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Forests, Carbon Markets, and Avoided
Deforestation: Legal Implications
Charlotte Streck*
Forestry and agriculture contribute significantly to the World’s emissions in greenhouse
gases. But they also hold the potential to play an important part in climate change mitigation. The Kyoto Protocol addresses land-use only unsatisfactorily and does not create
any incentives for reductions of forest-based emissions in developing countries, where
tropical deforestation alone contributes to a quarter of global greenhouse gas emissions.
Negotiators have acknowledged the importance of addressing emissions from deforestation in the context of a post-Kyoto agreement. But in order to effectively reduce emissions from the land-use sector while stimulating further sequestration, it is essential not
only to reduce emissions for deforestation, but also to stimulate sustainable agricultural practices and forest management, and to trigger afforestation. How successful such
mechanism will be, will depend on a smart set of incentives. Any effort to reduce emissions from tropical deforestation will have to rely on joint action by private and public
actors, and it is important to create a set of tools and mechanism that effectively stimulate change on all levels of society. Carbon markets may play an important role in the
definition of such mechanisms.
I. Introduction
Forests play an essential role in climate change mitigation. Forests store about 45% of the terrestrial
carbon and have the potential to sequester large
amounts of additional carbon. Carbon uptake by
forests contributed to a “residual” 2.6 PgC year1/1
terrestrial carbon sink in the 1990s, amounting to
approximately 33% of anthropogenic carbon emission from fossil fuel and land-use change.2 Landuse related activities, which include forestry, but
also agriculture and land management, can contribute to the mitigation of climate change in vari-
* Dr. Charlotte Streck, Director, Climate Focus B.V., Rotterdam.
1 The units of measuring the global carbon flux are PgC. – One Pg
[petagram]=one billion metric tonnes=1000 x one billion kg.
2 Bonan et al., “Forests and Climate Change: Forcings, Feedbacks,
and the Climate Benefits of Forests”, Science 2008, p. 1444.
3 See also Canadell/Raupach, “Managing Forests for Climate
Change Mitigation”, Science 2008, p. 1556.
ous ways. Landscapes can sequester additional carbon through afforestation; changed management
practices can lead to an increase in the carbon
stored in forestry by increasing the carbon density
of forests; sustainable agriculture can increase carbon stored in soils and agricultural systems; fossil
fuels are displaced by expanding the use of timber
and other sustainably harvested forest products;
and finally greenhouse gas (GHG) emissions are
reduced by slowing, or even stopping, deforestation
and land degradation.3 The importance of forestry
for international climate policy has been underscored by the Intergovernmental Panel on Climate
Change (IPCC) when it writes that “[f]orestry can
make a very significant contribution to a low-cost
global mitigation portfolio that provides synergies
with adaptation and sustainable development.” The
IPCC acknowledges, however, that there are problems associated with mobilizing emission reductions from forestry and land-use, and goes on to say
that “this opportunity is being lost in the current
institutional context and lack of political will to
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implement and has resulted in only a small portion
of this potential being realized at present.”4
It is true that emission removals and reductions
from agriculture or forestry are insufficiently
encouraged under the UN Framework Convention
on Climate Change (UNFCCC),5 and that the Kyoto
Protocol6 fails to support them with a strong incentive framework. There are, however, various promising signals indicating that negotiators will assign
a higher priority to forestry and land-use related
emission in the negotiations for a post-Kyoto international framework.
First, in the last two years emissions from tropical deforestation, today commonly abbreviated as
the challenge to “reduce emissions from deforestation and degradation” or “REDD”, have received a
high level of attention that has helped put land-userelated emissions firmly back on the agenda of in
ternational climate negotiations. Second, it is likely that countries such as the United States, a traditional supporter of a comprehensive view on climate change, will bring the issue of forestry and
land-use back to the negotiation table as soon as
they decide to actively engage. Third, with the notable exception of the European Emission Trading
Scheme (EU ETS), all regional and domestic emission trading schemes that are currently under
development or in the design phase foresee forestry
as an eligible offset class, thereby encouraging
activities that lead to emission reductions or enhanced CO2 removals form the atmosphere.
It is timely, therefore, to take a closer look at the
integration of forestry into existing international
legal instruments, and to provide an update on the
current state of the debate regarding a better consideration of forestry under any successor treaty to
the Kyoto Protocol. The description of existing and
emerging schemes will be followed by a review of
the legal and policy implications of existing and
emerging mechanisms that reward the climate benefits of forestry and sustainable land-use practices.
