House of Commons - Environmental Audit

Select Committee on Environmental Audit Minutes of Evidence

Memorandum submitted by Sustainable Forestry Management Ltd

INTRODUCTION TO SFM'S COMMENTS

If there was unanimity on one issue in Bali at COP 13, it is that tropical forests must play a central and vital role in any realistic effort to mitigate climate change. Another strong message from Bali is that payments for reductions of tropical deforestation and degradation are the key to the developing world's consent to a post-2012 treaty. Bali highlighted that virtually the only way in which most developing nations, and particularly the least-developed ones, can meaningfully participate in and benefit from the carbon markets is through land use change and forestry (LULUCF).[1] The promised benefits of the CDM have, however, largely bypassed almost all tropical and subtropical countries due to its stifling approach to LULUCF.[2] Finally, the important co-benefits of encouraging the conservation and restoration of tropical and sub-tropical forests were recognised, including protecting biodiversity and fresh water sources, and providing the best means of adaptation to climate change for many of the world's most vulnerable people.[3]

After years of controversy, much of it unjustified in our opinion, the essential ecosystem services provided by forestry in mitigating climate change were recognised as a result of the efforts of the Coalition of Rainforest Nations beginning in Montreal at COP 11,[4] the cumulative scientific work of the IPCC and the definitive economics of the Stern Review. Among other things, the Bali decision highlights the enormous damage imposed on the world's most important ecosystems and most vulnerable people by the EU ETS ban on forest carbon credits. The EU ETS is the world's largest operating carbon market[5] and thus the most important, near-term, potential source of the large-scale, long-term investment required to slow and reverse deforestation. Yet it has been made inaccessible for this purpose and to the people most dependent on forests for their survival. This inaccessibility has compounded the market failure caused by the CDM (as to which see below).

The EU ban on LULUCF credits, like the EU policy on biofuels, actually incentivises deforestation and the conversion of rainforest to agricultural use. This generates manifold perverse environmental consequences which are becoming more apparent by the day. Viewed objectively and from the point of view of developing nations, EU environmental policy is clearly designed to encourage continued tropical deforestation. The European Commission, lead by DG Environment, has now adopted two policies, the continued ban of LULUCF credits and its policy on bio-fuels, which not only fail to reflect the Bali consensus, but directly contradict the EU's expressed policies on climate, sustainable development, biodiversity and poverty alleviation. One need not be a cynic to see this as hypocritical. The Commission's recent proposal to amend the legislation governing the EU ETS,[6] in which it proposes a continuing ban on forestry credits beyond 2012, together with a radical curtailment of all other project credits, is simply unjustifiable and explicable only by European myopia and a willful disregard of the evidence.[7]

There are repeated references in Commission documents to the need for Europe to lead the world in emissions trading; to set an example. This is somewhat reminiscent of the last French administration's promotion of the French economic model; a "model" which no other economy sought to imitate. A continuing EU ETS ban on forestry combined with a phasing out of other carbon credits from the developing world, will not only discourage the participation of the developing world in a post 2012 treaty but it will, in fact, jeopardise the leading position the EU has achieved in the carbon trading markets. All other emerging carbon markets, both compliance and voluntary, in the US, Australia, New Zealand, and the post Kyoto arrangements, propose, or already include, forest carbon credits. The Commission's position therefore not only runs against the tide of the rest of the world, but will also render the EU ETS incompatible with all other trading schemes, directly in contradiction with its expressed desire to link with other schemes.[8] The "linking directive" has, in effect, become the "separation directive."

A further perverse effect of banning forest carbon credits will be to make European heavy industry uncompetitive to the point that, as DG Environment admits, there will be "carbon leakage" of these industries which will be forced, by the manipulated price of EU credits, to relocate to lower, or no, emissions cost countries.[9] The potential impact on employment has recently been acknowledged by leading Member States including France and Germany.[10] Recently floated remedies for this include creating tariff barriers against imported products which do not pay the cost.[11] This is not just the economics of the 1930's that lead to a worldwide depression, such a policy will lead to no net gain to the atmosphere. The losses to the tax base, the inevitable increase in unemployment and associated welfare costs will be exacerbated, in climate terms, by the inevitable loss from the EU of those companies whose management is the most capable and the most willing to focus their efforts on innovation in the very industrial sectors where it is most needed.

Finally, the ban not only contradicts the EU's policies on poverty alleviation, sustainable development and biodiversity, it actually prevents the achievement of the EU's stated goal of climate stabilisation by mid-century. The forecast EU carbon price which will result from the Commission's proposal is as high as

48/tCO₂e.[12] This is close to the price used by McKinsey in its analysis of scenarios leading to climate stabilization by 2030.[13] That analysis demonstrates that offsets from the forestry sector, particularly tropical and sub-tropical forestry, must account for a larger share of potential reduction abatement (25%) than any other sector over that time frame to achieve that goal.[14]

The Commission, in its rationale, suggests that its position might change if a successor international treaty is ultimately agreed.[15] In the meantime, it proposes to phase out virtually all project credits, thus severely damaging the market and market participants by artificially reducing demand for CERs.[16] The resulting chilling effect on the market and on investment in emissions abatement everywhere outside of Europe is already apparent. The Commission proposals are already making it clear to those who invest and develop climate change projects outside of Europe that no reliance whatsoever can be placed on European demand for carbon credits. The Commission also seeks the power to prevent Member States from meeting their Kyoto obligations with credits, such as CERs, which are excluded from the EU ETS and to determine itself whether or not any such credits will be admitted to the EU ETS (or used by Member States) in future whether or not a successor treaty is entered into.[17]

The result, of course, will be to raise the price of compliance in the EU and to EU Member States and to reduce the price of compliance to other Annex 1 countries and their industries.

As the Prime Minister and GLOBE 8 have recently suggested, it is time to take regulation of the carbon markets out of the hands of DG Environment and the United Nations and put it in the hands of a regulator with the expertise in financial markets required for an undertaking of this size and importance.[18] If further evidence were required that this war is too important to be left in the hands of those whose experience is elsewhere, the recent DEFRA proposals to limit "voluntary offset" providers to supplying CERs, which are full compliance instruments, provides it.[19] Why DEFRA thinks it makes any sense for anyone to pay the additional and redundant regulatory costs to it (for its "quality mark" approval) after all of the costs incurred to get CDM approval and then to sell the resulting CERs to voluntary purchasers, as opposed to mandatory purchasers, which are bound to pay a higher price, is beyond most rational observers.[20]

The overwhelming majority of respondents to the clearly perfunctory DEFRA consultation said that the UK voluntary market should include forest credits and credits from other projects which could either not afford CDM costs or did not come within its rules such as avoided deforestation; this has simply been disregarded by DEFRA.[21] To then demand that industry provide a single voluntary standard and prove its efficacy—by essentially creating replica CERs—is disingenuous at best. DEFRA knew that robust standards pre-existed the consultation (Chicago Climate Exchange, WWF Gold Standard and the Climate, Community and Biodiversity Alliance Standards) and that a further comprehensive standard was promulgated, with widespread industry support, during the consultative period (the Voluntary Carbon Standard). Its conclusion that none of them, despite years of wide consultation with all categories of stakeholders, are adequate to protect the UK public is arrogant to say the least. The DEFRA standards amount to no more than a reiteration of CDM rules; this is not "leadership"; it is a retrograde step indicative of a failure to understand or accept market demand and market evolution. This rigid, prescriptive, as opposed to flexible, principles-based, approach to regulation has come to typify the regulatory approach in Europe and under the CDM. It is also an approach which is failing and is destined to fail.

What seems to have been lost on these regulatory bodies, or indeed seen by them as a negative impact, is that the reason that market-based approaches were adopted to deal with climate change is to lower the cost of achieving mankind's climate goals. The persistent effort by regulations such as the EU's explicit ban and the CDM Executive Board's implicit ban, on LULUCF credits, is to rig the market to achieve a higher price than necessary. Whether the result of confusing the role of markets (which is to seek the most efficient use of capital) with that of subsidies (which is to replace profits in early stage innovation) or the result of what one informed observer has called "magical thinking", the clear intention is to command a sudden and radical change in the economy. There have been several such efforts in the past, China's "Great Leap Forward" comes to mind and the results have been uniformly destructive. The EU Commission's current effort to rig the price of carbon to administer shock treatment to the European economy is no more likely to succeed. It will certainly do nothing to mitigate climate change as no other country will follow suit in seeking higher rather than lower cost (ie more efficient) solutions to climate change.[22]

In the context of global warming a "fortress Europe" approach is futile and counterproductive. The suggestion made by some, that this is just a bargaining position to force the US and China into a successor regime, may sound clever but is, in our view, "too clever by half". It is virtually inconceivable that the United States will accede to UN regulation of its carbon market particularly given the UN's performance as a regulator thus far. It is also unlikely that China will adopt regulations which mandate high carbon prices in an economy at its stage of development. It is unlikely in the extreme that those developing nations which remain dependent on agriculture and forestry will regard being cut off from investment and the carbon market for another 5-10 years as being a signal that they will one day benefit. Their disappointment in the decade of non-delivery by the CDM was palpable at Bali. Given the economic logic of the EU Commission's proposed exclusion of virtually all project credits for the indefinite future, even if a future treaty is negotiated, the likely response of developing nations is obvious: continued response to real, as opposed to imaginary, market signals. Increased timber harvest of native forests, conversion of forests to agriculture and increased production of commodities with real demand (palm oil, beef, soya and sugar) are inevitable. Precisely what we all want to avoid.

