Non-Permanence Modalities for LULUCF Projects in the CDM Catherine Leining and Ned Helme COP-8 Side Event 29 October 2002

2 Overview l Background on the Center for Clean Air Policy l The need for non-permanence modalities l An analysis of two proposed modalities: »Issuance of temporary credits »Issuance of insured credits l Questions for discussion

3 The Center for Clean Air Policy l Non-profit environmental think tank »Headquarters in Washington, DC »Office in Prague and field staff in Warsaw and Kiev l Focus on: »Linkages between climate, air quality, energy and transportation »Market-based mechanisms for environmental protection »Facilitation of dialogue among diverse stakeholders

4 The Center for Clean Air Policy, Cont. l Project areas include: »State and federal climate policy development in the US »Climate change capacity building in developing countries (Chile, Mexico, Brazil, Caribbean, China) and Central/Eastern Europe (Czech Republic, Slovakia, Poland, Ukraine, Russian Federation) »International Dialogue on the Clean Development Mechanism »Design of future commitments

5 Overview of the CDM Dialogue l Opportunity for informal discussions on CDM design & implementation »7 meetings since May 2000 l Negotiators from ~30 Annex I and non-Annex I countries l Funded by Annex I participants: »UK, Netherlands, Canada, Norway, Denmark, Germany, Sweden, European Commission, Australia, US

6 Non-Permanence l Issue of non-permanence is unique to LULUCF projects. »Loss or reversal of project benefits can happen during the project and/or after the project has ended. »Failure to address non-permanence would undermine Protocol integrity; special modalities are needed. »Guiding principle of Draft Decision-/CMP.1 (LULUCF) in Decision 11/CP.7: –That reversal of any removal due to LULUCF activities be accounted for at the appropriate point in time.

7 Party Submissions: CDM LULUCF Non-Permanence l 1. Risk mitigation measures should be incorporated into project design »A. Project design to prevent loss »B. Project design to distribute/dilute risk l 2. When a projects GHG benefits are lost/reversed, modalities are needed to keep the atmosphere whole.

8 Proposed Modalities l Issuance of temporary CERs »First proposed by Colombia in 2000 »Alternate approach proposed by EU in 2002 (FCCC/SBSTA/2002/Misc. 22) l Issuance of insured CERs »Proposed but not elaborated by Canada in 2002 (FCCC/SBSTA/2002/Misc. 22)

9 EU Proposal for TCERs l After a carbon stock increase of 1 t CO 2 is verified, a TCER is issued. The TCER expires five years after issuance and is only valid for use in the CP when issued. l A valid TCER can be retired by an Annex I Party to meet its commitment. l During the next CP, when that retired TCER expires, the Party that retired it must cancel one unit to compensate: AAU, RMU, ERU or CER (or possibly another TCER).

10 EU Proposal for TCERs, Cont. l After TCERs have expired (forcing full replacement through cancellation of other units), the project developer can re-verify the standing carbon stocks against the baseline and issue new TCERs for all the carbon stocks that have accumulated since the start of the project. These TCERs will be valid for the next 5 years.

11 Evaluation of the EU Proposal »Creditable carbon for 1 st CP accumulates from ; there is no incentive to issue TCERs before 2008 (unless domestic incentive for annual surrender) »Liability for replacement is assigned to the Annex I Party that retires the credit »Maximum of 5 year disconnect between stock loss & credit validity »Potential for re-issuance creates clear incentive for longer projects, and could be used to address future changes in project eligibility or accounting rules »Re-issuance takes the place of banking

12 Canadian Proposal for Insured Credits l Option #1: Project participants could purchase insurance for replacement of the physical project or CERs lost. l Option #2: Project participants could self-insure by maintaining a contingency reserve of CERs. l Further elaboration is needed to clarify how this would work.

13 Reflections on Insurance l We are looking to insure against a new kind of risk: »Once CERs are issued and retired, if the carbon stocks are lost and the CERs are not replaced, then the atmosphere will bear an emission burden.