II. Forestry Under the UNFCCC and the
Kyoto Protocol
Both the UNFCCC and the Kyoto Protocol acknowledge the vital role that forests play for the global climate. However, they do not define a system which
creates strong incentives for biological carbon storage and mitigation of emissions from tropical
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forests.7 The UNFCCC recognizes the importance
of carbon sinks and reservoirs in terrestrial and
marine ecosystems.8 The convention’s objective of
“stabilization of greenhouse gas concentrations in
the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate
system”9 should be reached, inter alia, by the capacity of sinks to reduce the concentration of GHGs in
the atmosphere.10 The UNFCCC fails to mandate
any binding action on how to achieve this goal,
however. The international community had to wait
until the negotiations of the Kyoto Protocol to see
modest emission limitation targets be imposed on
industrialized countries for the period from 20082012. Still, Parties did not reach consensus on how
to integrate forestry-related carbon fluxes in the
Kyoto Protocol. Scientific knowledge was limited
and negotiators were poorly informed.11 How to
account for forestry removals and emissions became chronically controversial. States were fundamentally divided on the role of forestry in meeting
Parties’ commitments and on whether forestry
emission reductions and removals should be
allowed as a means of offsetting emissions from
energy and industry. The forest-skeptics largely prevailed and gave the emerging text an almost exclusive focus on industrial and energy-related emis4 IPCC, Fourth Assessment Report: Mitigation of Climate Change,
Cambridge 2007, p. 543, available at www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter9.pdf.
5 United Nations Framework Convention on Climate Change
(UNFCCC), I.L.M. 1993, p. 849 ff.
6 Kyoto Protocol to the Framework Convention on Climate
Change, I.L.M. 1998, p. 22 ff.
7 For more detail: Streck/Scholz, “The Role of Forests in Global Climate Change: Whence We Come and Where We Go”, International Affairs (2006), p. 861 ff.
8 UNFCCC, Preamble, para. 4.
9 UNFCCC, Art. 2.
10 Moreover, the following articles are of particular interest under
the UNFCCC: Art. 4.1 (a) requires Parties to establish greenhouse
gas inventories of anthropogenic emissions by sources and removals by sinks, Art.4.1 (b) prompts the formulation of regional programs to mitigate climate change by addressing emissions from
sources and removals by sinks, Art. 4.2 (c) stipulates cooperation
in the development and transfer of technology that reduces emissions from, amongst others, forestry, and Art. 4.1(d) promotes the
sustainable management and the conservation and enhancement
of carbon sinks and reservoirs. In Art. 4.2 (d), finally, the Parties
of the UNFCCC committed themselves to adopt national policies
to mitigate climate change also by protecting and enhancing
their greenhouse gas sinks and reservoirs.
11 Trines, Possible Role of Land Use, Land-use Change and Forestry
in Future Climate Regimes: An Inventory of Some Options, Study
commissioned by the Ministry of Agriculture, Nature and Food
Quality of The Netherlands, November 2004, available at
www.treenessconsult.com/index_files/pdf1.pdf.
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Forests, Carbon Markets, and Avoided Deforestation: Legal Implications
sions. As a result, the reference to forestry activities
in the Kyoto Protocol is limited to a number of
accounting rules and the possibility of implementing forestry projects under the Protocol’s flexible
mechanisms.
The Kyoto Protocol keeps forestry and land-use
related emissions separate from other GHG emissions which contribute to the base year emissions
of industrialized countries. Given the way the
accounting framework of the Kyoto Protocol is currently designed, the forestry sector can just generate additions to or subtractions from the assigned
amounts, but does not form part of the calculation
of emission limitation targets.12 Parties decided
that “direct human-induced”, i.e., “net changes” in
GHGs and removals by sinks since 1990 may be
used to meet part of the Parties’ emission commitments.13 Countries have to (Article 3.3 KP)14 or
may (Article 3.4 KP)15 account for the change in
carbon stock in forests.16
Furthermore, Articles 6 and 12 KP, which define
the project-based mechanisms Joint Implementation (JI) and Clean Development Mechanism (CDM)
refer directly (JI) or at least indirectly (CDM) to carbon sinks. These mechanisms allow industrialized
12 Article 3(3) provides that emissions resulting from afforestation
activities will be added and emissions from deforestation activities will be subtracted from the amount of emissions that a Party
may emit over the commitment period (2008-2012). Art. 3(4)
introduced “additional human-induced activities related to changes in greenhouse gas emissions by sources and removals by
sinks in the agricultural soils and the land-use change and forestry categories”. For a long time, it was unclear and debated
which particular activities should be included under this article.
