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Carbon Sinks and Emissions Trading: Room for Optimism?

Ricardo Bayon

On May 11, 2005, in Cologne, Germany, the Ecosystem Marketplace, in conjunction with its various partners, held the second in a series of "Katoomba Dialogues" on markets for ecosystem services. The dialogue, entitled "That Sinking Feeling; Carbon Sinks and Emissions Trading," highlighted the arguments both for and against the inclusion of forestry-related carbon sinks in emissions trading schemes. A number of interesting issues were raised during the discussion and the lively conversation ended, for the most part, on an optimistic note. Below is an edited transcript of the dialogue. The Ecosystem Marketplace will be holding more dialogues in the months and years to come; always around a contentious or controversial issue surrounding markets for ecosystem services.

On May 11, 2005, in Cologne, Germany, the Ecosystem Marketplace, in conjunction with its various partners, held the second in a series of "Katoomba Dialogues" on markets for ecosystem services. The dialogue, entitled "That Sinking Feeling; Carbon Sinks and Emissions Trading," highlighted the arguments both for and against the inclusion of forestry-related carbon sinks in emissions trading schemes. A number of interesting issues were raised during the discussion and the lively conversation ended, for the most part, on an optimistic note. Below is an edited transcript of the dialogue. The Ecosystem Marketplace will be holding more dialogues in the months and years to come; always around a contentious or controversial issue surrounding markets for ecosystem services.

Background

For some time now, the issue of how to incorporate forestry sinks (referred to within Kyoto circles as Land Use, Land Use Change, and Forestry, or LULUCF for short) into any carbon emissions trading schemes has been extremely controversial. The problems are many. Critics believe that sinks will simply serve as an easy "greenwashing" mechanism that will enable companies to avoid cutting greenhouse gas (GHG) emissions. They further argue that paying for sinks will lead to the creation of monoculture plantations in developing countries; plantations that ultimately damage biodiversity, impact communities, and don't really contribute to resolving the climate change problem. Advocates, meanwhile, say that incorporating sinks into carbon emissions trading schemes will benefit not only the world's climate, but also its forests and biodiversity, not to mention communities in developing countries. At the same time, including sinks is important to carbon emitting businesses, they hold, because it will keep down the costs of meeting Kyoto targets, while at the same time allowing the world's least developed countries to participate in the carbon market. Finally, sinks advocates point out that as much as 30% of global GHG emissions come from the burning of forests, so it makes sense to include forests and forestry in any plan designed to address climate change. Although the debate over forest sinks remains unresolved, the European Union Emissions Trading Scheme (EU-ETS), the world's largest carbon market, has so far decided not to allow the trade of carbon credits generated through forestry. This policy could, however, be reviewed in 2006, making the time ripe to revisit the problems, potential, and opportunities raised by forest sinks.

The Panelists

In order to access a variety of perspectives, the Ecosystem Marketplace and its partners asked 6 distinguished people to join me for a moderated discussion of forestry sinks during the May 2005 Global Carbon Expo in Cologne, Germany. The panelists, in order of their remarks, were:

  1. Charlotte Streck, Climate Focus–a consultant with an understanding of the political processes surrounding climate change in Europe.
  2. Kirsten Macey, Climate Action Network–a policy officer at an NGO focused on climate change and a critic of the inclusion of sinks in emissions trading.
  3. Gisela Ulloa, Bolivian Clean Development Office–the coordinator of the regulatory body that acts as the Designated National Authority for Clean Development Mechanism (CDM) projects in Bolivia.
  4. Byamukama Biryahwaho, Eco-Trust, Uganda–a program officer at an NGO involved in sinks projects in Africa.
  5. John O. Niles, Climate, Community, and Biodiversity Alliance–the project manager of a new organization advancing high community and biodiversity standards for carbon projects.