14 Reflections on Insurance, Cont. l We would need rules to protect integrity of the insurance approach: »Insurance would have to be maintained until the credited carbon stocks were lost, monitoring stopped, or the insurance premium was not paid, whichever happened first. »The insurance would have to provide for full replacement of all retired and/or sold CERs within an acceptable time frame after any of those events occurred. How would this work in the registry system?

15 Reflections on Insurance, Cont. l Integrity rules, cont.: »Acceptable frequency of monitoring would need to be specified (e.g., monitoring of stocks at least every [5] years). »If the insurance company defaulted on its obligation, ultimate liability for replacement would need to pass to the Annex I Party that retired the credit. »Rules would be needed on banking and treatment of future changes in LULUCF eligibility/ accounting rules.

16 Key Questions on Insurance l Would the insurance industry be willing to play? l Could a requirement to hold insurance serve as a barrier to projects in high-risk areas and/or small-scale projects?

17 Comparison of Approaches l With particular integrity rules, the insurance approach could become quite similar to the use of temporary credits (as proposed by EU). »Under both approaches, full replacement of all retired credits occurs after stocks are lost. »Depending on the monitoring rules, the lag period between loss of stocks and expiration of credits could be similar under both approaches.

18 Comparison of Approaches, Cont. l Main differences: »The insurance approach proposed by Canada assigns replacement liability to the project participant, who then passes the replacement obligation to the insurance company and the cost to the buyer. If the insurance company defaults, ultimate liability for replacement passes to the Annex I Party. »The EU approach assigns liability for replacement to the Annex I Party that retires the TCER; this reduces the willingness to pay of the Annex I Party.

19 Comparison of Approaches, Cont. l Main differences, cont.: »The EU approach includes more detailed elaboration of the registry accounting procedure for replacement. »The EU approach mandates expiration/ replacement and re-issuance (after re-verification) at 5-year intervals. Under the Canadian approach, replacement happens only when stocks are lost (or monitoring/insurance stops). l With the right rules, it appears possible that both approaches could co-exist in the system. l We need to investigate the relative costs.

20 Core Elements of Non-Permanence Modalities l Is full, partial, or no replacement required when stocks are lost (or monitoring stops)? l Must stocks still be in place for credit to stay valid? Can credit remain valid for some period of time after stocks are lost? l Should a minimum/maximum project lifetime be required? l Length of crediting period? Renewable? How many times? With baseline re-validation? l Who is liable for replacement after loss? l Re-issuance allowed? Banking allowed?

21 For more information…. Please contact: Catherine Leining or Ned Helme Center for Clean Air Policy 750 First St. NE #940 Washington, DC USA Tel: Fax: or

22 Case Study: EU Proposal l Scenario 1 »In 12/2003, 1 t CO2 removed »In 12/2008, verified; 1 TCER issued, valid for 5 years »In 12/2012, TCER is retired »In 12/2013, TCER expires and Party pays back »In 12/2013, new TCER can be issued for same tonne if no loss/reversal l Scenario 2 »In 12/2003, 1 t CO2 removed »In 12/2008, verified; 1 TCER issued, valid for 5 years »In 12/2010, loss of stocks »In 12/2012, TCER is retired »In 12/2013, TCER expires and Party pays back »In 12/2013, NO new TCER can be issued for that tonne

23 Case Study, Cont. l Scenario 3 »In 12/2007, 1 t CO2 removed »In 12/2008, verified; 1 TCER issued, valid for 5 years »In 12/2012, TCER is retired »In 12/2013, TCER expires and Party pays back »In 12/2013, new TCER can be issued for same tonne if no loss/reversal l Scenario 4 »In 12/2009, 1 t CO2 removed & verified; 1 TCER issued, valid for 5 years »In 12/2012, TCER is retired »In 12/2014, TCER expires and Party pays back »In 12/2014, new TCER can be issued for same tonne if no loss/reversal