At the resumed COP6 (Bonn in 2001) Parties agreed to include
“forest management”, “cropland management”, “grazing land
management” and “revegetation” as eligible LULUCF activities
during the first commitment period, provided those activities
occurred after 1990 and are human induced. In addition, a new
and non-bankable LULUCF-related unit was established, the
Removal Unit (RMU), which accounts for all forest management
related activities in Annex I countries in the first commitment
period.
13 Such “net changes” must be “measured as verifiable changes in
carbon stocks in each commitment period.”
14 Afforestation, reforestation and deforestation.
15 Forest management, conservation, soil carbon conservation.
16 Deleted.
17 These countries are listed in Annex I of the UNFCCC. The emission targets are formulated in Annex B of the Kyoto Protocol.
Most commonly, the Parties with an emission target are referred
to as “Annex I” countries.
18 See Decision 3/CMP.1, Modalities and procedures for a clean
development mechanism as defined in article 12 of the Kyoto
Protocol, UN Doc. FCCC/KP/2005/8/Add.1, paras. 7(a) and (b).
19 The inclusion of this category in limited circumstances in smallscale CDM projects is currently being debated among the Parties.
241
countries with an emission limitation or reduction
target17 to implement projects that reduce emissions in developing and transition countries. Once
these emission reductions are quantified, measured
and verified by environmental auditors, they can be
credited towards the emission targets of the investor country. JI defines a crediting tool for emission reductions projects implemented in cooperation between two industrialized countries. The
CDM is the instrument that involves developing
countries in the compliance framework of the
Kyoto Protocol by allowing the transfer of “certified
emission reductions” or CERs from activities in
developing countries to their industrialized counterparts. The CDM establishes a carbon offset
mechanism that allows the generation of emission
reduction or removal credits that can be used to offset GHG emissions from industrial processes, energy generation, or other emitting activities in countries that operate under GHG emission limitations
subject to the Kyoto Protocol. Today, only afforestation and reforestation projects are eligible forestry
projects under the CDM, and the use of credits from
sinks projects in developing countries is restricted
to only one per cent of a country’s Kyoto obligations.18 The protection of existing carbon pools
(avoided deforestation) is not eligible as a CDM
project category.19 In sum that means that the current international framework does not create any
incentives for reducing emissions from deforestation and, taking into account the overly restrictive
rules on forestry projects under the CDM, hardly
any incentives for afforestation.
III. What Makes Forestry so Special?
The fact that forestry related emission reductions
are able to off-set industrial emissions has always
been a source of disagreement among international
negotiators. The reversibility of climate benefits of
forestry – or the “permanence of carbon storage” –
formulates the basis of concern for all forestry
activities. Whereas a tonne of emissions reductions,
once achieved, remains a benefit to the atmosphere,
a tonne of sequestered carbon is of benefit to the
atmosphere only as long as it remains sequestered.
If a tree is felled, stored carbon is released and the
temporary climate benefit reversed, i.e., the benefit
is ‘non-permanent’. Reversibility is not an issue for
energy-related GHG emission reductions. If fossil-
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fuel use is curtailed by reduced use or introduction
of more efficient machinery, that reduction would
not be lost even if the emission-saving project were
to be terminated at some future time. In the case of
forestry projects that generate emission removals
or reductions accepted as offsets under an emission
trading regime, however, the associated “permanence risk” must be addressed.20
Scientific complexity, insufficient data and the
challenge of monitoring forestry projects has also
led to criticism of forestry activities under the
Kyoto Protocol. The accounting rules for carbon
removals therefore command a conservative approach in measuring and monitoring sequestration
activities. Full carbon accounting, i.e., the assessment of carbon fluxes within all compartments of a
forest ecosystem, can be achieved by choosing
between various scientific models, which have been
developed by the IPCC and the FAO in collaboration with scientific forestry research institutions.21
Applying state-of-the-art remote sensing techniques
in combination with terrestrial surveys guarantees
the accurate monitoring of activities and impacts
during the project’s lifetime. In many countries
Geographic Information Systems exist which provide useful information on the history and development of natural resources, and facilitate monitoring. The Good Practice Guidance for Land Use,
Land-Use Change and Forestry (GPG-LULUCF) produced by the IPCC provides methods and guidance
for estimating, measuring, monitoring and reporting on carbon stock changes and GHG emissions.22
Despite improved calculation and monitoring
methods, uncertainties remain and need to be discounted from the carbon that is credited for a particular activity.