  6. Jan Fehse, EcoSecurities–a program coordinator at an environmental finance firm involved in the carbon market.

In order to avoid the "Death-by-PowerPoint" syndrome that sometimes afflicts panel presentations, panelists were simply asked to answer questions and engage in honest debate about the problems, potential, and opportunities surrounding forestry sinks and the carbon market. My role as moderator was to play "devil's advocate," challenging both the proponents and critics of sinks to be clear, concise, and consistent in their positions, and to respond to questions put forward by the audience Ricardo Bayon: Good Morning. My name is Ricardo Bayon. Welcome to this, the second of our Katoomba dialogues on issues relating to environmental markets… The subject of this Katoomba dialogue, will be the issue of forestry-based carbon sinks, or what in the Kyoto community is known as "Land Use, Land Use Change and Forestry" (or LULUCF) carbon, and their inclusion (or lack thereof) in emissions trading schemes, in particular the European Union's Emission Trading Scheme (EU-ETS). …I will ask Charlotte to start us off by talking a bit about the current state of forestry carbon in the EU…Charlotte, where does this issue stand on the political level here in Europe, and where do you see it going? Charlotte Streck: …Let me give you a quick update on where we are: The EU adopted in 2003 an emissions' trading scheme, which started operating this year. The main focus of this scheme is to lower the emissions of energy-intensive industries within Europe. In its initial version, [the EU-ETS] was not linked to the Kyoto protocol; it was just an act of domestic measures in the EU. It has [since] been amended by the establishment of a… linking directive, which was adopted last October, and which is at the moment in the process of being transposed into [EU] member-state law. The deadline for that is the 13th of November, of 2005. And what this instrument, this linking directive, does is connect the Kyoto markets with the EU emission-trading markets. Essentially it has opened the EU emission-trading scheme to credits generated by Joint Implementation (JI) and the Clean Development Mechanism (CDM). So operators that are covered under the EU-ETS can use CDM credits, as well as JI credits, for compliance with their own obligations. This linking directive sets limitations of a quantitative and qualitative nature [on the use of Kyoto credits]. It allows [for instance]–or it mandates member states that allow–the use of CERs [Certified Emissions Reductions] and EAUs [Emissions Allowance Units] for compliance purposes to put limits on how many of these [CDM or JI] credits operators can use. So it's up to the member states to decide; but they have to set a limit. It also sets qualitative limits [on the kinds of CDM and JI credits that can be used] in that it says: no nuclear and no LULUCF. So it not only excludes T-CERs [temporary Certified Emissions Reductions that are awarded to LULUCF projects] and L-CERs, [long-term certified emissions reductions], but it also excludes all LULUCF credits generated by joint-implementation projects. What the linking directive says is that there is [to be] a review [of the current system], and that review is currently taking place. The review has to be tabled in 2006, and this review is, among others, evaluating… whether sinks' credits should be included or not. There are currently consultants working on this review. So this is the status quo. Now, on the general political atmosphere: as you know, the EU, as a whole, has been critical towards sinks in the process of [Kyoto] negotiations. But there is a change…towards a more pragmatic position for a number of reasons. First of all, there is a general change in climate-change politics: While for the longest time the COP [Conference of the Parties to the Kyoto Protocol] was something of [interest only to] ministries of environment; now, climate change becomes much more of a general political issue. That means that in the countries–and I am now talking of the EU–all of a sudden, ministries of economy, ministries of finance, ministries of development cooperation, [are all beginning to take a greater interest in climate change]… And they do not necessarily share the views [the criticism towards sinks] of the ministries of environment… The ministries of environment, with respect to EU-ETS or, as I just said, the critics of the inclusion of the sinks, say that the EU emission-trading scheme is an instrument to lower energy-related emissions in the EU; so if you open it to other credits, then [it should be open] only to those credits that also come from energy-related activities, they also claim that there are too many insecurities related to sinks' credits; that their monitoring is difficult. On the other hand, [there are those]… that are more in favor [of including sinks]…[because there is a real] need to find or use all possible means to meet … the Kyoto target. It is also [true] that more and more of the benefits of sinks are seen, especially [as a] tool to bring developing countries on board in the context of post-Kyoto negotiations. So it has a political component, as well as a development component. [Part of the problem with sinks, however, is]… that there is a certain fatigue, especially in the EU Commission, as to any amendment of the linking directive or the EU-ETS. I think it is mainly because these people [EU bureaucrats] are totally overworked, and [that is understandable, bearing in mind that] the EU emissions trading scheme has been implemented in Europe–[compared to] other EU processes–at the speed of light. So everybody is tired, and if you [add to that] the challenges the countries are confronted with–registries that break down all the time, [problems with] transfers and exchanges, and [all the other] legal and transactional issues—[countries and EU officials] are not looking for more complications. [So, to summarize, at this stage the problem is that the issue of sinks] is just not important enough [on its own] to make the EU-ETS amend [the linking directive]. But I think–and this is my personal opinion–[that] if there is an amendment [of this directive] anyways, for other reasons…then there might even be a majority of countries which would push for the inclusion of sinks… So it's technically possible. Ricardo Bayon: Kirsten, I'd like to ask you to maybe give us your perspectives on the inclusion of sinks. Do you think it's a good thing or a bad thing; and, if so, why? Kirsten Macey: Thanks, Ricardo. I have to be honest, I come from a non-government organization perspective that is about protecting the climate for future generations… [And] from the Climate Action Network's perspective, we do not believe that sinks are a valid way [to help] protect the climate. And let me explain [four reasons why]:

  1. The permanence of sinks: To keep a forest protected and managed… requires that you ensure that no extreme weather events take place in that forest so the forest cannot be degraded. [It requires that] the forest cannot be illegally logged. In the forest, there [can be] no accidents so that the trees are accidentally removed. No pests [can] come and destroy the forest. We need to ensure that the permanence of the forest is maintained and that integrity is maintained.
  2. The uncertainty issue: How can we actually measure how much carbon is stored in the forest? And this is something that many people and many organizations are spending a lot of time to ensure that we can actually account for the amount of carbon stored in forests. What I can say is that the carbon stored in the forests is not the same as the carbon in fossil [fuels]. If you are going to emit carbon from fossil fuels–through industry, through our households, through the way that we use our cars— [that] is different from the way that trees store carbon.

The other issue, of course, is about part of this– Ricardo Bayon: Can I push you on that? How different? How do you see the difference? Kristen: The emissions from fossil-fuels are permanent, we are seeing permanent increases in carbon dioxide [from fossil fuels]… The difference between a permanently emitted [ton of] carbon dioxide from fossil fuels and one stored in forests is that forests are temporary, and those uncertainties about … impermanence … mean that they basically are not the same. And you can't suggest that permanently emitted carbon from fossil fuel is the same as temporary stored carbon in the forests.

  1. The biodiversity issues: We need to ensure that… the biodiversity integrity of any forest is maintained. [Unfortunately] carbon sinks are likely to produce fast-growing monocultures, which may not necessarily be the right trees for a particular area. For example, the World Bank is wanting to grow eucalyptus trees in Brazil. Now, eucalyptus trees come from Australia, where I come from, they are endemic to Australia. The integrity of the biodiversity of Brazil is therefore an issue that needs to be taken into consideration.
