Structure And Trends In Markets For Forestry Offsets

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The inclusion of forestry as a legitimate means of offsetting emissions is by no means uniform in regulatory schemes, as illustrated in Table 3.2. The import of emission reduction units (ERUs) and certified emission reduction (CERs), which can include forestry projects, is allowed into the EU ETS, but member countries cannot allow industries subject to caps on emissions to initiate forestry offset projects within their borders.

The emission reductions generated by Kyoto projects, but not yet registered and issued with ERUs or CERs, can be traded on the voluntary

BOX 3.2 DOUBLE-COUNTING TO SPOIL THE VATICAN'S BID TO BE THE WORLD'S FIRST CARBON-NEUTRAL STATE

According to a New York Times article (Rosenthal, 2007), a 37 hectare tract of land at Tiszakeski, on the Danube River in Hungary, will be planted with trees to offset the Vatican's 2007 CO2 emissions. The Vatican has already cut emissions by installing solar panels but wants to offset its emissions from cars, heating and lighting.

The land in question is degraded and weed-infested, and carries a low level of carbon that will be increased 10 times by the planting of native saplings. The local company, Klimafa, backed by San Francisco parent Planktos International, will donate the trees and contract the labor.

The Vatican is claiming that it has offset its emissions to the extent of the carbon to be sequestered in the future forest. The article notes, however, that the funds for project implementation will be raised by the sale of the carbon credits on the market. If this is so, then the buyer will rightfully claim the credits that the Vatican has already claimed.

This case illustrates the risk of double-counting of offset projects in the voluntary market. This risk is reduced by recording the transaction in one of the registries being set up.

market. But voluntary forestry offsets cannot be traded in the regulatory markets or in the CCX. To ensure that genuine abatement is achieved by industries or businesses that are subject to emission caps, regulatory schemes and the CCX place limits on the proportion of GHG emissions that can be offset.

Any business that can mount a forestry project is a potential forestry offset developer. Voluntary offsets projects tend to be relatively small, averaging only 5000t CO2e, compared with the average under the Kyoto Protocol of 50 000t. We saw in the previous chapter how the transaction costs for Kyoto projects were high, absorbing some 20 to 40 percent of the value of the offset. Voluntary offsets have the advantages of much lower transaction costs and greater flexibility in design.

The voluntary market for offsets is diverse as well as dynamic, and afforestation/reforestation (A/R) offsets play an important part (see Figure

Table 3.2 Forestry offsets in regulatory and voluntary greenhouse gas reduction schemes

Market

Scheme

Allowances tradable

Import of offsets allowed

Forestry offsets allowed

Limit to offsets

Regulatory

NSWa

yes

nob

yes

yes

EU ETSc

yes

yesd

noe

yes

Kyoto Protocol

yes

no

yes

yes

Voluntary1

CCXg

yes

no

yes

yes

Greenhouse

n.a.1

no

yes

no

Challengeh

Non-CCXj

n.a.

yes

yes

a NSW = New South Wales Emission Reduction Scheme. b Caters for New South Wales only. c EU ETS = European Union Emission Trading Scheme.

d Member states may allow their regulated industries to use emissions reduction units (ERUs), generated by Joint Implementation (JI) projects, and certified emissions reductions (CERs) generated by the Clean Development Mechanism (CDM) projects in third countries, in meeting their emission targets. e Land use, land-use change and foresty (LULUCF) projects in EU ETS member states are disallowed.

f In contrast to emission allowances generated under regulatory schemes that are homogeneous and facilitate trade, voluntary emission offsets are diverse in type and may or may not be approved under different standards. The emission reduction units claimed are therefore discounted according to the risk assessment of the buyer. g CCX = Chicago Climate Exchange.

h Greenhouse Challenge = Voluntary scheme of the Australian government. i n.a.= not applicable.

j Non-CCX = All voluntary offsets other than generated by CCX. Sources: Europa (2008); Greenhouse Gas Reduction Scheme (2008).

3.1) (see note 3). However, the 15 percent of total offset sales commanded by forestry in 2007 is in contrast to the 36 percent in the previous year. The fall was most marked for offsets of mixed species plantations, from 31 percent of all offsets traded in 2006 to 8 percent in 2007, as depicted in Figure 3.4.