Omitting biological sinks from climate regulation leaves out a major exchange of carbon, which
could swamp any gains made through fossil fuel
reductions under the Kyoto Protocol. Including
them into climate regulation and emission trading,
will have to reflect insecurities and the permanence
problem in the design of conservative accounting
rules.
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bon credits from forestry activities as offsets that
can be used to compensate for the equivalent GHG
emissions under the regulated scheme. Apart from
creating additional flexibility by adding liquidity
to the scheme, offsets also serve as a price valve,
given that offset provisions allow access to costefficient emission reductions that can be imported
into the system. The EU ETS authorizes the use of
carbon credits from CDM and JI in general, but it
excludes credits generated by forestry activities. In
contrast, Australia, the US, and Japan have traditionally argued in favour of considering forestry
credits in international and national emissions
trading. It is therefore no surprise that forestry offsets occupy a prominent role under existing and
proposed GHG trading programmes:
– The Australian “New South Wales Greenhouse
Gas Abatement Scheme” establishes annual statewide GHG reduction targets for the electricity
sector. It was established in December 2002 and
requires electricity retailers and certain other
entities including large electricity users to meet
mandatory targets for reducing or offsetting the
emission of GHGs from the production of the
electricity they supply or use. The Scheme makes
provision for abatement certificates to be created
from afforestation and reforestation projects,
which can subsequently be used by regulated
participants to meet their emission reduction
obligations.23
20 Schlamadinger/Marland, Land Use & Global Climate Change:
Forests, Land Management, and the Kyoto Protocol, Arlington,
Va., 2000.
21 See Penman/Gytarsky/Hiraishi et al. (eds), Good Practice Guidance for Land Use, Land-Use Change and Forestry, November
2003, available at: www.ipcc-nggip.iges.or.jp/public/gpglulucf/
gpglulucf.htm. This document provides supplementary methods
and good practice guidance for estimating, measuring, monitoring and reporting on carbon stock changes and GHG emissions
from LULUCF activities under all relevant articles of the Kyoto
Protocol.
22 Ibid.
IV. Regional and Domestic EmissionsTrading Schemes
Despite these challenges, a number of regional and
domestic emission trading schemes recognize car-
23 See Greenhouse Gas Benchmark Rule (Carbon Sequestration)
No. 5 of 2003, available at www.greenhousegas.nsw.gov.au/
documents/syn66.asp. See for more detail: Gould, Miller and
Wilder, “Australian and New Zealand Legislative Approaches to
Forest Sinks: Working Models for Other Jurisdictions?” in:
Streck/O’ Sullivan/Janson-Smith/Tarasofsky (eds.), Climate
Change and Forests: Emerging Policy and Market Opportunities,
Washington, DC, 2008, p. 253.
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– In September 2007, the Ministry for the Environment and the Treasury of New Zealand
unveiled the cornerstones of a national emissions-trading scheme (the Emissions Trading
and Renewable Preference Bill).24 The proposed
scheme would cover all sectors of the economy
over a six-year period, starting with forestry in
2008 and ending with agriculture in 2013.25 It
also allows the use of CDM forestry credits for
compliance purposes.
– In the United States, various emission trading
systems are under discussion at the state and federal level, which include the Regional Greenhouse Gas Initiative in the North East and the
Western Climate Initiative on the West Coast.
Additionally, Florida as well as six Midwestern
states have announced the implementation of
cap-and-trade schemes.26 Several legislative proposals for a federal system are also currently under discussion in the US Congress. All schemes
allow agricultural or forestry offsets generated in
the United States, most of them also consider
international off-sets.27
The various trading schemes and offset standards
have established different eligibility and accounting
criteria. Different standards for additionality and
24 Available at www.legislation.govt.nz/bill/government/2007/
0187-1/latest/DLM1130901.html. A report was issued by the
Finance and Expenditure Select Committee (FESC) of the New
Zealand Parliament on 11 June 2008.
25 New Zealand Ministry for the Environment and Treasury, The
Framework for a New Zealand Emissions Trading Scheme, Wellington 2007, available at www.mfe.govt.nz.