Finally the suggestion that revenues from the auctioning of permits will be earmarked for various project sectors is, to be polite, disingenuous at best. Finance ministers have already made it clear that they will not accept hypothecation of auction proceeds and even if they did there is no structure for them to allocate such revenues.[23] Projects supported by aid will not suffice. Leaving aside the sorry history of such attempts, the billions of dollars which are required annually and for decades to come to deal just with deforestation will not be forthcoming from the public sector. The private sector, the only realistic source of such funding, will only make large long term investments if it is confident in the long-term stability and predictability of the markets for carbon credits. The persistence of political and regulatory interference, particularly with supply and demand (and hence prices) will only delay and in many cases prevent, such investment. Participants in the carbon market, which is centred in London, are already reconsidering its viability in the face of the EU Commission's proposals and the manifest inefficiencies of the CDM. Once a market collapses it is hard and often impossible to resurrect. Given that the Commission proposes to exclude project-based carbon credits for years to come it is all too likely that other trading centres, such as New York, will take its place.[24]

SPECIFIC COMMENTS ON EAC QUESTIONS

How might mechanisms to tackle emissions from deforestation be developed? How can we ensure that such mechanisms contribute to wider sustainable development aims? Will such mechanism deal with the need to ensure the protection of indigenous people, land use rights and governance? How might forest degradation be dealt with? Are additional mechanisms required to enable the creation of carbon sinks?

The Mechanism

The mechanism for dealing with emissions from deforestation and forest degradation already, at least in principle, exist: the carbon trading market. No new mechanism is required although radically improved regulation is necessary. If forest carbon is made freely available for compliance purposes, as well as in the voluntary sector, of the carbon marketplace the critical problem of tropical forest deforestation and degradation will be successfully addressed and emissions from that source radically reduced. All that is required to accomplish this is the setting of long term targets for emissions reductions and structural change in the regulation of the market as recently proposed by GLOBE 8.[25]

Sustainability

Deforestation and forest degradation is fundamentally about land use. The land will be used for something and the question is what affects the choice of use. Today, in the absence of any market value for forest carbon, the land is and will continue to be used to produce timber and agricultural products. These products, whether on the scale of agri-business or subsistence, have a real value to the landowners, whether public, communal or private. Unless the landowners are offered a price for an alternative land use, such as carbon storage and sequestration, which is at least equal to or higher than what they get for timber, soya, palm oil, beef, sugar or maize, what economists call the "opportunity cost", deforestation and forest degradation will continue. The demand for these products will not abate given rising population and living standards; the question is how to direct such production into sustainability. But there will be no sustainability unless there is long-term commercial sustainability. The moment that payments for carbon storage cease conversion of forest land with its attendant emissions will resume.

The requirement, therefore, is for continuous, predictable payments of the relevant opportunity cost for each forest area for decades to come. No one has yet proposed anything that can be seriously considered capable of accomplishing this aside from crediting carbon stored or sequestered in biomass for use in the compliance markets. The failure to do so for the last 15 years is a tragedy and has compounded the difficulty mankind now faces in dealing with climate change in the limited time left before it goes beyond our control. Fortunately, considerable work has been done and continues to be done to assess the opportunity cost of carbon storage in tropical and sub-tropical forests and it is affordable; that is, it can be done at a price equal to or lower than the cost of technological sources of emissions reduction.[26] The only barrier to these payments being made to landowners and incentivising change in land use is the regulatory structure thus far imposed on the carbon markets particularly by the EU and the CDM.

The opportunity cost of reduced deforestation, was the basis of a study carried out for the Stern Review. This estimated the opportunity cost for eight countries that collectively are responsible for 70% of land-use emissions. If deforestation in these countries were to be reduced by 50%, the opportunity cost would amount to at least $5-10 billion annually (approximately $1-2/tCO₂ on average).[27] Although there are various proposals for public sector funding, donor governments and agencies show little sign of being able to contribute funding necessary at that level for the decades required.[28]

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Chomitz, K, 2007, At Loggerheads? Agricultural Expansion, Poverty

Reduction and Environment in the Tropical Forests, The World Bank

Carbon credits from avoided deforestation allow a real commercial alternative value to be placed on tropical forests if they are integrated into carbon credit trading systems in a fungible and transparent manner. The carbon market can in many cases "tip" the balance of economics in favour of forest conservation. According to the World Bank's most recent study of the subject, tropical forest cleared to pasture is worth between $200-500 per hectare. Based on its average CO₂ storage per hectare of 500 tonnes, its value is between $1500-10,000 per hectare (@ $3-20/tCO₂).[29] Even at the low end range of carbon prices continued deforestation would become unprofitable in many land systems if it is credited in the carbon markets.[30]

The international community, prompted by a proposal from 15 developing countries,[31] now understands this and has been in dialogue over the inclusion of emission reductions from avoided deforestation and degradation in the post-2012 regime for the last two years. At COP 13 in Bali the parties resolved in their decision on "Reducing emissions from deforestation in developing countries: approaches to stimulate action" a number of measures to assist in evaluation and implementation of mechanisms to tackle emissions from this source.[32] In relation to specific mechanisms it was resolved "that policy approaches and positive incentives on issues relating to reducing emissions from deforestation and forest degradation in developing countries will be considered in the context of land use . . . [33]The role of the carbon market in this effort was recognized in the Bali Roadmap where it is stated that "various approaches, including opportunities for using markets, to enhance the cost-effectiveness of, and to promote, mitigation actions, bearing in mind different circumstances of developed and developing countries".[34] Forests, in short, are finally being recognized as a critical, "cost-effective" key to a future climate change treaty as well as being important for the other environmental services they provide[35] including services which are also essential to adaptation to climate change by the rural poor.[36] It is also now acknowledged that the carbon market is the most appropriate vehicle to deliver these policy goals.

The 26 developing countries in the Coalition of Rainforest Nations[37] have made it clear that either they receive compensation for the carbon sequestration services which their native forests provide to the world or they must continue to exploit them as sources of energy, food and wood products.[38] The implications of the latter are illustrated in that Indonesia is now the third largest emitter of greenhouse gases in the world, almost entirely the result of continued deforestation, and Brazil is fourth for largely the same reason.[39] It is only through linking emission reductions from avoided deforestation and degradation to the carbon market, and in so doing linking forests with the world financial markets, that sufficient capital will be available to ensure that a substantial reduction in deforestation globally and a shift to sustainable sources of supply actually occurs in the time remaining to us.

It is also critically important to understand that the payments to landowners, while necessary, are not sufficient to sustainability. New sustainably managed sources of timber and forest product supply must be created to meet ever increasing demand. This too was acknowledged at Bali.[40] These too require annual investments measured in the billions of dollars. The continued discouragement of such investment in the developing world by the EU ban on forest credits and the CDM rules on afforestation and reforestation compound the difficulty of reaching the goal of sustainable supply and sustainable development. We cannot just reduce or end the harvest of native forests without creating such alternative supplies; in Kyoto-speak: we cannot have REDD without A/R.

