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UNDERSTANDING CARBON OFFSET PROJECTS
A scientific consensus has emerged over the last decade that climate change - caused primarily by human activities such as carbon dioxide (CO2) emissions resulting from the burning of fossil fuels and deforestation - is underway and will have significant impacts on society. Governments, corporations, environmental organizations, and consumers are now responding. Most reductions in greenhouse gases (GHGs) such as CO2 will need to be realized through energy-related measures such as energy efficiency improvements and investments in renewable energy technologies. However, an alternative and cost effective means of achieving GHG reductions looks to forests as carbon "sinks" that absorb atmospheric CO2 through photosynthesis.
As forests sequester (i.e. store) carbon, forestry projects can mitigate or offset a portion of CO2 emissions from the burning of fossil fuels or other CO2-emitting activities. Moreover, an estimated 20-25% of total GHG emissions result from deforestation, when carbon stored in plants and soils is released into the atmosphere as a result of burning or decomposition. Therefore, an important strategy for addressing climate change involves restoration of forests and the protection of forests that are under threat.
Many conservation projects around the world have already raised funds to promote project activities that will have a positive impact on climate change via forests' ability to offset carbon emissions. The purpose of this chapter is to help readers understand how some conservation projects might generate extra funds by offering climate change benefits, and how to begin the process of measuring, marketing, and selling those benefits.
As a response to climate change, governments have been developing an international regulatory framework to mitigate global warming. In 1997 they signed the Kyoto Protocol. The Protocol sets mandatory caps (limits) on the GHG emissions of industrialized countries and "transitional" (mainly ex-communist) economies. While each country has its own specific targets, the total aggregated reductions equal a 5.2 percent reduction from 1990 levels by the so-called first "commitment period" (2008-2012), -the period by which countries must be in compliance. To achieve this target, industrialized signatory country governments will set emissions limits for GHG emitting companies.
In addition to setting emission limits, the Kyoto Protocol provides several market-based mechanisms to enable GHG emitters to achieve their assigned reductions. The basic idea, trading emission rights, has been successfully implemented for other pollutants in many countries. Under this system, because some countries will be able to reduce emissions more easily and cheaply than other countries (for example through forest-based carbon offset projects), they can sell their surplus reductions (or carbon credits) to countries that emit more than their limit. This will enable achieving the overall global emissions target at the least cost.
Carbon projects can therefore generate financing for conservation by selling certified carbon credits to GHG emitters. The outcome of international agreements such as the Kyoto Protocol and various national regimes will determine the range and magnitude of opportunities for funding for carbon offset projects.
Carbon projects can be developed in both the energy and the land-use, land-use change and forestry (LULUCF) sectors. However, this Guide, with its focus on conservation finance, will consider only projects in the LULUCF sector, and in particular, forestry-based projects. Such projects often have multiple other benefits such as biodiversity protection, soil conservation, watershed maintenance, and sustainable forest management. However, it is important to keep in mind that, given the current level of policy and carbon market development, not all conservation projects will make good carbon projects (this will be discussed in section 1.1.2). Nor are all carbon projects good for biodiversity. For example, restoring native vegetation can actually result in a loss of carbon storage because exotic vegetation that may store more carbon has to be removed. In many cases conservation projects will result in little to no net impact on CO2 emissions. Therefore, only a small subset of conservation projects are likely to be attractive as carbon offset fund-raisers. Conservationists will need to balance maximizing carbon benefits with fulfilling their commitment to biodiversity conservation.
Some companies and countries are already investing in carbon offset projects with a view to gaining experience while generating offsets, achieving collateral benefits such as conservation of biodiversity and community development, and gaining greater access to ongoing policy discussions.
Box 1 The Guaraqueaba Climate Action Project
An example of one such conservation project generating funding through its carbon offset potential can be seen in the Atlantic Forest of Brazil. The Guaraqueaba Climate Action Project seeks to restore, protect and manage approximately 20,000 acres (8100 hectares) of partially degraded and-or deforested tropical forest within the Guaraqueaba Environmental Protection Area in southern Brazil. With financial support from Central and South West Corporation, a US based electric utility (recently acquired by AEP), the Project - a collaborative effort between AEP, The Nature Conservancy (TNC), and Sociedade de Pesquisa em Vida Selvagem e Educao Ambiental (SPVS), a Brazilian conservation organization - will promote assisted natural forest regeneration and re-growth on pastures and degraded forests on acquired lands. It will also protect standing forest that still exists within the Project area but is under threat of deforestation. With a total investment of US$5.4 million, the Project is expected to reduce or avoid emissions equivalent to approximately 1 million metric tons of carbon over the next 40 years. The Project aims to produce significant net carbon benefits that are scientifically quantifiable and long-lasting for its investors; protect biodiversity and ecosystems and improve local environmental quality; and promote sustainable development by creating economic opportunities for local people. Brief overviews of other carbon offset projects can be found in section 1.1.4.
