CLEAN DEVELOPMENT MECHANISM & LULUCF

29th March 2008IIM Lucknow

Dr. Mohit Gera, Senior FellowThe Energy and Resources Institute (TERI)

mohitg@teri.res.in

OUTLINE…

• Introduction • CDM project requirements• Case studies• Cost effectiveness of LULUCF projects• SWOT analysis of forestry projects

How forest sector is relevant to Climate Change?• As a source (deforestation and forest degradation)

• Impacted by the Climate Change • As a sink (Existing natural forests & TOF)

• Offer opportunities for C-sequestration (Afforestation, reforestation & existing plantations)

Carbon in Forests: Growth, Harvest, Use & Decay

Carbon Markets

• C-Sequestration– Mandatory – CDM– Institutional buying ( WB’s Biocarbon fund)– Voluntary – CCX

• Asia Carbon Market – Yet to take off…

• India Carbon Exchange – May be, we have in future …

• Compensated Reduction & Conservation– Relevant to post 2012 and being negotiated. Outcome

expected by Dec 2009

Kyoto Protocol (1997) - Commitments on Emissions Reduction• At the heart of the Protocol lie its legally binding

emission reduction targets for Annex I Parties. These amount to an aggregate reduction shared among all such Parties of at least 5.2 percent from 1990 levels by 2008-2012.

• KP provides for 3 flexible mechanismsJI (Joint Implementation)ET (Emission Trading)CDM (Clean Development Mechanism)

• KP is operational since 16-02-2005

The Clean Development Mechanism (CDM)CDM is designed to :(a) Help developing (non-Annex I) countries in

achieving sustainable development and (b) Assist developed countries (Annex I) to meet

emission reduction targets.The aim is that the entities from developed

countries would invest in ‘clean’ projects in developing countries and emissions reduced or removals increased through such investment would be credited to them.

CDM & Forest SectorCDM sink projects are limited to Afforestation and Reforestation (A&R)C-pools accepted – AGB, BGB, woody litter and soil carbon.C-pools being debated – Harvested Wood Products Under CDM GHG emission offsets are measured in tonnes of CO2 equivalent and are called Certified Emission Reductions (CERs)CERs issued under forestry projects are non-permanent, and are of two types:

lCER (Market price: 50-70% of normal CER).tCER (Market price: 15-20% of normal CER).

Definition of Forest

The definition submitted by India is: Minimum area – 0.05 haCrown cover – 30% and aboveMinimum height – 5 m

Requirements for Forestry CDM Project Development

Land eligibilityShould not be a forest as on 31-12-1989. Eligibility of land for CDM projects along with approval of the local stakeholders needs to be demonstrated

BaselineThe baseline is the scenario that reasonably represents the anthropogenic emissions by sources of GHGs that would occur in absence of proposed project activity. A clear and verifiable baseline scenario giving C- stock changes in ‘without project’situation needs to be presented using approved methodologies.

Requirements for CDM Project contd…Project boundary

The “project boundary” geographically delineates the project activity under the control of project participants. It may contain more than one discrete area of land. Must be clearly defined in order to estimate C benefits due to project activities and address leakage, if any.

Project activities (Afforestation/Reforestation)

Proposed A&R activities along with area to be dedicated should be described

Requirements for CDM Project contd…Leakage• Leakage is the increase in GHG emissions by sources which occurs outside the boundary of the project activity which is measurable and attributable to the project activity

• The project should also demonstrate how leakage issue will be addressed to ensure sustained carbon benefits.

Non permanenceNon-permanence to be addressed by project participants

by selecting one of the following approach:tCERSlCERs

Monotonically increasing C-stock

• No operational advantage in selling of tCERs or the lCERs• The number and the value will be different for the tCERsand the lCERs.

Fluctuating C-stock

• In case of period of loss of biomass, the seller may require either to replace reversed lCERs or retire (not sell) them.

• All tCERs can be sold regardless of potential loss of biomass.