Methods

The methods of linking the land with the capital markets are now well developed and understood. The SBSTA workshop (Cairns, 2007) concluded that "there is general agreement that methods, tools and data are robust enough to estimate emissions with an acceptable level of certainty and that the IPCC Good Practice Guidance for LULUCF and the 2006 IPCC Guidelines provide a good basis for the estimation of emissions from deforestation and their reductions".[41]

Since the early 1990s, changes in forest area have been able to be measured by satellite with confidence.[42] Analysis of remotely sensed data from aircraft and satellites supported by ground based observations is now well developed at the national level.[43] Some developing countries have national level monitoring initiatives in place for the land use sector such as Brazil[44] and India[45]. Other countries are developing these capabilities or have successfully monitored forests with aerial photographs that do not require sophisticated data analysis or computer resources. A variety of methods that are applicable to varying national circumstances regarding forest characteristics, cost constraints, and scientific capabilities are available and adequate for monitoring deforested areas and verifying the accuracy of such measurements. Additionally, the historical remote sensing database is sufficient to develop a baseline of tropical deforestation in the 1990s.[46]

Based on current capabilities, GHG emissions from deforestation can be accurately estimated. These estimates come from changes in the carbon stocks in the above-ground biomass of trees and from other forest carbon pools using models and default data in the IPCC Good Practice Guidelines report.[47] Forest inventories can provide biomass values according to forest type and use, such as mature forest, intensely logged, selectively logged, fallow etc. Many developing countries do not have sufficient data from national forest inventories and they should be assisted in developing this information and the related administrative systems.[48] However, even in their absence, the FAO database provides a default value for national carbon stock with stratification into main ecological zones.[49] Compilation of data from ecological or other permanent sample plots can provide estimates of carbon stocks for different forest types subject to the design of site specific scientific studies.

There are a variety of approaches and potential mechanisms to crediting avoided deforestation and degradation activities which reflect the variety of historical experiences of the countries which are the intended beneficiaries. A flexible combination of approaches is the best way forward whether based on mandatory or non-mandatory emissions targets being adopted by such countries. A sectoral approach based on national boundaries and national administration established under broad principle-based regulation, as opposed to the current CDM approach of prescriptive, project by project assessment, is required both because of its simplicity and its respect for sovereignty and because it eliminates many of the methodological problems, such as leakage and additionality, which have plagued development of the CDM market thus far. National forest sector emission targets adopted by developing countries are by far the most efficient way of encouraging sustainable forest management and reducing deforestation. This approach lays the foundation for the capital markets to operate in a coherent regulatory environment.

Indigenous Peoples, Land Use Rights and Governance

The Bali decision on "Reducing emissions from deforestation in developing countries: approaches to stimulate action" specifically recognizes "that the needs of local and indigenous communities should be addressed when action is taken to reduce emissions from deforestation and forest degradation in developing countries". One of the key aspects of markets that seems to elude most participants in the debate over forest carbon credits, is their requirement that land ownership and entitlement to land use rights are clearly established. Unless the buyer is confident that the carbon credits it purchases have been lawfully created and transferred he will not buy them. Exchanges and clearing houses are specifically designed to ensure that "good delivery" takes place in the commodities which they list and trade. Purchasers of carbon credits in particular, exposed as they are to public and regulatory oversight, do not want to find that the credits they buy are sourced through abuses of human rights or from stolen land. It is critical to all markets that ownership be clearly established and the market for land use rights, like carbon storage and sequestration is no exception.

Markets quickly punish and exclude those who fail to deliver what was bargained for. The carbon markets have appropriate standards for "good delivery" of forest carbon; these standards have already been developed and are being adopted by exchanges, in over-the-counter transactions and in the voluntary sector.[50] By the same token good delivery requires lawful delivery requiring compliance with both domestic and international law such as ILO 169.[51] In short, good governance is integral to well-regulated markets and is demanded by them. The opportunity to benefit from the payments such markets offer is itself a powerful incentive to improved governance including acceptable standards of land tenure and registration and the adoption of the safeguards for vulnerable communities required by long term investors of capital.

Forest Degradation

Although carbon emissions from forest degradation may not be as large per unit area as the complete removal of forest through deforestation, forest degradation occurs over large areas and can contribute significantly to overall emissions from forest loss.[52] Differences between forest and degraded forest are more subtle than in the case of deforestation, and degradation patches are generally small compared with clearings. Monitoring degradation is technically more difficult than monitoring deforestation but is now practicable. Techniques have been developed and are being steadily improved. A team at the Carnegie Institution of Washington, for example, has developed techniques for automated remote-sensing analysis of selective logging utilising Landsat satellite imagery combined with extensive fieldwork. Their work highlighted that exclusion of selective logging from a monitoring system would miss a substantial source of emitted carbon and that such activity can be monitored remotely.[53] Forest degradation therefore must and can be included in the calculation of biomass subject to emissions reduction targets and for crediting in the carbon marketplace.

Our recommendation is that countries that have the capacity and funding to measure and monitor degradation should be encouraged to do so by the opportunity to sell the carbon credits generated from reduced forest degradation in the same manner as those generated from avoided deforestation activities. We recommend that countries be able to choose the level of carbon accounting for their country (with periodic review). This would allow countries which have the funding and capacity to generate emissions reductions from reduced degradation to generate carbon credits immediately while those countries who have not reached a stage to implement this level of technological capacity are assisted to do so.

Additional Mechanisms for Carbon Sinks

As will be apparent from the remarks above, some developing countries, although by no means all, lack the infrastructure for full realisation of the markets' potential. The key is to provide them with the capacity to reap those benefits. Some need assistance to measure, monitor and verify their carbon stocks. Some have weak systems of land tenure and registration, others require assistance with administration and public accountability. Some need assistance with law enforcement. These are essential elements to a functioning market. It is here, in capacity building, that the public sector and multinational institutions have a key role to play and a role in which they have expertise and institutionalised experience. If the available resources from the public sector were utilised for this purpose carbon sinks everywhere can be fully valued by the market for the benefit of all concerned. If there is a role for a "fund" (which was the original intention behind the creation of the CDM) this is surely it.

Are the Clean Development and Joint Implementation Mechanisms functioning effectively? How might they be improved? How might they better be used in relation to forestry or other land use emission reduction projects? Should CDM and JI projects play a greater role in sustainable development more widely? To what extent should credits such as those from the CDM and JI be permitted to be used in emissions trading schemes, or contribute to emissions reductions targets?

It is now evident that insofar as land use and forestry is concerned both the CDM and JI have failed to make any contribution. This was, in many ways, failure by design. Despite the fact that all forestry and land use is accounted for in Annex 1 countries, at the outset of the debate over the role of developing countries, the CDM excluded deforestation entirely.[54] Then, in 2001 at COP7 in Marrakech, it adopted rules (the "Marrakech Accords") which by their terms and in subsequent interpretations by the CDM Executive Board, made it nearly impossible even for afforestation and reforestation projects to be approved.[55]

Needless to say, investment in the forestry sector through the CDM has been virtually nonexistent, despite a relatively large number of approved methodologies for CDM projects in general. Out of 106 approved methodologies, 10, or 9.4%, relate to afforestation and reforestation. However, out of 945 registered CDM projects, only 1, or 0.1%, is an A/R project.[56] Moreover, this project is projected to generate only 340,000 tCO₂ by the end of 2012,[57] in comparison to the projected 1.17 billion tCO₂ from the other registered projects. As of today, there are no forestry projects approved under JI.[58] The obvious bias against LULUCF is such that no meaningful commercial investment is likely under the present regime.

Despite being initially excluded from the CDM, deforestation in developing countries has finally returned to the agenda. The consensus in Bali on the urgent need to deal with tropical deforestation and forest degradation speaks for itself. The developing nations have also made their position clear: unless they are paid for their carbon sinks they will not accede to a post-2012 treaty. The logic of their position is unassailable. Unless they receive compensation for not converting forests to agriculture they cannot develop their economies sustainably or otherwise. They are the low cost producers of many agricultural products as well as the principal source of timber demanded by the industrial world and they will not give up that competitive advantage for nothing. They also must feed growing populations.[59]

To be understood, deforestation has to be seen primarily as a response to market forces both international and domestic. The world's growing demand for food and forest products will not abate; it can only be directed toward sustainable supplies by the same market forces that create the demand. This is the critical role which the carbon markets can play if, but only if, appropriate regulation is now introduced. There needs to be both structural and regulatory realignment before that market can have its desired effects. We suggest below seven steps which need to be taken urgently if tropical forest loss is to be arrested.

The first step is to rectify the bias against the developing world now codified in the Kyoto Protocol. Any successor treaty must treat North and South alike by extending the same comprehensive crediting of forests and agricultural land allowed to Annex 1 countries to all treaty adherents. There is no longer any justification for and many reasons against, continued discrimination against tropical carbon sinks.[60] The goal should be full carbon accounting, whereby all biomass is accounted for in measuring progress toward achieving each country's emission reduction goals. The scientific and technological techniques for this now exist.[61] The only requirement for qualifying for such treatment should be demonstration of technical and administrative capacity. Those countries which do not have, or cannot afford, such capacity should receive internationally funded support to achieve it such as that proposed by the World Bank's deforestation initiative.[62]

The second step is to remove from the CDM the authority to approve carbon projects for crediting. No agency in the world has, or can have, the requisite capacity, expertise and resources to make judgements as to every project in over 100 countries spanning everything from agriculture to industrial processes. Instead of the current prescriptive approach of the CDM, the successor treaty should adopt a principle-based approach to regulation such as that now adopted by the Financial Services Authority. Project approvals should be entirely devolved to participating countries whose designated agencies would take on the responsibility to conform their rules to broad principles established by or under the successor treaty. There does not need to be paternalistic second guessing by others provided that the market is then allowed to operate within a stable regime.