  2. And finally, [the issue of integrity of ecosystems]: Before they were called sinks, they were forests; they were ecosystems. They were where people lived. They were where people got their subsistence, and where a lot of other things happened. So there was integrity, and that should also be discussed and maintained. So we need to ensure that the forest is a forest, and all the other services that it provides are also taken into consideration.

Ricardo Bayon: Thank you, Kirsten. Moving down the panel, Gisela, if you could talk a bit from the perspective of a developing country and a developing country government, how do you see this issue, and what would you like to see in terms of forests and LULUCF? Gisela Ulloa: …We are dealing with developing projects, as well as all the institutional frameworks of the CDM [Clean Development Mechanism]. We are actually learning how to come up with good methodologies. It's been a long process, it's very difficult, and what we really… need is to learn a little bit more about how we are going to deal with the LULUCF sector. Right now, the only activity that we have under CDM is afforestation and reforestation, as you may know. That is a small part of the potential of the LULUCF sector to sequester or reduce carbon [emissions]. But if the European Emissions Trading Scheme doesn't allow LULUCF projects, then my feeling is that these types of projects won't take off because of all the [difficulties] that are already [involved]. [For instance,] the characteristics of the L-CERS, and the T-CERS, the [long-term and] temporary credits, are making it so that right now these types of credits are not very [much in demand], even though they are probably going to have a lower price than the CERs. So what we will probably [see is that there won't ] be many of these [types of] CDM projects. …And what is bad about that? …If we don't have these type of projects in place, we won't be able to learn how to deal with methodologies; we won't be learning how to deal with all of the aspects that other people have been thinking of. [For example,] how are we going to include indigenous people? [In essence, we won't be able to manage] the most important aspects to consider in terms of biodiversity–all of these things that we all agree about, but that on the ground are very difficult to implement and to measure. [In addition,] we really need to start thinking about introducing emissions avoidance [essentially avoided deforestation] as another alternative activity. But how are we going to… [do this] if we haven't had any … "experience" in how to deal with these types of projects? They [LULUCF projects] are very complex on the ground, and we need to learn a little bit more about [their implementation]. Ricardo Bayon: I take it, you would like to see more of LULUCF incorporated into the market. Can you tell me why, why you think it's a good thing to include? Gisela Ulloa: Because, as you know, a third of the emissions of the world come from the LULUCF sector. Eventually, we will have to deal with that. So why don't we start learning how to deal with it now? We all know that it's a very difficult sector; we all know that there is a lot of scientific uncertainty in how we are going to measure [sequestration, etc.]. But if we don't start working on that, how are we going to come up with a solution when the time comes? I am sure there will be a time where we really will need to address deforestation in the world as a big source of emissions. So why don't we start now? Ricardo Bayon: Okay. BB if you could talk a bit from your experience in Uganda, how do you see this, and would you like to see forestry included more or less, and why or why not? Byamukhama Biryawaho: Thank you very much. [In our experience] we have observed that forestry projects are not favored by a number of trading schemes. The European trading scheme as they have mentioned and the CDM. But from the community perspective, we depend very much on land and land use and forests. So it's important as part of our sustainable development to address forestry activities, and we [in Uganda] have been working on a program that involves small landowners in planting the trees for carbon sequestration. Of course, in terms of measurement, as stated, it's perceived as something very difficult; but I think there are conventional forestry methods that will tell you how much carbon the tree is going to sequester over its rotation period. So that shouldn't be a problem. The experience is that you can measure the carbon sequestered, just as you can measure the carbon that you offset by not using fossil fuels. In terms of permanence, I come from a culture where, as we inherit property from our parents, one of the things they give you is a stool made out of wood, and I can assure you that the stool that my father inherited from his father is still there. This is 100 years or so. So once carbon dioxide has been fixed in the wood, if you convert the wood to timber, and the timber, the stool, the table, will be there for many more years. So what other permanence are we talking about if we cannot look at products that will stay 100 years or more, having sequestered carbon? I think we need to have all of these ideas at the back of our minds… In terms of permanence, I think there are arguments to show that forestry projects can create permanence, can be permanent. Ricardo Bayon: Kirsten, I'll give you an opportunity to respond to that in a minute; but first, if we could move over to John O. Niles and hear your perspective on this. John O. Niles: First, I'd like to mention that there are very good fossil-fuel projects, and there are very good forestry projects. And, I'd like to start with the permanence issue, too. There is a notion that by slowing down some of the emissions from fossil fuels, that that's a permanent reduction, and I take extreme issue with that. If you have a solar project in Kenya, and the argument is that this community in Kenya will no longer be using fossil fuels there and that that's a permanent reduction. I don't buy it…if we stop some oil from being pumped this year, there is absolutely no guarantee that that oil will not be pumped in subsequent years… I don't think anyone can make the argument that even a fossil-fuel reduction is permanent. It's long term. If the world decides it's going to pump oil in 100 years, that oil is still underground and can still be pumped. As for uncertainty, which is the second issue that the critics throw at this, again, there is a lot of very credible science. You can quite accurately measure and monitor how much carbon has been sequestered or stored from a baseline. It's not that difficult. I think that was a legitimate argument 10 years ago, and now it sort of rings a little bit hollow. In terms of biodiversity issues, which is the third issue that the critics raise…the biodiversity benefits of protecting forests or restoring forests, I think, are much more clear than [the potential biodiversity benefits] of the fossil-fuel projects. If you replant native trees and you connect wildlife corridors and you maintain watersheds, the biodiversity benefits for me as a biologist are much clearer than if you had a solar project. Of