How the Issue of Permanence is Dealt With in Different Schemes

The Kyoto Protocol deals with the issue of permanence of A/R projects by assuming that all carbon credits generated by forestry are temporary. In the Clean Development Mechanism (CDM), CERs are either long-term (lCER) or short-term (tCER). Both types must be replaced by Kyoto units at expiry (see note 2). While this rule guarantees that forestry CERs are of similar value to other Kyoto units, it also adds complexity to the process of registering a CDM project. (Chapter 2 provides a more detailed account of how the issue of the permanence of carbon sequestration is tackled by the Kyoto Protocol.)

In the voluntary markets a different approach is followed that relies on buffer stocks and other methods to shield against the risk that the forest on which offsets are based will be destroyed. In Greenhouse Friendly (GF), the voluntary scheme of the Australian government, forestry projects are required to have a buffer of 20 to 30 percent in excess of the carbon sequestered and sold from the project. The carbon in GF forest sinks must be verified every five years, and a requirement for annual reporting means that annual losses in sequestered carbon that come to light are debited to the project. Credits of GF projects are counted in the land-use, land use change and forestry (LULUCF) section of Australia's carbon accounts.

The CCX has a similar system, except that the buffer or forestry reserve pool, equal to 20 percent of all forestry offsets generated, is held by the exchange itself. The risk of reductions in carbon is further reduced by the policy of issue of CCX offsets retrospectively on the basis of an annual increase in carbon verified to be actually sequestered. Forestry offsets are thus fully fungible with other types of CCX offsets.

In contrast to practice in regulated markets, however, voluntary deals are often negotiated on a case-by-case basis requiring no such certification or verification, nor registration with a central authority that maintains a greenhouse gas inventory. The VCS has been developed to improve the transparency of forest offsets by introducing rules governing the measurement and additionality of carbon sequestered and, in particular, rules governing buffer stocks with the aim of reducing risks associated with the impermanence of forests.The VCS automatically approves projects that are registered under the CDM and JI. It also uses a single pooled buffer account to reduce the risk of impermanence, but the way in which the buffer offers insurance is different from that in other schemes. In the VCS, future verification of carbon sequestered by an A/R project is optional. However, the proportion of carbon benefits held in the buffer is lower, and the proportion that can be traded as Verifiable Carbon Units (VCUs) higher, if verification is carried out regularly.

In the VCS the initial size of the buffer for each project is determined by an assessment of risk factors including not only natural disasters but financial and political factors also. If the risk assessment remains the same or improves from one verification period to the next, then 15 percent of the project's buffer reserve is released from the pool and made available for trading over the five years until the next risk assessment. If a project's risk rating increases from one five-year verification to the next, then there is no reduction in the buffer reserve.

If a project fails to submit a verification report within five years of the last, then 50 percent of its buffer credits are automatically cancelled. After another five years all its buffer credits are cancelled. It should be noted that although carbon may be lost to the system and the buffer stock is cancelled, VCUs already issued are considered permanent and do not need to be paid back.

In the future, individual VCS projects could have the option of managing non-permanence risk through insurance products as they become available. In the GF and CXX schemes the risk of impermanence is reduced by undertakings that forest sinks will be maintained for future periods. The VCS requires no such undertaking because any impermanence is reflected in the loss of buffer stock (VCS, 2007).

Unlike the Kyoto Protocol, the CXX and the VCS both cater for the generation of offset credits by reducing deforestation (RED). The VCS employs the same buffer stock method in countering the risk of losses from RED projects as it does for A/R projects. The higher the risk of deforestation rates above baseline levels and the shorter the project expected lifetime, the higher the buffer is set. Existing RED methodologies are important given RED's vast potential to avoid emissions, and the current consideration by the UNFCCC of the inclusion of RED protocols in post-Kyoto arrangements.

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