originally posted on Cleantech Blog on Thursday, February 05, 2009
By David Niebauer
In an earlier article, I reviewed the issues and obstacles to generating carbon offsets through reducing emissions from deforestation and degradation (REDD) in a post 2012 global climate regime. A recently published research paper written by Eduard Merger titled Forestry Carbon Standards 2008 (November 2008) reviews standards for forestry projects in the voluntary carbon market. Merger compares four voluntary carbon offset standards for forestry projects that have emerged in the last few years and provides valuable information for both project developers and CO2 offset purchasers on the variations in the four standards. The standards compared are Climate, Community and Biodiversity Standard (CCBS), CarbonFix Standard (CFS), Plan Vivo Systems and Standard, and the Voluntary Carbon Standard (VCS) Agriculture, Forestry and Other Land Use (AFOLU). As with the controversy surrounding REDD, significant issues exist affecting the forestry sector in general relating to the complexity of conducting carbon sink or sequestration activities on the land. The entire program has been beset with doubts over the integrity of carbon emissions reductions being generated, particularly over permanence, additionality, and adverse non-carbon environmental impacts. While forestry projects have been met with skepticism in the European Union, legislators in the US appear to be more favorably disposed. The reason for this may be that, being the world’s largest polluter, the US will need a substantial supply of cheap credits – and forestry credits may be one of the few options available. See US Open to Forestry Offsets in Climate Fight. Be that as it may, offsets from forestry projects appear likely to be included in any future global warming agreement. The voluntary standards being developed provide some guidance for legislators grappling with the complexities of making such a system work.
The Standards and What They Apply
Any buyer of CO2 offsets from a forestry project will want assurances that the project generating the offsets is additional (it goes beyond “business as usual”), that it is verified and monitored by an independent third party, that it is permanent and that the methodologies applied to the project are transparent. In addition, many buyers want to know that the project provides significant socio-economic and environmental benefits. Finally, a buyer will want the offset credits accounted for on a recognized registry and will want to pay a fair price. We will review these criteria by comparing how the various new voluntary standards address them. Additionality is a fundamental concept in all carbon offset projects. Essentially, for a project to be additional, funds from the sale of offsets generated by the project must be essential for the project to move forward. If this is not the case, the sale of offsets is merely providing enhanced financial return to the project developer. All of the standards reviewed by Merger accept the A/R CDM additionality tool, a methodology adopted by the UNFCCC’s Clean Development Mechanism for afforestation and reforestation projects. Each standard also permits other methodologies developed by the standard body itself. Due to the importance of additionality, the methodology applied if not the A/R CDM additionality tool should be scrutinized carefully. Verification actually encompasses a range of functions including validating the project (review of essential documents), validation, monitoring, accreditation of validating parties, issuance of carbon credits and registration. All of the standards apply a verification process that includes independent third-party verifiers. Such verifiers generally need to be approved, or accredited, by the standard body itself. Verifications also need to be conducted at regular intervals, usually between two and five years. The entire verification process through issuance of a carbon offset certificate can take anywhere from two to eighteen months. The cost of verification ranges from $5,000 to $40,000, depending on the standard and the project being verified. In addition, most of the standards apply a charge per ton in the $0.30 – $0.50 range.
Socio-economic and Environmental Benefits
A claim made by forestry project developers is that forestry projects are able to generate carbon offsets with far more socio-economic and environmental co-benefits than other types of offset projects. This may well be the case. A project that regenerates a forest will provide jobs, biodiversity, recreational use and other benefits associated with living, growing trees. The same cannot be said for a methane capture project, for example, or the destruction of industrial gases – projects that also generate carbon offsets. Of the four standards reviewed by Merger, only the VCS did not require a strong showing of socio-economic and environmental benefits. The VCS does require that project developers demonstrate that the project will not have negative impacts. The CCBS provides the highest co-benefit standard of the four standards reviewed.
A forestry project’s permanence is arguably the most important factor in determining the climate potential of the project. Should a forest be damaged or destroyed, either by natural or human causes, not only does the forest cease to act as a carbon sink, it actually becomes a carbon source. Fire and tree rotting release CO2 into the atmosphere. A failure to ensure that a forest is permanent turns a climate change positive into a serious negative. The primary means to address the risk of impermanence of all four standards is to mandate a risk buffer – a certain percentage of the offsets generated that are held back and subsequently retired in the event that a portion of the forest is damaged or destroyed. The percentage of offsets from a project that are required to be “held back” in a risk buffer vary from up to 60%, depending on the standard. The credits held in the risk buffer would be retired in the event the forest is damaged or destroyed. None of the standards require insurance, per se, although the insurance industry has been reviewing forestry projects for some time. See Insurance industry on carbon stored in forests: “It’s a regulatory asset.” In the REDD Monitor. At least one insurance broker in London, ForestRE, formed in early 2008, will sell Lloyd’s policies insuring the permanence of forest projects. Should the number of credits generated from forestry projects increase, and especially if (when) they move into the regulated market, you can be sure a large percentage will carry financial insurance of some form.
Each standard provided Merger with 2009 price forecasts. The results are interesting (although certainly these estimates were provided prior to the global financial meltdown). The CCBS reported an expectation of “premium prices”; CFS, $14-27; Plan Vivo, $8-30 and VCS AFOLU $12-18 (per ton of carbon). These prices look wildly optimistic given the battering taken by the European carbon markets of late. The price of a certified emission reduction (CER) credit dropped below 10 euros per ton in early February 2009. Voluntary credits tend to cost significantly less, although VERs generally seem to be fairing well, perhaps due to the new Obama presidency. See Global downturn hits carbon credits.
My prediction is that forestry projects will increase in number and significance in the coming years and will be included in a post 2012 climate regime. Although ensuring carbon sequestration in trees posses a number of significant issues, the importance of saving forests, especially in tropical jungles, combined with the large number of projects and credits that can be generated, point to increased attention on forestry projects. The voluntary forestry standards being promulgated will provide “best practices” guidance for regulators in a future global cap and trade scheme.
David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on clean energy and environmental technologies. www.davidniebauer.com.