26 See
www.america2050.org/2007/11/midwest_joins_northeast_and_
we.html.
27 See www.rggi.org; on 25 October 2007, the Californian Air
Resources Board adopted a set of accepted methods for measuring the amount of carbon stored in a forest, making it possible to
use forest projects in California to reduce greenhouse gas emissions and fight global warming and to meet obligations under the
Global Warming Solutions Act of 2006, see www.californiagreensolutions.com/cgi-bin/gt/tpl.h,content=1299; see also the
recently defeated Lieberman-Warner Climate Security Act, available at thomas.loc.gov/cgi-bin/bdquery/z?d110:s.02191.
28 Houghton/Ding/Griggs/Noguer/Van der
Linden/Dai/Maskell/Johnson, Climate Change 2001: The Scientific Basis. Summary for Policy Makers. Contribution of Working
Group I to the Third Assessment Report of the Intergovernmental
Panel on Climate Change (IPCC), Cambridge 2001.
29 UN Doc. FCCC/CP/2005/MISC.1.
30 UN Doc. FCCC/SBSTA/2007/L.23/Add.1/Rev.1.
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non-permanence may influence the quality of the
generated offsets and will stand in the way of the
potential linking of emission trading schemes. In
order to guarantee a harmonized high quality of
forestry credits, it would be desirable to set up of a
common and internationally accepted standard that
various emission trading schemes could refer to.
V. The Post-Kyoto Debate and REDD
Design Options
It is increasingly acknowledged that the forestry
and agricultural sector is far too important, both as
a sink as well as a source, to be again left behind in
international climate negotiations. Differences in
opinion remain, however, as to the when, if, and
how land-use related emissions should be integrated into a post-Kyoto regime. Still falling short of
addressing the problem more comprehensively, an
important first step was made when negotiators
agreed to put the definition of a mechanism to
reduce GHG emissions from deforestation and forest degradation (REDD) in developing countries on
the international negotiation agenda.
In 2005, Costa Rica and Papua New Guinea galvanized the issue of REDD from a state of hibernation, in which it had remained ever since tropical
deforestation was excluded from the CDM as an eligible project class. Given that deforestation has
been responsible for 90% of all GHG emissions
related to forestry and other land-uses since 1850,28
the reanimation of the topic was overdue. Papua
New Guinea and Costa Rica are at the forefront of a
group of developing countries that have agreed to
consider taking measures to reduce deforestation
provided that the future climate regime would
include an appropriate award and incentive framework.29 This proposal marked a watershed in international climate negotiations, since it was the first
time that developing countries proposed to take on
some sort of emission limitation measures under a
post-Kyoto agreement. Consequently, the initiative
secured a high amount of attention in international
negotiations, but also from initiatives sponsored by
non-governmental organizations, private investors
and donors, and different actors in bilateral and
multilateral development cooperation. The 13th
Session of the Conference of the Parties of the
UNFCCC, held in Bali in December 2007, adopted a
decision that confirms the intent of the Parties to
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address the issue of deforestation in a post-Kyoto
framework and encourages the implementation of
demonstration (pilot) activities.30
1. Architecture
The Bali decision expresses a general agreement
within the international community on the importance of tackling deforestation under a post-Kyoto
climate regime. There is less agreement, however,
when it comes to discussing mechanisms that could
stimulate emission reductions from deforestation.
A number of options are being proposed, including
both market and non-market-based approaches.
Market-based proposals that are supported by the
majority of countries (but notably not by Brazil)
rely on creating incentives for avoiding further
deforestation. Many see market-based instruments
as intrinsically linked to the award of tradable carbon credits once a country or project activity has
generated a proven climate benefit by reducing
GHG emissions. Incentive mechanisms that reward
emission reductions from deforestation could be
built on absolute or relative (action) emission
reduction targets. Crediting could take place on the
national level only or involve individual project
activities, could be based on an initial allocation of
allowances (cap-and-trade) or ex-post crediting
(baseline-and-credit).