The fall in the proportion of forestry offsets in 2007 appears to have been the result of a combination of factors. There had been a great deal of speculation in the press and elsewhere about the investment risks posed by plantations. For example The Economist (2006) said in relation to offsets: 'One popular sort involves planting trees, which remove carbon from the atmosphere as they grow: but this approach is now somewhat discredited, since the carbon may be released back into the atmosphere again when

A/R plantation A/R mixed native Avoided deforestation

Note: A/R= afforestation or reforestation Source: Hamilton et al. (2008: Figure 12).

A/R plantation A/R mixed native Avoided deforestation

Note: A/R= afforestation or reforestation Source: Hamilton et al. (2008: Figure 12).

Figure 3.4 Percentage market share of forestry in the non-Chicago

Climate Exchange voluntary offset market, 2006 and 2007

the trees are cut down'. In the following year The Economist (2007) again cast aspersions on the voluntary market, particularly in relation to the difficulty of calculating both emissions from air travel and how much carbon trees sequester. Box 3.3 provides an example of the claims of a project developer with respect to carbon benefits and associated co-benefits.

Chapter 2 deals with how the stringent Kyoto Protocol rules are applied to the issues of permanence and measurement.8 Parts of the voluntary forestry market are now embracing similar rules that, if adopted widely, will restore confidence among buyers; at the same time, however, transaction costs will increase.

In 2007 buyers were more attracted to well-understood project types like methane capture and destruction from landfill and agricultural waste, and renewable energy projects, than to forestry. A preference for quality has been assisted by the further development of standards and registries which were taken up enthusiastically by sellers in 2007, covering 52 percent of the projects that chose to adopted standards in that year (Hamilton et al., 2008: 54). The Voluntary Carbon Standard (VCS) was the most popular, used by 29 percent of those who adopted standards; other standards are the Gold Standard, VER+, the California Climate Action Registry and Green-e Climate (Hamilton et al., 2008: Figure 22). The price of offsets from forestry plantations tended to be more expensive than other types of offsets, averaging $7 to $8 per tonne of CO2e (Hamilton et al., 2008: 39), and this may also have been a deterrent to investors.

BOX 3.3 CLAIMS OF A VOLUNTARY OFFSET PROJECT WITH SUSTAINABLE DEVELOPMENT CO-BENEFITS

A US-based, not-for-profit organization uses tree planting as a vehicle for delivering development programs in Africa, Asia and Latin America. The benefits of tree planting claimed include soil erosion control, fruit and wood products production, and fodder for livestock.

The site of the NGO explains that a typical jet emits 1lb of CO2 for every passenger-mile flown, and therefore a ton of CO2 per passenger over 2000 miles.

It is claimed that each tree planted in the humid tropics absorbs 1 ton of CO2 over its lifetime. Voluntary labor keeps the cost of planting a tree down to a mere $0.10 each. Therefore the cost per ton of CO2 sequestered is $0.10. The suggestion is that the purchase of three trees for $0.30 will offset 3 tons of CO2 emitted by a round-trip New York-Los Angeles-New York.

Certificates of denomination of US$1.00 to US$40 are offered so that the customer can travel without damaging the atmosphere, by planting more than the required number of trees. Travel kits are on offer to travel industry businesses that include logos for promotional purposes.

Trees in this program have a range of uses. It is unlikely, however, that fruit trees, trees harvested for wood products, or used by grazing cattle will attain the level of carbon sequestration claimed. Moreover, losses are inevitable in tree plantations and it is possible that many of the trees will not survive to maturity. If trees do survive, their lifespan could well be less than 50 years, depending on species.

While the sustainable development objectives and methods of the program may be exemplary, the claims with respect to the level of CO2 offsets achieved embody many of the uncertainties that have led to adverse criticism of voluntary forestry offsets as a method of climate change mitigation. In summary these are:

• A message is sent that it is not necessary to cut personal travel when a ton of CO2 can be offset for US$0.10;

• The CO2 emitted will not be completely offset until 50 years have elapsed, whereas a reduction in travel would cut CO2 emissions immediately and permanently;

• The amount of carbon to be sequestered by trees is in doubt especially given their multiple uses;

• The permanence of the carbon sequestered is questionable given the possibility of disease, fire, the limited life span of trees and the possibility of conversion of the land to other uses.

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