The policy analysis now extends to the Clean Development Mechanism (CDM) of the Kyoto Protocol which allows Annex B countries to mount forestry projects in developing countries and to claim the reductions in greenhouse emissions achieved against their national carbon accounts. Developing countries are expected to benefit from the investment and the sustainable development aspects of such projects. This section analyzes and discusses the effectiveness of the CDM in terms of providing viable carbon sinks and what role it might have in the future. The conclusions rest on detailed analysis conducted in Chapter 2.
Forestry under the CDM is bound by strict rules designed to overcome the temporary nature of forests and the risk that forestry offset credits would overwhelm markets and reduce the incentive to reduce emissions. In the first commitment period the role of forestry has been limited to afforestation and deforestation (A/R), reduced deforestation being excluded. Moreover, the role that A/R can play is constrained: the Marrakesh Accords of COP 7 placed limitations on the amount of credits claimable
Table 7.2 Certified Emission Reductions (CERs) under the Clean
Development Mechanism (CDM) to 2012, by type of offset, millions, as at November 2008
Offset Certified Emissions
CH4 reduction & cement & coal mine/bed 544.2
Energy efficiency 349.8
Fuel switch 204.3
HFC & N2O reduction 757.1
Afforestation & reforestation 11.0
Accumulated total 2,838.1
Source: UNEP Risoe (2008).
to Annex B Parties under the CDM to 1 percent times 5 of their 1990 emissions (or 5 percent of their 1990 emissions for the period 2008-12) (UNFCCC, 2006: 7). And under the CDM, A/R projects are restricted to those that would not have occurred without CDM financing and to areas that were not forested prior to 1990.
The Certified Emissions Reductions (CERs) achieved under the CDM are deemed to be temporary. CERs cannot be carried over to the next commitment period but must be replaced at the end of five years. Long-term CERs must be replaced at the end of 20 to 60 years by non-forestry CERs, or when the certification report indicates a reversal of net removals of CO2e.
The contribution of forestry under the CDM to the creation of carbon sinks can be assessed by examining the CDM project pipeline. Only 34 A/R projects have reached the stage where they are being assessed and are in the CDM pipeline at the time of writing, a number which represents less than 1 percent of the total number of projects of different kinds that are coming forward. Moreover no CERs (each equivalent to one tonne of CO2e) had yet been issued to A/R projects, although the total CERs issued to all projects was over 2 billion (UNEP Risoe, 2008). Table 7.2 shows that the A/R projects make up only 0.4 percent of the 2.8 billion CERs expected to be generated before the end of the first commitment period in 2012.
An important explanatory factor is the late start of forestry projects under the CDM. While other CDM projects could accumulate credits from year 2000, the basic rules governing forestry were not resolved until the end of 2003, which makes the implementation of projects before the end of 2005 unlikely, given the long lead times for project development and registration. By the end of the first reporting period in 2012, that is six years after planting in the beginning of 2006, only a fraction of the potential removal of CO2e by A/R can be achieved, as shown in Figure 2.3. 2
Neeff et al. (2007: 3) reported that there were some 50 to 70 late-starting projects under development. However, it remains to be seen how many are capable of reaching the point where they are issued with CERs by 2012, given that the monitoring process in A/R projects is highly complex and may delay or prevent the issue of CERs, and that there is limited time to correct any project design deficiencies. Further, Neeff at al. (2007) suggested that the profitability of projects was dependent on CER prices well in excess of the current market price of $3.00. Even if all these projects are successful the contribution of forestry in the CDM, compared with other offsets, would still be relatively minor.
There are several factors that contribute to the minor contribution of forestry. The sheer complexity of the pipeline was illustrated in Chapter 2, where Figure 2.4 shows that there are 13 major steps in achieving the issuance of CERs. Complying with the technical criteria necessitates expensive advice from international consultants, a major cost component in administration costs of $100 000 to $250 000, which is in addition to the costs of physically mounting a project. The project development costs and some of the administrative costs need to be met up to two years before there is a prospect of sale of CERs. Only a fraction of these high establishment and administrative costs could be covered by the sale of CERs generated before 2010 by A/R projects established at the beginning of 2006. Moreover, as Chapter 2 points out, a deterrent to the establishment of forestry projects in the beginning of 2006 and since is that credits are not bankable. There is no guarantee that credits generated post-2012, which by the nature of the growth of forests is the bulk of credits, will be saleable. Thus their very intrinsic value and tradability is brought into question.
Adding to the risk of investment in A/R is the discount that applies to the value of forestry CERs, because they are temporary and must be replaced. Their value to investors appears to be principally as a bridge to be followed by investment in permanent offsets. Chapter 2 points out that if the increase in replacement cost over time is in excess of the discount rate, then the future replacement price of expiring credits is greater than their repurchase costs and a loss will be made on the investment. The long delays in the fulfillment of forestry projects exacerbate the market price risk.
It is not surprising, given these impediments, that CDM forestry has been all but ignored by project developers and that most projects have been funded by the World Bank, rather than the private sector.
A post-Kyoto protocol could remove some of the impediments such as bankability, and speed up the approval process. The ability to earn credits in a future commitment period would make A/R more attractive to investors. However, it is doubtful if the general rules that apply to A/R can be relaxed without compromising the veracity of the CERs it generates. It was noted in Chapter 3 that even the voluntary forestry offset market, where there has been an absence of complexity, was moving towards the adoption of similar rules to the CDM in its validation of forestry projects. Projects that have complied with CDM rules are automatically accepted under the Voluntary Carbon Standard.
Little has been said about the role of forestry under the other flexibility instrument of the Kyoto Protocol, which is Joint Implementation (JI). At the end of 2008 there were no afforestation or reforestation projects in the pipeline (UNEP Risoe, 2008). A possible reason for this lack of interest on the part of Annex I countries in investing in forestry in other Annex I countries is that it is not cost-effective.
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