A number of proposals are associated with baselines developed at the national level. For such an
approach, countries would take on a national voluntary commitment to reduce their deforestation
rates in the form of a reduction target vis-à-vis this
national baseline.31 In order to account for the challenges faced by developing countries when establishing national-scale systems, it has been proposed
to combine national approaches with the authorization of a CDM-type prompt start of sub-national
approaches and project activities.32 The inclusion
of project-based activities that receive credits
through an international mechanism would have
the advantage of being more likely to attract private
capital than mechanisms that put the relevant
developing country in control of distributing funds
or credits. Subnational and project approaches
would stimulate early action, including in countries
that do not have the institutional capacity to
account for emissions on a national level or to
administer national REDD programmes. Other
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approaches, although less likely to garner widespread support, argue that an efficient system
has to move away from a baseline-and-credit system and move towards a cap-and-trade system
which will allow developing countries to access
financing on the basis of a binding conservation
commitment.33
Another question is whether credits generated by
REDD activities or programmes should be fully fungible with other carbon markets, returning us to the
old debate on whether GHG reductions achieved in
forestry should help industrialized countries to meet
their GHG emission reduction commitments. Taking
into account the amount of reductions that can
achieved through REDD activities and to avoid a
flooding of the market, fungibility would need to be
matched by very strict emission limitations in industrialized countries. Another option would be to create a separate market and separate targets for avoided deforestation.34
2. Integrity
The ultimate objective of REDD mechanisms is to
contribute to the reduction of global GHG emissions. The efficiency of a mechanism to mobilize
funding therefore has to be measured against its
31 Moutinho/Santilli/Schwartzman/Rodrigues, “Why Ignore Tropical
Deforestation? A Proposal for Including Forest Conservation in
the Kyoto Protocol”, Unasylva 2005, p. 27 ff.;
Santilli/Moutinho/Schwartzman/Nepstad/Curran/Nobre, “Tropical
Deforestation and the Kyoto Protocol: An Editorial Essay”, Climatic Change 2005, p. 267 ff.; Environmental Defense and the
Amazon Institute for Environmental Research (IPAM), Reducing
Emissions from Deforestation in Developing Countries: Policy
Approaches to Stimulate Action, Submission to the XXVI Session
of the Subsidiary Body on Scientific and Technological Advice
(SBSTA) of the UN Framework Convention on Climate Change
(UNFCCC), 23 February 2007, available at
unfccc.int/resource/docs/2007/smsn/ngo/004.pdf.
32 For various proposals on project and subnational approaches see:
Submission of Paraguay on behalf of Argentina, Honduras, Panama, Paraguay and Peru, and Submission of Colombia, XXVIII
Session of SBSTA, Bonn, 4 to 13 June 2008, available at
unfccc.int/resource/docs/2008/sbsta/eng/misc04.pdf; guidance
on the development of REDD projects has also been issued by
the Voluntary Carbon Standard, see www.v-c-s.org/afl.html.
33 Center for International Sustainable Development Law, Incentivising Avoided Deforestation – A Stock-based Methodology, Submission to the COP UNFCCC in Response to the Call for Views
on the Issue of Avoided Deforestation Issued at the 11th Session
of the COP, March 2006, available at
unfccc.int/resource/docs/2006/smsn/ngo/005.pdf.
34 Ogonowski/Helme/Movius/Schmidt, Reducing Emissions from
Deforestation and Degradation: The Dual Markets Approach,
August 2007, available at
www.ccap.org/docs/resources/69/FINAL_REDD_report.pdf.
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environmental effectiveness. Only if a mechanism
results in real emission reductions is it worth considering, and only if it relies on a feasible implementation mechanism will it trigger activities that
result in emission reductions.
Environmental credibility is a function of a
robust accounting framework. Such accounting
can either be guaranteed through a cap-and-trade
approach by accounting for all emissions of a sector and creating shortage by allocating less
allowances than corresponds to the full amount of
such a sector’s emissions. As is currently the case
under JI, host countries would then be ultimately
liable for the achievement of emission reductions.
The current CDM, on the other hand, is based on
project-based crediting that is supported by rigorous checks and balances to ensure the correct
number of credits are issued for eligible projects.
These checks and balances include tests to make
sure emission reductions are additional, and correctly monitored and verified. Environmental
integrity of credits is one of the key requirements
for the eligibility of the CDM as a means of offsetting a portion of industrialized counties emissions.
It is important that any REDD mechanism meet
equivalent or higher standards, in particular where
emission reductions are rewarded by the allocation
of fungible carbon credits. If a future REDD mechanism builds on full sectoral accounting and host
country liability, environmental integrity depends
on the accuracy of available data. If the data quality is high and allowances are allocated on a sufficiently conservative basis, a closed and capped system will ensure accurate recording of emission
reductions.