course, you can have bad [forestry] projects…But I think that the majority of the projects out there, the Noel Kempf [Mercado project in Bolivia] is a very good example; the World Bank has some very good projects in its Biocarbon Fund. [I agree that some of the projects that were proposed early on] – the Plantar projects and others were far less than ideal… We [at CCBA] have developed a set of standards, like the WWF Gold Standards for fossil fuel projects. We have identified a process where you can find extremely credible [forestry] projects out there. These are projects that have the community involved from the beginning, a grievance processes if the community has a concern, [and]…a very credible climate calculation. The biodiversity benefits are very clear. GMO trees are excluded from this. Native species are favored. So, again, I think some of the arguments we're hearing were very useful early on, because it made us think of very tough issues; but now, there are good projects out there, and we need to get started. Ricardo Bayon: Let me throw this back at you, John. Can you really measure, and how do you really ensure that the projects that are done are the good projects, because isn't it cheaper to do a monoculture, and won't most people just go for the monoculture just because it's easy and cheaper? And if not, why not? John: NO. Well, I mean, people realize that, you know, if you have a company or even a government — and partly because of the critics have really raised this issue that we don't want bad projects — I don't mean to just bash them [the critics] they have done some wonderful things in terms of forcing the World Bank and some of the investors, not to look at monocultures. But I work with Intel and BP, they don't want to get involved in a monoculture. They don't want to have people attack them. They want to do a good project. They want to help local communities. They want to sequester carbon or conserve carbon… but they also want to be able to promote internally and externally that they are helping people, and they are saving panda bears. So they want to do good projects. Ricardo Bayon: OK, Jan, maybe we could get from you some perspectives on the market and how the market views this, and what would you like to see from [the perspective of a broker]? Jan Fehse: Well, to add on to what John O. just said, I think the market will be one of the drivers to differentiate between so-called "good" and "bad" projects. It's not the project in itself that is good or bad; it's the buyer who decides to pay an added value to a good project, because it has these added, good elements like high biodiversity value, high community-development value. If there are buyers that are content to buy perhaps cheaper credits…then they drive the development of these types of projects. If there are buyers that really want to see the nice projects with community development and high biodiversity value, that's fine, too; but then they should be prepared to pay a higher price for that. And so we are going to see differentiation probably in the market between the really nice projects that will be more expensive, obviously, to develop and the perhaps cheaper, more productive, more monoculture-based projects. Ricardo Bayon: But doesn't that just support Kirsten's arguments because the bad will drive out the good. [Those interested simply in compliance] will just go for the cheaper projects, won't they? Jan Fehse: Well, not necessarily, because … it's not that they have exactly the same market niche, and they will differentiate. There will be different buyers out there. The market is, in essence, compliance-driven. People will want to buy credits in the first place, because they have a liability towards the government or towards EU-ETS. And some of the risks they perceive when they buy credits will influence their choice. That's one aspect. Another aspect is [that part of] the risks that they face … could be exposure to bad criticism–from stakeholders, from shareholders, from the public in general–and so they don't want to be associated with these type of, let's say, "non-good" projects. So, you know, there will be a lot of different types of buyers out there, and I think there will be a lot of different niches for different projects to sell their credits in. Of course, one of the main aspects that we are going to have to sort out is the price of the credits. Will T-CERs and L-CERs be, first of all, valuable enough to let projects happen? Then, will they be cheap enough to compensate for impermanence [of the credits, for] … the fact that the credits expire after a certain amount of time? [So] how we are going to deal with that? Are we going to just say, after five years, you know, credit gone, and that's it; so we only pay 50 cents for your T-CER? Or do we deal with it in a more sophisticated way? Do we try to come up with constructions where T-CERs are replaced by the projects so that projects take on part of the risk? Here, we are going to see a whole different scale of approaches, from the very extreme one where you have your eucalyptus plantations that come up with T-CERs that they sell every five years for 50 cents because that is OK [still profitable] for them, to more sophisticated structures where teak projects take on more liabilities so that they can sell their credits at a higher price so that they can internalize more benefits for communities, or for biodiversity, for example. Ricardo Bayon: Thanks. Kirsten, do you want to respond to some of the things that have been said? Kirsten: Let me say that we agree that there are some good small projects out there that will probably be of benefit to the forests. The issue, of course, from a climate perspective is, what benefit will [these projects provide] to the climate, and how can we ensure the integrity of the climate? Sinks credits basically give permission for industries to continue polluting in these so-called "Northern" countries [by allowing them] to offset their emissions through sinks in the southern countries. [I guess in the end] it's about having a good project and good accounting… If you are going to bring these two issues [forests and climate change] into the same realm, we need to ensure that we have good accounting to ensure the integrity of the climate… So it's about thinking a bit outside the picture. Is the carbon market the best place to address both the issue of deforestation and [the issue of] climate change? Are we really ensuring that we are gaining the best possible outcome … for the environment [and] for the future generations? Ricardo Bayon: We have some questions from the floor. Stanley Glover: My name is Stanley Glover from Prime Forestry in Panama and I think we should [be careful of how we use terms like] …"good" and "bad." Charlotte: …I also have a problem with the notion of "good" and "bad", evil projects and the good ones…Unfortunately–and I think we need to work on this–we are talking about [a discussion] which is driven by emotions. And there is no other discussion in the whole climate debate [where we hear things like:], "I am the good, and you are the bad"… That is not the way how we can go, because we know we need to have credible ways [of dealing with the forestry