1 Sinks in the CDM: Assessment of Carbon Accounting Options XVIII Meeting of the Subsidiary Body for Scientific and Technological Advice Bonn (Germany) 4-13 June, 2003 Lucio Pedroni* *CATIE, Tropical Agricultural Research and Higher Education Center Side event organized by the Swiss Delegation 6 June 2003, 6:00-8:00 PM

2 1.Issues at stake 2.Accounting methods 3.Comparison of accounting methods Scenario analysis of hypothetical project Case study 4.Conclusions and recommendations Content

3 Carbon accounting = paradigm to address non-permanence of carbon in forests (  energy projects). Carbon accounting will impact on project viability and scale. Project scale is relevant: Equity & participation Impacts Leakage Investment requirements AR-CDM project viability is relevant. Issues at stake

4 Accounting methods Stock-change: Credits = Difference between stock at time t and stock at time t+i (measured in CO 2 equivalents). Ton-year: Credits = annual stock divided by the equivalence time (Te) [or multiplied by Ef = 1/Te]. Equivalence-adjusted average storage : Credits = average stock stored during the project lifetime adjusted for Te. Temporary crediting: Credits with finite lifetime.

5 Equivalence time (Te) “Length of the period of time that 1 t CO 2 must be stored as carbon in the biomass or soil for it to prevent the cumulative radiative forcing effect of a similar quantity of CO 2 during its residence time in the atmosphere” (IPCC, 2000) Length of Te? for ever? 100 years?* 55 years? * 100 years is the reference used to calculate the global warming potentials of non-CO 2 GHGs.

6 Ton-year accounting Credits generated at a year t: CERs year t = (CO 2 project – CO 2 base line ) t / T e Credits generated during a period of time i: t=x+i CERs período i =  (CO 2 project – CO 2 base line ) t / T e t=x

years tC/ha Ton-year credits Te = 55 Pinus patula plantation managed in 25 year harvesting cycles Ton-year credits Te = 100

8 Ton-year accounting... Advantages: Safe for the climate: there are no risks at the time of credit issuance. Credits do not expire. Disadvantages: Projects earn credits very slowly. An agreement on the length of Te is required.

9 Equivalence-adjusted average carbon storage accounting (ACS) t=n  (CO 2 project – CO 2 baseline ) t t=1 T e Te -adjusted average carbon storage =

years tC/ha ACS credits, n = 100, Te = 100 ACS credits, n = 50, Te = 100 Running average storage Average C storage n = 100 Average C storage n = 50 Pinus patula plantation managed in 25 year harvesting cycles

years tC/ha Average C storage n = 100 Average C storage n = 50 ACS-crediting requires special provisions (insurance, risk discount, buffer, banked TCERs or a combination) to cover the risk of carbon re-emission during the “uncertainty time” (time between verification and project end) “Uncertainty time”

12 ACS-accounting... Advantages: Projects earn more credits earlier. Credits do not expire. No need to create a new currency. Disadvantages: Risks for the climate (“uncertainty time”, not really ex-post ). Requires provisions to address the risk of carbon re- emission during the “uncertainty time”. An agreement on the length of Te is required. Requires monitoring and periodical verification during the entire planned project duration.

13 Temporary crediting Credits with finite life-time. Appealing (non-permanence is fully recognized). Critical questions: Length of life-time? Quantification? Renewal? Expiring or not expiring? Market viability?

14 How to quantify TCER x ? t-xt b a TCERx = a+(b-a)/2 b a t-xt TCERx = b t-xt b a TCERx = a

15 b a t-xt TCERx = b (TCER-1)(TCER-2) Uncertainty time (= x/2) How to quantify TCER x ? t-xt b a TCERx = a+(b-a)/2 t-xt b a TCERx = a

16 (T)CERs are two-dimensional: f (tCO 2, time) TCERs are less valuable and more expensive to produce than CERs 1 CER = 1 t CO 2 “forever” 1 tCO 2 Energy: 1 verification time 1 TCER 1 tCO 2 LULUCF: Periodical verifications for the same ton of CO 2 time

17 Crediting period Are new TCERs and renewed TCERs something different? time tCO 2 New TCER Renewed TCER Verif. & Certif.

18 If this would be an Energy project... tCO 2 CERs Verif. & Certif. Crediting period time

19 Crediting period Are new TCERs and renewed TCERs something different? time tCO 2 New TCER Renewed TCER Verif. & Certif. ?

20 Price of TCERs: Obviously less than permanent CERs. An economic approach to estimate the price of TCERs would be: $CER p2 $TCER = $CER p1 - (1+i) LT $TCER= Price of TCER $CER p1 = Today price of permanent CER $CER p2 = Price of permanet CERs in LT years i= Discount rate LT= Life time of TCERs Temporary crediting...

21 Advantages: More credits in less time. Buyer liability. Moderate or zero risk for the climate (depending on the lenght of “uncertainty time”). Disadvantages: Economic risk of TCERs, particularly their price (projects could be unviable). Need to create a new currency. More complex international book-keeping. Temporary crediting...