Postponing compliance by using tCERs

Requirements for CDM Project contd…

Additionality• Sequestration additionality• Financial additionality

A/R CDM activity is additional, if it leads to increase in net C-sequestration to what would have happened in B-A-U scenario. To demonstrate additionality, prove that the project would not have gone ahead in the absence of CDM benefits.

Requirements for CDM Project contd…

MonitoringThe proposal should include a detailed measurement & monitoring plan for collection and archiving data

• Project boundary area• C - stock changes• Parameters & frequency of measurements • Leakage estimation• Assessment of Environmental Impacts

CDM Project Cycle

(Source: CATIE, 2007)

CASE STUDIESi. Rupnagar, Punjab

ii. Bazpur, Udham Singh Nagar (UA)iii. Betalghat, Nainital (UA)

One year old block plantation of Poplar

4 years old block plantation of Poplar

A sample of woody litter

Collection of a soil sample

Newly planted orchard of Litchi

4½ years old block plantation of Clonal Eucalyptus

15 years old Teak plantation

Recording of ecological observations in Mango Orchard

Location of Rupnagar district

C - sequestered & likely benefits under different plantation models for 2005-30

Plantation model

Sequestration

potential (t ha-1)

Annual incremental

carbon per ha (tC ha-1)

Likely C-benefits*(Rs. ha-1yr-1)

66 1491/-

834/-

951/-

37

42

Poplar block planting

2.54

Poplar bund planting

1.42

Eucalyptus bund planting

1.62

* @ Carbon price of $4/tCO2 and 1$ = Rs. 40/-

Location of the site

Bazpur, Udhamsingh nagarUttarakhand

BAZPUR

CARBON SEQUESTERED & LIKELY BENEFITS UNDER SELECTED PLANTATIONS (2005-30)

Plantation model

Mitigation potential(tC ha -1)

Annual incremental C

(tC ha-1)

Likely C-benefits

(Rs. ha-1yr-1)

Poplar 55 2.13 1251/-*Eucalyptus

43 1.64 963/-

Teak 74 2.85 1674/-Mango 38 1.46 857/-Litchi 38 1.46 857/-

* @ Carbon price of $4/ tCO2 and 1$ = Rs. 40/-

BETALGHAT

C - sequestered under different plantation models & likely benefits (2005-35)

Plantation model

Annual incremental carbon per ha

(tC ha-1)

Likely C-benefits*

(Rs. /ha/yr)KHAIR 1.5 881/-PINE 7.1 4169/-MIXED SPP. 5.9 3464/-MANGO 1.7 998/-KINOO 0.2 117/-

* @ Carbon price of $4/tCO2 and 1$ = Rs. 40/-

Expected demand of CERs from forest sector under CDM

• Major Buyers: Japan, Spain & Italy• Other Buyers: Finland, Portugal & Sweden• Total Demand: 101 million CERs for 2008-2012• Annual demand = 20 million CERs during 2008-12• Assuming 10% demand met by India, a market

potential of 2 million CERs per year is expected • With avg. sequestration potential of 2 tC/ha/yr

i.e. 2 x 3.67 = 7.34 lCERs/ha/year, Land which can be dedicated = 272,480 ha

Cost Effectiveness of Forestry Project

• Assumptions– Project area: 6812 ha– C sequestration potential: 2 tC/ha/year– CO2 removal: 2 X 3.67 = 7.34 X 6812 – Expected number of CERs/year: 50,000– CER price: $10/t CO2

Cost Effectiveness of Forestry Project(Project size - 50,000 CERs/year)No Cost International market Indian Scenario

(US$) (INR)

1 Project Development 60,000-180,000 20,00,000

2 Validation 15,000-25,000 600,000(US$ 15,000)

3 Registration Fee$0.10/CER (First 15,000 CERs)@0.20/CER (15,001 onwards)

8,500 x 5 1,700,000(US$ 8,500 x 5)