issue]. So [I think we need to bear in mind that] forests are… responsible for a third of emissions. We need to deal with this, and we need to do it in a rational way… It would be nice to have all kind of other markets for environmental services; but, at the moment, the climate-change regime is the most effective one and the one that's working. And there are now–[and] I am not a technical person, but [this is what I gather] in talking to scientists–ways to do credible sinks projects. So we need to find [these ways]. We need to define [what is a credible sinks project]. We need to have a constructive dialogue. Ricardo Bayon: [So, let me ask] how do we … move away from these [terms]: "good" versus "bad", these biblical terms, how do we ensure that there are better projects that get done, as opposed to the worse projects? Byamukhama Biryawaho: About the good and bad projects, I'll give an example about the monoculture discussions. We are working on a project that is promoting indigenous tree planting for carbon sequestration in southwestern Uganda. Before we started on the project, the only tree that people were interested in was the eucalyptus. And you have evidence of a lot of eucalyptus woodlots in the landscape. So the carbon activity that we are bringing in is actually [helping] shift people [away] from planting eucalyptus, and we are bringing in indigenous trees, indigenous fast growing trees that have other environmental benefits. And the other one is the linkage between what we'll call the "good projects" and, in this case, energy projects. I will give an example of a small dam that depends on the watershed for its water supplies. And if you don't manage the watershed; if you don't have the project that brings the watershed services–then in the long term, they don't have this dam giving you energy and, therefore, they are not going to get the long-term credits, as well. So I think that the linkage [between energy and forestry] can help us have that comparison of the bad and the good projects. John O. Niles: Yeah. Obviously the words "good" and "bad" are loaded terms; but I think there are two points that need to be raised, [one is that] right now land-use projects and the land-use sector need credibility. I mean, it's been an extremely controversial area for a while, and so … maybe I'll be the un-PC [politically correct] player: I think we do know what a good project looks like, and we do know what a bad project looks like. A good project has the community involved in the design. It has an emphasis on net community benefits. [A good project is one where] there are some compelling biodiversity benefits, whether it's watershed management … and a good accounting program…. We developed what we hope are somewhat flexible standards [the CCBA standards]; but they also do move us towards good projects. So I think we do know what they look like. Ricardo Bayon: Are these going to be certification mechanisms that the market can then put a premium on, or what's the end game? John O. Niles: Yes, although I'm not sure that good projects are necessarily going to cost more. I think you can grow a very cheap eucalyptus plantation, but a eucalyptus plantation is not going to get in, or most other plantations aren't going to get in because of additionality. New plantations are profitable on their own, so they are not going to even make it into the market. Jan Fehse: John O., on [the] broad lines I agree with you; but you mentioned a few things that I don't agree with. I think good projects will cost more. There is no doubt about that. If you work with communities, you have the higher cost of working with communities, with contracts, with all the extension work that you have to do. Also, if you have a dispersed project, your monitoring costs will be higher. So there will be higher costs from that point of view, from purely the organizational, logistical point of view. Ricardo Bayon: Does that [mean that good projects] will have to charge a premium? [Will they be able to?] … Jan Fehse: Well, my view, if they deliver the same product and if you assume that there is a market price out there for that same product, then one will be able to sell it at that price because their cost rate is lower, the other one won't be able to make it; so they can only make it if they sell at a premium. John O.: Well, I think you are absolutely right. There are generally more up-front costs for very good projects…but if you have a good project, you're probably going to find a lot more donors. And the carbon price right now is not covering the costs. I don't know the World Bank price. But I do know [that people involved in these sorts of projects] will tell you that for a good project, the biocarbon-fund price doesn't cover all the costs. You need to find other investors, and these other investors are going to be looking for social and environmental benefits. So, yes, they probably do cost more up front. But you can get more donors, because the governments out there also have CBD [Convention on Biological Diversity] commitment, they have millennium development-goal commitments. So you're going to be able to find some bundling of projects. Charlotte: …I agree that good projects, or projects which guarantee sustainability, will attract more donors; but not necessarily a higher price for carbon. Because if you look at the compliance-driven market and then we see what's happening in the energy CDM field, where we have more discussions on prices, [in the end, what drives investments in projects] is just the prices [per ton of carbon] and the risk profile of the project, [and here I mean] the risk profile exclusively looking at it from the carbon-security perspective. So it's not that the good, nice, fossil-fuel project demands a higher price for CER. It is the project that will generate secure CERs, which gets a higher price. That is the market that we have created, and [the fact that these credits are generally bought] for compliance use is reflected in the price; and that has changed a little bit by the market becoming more compliance-driven, because as long as it was just government and institutional buyers who put a lot of additional considerations in the prices that they pay, it looked a little different. But – whether it's for the good or the bad— [now we have] a private sector market, and the risk premium is paid if it's considered a risky project [and that is determined exclusively by whether a project does or] doesn't generate CERs. Having said this, it is of course true that it's easier to attract donor money for good projects — not necessarily investor money… Ricardo Bayon: We have a couple of interventions from the floor. Fiona McCay: My name is Fiona McCay, and I work for the TIST programe that John mentioned. We're operating in Tanzania, Uganda, Kenya, and India. It's a reforestation/afforestation-candidate CDM project. We have been hearing a lot about the market mechanisms involved in CDM projects, and I think another part of the picture is the way in which carbon credits through afforestation/reforestation projects can lead to increased revenue streams that go right down to the grassroots level and can feed back, to those involved in the actual reforestation