Developers Choice Between tCERs and lCERs

Temporary CERs are issued for five-year periods. As the forest grows, each five-year period will yield more CERs, except where there is a fluctuation in sequestered carbon due to harvest or other factors. No liability is

Notes:

LCERs expire at the end of the crediting period and must be replaced.

R = Project Registration

V1-V4 = Project Verification

E = Project end

+ = Quantity of lCERs

+ = Lifetime of lCERs

Notes:

LCERs expire at the end of the crediting period and must be replaced.

R = Project Registration

V1-V4 = Project Verification

E = Project end

+ = Quantity of lCERs

+ = Lifetime of lCERs

Source: After Locatelli and Pedroni (2006: Figure 3).

Figure 2.5b Long-term CERs (lCERs) in afforestation and reforestation incurred by the fluctuation as the next five-year period simply yields fewer CERs (Figure 2.5a).

In contrast, long-term CERs are valid for the whole length of the project, which is a maximum of 60 years. Only the increment since the last verification is credited and losses must be made good. In a 20-year project at year 5, the credits will have a validity of 15 years. At year 10 they will be valid for 10 years, and so on, until expiry (Figure 2.5b).

For an investor, the purchase of expiring credits (either tCERs or lCERs) is equivalent to postponing compliance with reduction obligations to a future commitment period. The choice facing the investor is to buy permanent credits or temporary forestry credits. Forestry credits will be preferred if their purchase price plus their future replacement price is less than for permanent credits. The replacement cost depends on the future

Notes:

Verifications must not coincide with peaks before harvesting. Harvesting reduces the quantity of CERs issued.

R = Project Registration

V1-V4 = Project Verification

E = Project end

+ = Quantity of tCERs

+ = Lifetime of tCERs

Notes:

Verifications must not coincide with peaks before harvesting. Harvesting reduces the quantity of CERs issued.

R = Project Registration

V1-V4 = Project Verification

E = Project end

+ = Quantity of tCERs

+ = Lifetime of tCERs

Source: Author's design.

Figure 2.5c Temporary CERs with harvesting in afforestation and reforestation price of credits and the discount rate applied to that future estimated cost by the purchaser.

The relative price of an expiring credit will increase, the longer the time period and the higher the discount rate, because these two factors together reduce the replacement cost. The cost of replacing a five-year expiring credit will only be marginally lower than the present cost of a permanent credit, and this difference will determine what investors are prepared to pay.

Assuming an investor's discount rate is 4 percent, and that relative prices do not change in the future, it is possible to compare the value or price of temporary credits of different lengths against the value or price of permanent credits, as in Figure 2.6. For example, if the price of permanent credits is $10 then the comparable price for temporary 5-year credits is $1.80 and for 25-year credits $6.30, at a 4 percent discount rate.

A question remains as to how the decision to invest in expiring credits will be affected if the investor expects replacement credits to rise or fall in

-0.1 J

Notes:

The seller is required to replace lCERs lost during harvesting.

R = Project Registration

V1-V4 = Project Verification

E = Project end

+ = Quantity of lCERs

+ = Lifetime of lCERs

Source: Author's design.

Figure 2.5d Long-term CERs with harvesting in afforestation and reforestation the future due to demand rising or falling relative to supply. This may be answered by reasoning that the replacement cost will rise at expiry if prices rise, making expiring credits less valuable. On the other hand, a fall in the price of replacement credits makes replacement cheaper and increases the relative value of temporary credits (Bird et al., 2004).

If in practice the increase in prices over time is in excess of the investor's discount rate then the future replacement price of expiring credits is greater than their purchase cost and a loss will have been made on the investment, as pointed out by Olschewski and Benitez (2005). Other risks involved in investing in temporary forestry credits are now discussed.

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