The science of climate change
The natural phenomenon behind climate change is known as the greenhouse effect. Energy from the sun reaches the Earth's surface mainly in the form of visible light. Approximately 30% of the energy from these rays is emitted back into space almost immediately, but the remaining 70% stays in the Earth's atmosphere and is absorbed by greenhouse gases such as carbon dioxide, nitrous oxide and methane. The absorption of this energy by the greenhouse gases results in a rise in temperature, which enables life to exist on Earth. This is known as the greenhouse effect.
Since the industrial revolution the concentration of greenhouse gases in the Earth's atmosphere has increased to a level unknown for 10,000 years. This increase, attributed to human activities, has accompanied a rise in Earth's surface temperatures, often referred to as climate change. Scientists have concluded that this change in temperature will have significant environmental, economic and social impacts, including a rise in sea level leading to loss of low-lying islands and coastal lands, an increase in hurricanes, droughts, and floods. Equally disturbing, global warming could turn rich agricultural areas into drylands, drylands into deserts, and - paradoxically - even switch off the Gulf Stream's protective shield for temperate Europe, making vast alterations to current habitats and ecosystems. This represents a major threat to slow-adapting plants and trees as well as to vulnerable animals, insects and marine species even at the phytoplankton level. According to the international scientific consensus: "Anthropogenic climate change will persist for many centuries."
Since as much as one-fifth to one-quarter of CO2 emissions come from fossil fuel use, slowing deforestation could make an important contribution to the effort to reverse global warming. In addition to lowering emissions that result from deforestation, it is also possible to restore degraded areas and expand forests or other ecosystems, increasing the carbon they sequester. Scientists estimate that there is the potential to offset 10-20 percent of fossil fuel emissions between now and 2050 by sequestering carbon in growing trees and by protecting existing carbon stocks. If GHG emitters can compensate forestry and other land use projects that sequester carbon for this valuable environmental service, it could potentially become a significant source of revenue for conservation.
Such options often compare favorably in cost with many options designed to reduce energy-related emissions. If policy on carbon sequestration is developed and structured properly, it will provide an effective tool for putting a value on the environmental service that forests and other ecosystems provide to the atmosphere and, thereby, change the economic equation Surrounding decisions on land-use.
As a result of the scientific evidence of a correlation between elevated greenhouse gases from human activities and a measurable warming of the Earth's lower atmosphere, political concern with regard to the effects of climate change began to grow until in 1992 150 countries finalized the United Nations Framework for Climate Change (UNFCCC) . This was presented it for signature at the Earth Summit in Rio de Janeiro. The ultimate objective of the Convention is to stabilize the concentration of atmospheric greenhouse gas emissions (GHGs) so as not to produce negative impacts on climate systems. However, this is to be done within a timeframe that allows ecosystems to adapt to climate change and does not threaten sustainable food production and economic development. Countries adopted shared but differentiated responsibilities. Thus, industrialized countries agreed to voluntarily adopt GHG-reduction policies, contributing to climate change mitigation.
In 1995, the Conference of Parties (COP) became the Convention's ultimate authority. The first COP was held in Berlin. It was concluded that the voluntary commitments included in the UNFCCC were not being fulfilled, and that even if they were, it would not be enough to stabilize GHG emissions. The so-called Berlin Mandate was therefore established. In this declaration, countries agreed to address climate change on behalf of present and future generations, and pledged that developed countries would take the lead in action to address climate change and reverse its effects.
In 1997, the third conference of the parties (COP-3) was held in Kyoto, Japan, where countries adopted by consensus what is known as the Kyoto Protocol (KP). When the KP goes into force, it will legally bind participating industrialized countries to reduce their collective greenhouse gas emissions by a collective 5.2% below 1990 levels by the first commitment period (2008-2012). The Protocol will enter into force when it is signed and ratified by 55 countries, including developed countries whose total emissions represent at least 55% of the emissions of this group in 1990. The Protocol will reach its second ratification "trigger" when ratified by the Russian Federation, and can then come into force. The latest list of signatories and ratifications is found at: http:/unfccc.int/resource/conv/ratlist.pdf.