work on the ground. In terms of how we approve a project or which projects are out there in the ground, I don't want a blanket approach. We want a flexible system. Projects are different. Buyers will be looking for different community benefits, different sustainable benefits, different ways of feeding the money back to those on the ground. I think a lot of the discussion has been spot-on. There is very little point arguing for a blanket inclusion or a blanket exclusion [of different types of LULUCF projects]. It's much better to have a system where we can assess projects on their individual merits. We have seen some positive examples of projects, and we need to see more of them. We need to see concrete projects on the ground. We need to see projects being approved by the CDM Executive Board, so governments can actually deal with these projects and gain the experience they need in what is a very important field. Murray Ward: My name is Murray Ward from Global Climate Change Consultants in New Zealand… I was at a presentation for journalists yesterday, and just out of the discussion somebody asked, "Well, can't we use carbon dioxide for energy? You know, can you burn it?" And… people said, "No, no you can't do that.' And then somebody put up their hand and said, "Well, hang on. You've forgotten about photosynthesis". And so we essentially have a vehicle to remove carbon dioxide from the atmosphere and provide energy, and let's not forget that is a powerful, powerful thing. Ben Vitale: Ben Vitale from Conservation International, we are doing a couple of [carbon-forestry] projects. I wanted to address some of the cost aspects that were brought up… [I believe that] what you have to really do is understand the benefits of these kinds of projects and then price all of those benefits. [For example] one benefit is the carbon; but another benefit is biodiversity protection, and there is a cost and a price for that. And in addition, there are sustainable economic benefits that are designed into the project. And so there are various ways to look at a large-scale, land-based project that includes a lot of different activities and a lot of different benefits. And so if you include the cost of the business-as-usual case for economic development and how development funds are being spent in that corridor area, you don't necessarily have to build that into the project per se or into the project price; but you do need to consider, as a risk strategy and a permanence issue and a leakage strategy, some elements of those, because that's inherent in the project design. So you have to make sure that the balance of risks and project activities are such that it doesn't price itself out of the market. So there may be, for example, different revenue streams that can come into a project from different sources that address the various levels of benefits in a project, not just the carbon benefits. Ricardo Bayon: So there have been a lot of issues thrown out here. I just want to see if anybody from the panel wants to address some of them. Maybe Gisela, you can talk a bit…from the Bolivian perspective. Gisela Ulloa: Well, about the market right now for forestry projects, we all know that we don't have a methodology approved, so that is delaying [the creation of] potential projects out there. I mean in our specific case, the price that we've been talking about here is around, let's say, $2 per ton of CO2, or even less. With that price, it's very difficult for those wonderful…projects that everybody was talking about [to] actually take off. And as far as somebody was saying that part of the investment of developing these type of projects will come, or could come, from carbon markets, [in reality] for us, it's very difficult to find another type of financing to actually close out these type of projects. So right now, I really don't think that with this price and the incentives that we have right now in the market, I don't think that we will be seeing a lot of CDM [LULUCF] projects. And you know that there is not much time until 2012 [when the first phase of Kyoto comes to an end]; so if we start the plantation right now, how much carbon will we be able to sell by 2008 [when the fist commitment period comes to an end]? Probably not that much… everybody has said here that there are different type of projects everywhere, and probably we will need different type of methodologies; but we don't even have one right now. So for this first commitment period, I really don't think we are going to be seeing a lot of CDM projects out there. And that is a bad thing. Ricardo Bayon: Do you have an idea of what the price point is where it would make it worthwhile in Bolivia to do these sorts of projects? Gisela Ulloa: Oh, that's very difficult, because every project is unique. [But], let's talk about $4 or $5 per ton of CO2. But, now, it depends on what type of project would you like to see. And I agree that the project of the quality that we have been talking about here in my country needs a lot of effort. Working with communities is not easy. Ricardo Bayon: Just before we go back to the floor, Jan, if you could address Charlotte's point that the market, really, right now is only paying for risks and one kind of risk, and that's the risk that the credit will actually be delivered and [can be used] in compliance terms and how does this affect the market for LULUCF projects. Jan Fehse: Yeah, I would agree with that… But for forestry projects, again, I do think that more community-based-type projects … will need to yield a higher carbon price to be able to make them financially attractive. Where are you going to get the money to plant those trees? The communities don't have it. You know, you need somebody to put up that money, and if it's not donor money from somewhere–you know, it can't be ODA, but it could be other donor money … then it will have to be some sort of private capital. And private capital wants to see returns, and if the [project's] returns are not going to be high enough–because you're working with native species [or whatever] … –if you want to make that whole thing work financially you will just need to get a higher carbon price or, as Ben said very wisely, get a combination of various other, let's say, ecosystem services that you are producing; so it could be a combination of carbon and biodiversity credits or something like that. But [the point is that] you'll need to have an additional income to make the whole thing viable… And if the market doesn't want to pay that in the future–because they are completely only risk-minded and only compliance-minded–then probably we will not see very many of these type of projects. However, if the market does want to see that–if there are people out there that are willing to take on a price premium for the best and the cuddliest type of projects–then, okay, they have a chance. Ricardo Bayon: I wonder if I could put Richard Burrett, of ABN-AMRO, on the spot here and ask from your perspective [the perspective of a large bank] will the market be willing to pay for these things, do you think? Will there be appetite for some of the other aspects of LULUCF projects other than the purely compliance-driven, regulatory-driven side