22 Comparison of accounting methods Model: What is the minimum project area at which: Revenues from (T)CERs = Transaction costs? Case study: Viability of two potential projects in Nicaragua and Honduras

23 Minimum project area = function of: Biophysical and management features: – Growth, thinning-harvesting regime,... CDM modalities: – Accounting methods, crediting period,... Carbon-market and its rules: – Price of CERs, transaction costs (design, validation, monitoring, verification, share of proceeds), economic discount rate,... Logic of the Model COP-9

24 The Model Present value of benefits Net benefits minus Present value of transaction costs Input: Parameters Variable area Output: Minimum project area

25 4 accounting methods (ton-yr, ACS, TCER-1, TCER-2) CER price: 3, 6, 9 or 12 US$/tCO 2 Annual variation rate of CER price: -3%, 0%, +3% yr -1 Time interval between verifications: 5 or 10 years Crediting period: 10, 30 or 50 years Risk discount factor: 0%, 1% or 2% yr -1 Cost Factor F : 1, 2, 3, 4 or 5 – Design and validation: F * US$ – Monitoring costs: F * US$ 2000 / monitoring event F * US$ 0,1 / ha / monitoring event – Verification costs: F * US$ / verification event Economic discount rate: 3%, 6% or 9% yr -1 Totaling 7,776 simulations. Input parameters

26 Baseline = 0 Leakage = 0 Project duration: 75 years Harvesting cycle: 25 years Equivalence time: 100 years National and international share of proceeds: 7% Risk discount = f (duration of “uncertainty time”, annual risk discount factor) Price of TCERs: $TCER(t) = $CER(t) - $CER(t+5)/(1+r) 5 Model suppositions

27 Minimum project area, all 7776 scenarios % of scenarios allowing the CDM to be profitable Minimum Project Area (ha)

28 Method Median value % of scenarios allowing projects smaller than 500 ha to be profitable with the CDM % of scenarios allowing projects smaller than 1000 ha to be profitable with the CDM Ton-year11,000 ha0%2.8% ACS3,000 ha5.1%17.7% TCER12,300 ha13.7%30.2% TCER23,250 ha9.7%23.1% Frequency distribution according to the carbon accounting method

29 Net present benefits of carbon selling (constant CER price) Net present benefits of carbon selling (US$/ha) Area (ha)

30 Net present benefits of carbon selling (increasing CER price) Net present benefits of carbon selling (US$/ha) Area (ha)

31 The “best method” in all simulations (“best method” = the one that allows the smallest projects to benefit from the CDM ) % of scenarios in which the method allows benefits to the smallest project

32 “Best method” with constant or increasing CER prices % of scenarios Only with increasing CER price Only with constant CER price

33 “Best method” with high or low risk discounting % of scenarios Only with high risk discounting Only with low risk discounting

34 Median value of minimum project area Extreme condition Ton-yearACSTCER1TCER2 All methods The crediting period is only 10 years 275,00014,2003, 00050,000 The CER price is only 3 US$/tCO2 30,0006,7504,5006,5508,900 The transaction cost factor is the highest 18,5505,6503,7005,0008,300 Risk discounting is the highest (2% annual) 11,0005,1502,4003,2505,300 The CER price is foreseen to increase 3% annually 11,0003,00014,55030,0007,300 Without any condition (all simulations) 11,0003,0002,3003,2504,200 Median value of minimum project area (ha) under “extreme conditions”

35 US$ / tCO 2 minmaxminmax ACS Ton-yr Reforestation 1800 ha, 15 m 3 /ha/yr (Nicaragua) Regeneration 51,063 ha, 2.4 m 3 /ha/yr (Honduras) + = Project PNV > 0- = Project PNV < 0 Case study TCER (original Colombian proposal)

36 Conclusions Ton-year:Excludes small projects from the CDM. ACS:Is “better” if risks are low and prices of permanent CERs increase. Can be environmentally integer if adequate provisions are taken to address the risk of C re-emission during “uncertainty time”. TCERs:Are the “best” method only if the price of CERs does not increase in the future. Critical issues have still to be clarified.

37 Economic risk of TCERs is high, particularly if: Price of CERs increases (likely!) Crediting periods are short No credit renewal after crediting period TCERs expire once certified TCERs are quantified as the stock existing 5 years before the certification

38 Recomendations TCERs = TCER-1 or TCER-2 (see slide 15), or “average storage between two verifications, multiplied by the time elapsed between the verifications and divided by credit lifetime”. Long crediting periods Native species Long-term C storage Smaller-scale projects New and renewed TCERs New TCERs only during crediting period. Renewed TCERs: as long as stocks exist and can be verified (see slide 19).

39 Banking = Offset of future emissions = good for climate Makes AR-CDM more attractive 1% CDM-cap prevents from excessive banking Not expiring TCERs could be used as insurance or buffer for other LULUCF-CDM projects Two options: 1.TCERs without expiration date = Banking by developing countries (YES) 2.TCERs can by consumed in whatever commitment period = Banking by Annex-1 countries (NO)

40 Flexible accounting regime Minimizes economic risks of TCERs Promotes LULUCF project portfolio allowing learning by doing Requirements: Each approved method shall be equivalent in terms of “environmental integrity” Only approved methods (approval by EB or COP-MOP) Start with: TCERs Equivalence-adjusted average C storage

41 TCERs: Not expiring TCERs No banking by Annex 1 Long crediting periods Possibility to renew credits beyond the crediting period Equivalence-adjusted average C-storage: Risk discounting based on credible risk assessment Carbon discounting on projected flows Insurance (or buffer or TCERs or combination) until end of “uncertainty time” 100 year equivalence time Ton-year to determine amounts to be covered by insurance in case of C re-emission.

42 Thank you CATIE thanks the support provided by the Swiss Government for the preparation and organization of this side-event Tropical Agricultural Research and Higher Education Center