The high cost of global emission reductions led to the negotiation and approval of various flexibility mechanisms that offer industrialized countries more cost-effective means to achieve their GHG emission reduction targets (and creates the framework for a global carbon market). The Kyoto Protocol authorizes these mechanisms with the understanding that GHGs are globally distributed and that the effect of emissions or sequestration is the same no matter where they take place. The Kyoto Protocol includes the following flexibility mechanisms each of which is associated with a specific type of carbon credit:
- Emissions Trading (ET) (Article 17 in the KP): This mechanism allows developed countries and countries with economies in transition to purchase assigned amount units (AAUs) from other developed countries and economies in transition, in order to fulfil their emissions reduction commitments. Emissions trading must not replace domestic action to reduce emissions.
- Joint Implementation (JI) (Article 6 in the KP): In order to attain their reduction commitments, JI allows developed countries to purchase emission reduction units (ERUs) resulting from project activities implemented in any other developed country or country with an economy in transition.
- Clean Development Mechanism (CDM) (Article 12 in the KP): The CDM allows industrialized countries to accrue credits ("certified emission reduction units") in return for financing carbon reduction projects in developing countries that help further their sustainable development. The first baseline and monitoring methodologies were approved for CDM in July 2003. For details see: http://unfccc.int/press/prel2003/pressrel280703.pdf
- Removal Units (RMUs): This new carbon credit unit represents forestry credits generated within industrialized countries and can be traded through ET or JI mechanisms. The limitation of this unit is that it can only be generated during the commitment period (2008-2012) and not transferred to a future commitment period, unlike other carbon credit units.
Note: All carbon credits, which include CERs, ERUs, AAUs and RMUs are equal to one metric ton of carbon dioxide equivalent.
At the seventh Conference of the Parties (COP-7), held in Marrakech, Morocco, in 2001, delegations from over 170 countries came to a final agreement on a package of decisions for the implementation of the Kyoto Protocol. At this meeting, countries agreed to limit carbon sequestration projects under JI and CDM during the first commitment period (2008-2012). In the case of CDM, allowable activities were limited to reforestation and afforestation. Limits were also placed on land-use based CDM projects. Only 1% of a developed country's base year emissions, for each year of the-5 year commitment period, can be achieved using such sinks. In the case of JI, allowable activities include reforestation, and afforestation, as well as forest management.
This means that project activities focused solely on the protection of existing forests, (referred to as avoided deforestation activities) which by definition are central components of many conservation projects are excluded under the Kyoto Protocol until the year 2012.
Since the climate negotiations began in 1992, the development of a carbon market has evolved almost in parallel responding to corporate demands for carbon credits. These were spurred by government regulations on GHG emissions such as the Kyoto Protocol as well as national climate change policy frameworks, and bilateral and/or regional agreements. As more countries ratify the Kyoto Protocol, the future market for carbon is expected to grow significantly, even without US participation. As policy continues to evolve and develop within national climate change frameworks, and perhaps at the international level as well, a market for forest protection (or avoided deforestation) credits may yet emerge. The carbon market and its evolution are further discussed in section 1.1.3.
The Kyoto Protocol has established various standards that projects must achieve in order for their carbon credits to be considered valid. To have carbon credits certified or accredited under the international regime, carbon projects will need to meet the following standards:
- Additionality: Projects must demonstrate that their carbon benefits are additional to any that would otherwise occur" without project investments, and "additional to any that would occur in the absence of the certified project activity". In other words, if a project area is already being re-forested without carbon-related investments, it is not eligible to receive carbon credits for that reforestation.
- Quantification: Carbon credits must be real and measurable. In order to measure the carbon credits produced by the project, the project must develop a baseline (that projects what would have happened without project activities). The baseline is the standard by which to measure verifiable changes in carbon stocks.
- Permanence: Projects must assure the long-term provision of carbon benefits to the buyer of the carbon credits..
- Leakage: Project activities must demonstrate that their carbon benefits are not being displaced to other locations through what is called "leakage." For example, if the project is designed to retire a logging concession, project design should help account for the possibility of the concessionaire shifting operations to another location. In the international negotiations this matter is still under discussion and the scientific community was requested to provide scientific solutions to address this issue.
- Monitoring and verification: projects will need to develop monitoring plans to ensure that the carbon credits claimed remain the same throughout the lifetime of the project or that changes be claimed. Furthermore, projects will need a third party to verify that the carbon credits claimed are measurable, real and additional.
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