A necessary third step is therefore an agreement on long-term emission reduction goals which are not subject to periodic political or regulatory interference. A key structural weakness of both the Kyoto Protocol and the EU ETS are the five-year compliance periods at the end of which political and regulatory interference is virtually assured. This creates wholly unnecessary uncertainty. Investments which must perform over decades cannot be implemented in this context particularly those dealing with forest and land use. Clear overall targets for emissions reduction must be set and adhered to both in terms of the level of reduction and the period in which they must be accomplished. A realistic time period is at least until 2030 and preferably beyond. Fundamental changes in the world's economy will not take place in any shorter period and neither the capital nor trading markets can operate to facilitate that change if the challenge is compounded by periodic political and regulatory interference.

The fourth step is to increase the participation of the private sector in the regulatory process. Uniquely in recent history, the development of climate change goals, legislation and regulation has taken place without any meaningful consultation of the private sector, the capital markets or even financial market regulators. The Stern Review, the first government sponsored economic analysis was published in 2007, some 15 years after the Rio Conference which launched the Kyoto process. Until its publication virtually no economic or financial analysis was referred to in the climate debate. To the authors' knowledge no meaningful input has yet been sought, by the UN or by the EU, from those most experienced with capital and commodity markets such as central bankers, market regulators and market practitioners. This sealed box approach has lead to such recent fiascos as the price collapse in the market in Phase One of the EU ETS; the acceleration of tropical deforestation and increase in food prices caused by mandated bio-fuels standards and most recently the suppression of the market for CERs.[63]

Fifth there must be far more open and efficient decision making whether at international or national levels. The lack of transparency in decision making by the CDM is now legendary and has caused enormous harm particularly to those seeking to work within its rules.[64] Symptomatic of the causes of damage to investment is the time it takes to get a project from the period of public comment to the registration. The CDM requires an average number of 237 days for a project to progress from the start of the public comment period until a request for registration; then there is a further average delay from the request for registration until registration of 84 days. It thus takes well over a year to create a CER and the process is slowing down, not speeding up as should be the case now that the CDM Executive Board has years of experience to draw upon. In June 2005 it took an average of 70 days for a project proposal to proceed from a registration request to registration. By June 2007, this had increased to 110 days. For projects that require a new methodology, it takes an average of 305 days from the point of submission of a new methodology to its approval.[65] In other words a project developer seeking innovative solutions will be required to wait two years or more to find out if he can proceed. We simply don't have time for such a bureaucratic process if the developing world is to make a meaningful contribution to dealing with climate change. There is also substantial anecdotal evidence of political and personal bias in decision making.

The sixth step is to repeal, and certainly not to replicate or extend, the regulations and regulatory interpretations which have stifled investment in the forest and land use sector. The required use of counterfactual scenarios and the adoption of arcane concepts with no meaningful analytical underpinning have created a "parallel universe" of regulatory requirements which are completely detached from commercial reality. The first and key step, as mentioned above, is to extend to developing nations the same scope of forest project credit types as is afforded to Annex 1 countries. This leads to the second reform which is to provide for the inclusion of the full spectrum of land use: avoided deforestation, forest degradation, reforestation (natural and assisted), sustainable forest management, afforestation, low till and no-till agriculture. Third, prescriptive rules such as those created by the CDM for afforestation and reforestation should be rejected. These include such counterproductive measures as the following:

Capping at 1% of compliance requirement the use of A/R credits by Annex 1 countries

₂

A/R projects are limited in location to lands deforested or in agricultural use prior to 1990 and which remain deforested at a project's inception. Restoration of land deforested since 1990 or of degraded land is excluded

The result of this rule has been to exclude from the system any credit for regeneration or replanting of forests destroyed since 1990. As a result between 125-195 million hectares of deforested land is now ineligible for CDM forestry (an area three times the size of France) and the area is growing (not least because of the lack of any crediting of avoided deforestation) by an area the size of Greece every year and it is happening in the most bio-diverse areas and the home to many of the world's last remaining indigenous peoples.

Requiring the replacement of A/R credits after a maximum of 60 years

New rules should be principles-based and should allow for the recognition of the full value of tropical and subtropical forest land carbon storage and sequestration. LULUCF projects can bring multiple benefits, all of which are intricately linked and promote sustainable development. They include ecosystem services such as soil protection, erosion control, water purification, reduced flooding, agricultural pollination, local rainfall and biodiversity protection. They also include benefits to local communities and indigenous people by encouraging the resolution of land tenure issues, increasing resilience to adaptation to climate change, such as drought, storms, wildfires and floods.[67] New rules should encourage payment for these services in addition to carbon storage and sequestration and thus begin to fully value the multiple benefits of tropical and sub-tropical forests.

The seventh and final step is to ensure public accountability both of the regulators themselves and the efficacy of the regulations they promulgate. The CDM Executive Board, for example, is appointed by an obscure process in which those most affected by its decisions have no say. There is no requirement that its members have any relevant experience or expertise and its resources are not the subject of any budgetary scrutiny. Regulations are promulgated without any serious attempt to determine their costs or benefits, their impact on climate change or in the case of land use and forestry, their impact on biodiversity, on communities or on other critical resources such as fresh water. Neither the markets nor the general public can have any confidence in such a system of regulation.

SUMMARY

None of the manifold benefits and none of the climate change mitigation potential of the tropical and sub-tropical forests are now being realised precisely because of their exclusion from the carbon markets by misconceived regulation. Markets, contrary to many of the underlying assumptions of these counterproductive regulations, are in fact are very good at ensuring the integrity of the products they buy and sell and in punishing bad deliveries and bad deliverers. Market discipline, supported by appropriate, not manipulative, regulation will always be more efficient than bureaucratic attempts to ensure capital formation and price discovery. Markets are excellent at distinguishing the qualities of competing products by pricing them and their associated risks. There is no need to tell them what to do and efforts to do so, to pick winning technologies or approaches, always fail at huge and unnecessary cost. The EU bio-fuels targets are just one recent example of this.

Structural change is required which removes regulatory authority for the carbon market from the UN and EU Commission and vests it in the hands of experienced and accountable bodies such as central banks and securities markets. The role of the UN should be to establish the emissions targets to be undertaken by each country and to set out the broad principles which all countries must adhere to. No attempt should be made to make special rules which discriminate against the full participation of the developing world in the carbon markets such as is embodied in the CDM. The World Bank and other multinational bodies should assemble and distribute public sector funds to capacity building in the developing world so that all countries can benefit from investment driven by the carbon market.

We are firmly of the view that use of forest and land use credits, broadly defined to include the whole spectrum of rural land use, should be permitted to an unlimited extent in emissions trading schemes and in reaching emission reduction targets. Climate research has shown that to avoid catastrophic changes to the global climate and large scale irreversible systemic disruption temperatures must not increase above a threshold of 2% those in pre-industrial times.[68] Achieving this target requires significant emission cuts. The task of reducing and mitigating greenhouse gases on this timescale is enormous and to do so at a minimal cost to the world's economy should be a priority for policy makers. Emission trading schemes are designed to put a price on an industrial pollutant and to yield the lowest cost sources of compliance. Thus, opening the scheme as widely as possible to all sources of credits will allow the market to drive investment toward these low cost solutions. Unrestricted trading of REDD and LULUCF credits will provide a major portion, up to 25%, of the solution, will lower the cost of overall compliance and provide time for industry to implement the balance of the solution. If we do not rectify the fundamental error of excluding such credits from the carbon markets we will fail in the attempt to stabilise the climate.

Is there adequate support for developing countries to adapt to climate change?

