide perverse incentives

(Forthcoming journal article in Forestry).


Summary & concluding remarks (1)

Woodland carbon cost-effectiveness as ‘work in progress’:

• Carbon sequestration is a significant ecosystem service provided by UK forests which existing estimates suggest increased five-fold from 1945-2009.

• Carbon storage by UK forests is also very significant.• Available evidence points to UK forestry options being

relatively cost-effective, although estimates vary & are sensitive to the method used, & approaches could usefully be standardised to aide comparability.

• Evidence gaps remain in comprehensive assessment of the cost-effectiveness of UK woodland options (e.g. accounting for the entire range of ecosystem services associated with woodland carbon projects, spatial & temporal variations, & future climate impacts).


Summary & concluding remarks (2)

Woodland carbon incentives as ‘work in progress’:

• Little incentive exists from regulatory frameworks at present for UK owners to account for forestry carbon in making decisions

• New instruments and mechanisms to help realise the societal benefits of woodland carbon are being explored.

• A Woodland Carbon Code to help underpin emerging markets for UK forestry carbon has been developed.

• Gaps remain in incentives for owners to account for forestry carbon in making decisions (e.g. the Woodland Carbon Code focuses on carbon sequestration associated with woodland creation, and does not extent to forest management, carbon substitution or storage benefits) and disparities remain between market and social values.

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Woodland carbon & Incentives for Climate Change Mitigation by the UK Forest Sector

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