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CCLR 3-2008#14 15.09.2008 CCLR 12:55 Uhr 3| 2008 Seite 239 Forests, Carbon Markets, and Avoided Deforestation: Legal Implications 239 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 CCLR 3-2008#14 15.09.2008 240 12:55 Uhr Seite 240 Forests, Carbon Markets, and Avoided Deforestation: Legal Implications 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 CCLR 3| 2008 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. CCLR 3-2008#14 15.09.2008 CCLR 3| 2008 12:55 Uhr Seite 241 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- CCLR 3-2008#14 15.09.2008 242 12:55 Uhr Seite 242 Forests, Carbon Markets, and Avoided Deforestation: Legal Implications 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. CCLR 3| 2008 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. CCLR 3-2008#14 15.09.2008 CCLR 12:55 Uhr 3| 2008 Seite 243 Forests, Carbon Markets, and Avoided Deforestation: Legal Implications – 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. 243 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 CCLR 3-2008#14 15.09.2008 244 12:55 Uhr Seite 244 Forests, Carbon Markets, and Avoided Deforestation: Legal Implications 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 CCLR 3| 2008 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. CCLR 3-2008#14 15.09.2008 CCLR 3| 2008 12:55 Uhr Seite 245 Forests, Carbon Markets, and Avoided Deforestation: Legal Implications 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. CCLR 3-2008#14 15.09.2008 246 12:55 Uhr Seite 246 Forests, Carbon Markets, and Avoided Deforestation: Legal Implications 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 CCLR 3| 2008 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 . CCLR 3-2008#14 15.09.2008 CCLR 12:55 Uhr 3| 2008 Seite 247 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- 247 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.