No and there never will be without large scale private sector investment in rural land use in the developing world. Adaptation to climate change is costly, and to date it is unclear where the necessary funding will come from. According to the Stern Review in OECD countries the cost of making new infrastructure resilient to climate change could range from $15-$150 billion each year (0.05-0.5% of GDP), with their costs reflecting the prospect of higher temperatures in future. The Stern Review highlights that while there are few credible estimates of the costs of adaptation in developing countries it estimates the additional costs of adaptation alone in the developing world are $4-37 billion each year. This includes only the cost of adapting investments to protect them from climate-change risks, and it is important to remember that there will be major impacts that are sure to occur even with efforts at adaptation.[69] Needless to say, many of the key elements of adaptation for the rural poor of the developing world are integral to sustainable management of the tropical and sub-tropical forests as well as sustainable use of agricultural lands.[70] In the absence of such investment and the stabilisation of their local environments, particularly soils and sources of fresh water, tens if not hundreds of millions of the 1.4 billion people dependent on forest resources for their survival will become involuntary environmental migrants with profound negative effects on their societies and on ours.[71]

Sustainable Forestry Management (UK) Ltd

4 Grosvenor Place, London, SW1X 7HJ, +44 (0)20 7589 852

schedule 1: Rebuttal to DG Environment

29 January 2008

RESPONSE TO DG ENVIRONMENT'S STAFF WORKING DOCUMENT IMPACT ASSESSMENT ON LULUCF AND FOREST-BASED CARBON CREDITS

In December 2007, the staff of the European Commission's Directorate General for Environment circulated a draft Staff Working Document on an impact assessment of its proposal for a Directive to amend Directive 2003/37/EC on the EU Emissions Trading Scheme (the "Staff Working Document"). This paper responds to the Staff Working Document's sweeping and unjustified assertions on land use, land-use change and forestry ("LULUCF") and in particular on forest-based carbon credits.

The crucial importance of the world's tropical forests—the second largest source of CO₂ emissions—both to achieving climate stabilisation by mid-century and doing so at a reasonable cost, has been authoritatively and repeatedly documented by the Intergovernmental Panel on Climate Change ("IPCC"), in the Stern Review and in numerous studies of other independent parties, such as McKinsey.i It is also widely recognized that reducing deforestation and encouraging reforestation are essential to enabling the world's poorest and most vulnerable people to adapt to climate change. ii

This widespread scientific, economic and political consensus was emphatically endorsed at the 13th Conference of the Parties of the United Nations Framework Convention on Climate Change ("UNFCCC") in Bali last December 2007. There is also a growing conviction among many influential scientists, policymakers, and representatives of civil society and indigenous peoples that carbon markets, and in particular the EU Emissions Trading Scheme ("EU ETS"), represent the single most important source of long-term and large scale investment that is urgently needed to protect and restore the forests of the developing world. iii

The Staff Working Document stands well outside this mainstream view. It contains many extreme and very negative allegations against the contribution of LULUCF activities to climate change mitigation and the role of forest-based carbon credits. Yet, unsurprisingly given its ideological orientation, the Staff Working Document fails to cite a single authoritative source for any of its broad assertions.

This paper will show how most of the Staff Working Document's assertions are factually incorrect, contradict international scientific and technical consensus, and reveal an unjustified bias against the contribution of sustainable forestry to climate change mitigation.

Thus, for the reasons explained below, we urge policy markers to set aside the Staff Working Document in formulating the EU's approach to the revision of the ETS as it relates to LULUCF and forest-based carbon credits.

1. EMISSIONS FROM LULUCF ACTIVITIES

DG Environment's Staff Working Document

Allegation

Land Use, Land Use Change and Forestry (LULUCF) activities can lead to emissions of greenhouse gas and their removal from the atmosphere. These processes are inherently reversible, and carbon stored can at some point be released.

THE FACTS

"Risk of financial loss from a damaging natural event surely exists in timberland investments. Yet, 12 years of historical loss data reinforce what we have believed all along—that the risk of loss from a natural event has been very small, averaging 0.04 percent (4 basis points) of loss per year". (Hancock Timberland Investor) iv

Forests are a long-term store of carbon. They have covered vast areas of the Earth's surface for millennia and contain 60% of the carbon stored in terrestrial ecosystems.v Their duration exceeds that of any industrial facility.

Robust methods are also available to address and account for permanence, including maintenance of adequate reserves or buffers to cope with unforeseen losses in carbon stocks, insurance, discount factors based on the assessed risk of carbon loss and general strategies to reduce risk to carbon stocks, such as pest control and fire management. The risk of loss from a natural event in managed forests is also very small, averaging 0.04% of loss per year. vi In fact, it is so small that most large forest enterprises self-insure.

2. THE CARBON SEQUESTRATION POTENTIAL OF FORESTS

DG Environment's Staff Working Document

Allegation

The capacity of carbon sequestration by forests diminishes with time, and climate change will have further negative influence on a natural carbon uptake by the terrestrial biosphere.

THE FACTS

"Experiments have unequivocally shown that plants can grow faster and larger in a CO₂-enriched atmosphere, and the mechanisms of response are well understood". (Proceedings of the National Academy of Sciences) vii

"A series of carbon budgets based on data from forest inventories have shown that carbon is accumulating in northern mid-latitude terrestrial ecosystems". (Woods Hole Research Centre) viii

In a study recently published in the Proceedings of the National Academy of Sciences, an international team of 19 researchers states that "experiments have unequivocally shown that plants can grow faster and larger in a CO₂-enriched atmosphere, and the mechanisms of response are well understood".ix Attention to the global carbon cycle over more than 30 years has focused on the so-called "missing sink," missing because the accumulation of carbon in the atmosphere that would be expected has not been observed. In the last few years, several independent analyses based on geochemical data (ie, data from the atmosphere and oceans) and a series of carbon budgets based on data from forest inventories have shown that carbon is accumulating in northern mid-latitude terrestrial ecosystems.x

In addition, the Staff Working Document's allegation is entirely irrelevant for credits from Clean Development Mechanism ("CDM") and Joint Implementation ("JI") projects, and only serves to set a negative and biased tone. CDM and JI rules require that changes in carbon stocks over time within the project boundary be accounted for in the project's monitoring system. As a result, credits can only be issued for ex-post verified carbon sequestration above an established baseline, based on scientifically accepted monitoring techniques (See eg, the IPCC's Good Practice Guidance for LULUCF and the nine approved A/R CDM methodologies).

3. PROCEEDS FROM AUCTIONING FOR AVOIDED DEFORESTATION

DG Environment's Staff Working Document

Allegation

Proceeds from the auctioning of allowances within the EU ETS should be used to mitigate greenhouse gas emissions, in particular to fund measures to avoid deforestation.

THE FACTS

"A study carried out for this [Stern] Review estimated opportunity costs on the basis for eight countries that collectively are responsible for 70% of land-use emissions (responsible for 4.9 GtCO₂ in 2050 under BAU conditions). If all deforestation in these countries were to cease, the opportunity cost would amount to around $5-10 billion annually". (Stern Review) xi

The resources required to combat forest degradation and encourage forest restoration are very substantial, measuring in the tens of billions of Euros and will be required for decades to come. There is no likelihood that any fraction of the proceeds from auctioning will generate sums of this magnitude. Avoided deforestation activities will have to compete with a variety of other climate change adaptation and mitigation activities for a share of the proceeds resulting from the auctioning of emission allowances. The Commission's proposal for a Directive amending the EU ETS Directive provides for only 20% of the proceedings to be destined to climate change mitigation and adaptation activities, which include, in addition to avoided deforestation, contributions to the Global Energy Efficiency and Renewable Energy Fund, the development of renewable energies, capture and geological storage of greenhouse gases ("GHGs"), facilitation of developing countries' adaptation to climate change, addressing social aspects in middle and lower income households, and administrative expenses of the EU ETS. xii

In contrast, carbon markets and forest-based carbon credits are efficient market based instruments that can mobilize the huge amount of resources that are so necessary to encourage developing countries to meaningfully engage in sustainable forestry.

4. APPROVED CDM LULUCF PROJECTS

DG Environment's Staff Working Document

Allegation

Only nine LULUCF methodologies have been so far approved for CDM use, resulting in only 2% of all CERs for the first phase. The official registry pipeline (UNEP Risoe) identifies only one JI LULUCF project as registered. The reason for this relatively small occurrence is primarily to be found in the complexity of solving inherent inconsistency of the LULUCF projects: ensuring permanency, verification and adequate monitoring of carbon storage.

THE FACTS

In fact, to date no JI LULUCF project and only one CDM afforestation and reforestation ("A/R") project has been registered. xiii Contrary to the Staff Working Document's allegation, however, the key reasons for this are the following:

(i) The modalities and procedures governing LULUCF were discussed and decided only at COP 9 in Milan. xiv

(ii) The slow bureaucratic process of the CDM Executive Board has meant that there has been considerable policy uncertainty compared to other sectors, with only the first CDM A/R methodology approved in December 2005 and the first (and so far only) project registered in December 2006.

(iii) The fact that LULUCF is excluded from the EU ETS has been a disincentive for investors to develop projects and methodologies in this sector as the market is limited.

(iv) With the exclusion of LULUCF credits from the EU ETS, governments have been the only possible buyers of CDM LULUCF. This means that minimal experience has been gained with respect to forestry credits and governments have been wary to utilize credits with which they have little experience. Thus, market liquidity, which is necessary for the efficient functioning of any market, has been denied to the forestry sector.