of things? Richard Burrett: I think the answer to that is very difficult. I think what is currently driving the market is compliance. And we are seeing markets built around compliance, whether that's the carbon markets here in Europe, whether it's some of the wetland-mitigation markets that you are seeing developing in the [United] States. There are other biodiversity markets that are developing, but they are largely compliance-driven. To actually get people coming in on a–I don't like using the word– "voluntary" [basis will be difficult]. But perhaps that's the sort of area we have to think about to actually generate these additional payments for ecosystem services. I think it's troubling. I think there needs to be some commercial incentive or some other strategic incentive for people to come in and pay for these other existing services if we want a real market to develop. Otherwise we're reliant on a kind of philanthropy, which I frankly don't think is going to bring enough benefit in the long term to really make this [market] work. So, from my perspective, I am keen to see this develop around sound, compliance, commercial and other strategic imperatives, rather than relying on a more voluntary basis. Ricardo Bayon: Thanks. We have an intervention back there. Marten von Velsen: My name is Marten von Velsen from N-Serve … So the first point I want to make is that for least-developed countries, often the only chance they have to join the climate market is through forestry-related projects; otherwise, there are no other industrial project types they can do in these countries… So my call for action is, "Now, let's use this fatigue [on the part of bureaucrats that Charlotte was talking about]. Let's go there. Let's make lobbies. Let's make this review process happen." And I think another concrete step [that is needed is to join together to] establish a smaller group or a network which focuses on pushing these issues at the EU and on national levels, first point. My second point is: We have to come up with solution on the liability side…how to make the exchange between [the various forestry credit mechanisms such as] L-CERs and T-CERs into the European allowances. That's a very concrete aspect of the issue we have to solve from a financial point of view, and we need a group of [financial] experts working on this. If we have this in place, I think the integration into the European emission-trading scheme will be much more likely. Bernard Schlamadinger: Yes. My name is Bernard Schlamadinger from Joanneum Research in Austria. I would like to add to what Murray Ward just said before about bioenergy. I think in part, the results of the CDM negotiations on land use are a little bit flawed, in that they have not really recognized the linkages between bioenergy and land use. And really, we seem to have a chicken-and-egg problem here. We want to create more biomass fuels, and the IPCC assessment reports assume a huge potential for biomass fuels in developing countries… But I am afraid we are about to kill the chicken here [by] not allowing these land-use projects. We are not going in the right direction at the moment. And, well, there are two types of biomass energy in the CDM. You have the traditional biomass energy, which actually is 13%, 14% of global energy use, and we have altogether excluded that from the CDM, too. If you have a project that improves, let's say, charcoal production, charcoal from unsustainable biomass, or if you have a project where you improve cooking stoves in developing countries, these are not eligible in the CDM. Why are they not eligible? Because we have excluded land use. I think this is a major disaster that we are facing here, because there are countries like maybe Tanzania and other countries that derive 80% to 90% of their energy from land use, from biomass, and we have excluded them altogether from the CDM. And next, we want to create a new source of sustainable biomass fuels in these developing countries, and we are also killing that, because we are not allowing these land-use projects, let's say, in the European emissions' trading system. And the irony of all of this is that we now have a G8, which has as its main objectives Africa, climate change, and reducing illegal logging; so, somehow, I think there is a disconnect here. Ricardo Bayon: Can I turn that around? How do we use that to push things forward in this next review [of the EU-ETS] coming up? Bernard Schlamadinger: Well, I think there is now time to rethink the inclusion of land use in the European emissions' trading system. We have a chance to get a pilot scheme going, where we try it–learning by doing. That's one thing. The second thing, I think there is a need for a CDM reform that does allow for the inclusion of this traditional biomass energy, and maybe there is something that a COP/MOP [Conference of the Parties/Meeting of the Parties to the Kyoto Protocol] could take a serious look at. We have made a submission together with FAO to the Executive Board on this issue. They've hired a consultant. The consultant is now working on this. But I think we need to take the next step there and build the momentum and the pressure on the COP/MOP to think about this seriously. So I think there is a lot to be done, and I encourage you all to think about the linkage between bioenergy and land use. Ricardo Bayon: [Kirsten, let me come back to you and ask:] Is it [at all] possible to include forestry, from the critic's point of view, [in emissions trading]? Are there ways that we can address some of the issues you've raised and make it possible to have these sorts of things included in emissions' trading, or do you see that as a no-go? Kirsten Macey: The issue still remains that emissions from fossil fuels will not be alleviated through planting forests, temporary forests. I think if we are going to have a robust, viable market for carbon, we need to ensure that we … can verifiably prove and monitor that carbon is actually being stored. And until that happens and until we have proof of that–and so far, I haven't … heard the proof, I haven't seen the proof… –then the [carbon] market will not be the right mechanism [to address issues of forestry]. Ricardo Bayon: Let me put it this way: If we could find a project that would prove to you the permanence issue, [that would address] the uncertainties of measurements and some of the other issues you raised, do you think there would be a way to get the critics to say, "Yes, this is good. Let's include it in the market. Let's let it be sold"? Kirsten Macey: Yeah. If you can ensure all of these things that you said, and I mean this is highest common denominator. This is gold standard. We've heard about gold standard mentioned. If you are going to do a project, make sure it's gold standard. Make sure the community is involved. Make sure that it's verifiable. We've come to this dilemma, because we are linking these two very serious issues [climate change and forestry], where the climate change treaty may not necessarily be the right place to link them… So, three things: We need to reduce our greenhouse emissions now; we need to ensure that we've got sustainable energy to replace our dirty, polluting, fossil-fuel