If REDD approaches are based on a baselineand-credit system, the definition of the baseline or
reference emissions determines that system’s credibility. If the system allows countries to adopt voluntary “no-loose” emission reduction targets, they
would receive credits if they demonstrate that they
lowered their relevant emissions below the target.
There is, however, no sanction if the country fails
to cut its emissions. Losers would only be the climate and those dependent on forests. Moreover,
national baselines create significant environmental risk if they are negotiated so that a sector’s actual emissions are below its negotiated target. This
may occur either through over-estimating historic
emissions, and/or making overly generous projec-
245
tions of growth and corresponding emissions within a sector. In either case, if credits are being allocated on the basis of negotiated sectoral baselines,
generous baselines have the potential to produce
significant numbers of credits that are not
matched with real emission reductions on the
ground.
In a system in which credits are issued for national reductions of emissions below a baseline,
the number of credits that eventually may be
issued is uncertain. This means that creating carbon credits that are fungible with credits allocated
to countries that are fully accountable for their
emissions puts at risk the functioning of those
markets (such as the markets generated by the
Kyoto Protocol). In particular, where multiple
REDD and other sectoral agreements are based on
the promise of issuing carbon credits, linking
those systems to cap-and-trade systems is challenging. National administrators of domestic or
regional cap-and-trade regulation will ensure their
systems are fenced in to maintain a satisfactory
level of prices and incentive for achieving emission reductions within the system. This means that
demand from industrial countries for international credits, and thus funding for REDD efforts, will
have limits. The more emission reductions are
achieved, the lower the value of a particular credit.
Such a system may thus provide a perverse incentive to limit emission reductions to a small amount
in order to keep prices high enough to make carbon credits a viable financing instrument.
Consequently, issuance of carbon credits for sectoral achievement of emission reductions beyond
an established baseline is a risky and potentially
inadequate policy instrument. Any final design of a
financing mechanism will have to be built on a
careful modelling of the emission reductions that
can be achieved, credits that could be issued, and
market links that have to be established. While the
carbon market has proven successful in mobilising
private funding, it is worth investigating in this
context whether government performance indeed
needs to be rewarded with the issuance of carbon
credits. Other finance mechanism may be more
adequate to incentivise government action. Since
the carbon market is unlikely to mobilise the funding needed to stimulate action in all participating
countries and sectors, other financing mechanism
should be looked at to complement the the tool box
of REDD mechanisms.
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VI. Legal Nature and Ownership of
Forest Carbon
Carbon credits are created under various legislative
and contractual arrangements to allow the trade of
emission quotas and carbon rights. In the case of
forestry activities, these rights represent the rights
associated with carbon stored in biomass that are
tradable independent of the physical biomass.
At the time of writing, only very few countries
had adopted legislative definitions of carbon sequestration rights35 or integrated the concept of
CERs, verified emission reductions or other carbon
rights into national law. In the absence of a clear
legislative framework defining principles of ownership for emission reductions, uncertainty exists as
to how legal title to these rights can be securely
established and transferred. However, there are two
main indicators for legal ownership.
– First, under the international CDM and JI rules,
private and public entities that want to participate in CDM or JI need to be authorized to do so
by a Party government. This authorization is
deemed to occur in the Letter of Approval.36 The
government authorization can be seen to not
only authorize entities to engage in transaction
involving Kyoto credits, but also to transfer actual ownership of the credits to private or public
entities.
– Second, principles of national law have to be
applied to decide which entity has the right to
explore the benefits associated with a project
activity. National law thus helps to establish the
right entity to participate in a CDM/JI project
and to apply for national approval, which results
in the transfer of ownership.
For developers of forestry projects, it is therefore
crucial to establish, in a first step, the entity authorised to explore the carbon benefits of a forest or a
plantation. This entity is generally recognised as
the owner of the primary carbon rights of a carbon
project. Once this entity has been identified, a decision needs to be taken whether this entity is also
the appropriate one to act as the seller of the projected carbon credits. If this is the case, the primary
owner of the carbon rights will also act as the seller
of the carbon credits. In the event that the primary
owner of the carbon rights is not equipped, willing
or able to take on such responsibility, it would have
to transfer the rights to sell carbon benefits of the
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activity to an intermediary or agent who sells the
carbon on behalf of the primary owner. The latter
construction is very common in afforestation projects which involve land of multiple small land owners or farmers.