In essence the EUTS ban of forestry credits has become a self-fulfilling prophecy which is now used to justify its continuance.

5. EFFECTIVE SOLUTIONS FOR THE TEMPORARY AND REVERSIBLE NATURE OF LULUCF ACTIVITIES

DG Environment's Staff Working Document

Allegation

All options under consideration pose problems concerning the temporary and reversible nature of LULUCF activities. As forests and cultivated land are dynamic ecosystems, changes in carbon capture are not only linked to the developer's influence, but are subject to temperature, weather conditions, outbreaks of transmissible tree diseases and pests as well as fires. [ . . . ]

The problems related to the temporary and reversible nature of LULUCF have not yet been solved and no effective solutions are in sight at the moment.

THE FACTS

"The EU notes that non-permanence is not an issue when possible reversals are compensated. Approaches to deal with non-permanence include (a) using temporary credits in a manner similar to the current A/R CDM projects, (b) reducing future financial incentives to take account of deforestation emissions above the agreed level, (c) bank credits and debits from one period to another, or (d) by mandatory banking of a share of the emission reductions. The transition from unsustainable to sustainable land use management reduces the risk of increases in emissions from deforestation". (Submission of the European Union to the SBSTA) xv

Forests and natural ecosystems are in dynamic equilibrium. For many ecosystems, exposure to fire, changing weather conditions, pests, and so forth are part of their natural disturbance and successional regimes. xvi In the case of CDM A/R projects, CERs are only generated ex-post at various intervals during the project lifetime, and therefore, credits are only issued for carbon which has been physically measured on the landscape. xvii

The risk of non-permanence of forests can in fact be addressed in many different ways. These include insurance products, pooled buffers, risk discounts, project rating services, and the ton year approach, which takes the life time of a molecule of CO₂ in the atmosphere as a measure if permanence.

The CDM's creation of temporary credits (ie, tCERs and lCERs) is yet another approach to the risk of non-permanence of forests. However, this approach, while technically adequate, is not optimal because it does not remove the perception of non-permanence from potential buyers.

Other mandatory and voluntary schemes have addressed the "temporary" nature of LULUCF in different ways. For example, the New South Wales Greenhouse Gas Abatement Scheme, which is the precendent for the announced Australian Emissions Trading System, has designed measuring and accounting systems that insure the permanence of forestry credits in the scheme. xviii As a result, sequestration credits from forestry are considered permanent in the New South Wales Greenhouse Gas Abatement Scheme, and there is no differentiation on the compliance buyer's part of a forestry credit from any other type of credit in the system. The New Zealand Emissions Trading System likewise has no difficulty in accounting for fluctuations in forest carbon accounting. xix

In the voluntary sector, the Voluntary Carbon Standard requires a buffer of credits that are held in reserve in the case of non-performance of the project. Project developers can draw on this buffer if the project does not deliver the required amount of credits. xx The Chicago Climate Exchange rules for forest-based carbon credits are well established and similarly require a buffer stock approach. xxi

6. LIABILITY RISKS OF TEMPORARY CREDITS

DG Environment's Staff Working Document

Allegation

Temporary credits create significant liability risks. For example, companies that consider closing down might be tempted to use temporary credits. If the company ceases to exist, it can no longer replace the temporary credits hence requiring that carbon cuts are made elsewhere to meet emissions targets. As a result, the Member State in which the company operated would have to cover for the expired credits. A key reason for not allowing the use of credits from LULUCF in Phase I and II would be to avoid the risk of liability falling on State where such credits have been used by companies. A company that intended to close its operations would have a clear incentive to use such credits and transfer liability to the State, since these credits—owing to the need for repeated surrender—will be less valuable than permanent credits. Council and Parliament also excluded any possible JI credits relating to LULUCF from the EU ETS because, as mentioned above, no modalities have been developed in relation to the non-permanence and other issues arising in relation to JI LULUCF projects.

THE FACTS

The temporary nature of credits does not affect the treatment of any liability of EU ETS operators in the case of insolvency. The obligation to surrender allowances forms part of the liabilities that belong to the legal estate of an operator. All suppliers of carbon credits sell them for forward delivery and, in the event of their insolvency, the liability for failure to make delivery will be the same whether the credits are "temporary" or not and regardless of how they were supposed to be generated.

It is extremely unlikely that an EU ETS operator would purchase any EU allowances (and not only forest-based carbon credits) in the face of bankruptcy. The liability to surrender any allowances to the government is under most insolvency laws not a liability that is given high priority. Certainly, an operator would first have to pay taxes, salaries or service senior financial obligations before it would have to fulfill EU ETS obligations. The same applies in the case of liquidation. The liquidator would also service more senior liabilities first.

Furthermore, in the extremely unlikely case that an operator would go out and purchase tCERs to meet its EU ETS obligations in the face of bankruptcy, the obligation to replace the tCERs would form part of the legal estate of the operator and the outstanding liabilities that would have to be liquidated.

Consequently, the purchase of tCERs does not change the liability situation or the treatment of a bankrupt EU ETS operator in case of liquidation.

7. LULUCF MONITORING TECHNOLOGIES AVAILABLE

DG Environment's Staff Working Document

Allegation

Current monitoring methodologies are still not reliable enough to fully measure the actual net carbon capture of LULUCF activities.

THE FACTS

"In the EU's view the IPCC guidance for greenhouse gas estimation should be a basis for monitoring emissions. The approaches to land identification developed by IPCC allow for both ground-based and remote sensing methods. The most cost effective combination depends on national circumstances but in all cases it is very likely that both remote sensing and ground-based data will be needed, and that there will always be a requirement for an appropriate monitoring system". (Submission of the European Union to the to the SBSTA) xxii

Concerns over measurement of carbon biomass have been comprehensively addressed over the years following the Seventh Conference of the Parties of the UNFCCC in Marrakech in 2001. Strong scientific and technical capabilities are now in place for accurately assessing long-term gains and losses of bio-mass carbon and other emissions from the forestry and land use sector. Landholders and government agencies now measure and monitor forest status and growth using a combination of techniques including direct field measurements, satellite and aerial photography, and computer modeling.

Many protocols for measuring and monitoring carbon project benefits also exist. xxiii The Good Practice Guidance for Land Use, Land-Use Change and Forestry ("GPG-LULUCF")xxiv produced by the IPCC provides methods and guidance for estimating, measuring, monitoring and reporting carbon stock changes and GHG emissions. The GPG-LULUCF's guidance is consistent with that of other sectors and can be used to quantify changes in GHG from a diverse range of forestry and land-use management practices. This guidance assists in measuring inventories for the sector that neither "over" nor "under" estimate. It supports the development of inventories that are transparent, documented, consistent over time, complete, comparable, assessed for uncertainties, subject to quality control and quality assurance, and efficient in the use of resources.

The currently approved CDM A/R methodologies have been developed, reviewed and approved by some of the leading experts in the field of forest carbon accounting and monitoring (see the UNFCCC's Roster of Experts, available from the Secretariat), and are all based on the IPCC's GPG-LULUCF.

In stark contrast, the above Staff Working Document's allegation is not based on any such references or credentials.

8. INTERDEPENDENCIES IN ECOSYSTEMS

DG Environment's Staff Working Document

Allegation

Furthermore, interdependencies in ecosystems are far from being fully understood, making it very difficult to assess the actual change in GHG emissions. Whereas emissions reductions in industry can be quantified by measuring input and output values, ecosystems are inherently prone to leakage. They are often referred to as flux rather than sinks.

THE FACTS

"Some methodological elements like baseline, additionality, leakage and permanence have already been addressed in the context of the Kyoto Protocol Clean Development Mechanism". (Submission of the European Union to the SBSTA) xxv

The Staff Working Document's allegation shows a clear misunderstanding of GHG quantification in the LULUCF sector. Indeed, interdependencies in ecosystems are well studied and actual changes in GHGs can be assessed.

First, carbon flux and sinks are distinct terms. Carbon flux refers to "the transfer of carbon from one carbon pool to another".xxvi Carbon sink is a carbon pool that, during a given time interval, has more carbon flowing into it than out of it. xxvii

Second, contrary to what the Staff Working Document suggests, measurement uncertainties are very manageable in the LULUCF sector. Measuring carbon pools is straightforward and scientists have developed clear guidance and protocols for this (See the IPCC's GPG-LULUCF). Furthermore, where uncertainties exist, all methodologies require taking a conservative approach that favors lower-end error margins and results so that projects are more likely to be under-credited.