industry; and, we need to ensure that we have a solution for deforestation. And how that happens is certainly a very interesting debate, particularly in the next few months. Ricardo Bayon: Before I go to the floor, let me just throw something out to think about. Given that it seems that the criticisms will not be going away, what are the chances that this thing [the inclusion of LULUCF into emissions trading] will actually happen? Wolfram Kagi: Hello, Wolfram Kagi fom BSS Economic Consultants in Basel… Gisella you said [that you are waiting for LULUCF] methodologies to be approved. What is happening [in that regard]? I mean… are you actually working on trying to get some new more project descriptions and methodologies [from Bolivia into the CDM]? And if not, why not? Gisela Ulloa: Yes, I agree with you [we need methodologies]… But at the moment, we have a problem. We don't have the financing to come up with a really good study that could actually pass through the [CDM] Executive Board… [And therefore] I think most of our project proponents will likely wait until some others come up with approved [LULUCF] methodology. Richard Burrett: I'd like to just make some comments; because I don't really want to hear the same answers coming out again. But if I look at forestry and CDM and this whole issue of permanence and impermanence, how long does a landfill gas recovery site last? How long does a biofuel site last? It's maybe 15, 20, 25 years. There is no permanent reduction. …So let's not get hung up on this permanence issue, because none of the projects that people are developing within the CDM are going to be around forever… And we need to get forestry into the CDM because [forests] provide so many other ecosystem services…. I would really just encourage people to think sensibly about this, rather than just opposing it on micro-detail, because in the bigger picture, I think there are huge benefits that we can bring by embracing forestry projects within the CDM setup, and I think we should really be pushing for that. Charlotte Streck: I am back to what I said at the beginning of my first statement. What do we need to do now? We have now acknowledged that we need to look at the whole picture, as we want to promote sinks projects [and this means] we need to create demand, create the market. For that, we need to open the EU ETS for sinks credits. We have a number of problems that need to be addressed, because we are dealing with temporary credits, credits that will have to be imported into the system. They are different from what is in there, because they have the potential to expire and they eventually expire; so we need to deal with [this problem]. We have at the same time … to address the issue of permanence because of the feature of the expired credits. We need to work on and go to our policymakers with proposals on how to address this. So how [can these] temporary credits, in case of expiry, be replaced by permanent credits. There is a willingness to listen to us, and there are proposals out there based on the idea that there are insurance mechanisms or fund mechanisms where there is a premium attached to the credit to the T-CER or L-CER when it comes into the system, an extra fee. That fee goes into a fund, and from the proceeds of the fund, permanent credits can be purchased and then imported into the system. I think we need to forge broader lines to work with the policymakers to read these proposals, to make them understand it is not so difficult–that legally and institutionally, it is not so difficult–and the benefits outweigh the little complications that we have there… [And one final point on the criticisms] of course, not everybody is in favor [of including sinks in emissions trading], for there is no policy measure in the world where everybody is in favor of it. It doesn't mean that we need to [get stuck] in permanent inertia… We are in a liberal system in a democracy, and everybody is allowed to [have a] say, and if we find a majority [in favour of including sinks], it will happen; if not, it won't. Byamukhama Biryawaho: … As someone said, [LULUCF is] the only opportunity for the developing countries, for local communities to get access to [the carbon markets] and the moment we don't include it, then we are locking them out of [these markets] and probably leading them to deforest [even] more. And I think the only way forward besides this bid is to go out here and to have pilot initiatives. And I also want to talk about the cost. The cost involved in establishing trees and how much carbon finance brings in is very minimal, and I think that the driving force to the community members [at least in our experience] has been the benefit out of trees. So, yes, the money from carbon funding would be small [and important]; but the driving force for farmers to invest more–invest their time, use the land for trees and not other activities–is, at the end of the day, "How much money am I getting out of timber? How much money am I getting out of fruit?" Kirsten Macey: … I'll end on this comment: that a carbon sink, a forest as a sink, will end up as a source sometime [in the future]. We need to distinguish between the pools, and we have already discussed this. The carbon cycle is an intricate, complex, scientific cycle, and it's the cycle between the carbon in the atmosphere, the trees, the biological forests' mediation and the ocean. We have been adding to that pool by emitting carbon from fossil fuels from underground for millions of years, and that is a serious thing that we have been discussing here today, and I'll leave you with that. Thanks. Ricardo Bayon: Well, thank you very much for coming. [Let me just end by saying that I think this debate has been useful, and that we need to have] additional dialogues bringing both sides of the debate to the table, because I think that's one of the crucial elements here: how do you bring both the critics and the proponents [of sinks] together [to figure out how to resolve this tricky issue]? And one [more] thing that I take away from this session is that in many ways, it isn't just the criticism–or maybe it isn't even mostly the criticism of sinks… –that is the problem here. [In many ways the more difficult problems that surround sinks relate to] many of the technical details [that still need to be resolved]: for example, how to assess [sinks credits], how to measure [them], and how to deal with the temporary nature of [sinks] credits [i.e. L-CERs and T-CERs] and who pays for [the risks that this temporary nature entails]. And one thing that to me is striking is, that many of the ways of dealing with [these problems] simply add [yet] another level of transaction costs to the prices of LULUCF carbon. And so I leave you with [this challenge]: How do we [address the problem of] adding yet another transaction cost to something that many of us think is good for the community, good for biodiversity, good for forests, and possibly–although [clearly some still think] this is debatable–good for the climate. Thank you. Ricardo Bayon is the Managing Editor of the Ecosystem Marketplace. He may be reached at rbayon@ecosystemmarketplace.com. First posted: 8/3/05

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