When the project developers and their legal advisors establish the ownership of carbon rights of a
forestry project, they should clarify the following:37
i) Whether there is any definition of carbon
sequestration rights in local law;
ii) if that is not the case: whether the benefits associated with sequestration are assigned to the
landowner, or whether they follow the right to
the timber;
iii) what, if anything, needs to be done to protect
and maintain unencumbered legal title to the
sequestration and carbon rights. This may
include buying the land, leasing the land, registering certain rights over the land, coming to an
agreement with indigenous land owners or
indigenous groups that may have rights over the
land or forests, or restricting the use of the land
and/or forests to certain purposes for a given
amount of time;
iv) whether or not there are any restrictions on the
transfer of sequestration benefits and carbon
rights, which may depend on how they are characterised under domestic law.
Establishing the legal situation of the land, the project, and the resulting carbon credits is not only necessary to be able to transact unencumbered carbon
credits. It is also necessary to complete the relevant
protocols, fulfil monitoring requirements, and
ensure that the project proponents and developers
have control over the project activity. In the event
that they do not exercise such control, they need to
ensure that those that have to ensure the implementation of the project or authorise the implementation of the project are supporting the project
activity.
35 Australian States have created various types of real legal rights
that are associated with the sequestration right attached to a
forest.
36 See the definition of “Approval by Parties involved” in CDM Executive Board, Glossary of CDM Terms, 3 August 2007, available
at
cdm.unfccc.int/Reference/Guidclarif/glossary_of_CDM_terms.pdf
37 See also Encofor, Encofor Tool Demonstration, available at
www.joanneum.at/encofor/tools/tool_demonstration/Tools_use.htm
.
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Forests, Carbon Markets, and Avoided Deforestation: Legal Implications
The assumption that forest carbon belongs to the
entity that has a right to the forest has important
implication for the design of any mechanism that
rewards carbon credits for emission reductions. In
the event that a future mechanism for REDD or
other forestry activities foresees the accounting as
well as the rewarding of emission reductions on the
national level, the national Government would have
to centralize the carbon or sequestration rights
attributed to a country’s forest. While it is already
now the legitimate owner of carbon rights of public
forests, it would have to claim the right to no-state
forest carbon through a legislative act. Private forest owners, but also indigenous, forest or other
rural communities that enjoy legal or customary
rights to the forest, would lose their claim to the
associated forest carbon. Such a transfer of right
would need to be justified by a legislative act, most
likely involve compensation, and be justified by a
public policy objective.
VII. Conclusions
Forest and biodiversity conservation are intrinsically linked to climate change mitigation and adaptation: With forests, we lose our most important terrestrial carbon storage mechanism and a system
regulating and influencing the freshwater household and rainfall patterns. It is therefore necessary
that a post-Kyoto regime include a comprehensive
carbon accounting mechanism that provides the
right incentive framework for conserving not only
temperate and boreal, but also – and in particular –
tropical rainforests.
After a long period of disregard, we find ourselves in the midst of a renaissance of forest carbon.
Governments, conservationists, forest owners, and
carbon markets are showing new interest in explor-
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ing the climate benefits of forestry and agriculture.
REDD is hotly discussed in international and
national policy forums, while emerging emission
trading schemes give credit to the role forestry can
play in reducing climate change impacts.
Reducing tropical deforestation is one of the most
urgent climate, biodiversity and livelihood problems, but it is important that this problem not be
seen in isolation. A successful REDD mechanism
will have to be accompanied by incentives for
afforestation that help to satisfy the markets’ hunger
for timber and biomass. The creation of REDD carbon credits will further have to be put in relation to
the expected demand for such credits. An oversupply of credits would drive prices down and not only
remove incentives to reduce GHG emissions in
industrialized countries, it would also deceive the
expectation of rainforest nations that carbon credits
will generate secure sources of income.
Since any effort to reduce emissions from tropical deforestation will have to rely on joint efforts
from government and private actors, it is essential
to create a multi-layered system of policy tools.
These tools should create incentives for all levels of
society, not only to reduce emissions for deforestation, but also to stimulate sustainable agricultural
practices and forest management, and to trigger
afforestation. Governments will have to ensure
appropriate GHG accounting mechanisms and put
in place measures that assist achievement of the
desired policy goals of reduced deforestation,
improved agricultural practises or incentives for
afforestation. Private actors and NGOs can help create and implement programmes that can be
financed by the promise of carbon credits. And
most importantly, those that live in, from and with
the forests need to be encouraged and rewarded so
as to become effective stewards of one of the
world’s most treasured resources: our forests.