Third, the Staff Working Document's suggestion that measurement uncertainties are equal to leakage is also incorrect. Leakage is commonly defined as the emissions of GHGs not taken into account because they occur outside of a project's accounting boundary as a result of project activities. xxviii Such leakage has often been raised as a major challenge associated with avoided deforestation projects. However, methods are readily available for avoiding leakage. These include providing economic opportunities for local communities that encourage forest protection; providing replacement products that are less carbon intensive, such as timber from plantations rather than native forests, and improving the productivity of agricultural lands. The Executive Board of the CDM has now approved methodologies for the control and measurement of leakage, and other practical methodologies have also been adopted under various other standards. xxix

Real projects have also demonstrated that leakage can be controlled and measured when it occurs. For example, the Noel-Kempff Climate Action Project has demonstrated that active management can reduce leakage, and that which cannot be eliminated can be quantified and deducted from the project's total carbon benefits. xxx Société Générale de Surveillance ("SGS"), an internationally accredited CO₂ certifier and Designated Operational Entity of the UNFCCC, validated the project design, and verified and certified emission reductions for the project. xxxi

Finally, the Staff Working Document's suggestion that non-forestry projects are not prone to leakage is also incorrect. xxxii In fact, leakage is often overlooked in most non-forestry CDM methodologies.

9. LULUCF AND TECHNOLOGY TRANSFER

DG Environment's Staff Working Document

Allegation

Currently, the LULUCF sector is mainly driven by voluntary emissions reductions, although a future increase of their share in CDM and JI projects may become economically attractive, as these projects can offer emissions reductions at a low cost. [ . . .] LULUCF in CDM slows down technology transfer and low-carbon technology development, as credits from forestry and land use will be much more competitive on price and hence crowd out other project types.

THE FACTS

"A substantial share of the overall opportunities, including a large potential to reduce emissions by protecting and replanting forests, lies in developing economies". (McKinsey Quarterly) xxxiii

"To control climate change effectively it will also be essential to halt tropical deforestation completely within the next two decades and then reverse it through afforestation or reforestation schemes. Deforestation currently contributes around 20% of global greenhouse emissions, more than transport. Discussions are taking place under the UN climate change convention aimed at creating appropriate incentives for reducing deforestation". (The European Commission) xxxiv

There is absolutely no evidence showing that LULUCF in the CDM has slowed down technology transfer or the development of low-carbon technology. On the contrary, inclusion of LULUCF will allow the acceptance of stricter commitments, and therefore, the achievement of climate stabilization goals. Without the inclusion of LULUCF, however, climate stabilization simply cannot be achieved at a reasonable cost. xxxv

It would be a mistake to exclude the forestry sector simply because one favours other sectors. First, it cannot be ignored that 20% of global anthropogenic GHG emissions are from the LULUCF sector. Second, reducing the rate of emissions does not reduce the concentrations of GHGs in the atmosphere, but only the increase of those concentrations. The world is already suffering the increasing impacts of climate change. A/R activities are therefore essential to remove as much CO₂ as possible while mankind transitions to a low-carbon economy.

Climate research has shown that to avoid catastrophic changes to the global climate and large-scale irreversible systemic disruption, temperatures must not increase more than 2 degrees Celsius above those in pre-industrial times. xxxvi There is a medium likelihood of staying below this temperature increase if GHGs are stabilized at a concentration around 450 ppm, xxxvii but this would entail maximum cumulative emissions of around 2100 Gt CO₂e between 2000 and 2100. xxxviii In turn, this would require limiting emissions to 32 Gt CO₂e/yr by 2030, xxxix a significant emission reduction in comparison with the business as usual scenario.

Emission reductions of this scale require the participation of the forestry sector. Offsets from the forestry sector account for a larger share of potential reduction abatement than any other sector, including potential reductions from the power sector over that period. xl This was also proved by a McKinsey study, which examined potential abatement scenarios for achieving the necessary emission reductions at a cost below

40/tCO₂e. xli

As the McKinsey report makes clear, assuming a price of

40/tCO₂e forestry accounts for 25% of the additional reduction potential in emissions required to achieve this target. It is clear that to achieve climate stabilisation by mid-century requires both avoided deforestation and reforestation (see Figure below). xlii Without the inclusion of forestry offsets, achieving these emissions reductions targets at an acceptable cost is impossible. In other words, the Staff policy makes it impossible to achieve the EU's own key climate policy goal.

IPCC research has also demonstrated that the potential of biological mitigation options is in the order of 100 GtC (cumulative) by 2050, equivalent to about 10 to 20% of projected fossil fuel emission during that period. xliii The analysis, however, also shows that emission reductions from the forestry sector, while essential to achieving medium term abatement goals, are also biologically constrained in their ability to mitigate climate change beyond a certain point. xliv This, amongst other considerations, should dispel fears that offsets from forestry will "flood" the market and reduce incentives to technological change. Forestry carbon credits and offsets are necessary but are not, by any means, sufficient, to achieve climate stabilisation goals. There is absolutely no reason to believe that they will crowd out other projects. There is, however, significant evidence that without them the cost of compliance will be so high as to force the emigration of industrial plant and employment to countries without binding emissions reductions commitments. xlv

Source: Vattenfall, 2007, Global Mapping of Greenhouse Gas Abatement Opportunities up to 2030

10. THE ROLE AND IMPACT OF LULUCF IN LEAST DEVELOPED COUNTRIES

DG Environment's Staff Working Document

Allegation

Another issue is that EU ETS aims at long-term emissions reductions in energy production and industry, the guideline being to foster the development of a low-carbon economy. Currently, the LULUCF sector is mainly driven by voluntary emissions reductions, although a future increase of their share in CDM and JI projects may become economically attractive, as these projects can offer emissions reductions at a low cost. While LULUCF projects offer a potential for the least-developed countries to benefit from the carbon market and profit from formerly unpriced carbon sequestration assets within forests and agriculture, they neither lead to technology transfer nor to carbon-conscious economic practices, thus hindering development towards a less carbon intensive economy by diverting financial resources from more promising projects with long-term benefits. LULUCF in CDM slows down technology transfer and low-carbon technology development, as credits from forestry and land use will be much more competitive on price and hence crowd out other project types.

THE FACTS

Sustainable forestry promotes sustainable development and technology transfer in least developed countries. In addition, CDM A/R rules require project developers to follow carbon forestry "best practices," which in turn require sustainable development and provide for technology transfer.

Sustainable forestry's contribution to sustainable development and technology transfer are well explained in the positions taken by the IPCC and other bodies as explained below:

"No single policy instrument will ensure the desired transition to a future secure and decarbonized world. Policies will need to be regionally specific and both energy and non-energy co-benefits should be taken into account". (IPCC) xlvi

"Forestry can make a very significant contribution to a low-cost global mitigation portfolio that provides synergies with adaptation and sustainable development. However, this opportunity is being lost in the current institutional context and lack of political will to implement and has resulted in only a small portion of this potential being realized at present". (IPCC) xlvii

"Forests and trees cover nearly one third of the Earth's surface. Sustainable forest management of both natural and planted forests and for timber and non-timber products is essential to achieving sustainable development as well as a critical means to eradicate poverty, significantly reduce deforestation, halt the loss of forest biodiversity and land and resource degradation and improve food security and access to safe drinking water and affordable energy; in addition, it highlights the multiple benefits of both natural and planted forests and trees and contributes to the well-being of the planet and humanity". (World Summit on Sustainable Development of Johannesburg ) xlviii

"Technology deployment, diffusion and transfer in the forestry sector provide a significant opportunity to help mitigate climate change and adapt to potential changes in the climate. Apart from reducing GHG emissions or enhancing the carbon sinks, technology transfer strategies in the forest sector have the potential to provide tangible socio-economic and local and global environmental benefits, contributing to sustainable development (IPCC, 2000b). Especially, technologies for improving productivity, sustainable forest management, monitoring, and verification are required in developing countries. However, existing financial and institutional mechanism, information and technical capacity are inadequate. Thus, new policies, measures and institutions are required to promote technology transfer in the forest sector". (IPCC) xlix

"R&D and technology transfer have a potential to promote forest sector mitigation options by increasing sustainable productivity, conserving biodiversity and enhancing profitability. Technologies are available for promoting mitigation options from national level to forest stand level, and from single forest practices to broader socio-economic approaches". (IPCC)l

"The development of suitable low-cost technologies will be necessary for promoting thinning and mitigation options. Moreover, technology will have to be developed for making effective use of small wood, including thinned timber, in forest products and markets. Thinning and tree pruning for fuelwood and fodder are regularly conducted in many developing countries as part of local integrated forest management strategies". (IPCC) li

