Download BioCarbon Fund - World Bank Group

BioCarbon Fund Experience
Insights from A/R CDM
Host Country Committee meeting, Barcelona
May 2011
Harnessing the carbon market to sustain
ecosystems and alleviate poverty
Table of contents
I.
The BioCarbon Fund experience in carbon finance in
Afforestation and Reforestation (A/R) – Lessons learned
II.
Recommendations
III.
Looking ahead
The BioCarbon Fund
The BioCF: promotes carbon markets for land-based projects
$90M mobilized to conserve and sequester carbon in forest- and agro-ecosystems
Promoting several aspects
of the forest carbon market
Linking buyers and sellers


Buyers: BioCF Participants
 6 governments and12 private companies
 Investments in exchange for carbon credits
 Investments in ‘infrastructure’
 Some seek credits to comply with regulations
and others for voluntary purposes
 As a trustee, the BioCF invests in projects to
generate carbon credits
Sellers: Project developers
 They sign an ERPA with the BioCF
 BioCF covers a portion of project
development costs – subsequently deducted
from emission reductions payments
 BioCF pays emission reductions on-delivery
upon validation completion and based on
project implementation reports

Developing methodologies and tools
to support project preparation

Producing training material on forest
carbon to facilitate project
preparation and implementation

Generating lessons learned

Facilitating communication between
UNFCCC bodies and project
developers

Strengthening capacity and
supporting negotiators for A/R and
the inclusion of other land-based
activities in the Kyoto Protocol
Forest carbon markets
A/R CDM: a small portion of forest carbon markets
A/R CDM credits have an important niche in the voluntary carbon market
Volume and value of forest carbon markets
Transaction volume by project type,
(2009, US$ million)
( OTC, 2009)
1%
1%
1%
2%
3%
160
7%
31%
3%
140
3%
Kyoto (AAU)
3%
120
4%
New Zealand ETS
4%
100
4%
A/R CDM
10%
80
New South Wales
7%
7%
60
Chicago Climate
Exchange
40
Voluntary over the
counter
20
0
Historical
total
2008
MtCO2e
Historical
total
M$
2008
8%
Landfill
A/R
Wind
Run-of-river
Avoid. Def
Livestock
EE&Fuelswitch
Coal mine
Geo-seq
Forest Magmt
Allowance
Agr. Soil
RE - all others
Wastewater
Agroforestry
Remaining-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 Regeneration
Ethiopia Humbo – farmer managed natural regeneration on severe degraded community lands
Albania – assisted natural regeneration of degraded lands
Afforestation / Reforestation
DRC 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 Management
Kenya – adoption of sustainable agricultural land management practices by small-holder farmer
groups to increase crop yields, farm productivity and soil carbon sequestration
Lessons learned
A/R CDM a powerful tool for sustainable rural development
But some barriers need to be removed to scale up from pilots to common practice
Generally observed opportunities
Pre-2005



Besides some small bush, Humbo was
devoid of any trees before this project
2010
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
Generally observed challenges



Forest growth from natural assisted
regeneration has been exceptional

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
Lessons learned
Identifying challenges and good practices in key topics
1 CDM
regulations
2 Land-related
issues
3
GHG
accounting
The challenge of pursuing forest carbon credits with
environmental integrity, efficiency, and effectiveness
Challenges and opportunities
The rigor and practicality Imbalance
4 Non
The temporary crediting approach to nonpermanence, a narrow window of opportunity for A/R
5 Finance
Catalyzing underlying investment for forest projects
permanence
Institutional
6 framework
7
Under-delivery
risk
8 Co-benefits
A key success factor for effective project
development and implementation
Taking advantage from early lessons on project
development and implementation
An opportunity for creating synergies – significant
potential
Lessons learned
CDM
regulations
The challenge of pursuing forest carbon credits with
environmental integrity, efficiency, and effectiveness (contd.)
 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 learned
CDM
regulations
The challenge of pursuing forest carbon credits with
environmental integrity, efficiency, and effectiveness (contd.)
 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 restratification

To overcome this challenge it is important to further simplify monitoring
rules and increase local capacities
Lessons learned
Land related issues: Challenges and opportunities
2
Land issues
 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 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

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+
Lessons learned
Land related issues: Challenges and opportunities
Land 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
Increased land tenure security in
an African BioCF project
Vacant
Land
56%
Before
Privately
owned land
with
recognized
customary
community
user rights
After
Untitled
Private
Land
29%
Vacant
Land and
Untitled
Private
Land
7%
Classified
Forests
and
Untitled
Private
Land
3%
Classified
Forests
5%
State land
with
recognized
customary
community
user rights
68%
Lessons learned
3
GHG
accounting
The rigor and practicality imbalance
 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
2004
2005
2006
2007
2008
2009
2010
Total
Number of
Projects
entering the
BioCF
Portfolio
9
8
3
3
2
25*
Number of
Guidance
Statement
Published
by CDM
EB
Number of
Clarifications
to
Methodologies
Published by
CDM EB
8
3
2
1
7
1
3
5
3
3
4
1
14
17
11
Number of
A/R CDM
Methodologies
approved by
CDM EB
Number of
Tools
Published
by CDM
EB
1
4
8
3
1
2
19
1
Tools
Elaborated
on by the
BioCF
TARAM
SMART
DOEs
Accredited
1
1
2
10
2
16
Lessons learned
4
Nonpermanence
The temporary crediting approach to non-permanence,
a narrow window of opportunity for A/R
 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
p1
p2
BioCF projects
preferred tCERs over lCERs
other approaches to non-permanence
are used
900,000
400,000
800,000
350,000
700,000
300,000
600,000
tCO2e
250,000
500,000
200,000
400,000
150,000
300,000
100,000
200,000
50,000
100,000
-
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Year
Year
tCERs
lCERs
tCO2e
Lessons learned
5
The role of
carbon finance
Catalyzing underlying investment for forest projects
 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
 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
 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
World Band project development costs by technology ($/tCO2e)
–Weighted average
Industrial gases
Hydro
Methane avoidance
Landfill gas
Biomass energy
Wind
Forestry
0.00
0.25
0.50
0.75
1.00
US$
1.25
1.50
Lessons learned
Institutional
framework
6
A key success factor for effective project development and
implementation
 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
# projects
# projects
(n=8)
(n=7)
(n=5)
(n=4)
(n=4)
(n=4)
(n=1)
(n=1)
0%
1- 59%
60-99%
100%
% of carbon revenue received by local farmers/ communities
 Designing and creating equitable benefit-
sharing schemes that effectively improve local
livelihoods is essential for the long-term
success of forest carbon projects
0%
1- 59%
60-99%
100%
% of total forest products assigned to local farmers/ communities
Example: where project entity uses 100% of carbon revenues to
cover its upfront costs, farmers are entitled to 100% of revenues
from timber.
 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
Complex partnerships demand higher
coordination and managerial capacities
Lessons learned
8
Co-benefits
An opportunity for creating synergies
 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
Recommendations
Regulatory
 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 nonpermanence 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
Recommendations
Finance
 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
Recommendations
Strengthening 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 reform
State and Trends of the Carbon Market
 BioCarbon Fund: www.biocarbonfund.org
Summary of all BioCF projects
Links to some key papers on carbon projects – See “Useful
Resources”
How-to guides
Thanks