4 Monitoring Cost Depends on size(25,000 ha)

---

7,00,000@Rs. 100/ha/5 years

5 Verification Cost 15,000-25,000 per audit

600,000(US$ 15,000)

Cost Effectiveness of Forestry Project(Project size - 50,000 CERs/year)

No. Cost International market Indian Scenario

(US$) (INR)

6 Issuance Fee$0.10/CER (First 15,000 CERs)$0.20/CER (15,001 onwards)

---

7 Adaptation Levy(by EB)

2% of CER generated(Adaptation fund)

20,00,000

8 Taxes Host country may charge a share in CERs issued

Nil

9 Total 2,27,500* 76,00,000

*Monitoring cost for projects in international market not included

Expected CER revenues

Expected revenue = 50,000 CERs X 10 $ X 5 Yr (Ist verification)

= US$ 2,500,000 or Rs. 10,00,00,000 (10 Crore)

The revenue will accrue every 5 years on verification

Cost/Benefits Verification Stage (Rupees `000)

II III IV V

Monitoring Cost 700 700 700 700

Verification Cost 600 600 600 600

Adaptation Fee 2,000 2,000 2,000 2,000

Total Cost 3,300 3,300 3,300 3,300

Revenue 100,000 100,000 100,000 100,000

Net benefits expected (Including transaction costs)(Project size – 50,000 CERs / Year)

Verification Expected Benefit (Rs.)

Expected Benefit per ha* (Rs.)

I 92,400,000 2712/-

II 96,700,000 2839/-

III 96,700,000 2839/-

IV 96,700,000 2839/-

V 96,700,000 2839/-

* 50,000 CERs/7.34 = 6812 ha ( In 5 years – 6812x5 = 34,060 ha)

Obstacles to Forestry Projects

• Forest sinks were viewed as “loophole”policy

• Late start (Dec 2003)• Temporary credits• Long-term investment• Methodological & procedural issues • Higher transaction costs & risks• Leakage

Factors that may lead to a successful CDM project• Objectives & project description

– Strong combination of objectives:• promotion of sustainable development• biodiversity enhancement• erosion control & • poverty alleviation

• Tree species– Mainly native species. Fast growing exotics

may be included purely for the reasons of early income to the communities

Factors that may lead to a successful CDM project contd…

• Contractual agreement– Agreement between local communities & SFD

or there may be multi stakeholder agreement

• Methodological & procedural approaches– Additionality– Leakage– Monitoring

SWOT Analysis of Forestry Projects

Strengths• Projects have multiple

benefits for local people and their environment.

• Carbon finance can enhance sustainable forest management.

• Approved methodologies present broad scope of possible project types (e.g., RDF, ANR agro-forestry & silvipastoral)

Weaknesses• First generation CDM

methodologies and procedures are still complex and time-consuming.

• High upfront-financing and late returns

• Projects bear risks of non-approval under the CDM, and non-permanence risks.

SWOT Analysis of Forestry Projects contd…

Threats • Temporary credits face

competitive disadvantage and relatively low value.

• EU Emissions Trading Scheme excludes forestry credits

• Kyoto Protocol imposes 1%-cap on forestry credits.

• Future CDM regime (post 2012) still remains uncertain.

Opportunities• Demand for carbon

credits by governments is increasing.

• Insurance schemes can address risks

• Political commitment to mitigate climate change and increasing public awareness of forests’crucial roles in it.

Multi-Stakeholder Partnership (MSP) for LULUCF projects• Govt. to encourage private investment and

strengthen community participation in CDM forestry projects.

• Legally enforceable MoU between parties• Parties to MSP

– Investor: the investing entity may be a private company, Firm, User Group, Trust, Society or any such organization.

– Local Community : Forest dwellers or local communities from adjoining areas represented by local institutions like VFC, FDA or Gram Sabha.

– Land Owning Agency : government, institutions, public sector enterprises. – Forest Department : Regulator, facilitator, providing technical know-how.

Discussion…