Cacho (2008) 1 THE ROLE OF TRANSACTION COSTS IN LUCF PROJECTS Research funded by ACIAR Oscar Cacho School of Business, Economics and Public Policy University of New England AUSTRALIA

Cacho (2008) 2 Outline Background The CDM project cycle Carbon accounting-issues Implications for REDD Overview of transaction costs Strategies to reduce transaction costs

Cacho (2008) 3 Background Clean Development Mechanism (CDM) allows Kyoto signatories to reduce greenhouse gas emissions in developing countries (Article 12). CDM projects can operate in the energy sector (reduced emissions) or in the land-use change and forestry (LUCF) sector (sinks). Afforestation and reforestation projects are eligible within the LUCF sector. The medium of exchange is the Certified Emission Reduction (CER)

Cacho (2008) 4 Abatement Costs opportunity cost of land-use change ( S P ). Transaction Costs cost of participating in the CER market ( C T ). SASA CTCT QAQA PAPA Q (CERs) P ($) SPSP D QPQP P

Cacho (2008) 5 project developer host government (DNA) project developer CDM executive board operational entity (DOE) operational entity CDM executive board CDM project cycle PDD Development approval by host country validation registration monitoring verification + certification CER issuance t ex ante (pre-implementation) ex post (implementation)

Cacho (2008) 6 Carbon-Accounting Issues Additionality Permanence Leakage

Cacho (2008) 7 Carbon-Accounting Issues Additionality Permanence Leakage Carbon sequestered by the project must be additional to “business as usual”

Cacho (2008) 8 Carbon-Accounting Issues Additionality Permanence Leakage Carbon sequestration can be reversed through fire and deforestation

Cacho (2008) 9 Carbon-Accounting Issues Additionality Permanence Leakage Emission reductions achieved within a project cause increased emissions outside the project boundary

Cacho (2008) 10 Full Carbon Accounting (FCA) An FCA system measures all changes, positive and negative, in all carbon stocks from all lands continuously… lands are monitored permanently over contiguous commitment periods… “ultimately the atmosphere does not differentiate (and neither should climate policy) between carbon dioxide molecules produced by fossil fuel combustion and such molecules produced through forest destruction” Bonnie et al (2002), p. 1871

Cacho (2008) 11 Implications for REDD REDD will only ever work under a Full Carbon Accounting (FCA) scheme FCA avoids the problems of permanence and leakage The link between FCA and forest dwellers still needs to be established and rewards must be distributed This link will carry transaction costs

Cacho (2008) 12 Search and negotiation Approval Project management Monitoring Enforcement and insurance Transaction costs

Cacho (2008) 13 Search and negotiation Approval Project management Monitoring Enforcement and insurance Transaction costs find site, establish contact, organize information sessions, draft contracts, provide training establish baseline for region estimate potential C stocks and flows of project produce PDD

Cacho (2008) 14 Search and negotiation Approval Project management Monitoring Enforcement and insurance Transaction costs approval by host country (DNA) validate the project proposal (DOE) Submit to CER Board

Cacho (2008) 15 Search and negotiation Approval Project management Monitoring Enforcement and insurance Transaction costs purchase hardware and software, establish office establish permanent sampling plots maintain database and administer payments coordinate field crews, pay salaries distribute payments to landholders interest costs

Cacho (2008) 16 Search and negotiation Approval Project management Monitoring Enforcement and insurance Transaction costs sample C stocks verification and certification by DOE check for leakage

Cacho (2008) 17 Search and negotiation Approval Project management Monitoring Enforcement and insurance Transaction costs maintain buffer of C purchase liability insurance, settle disputes protect plot from poachers and fire

Cacho (2008) 18 Generate and disseminate information on carbon stocks, baselines and potential carbon sequestration. Train landholders to measure carbon. Select cohesive communities and encourage community self-regulation to meet project commitments. Bundle projects and payment schemes. Grant land tenure to landhoders who restore degraded land. Reducing transaction costs

Cacho (2008) 19 search and negotiation approvalproject management monitoringenforcement and insurance Generate & disseminate information Bundle projects Teach landholders to measure C Encourage community self- regulation Promote secure land tenure Reducing transaction costs

Cacho (2008) 20 “It is unlikely that developing countries will be willing to take emission budgets that require FCA unless they gain experience in successfully curbing tropical deforestation while also providing for the needs of their citizens” Bonnie et al (2002), p. 1872