"Globally, hundreds of millions of households depend on goods and services provided by forests. This underlines the importance of assessing forest sector activities aimed at mitigating climate change in the broader context of sustainable development and community impact. Forestry mitigation activities can be designed to be compatible with adapting to climate change, maintaining biodiversity, and promoting sustainable development. Comparing environmental and social co-benefits and costs with the carbon benefit will highlight tradeoffs and synergies, and help promote sustainable development". (IPCC) lii

"LULUCF activities can reduce dependence on fossil fuels primarily by providing a source of biomass that can be used as a renewable alternative to fossil fuels in generating energy and by supplying wood products that can substitute for other products requiring more energy to produce. Fossil fuel substitution will generally require investments in technology and infrastructure to enable the adoption of biofuels and less carbon-intensive products and processes". (IPCC) liii

"Savings in the emission of GHGs can also be achieved through material substitution. Typical building materials-such as steel, plastics and aluminum-have large energy requirements for mining, processing, smelting, and, with some materials, reduction of oxidized ore. These energy requirements lead to corresponding CO₂ emissions. Cement production also leads to additional direct CO₂ release during manufacturing. Wood leads to the lowest emissions because it requires only minor energy inputs in harvesting and sawing. Hence, any substitution of wood for other materials could reduce energy requirements and associated GHG emissions (Kirschbaum, 2000). Moreover, the production of metals and plastics generates higher volumes of air, water, and solid waste pollutants than wood products such as lumber-particularly so with toxic chemicals (USEPA, 1997) ". (IPCC) liv

"Carbon forestry and agriculture are the only meaningful methods of offering sustainable livelihoods to the rural poor and the only way they can participate and benefit from the carbon market". (Wangari Maathai) lv

An analysis of the potential to increase carbon stocks in the Kakamega National Forest of western Kenya concluded that: "The East African indigenous rainforest found in Kakamega supports high levels of biodiversity and provides sundry ecosystem services to Western Kenya. In addition, as a high carbon density land cover type, it can provide a global service as carbon store helping to mitigate climate change. While past human disturbances have reduced forest areas and depressed forest carbon densities, the results of this illustrates the potential to increase carbon storage in the Kakamega National Forest at a scale that is economically, and perhaps ecologically, significant for the region".lvi

11. LULUCF PROJECTS AND OTHER MORE COSTLY MEASURES

DG Environment's Staff Working Document

Allegation

The risk of LULUCF projects crowding out more costly measures, such as projects aiming at CO₂ emissions reductions (especially in the case of Option 3.15) is considerable, taking into consideration that EU ETS is the most dominant buyer of CDM CERs at 86% market share in 2006 (ENTEC 2007b). Thus, the use tCERs and lCERs for compliance in the ETS would conflict with creating sustainable emissions reductions.

THE FACTS

As of 17 January 2008, the CDM Executive Board has approved only one CDM A/R project. lvii This project is forecast to generate only 327,000 tonnes CO₂e of emission reductions over the first commitment period, lviii or just 0.27% of the amount allowed under the Marrakech Accords. In fact, it is expected that all CDM A/R projects combined will generate only between 7 and 14 million tCO₂e reductions in the first commitment period (2.8 million tonnes CO₂e per year), lix or about 1% of the total predicted CER market of a billion tonnes. lx

In contrast, the average daily trading volume in the EU ETS in 2007 was over 6.0 million tonnes CO₂e. lxi Therefore, at the high end of forecasts for credits from A/R (2.8 million tCO₂e), annual reductions from A/R would be less than one half of the average daily trading volume in the EU ETS or less than one half of one percent of the annual EU ETS trading volume. Thus, the volumes of forestry credits in the trading markets are currently negligible compared to the sector's contribution to 20% of global greenhouse gas emissions.

12. PRACTICAL IMPLEMENTATION OF LULUCF PROJECTS

DG Environment's Staff Working Document

Allegation

Lastly, some issues relate to the practical implementation of LULUCF projects. The potential use of non-native or genetically modified species that are faster growing could pose threats to local ecosystems. Furthermore, there are concerns that indigenous or local populations could be denied access to their traditional resource lands or access to subsistence-use logging due to LULUCF projects.

THE FACTS

"We need a mechanism that will assist people in developing countries, certainly in Africa, to protect their standing forests and plant trees, to protect their soil, protect biodiversity and protect livelihoods while reducing carbon emissions for everyone". (Wangari Maathai) lxii

The CDM rules require project developers to document and analyze environmental impacts associated with a project (all projects including A/R). Furthermore, project developers must also undertake a detailed environmental impact assessment if the environmental impacts are considered significant. The CDM rules also requires stakeholder consultations. lxiii

All of the leading voluntary sector codes, including the Voluntary Carbon Standard and the Climate, Community and Biodiversity Standards also require the assessment of environmental and social impacts before credits are certified. lxiv

Potential corporate social responsibility ("CSR") issues may apply to any CDM or JI project and not only to LULUCF activities. These concerns are not a reason to exclude any sector from the EU ETS, and should be addressed by taking the appropriate care in the project design, as is the case with LULUCF projects.

Furthermore, the overwhelming majority of indigenous people organizations supports forest-based carbon crediting. There are clear and simple reasons for this. Carbon crediting is based on verifiable land title and verifiable reduction in forest deforestation and degradation, and this will serve to enhance indigenous peoples' title to land and also provide them with direct benefits to reward them for preserving the ecosystems on which they depend. lxv

13. THE COMMISSION'S APPROACH TO ADDRESS DEFORESTATION

DG Environment's Staff Working Document

Allegation

It is clear that very substantial action needs to be taken to address deforestation in the coming decades, and auction revenues could contribute towards such action. The Commission has also proposed that proceeds from the auctioning of allowances within the EU ETS be used to mitigate greenhouse gas emissions, in particular to fund measures to avoid deforestation. Investments made in this way would be in line with government's priorities, rather than necessarily reflecting the market's natural incentive to find the lowest-cost potential for crediting.

THE FACTS

As mentioned above, the scale of funding needed to reduce and halt deforestation is estimated in the tens of billions of Euros. lxvi It is inconceivable—and disingenuous to suggest—that this level of funding would be earmarked for avoided deforestation measures from auction proceeds not least because of competing demands for these funds.

14. ADDITIONALITY AND DOUBLE COUNTING OF LULUCF PROJECTS

DG Environment's Staff Working Document

Allegation

The additionality and double-counting of projects is a serious issue which can undermine the environmental credibility of emissions trading systems. As broader initiatives advance to tackle deforestation, the likelihood of potential double counting and lack of additionality increases as regards the crediting of project activities in this area.

THE FACTS

The CDM itself is such a "broader initiative." The CDM process requires every project to demonstrate additionality through its "Additionality Tool," both for projects in the industrial sector and the LULUCF sector. lxvii This tool could also be extended to REDD projects.

Double-counting is a registry issue. The EU has addressed this issue in the EU ETS through its national registries' interaction with the International Transaction Log. A similar system could be designed for credits from REDD projects.

15. MONITORING UNDER THE EU ETS

DG Environment's Staff Working Document

Allegation

Allowing already existing CDM credits from LULUCF in the ETS (Option 3.16) adds an additional monitoring burden on the EU and the ETS, although monitoring is already covered by existing UN CDM regulation. The main problem is that UN CDM targets state-level trade of tCERs, whereas the EU ETS aims at firms. Thus, while the ultimate liability would lie at the Member State level, the benefits would accrue to firms. Such a situation represents an indirect subsidy of LULUCF developers, as they would receive all benefits, while a share of the liability risk would be borne by the public.

THE FACTS

The project developer of LULUCF projects bears the costs of monitoring just as with any other project developer. This does not represent a subsidy.

Moreover, the EU already needs to monitor compliance of operators under the EU ETS. This is because the EU ETS itself is designed to transfer the liability of governments' Kyoto commitments to private operators. In the case LULUCF credits, their expiration would simply result in a debiting of the account of the holder of the LULUCF credits. The EU ETS' penalties and enforcement rules, however, ensure that liability always stays with private operators, and this would not be different in the case of LULUCF credits.

16. LULUCF DOMESTIC OFFSET PROJECTS

DG Environment's Staff Working Document

Allegation

Allowing domestic offset projects ("DOPs") from LULUCF could be based on adopting existing monitoring guidelines for CDM projects. However, as the existing guidelines prove to be insufficiently satisfactory compared to EU standards, further development is needed before credits generated from LULUCF DOPs can be used for compliance in the EU ETS.

THE FACTS

The EU is free to impose stricter standards than the CDM. The project developer can make the decision whether or not invest in a project.

17. MONITORABILITY OF LULUCF

DG Environment's Staff Working Document

Allegation

Including the forestry sector in the ETS (Option 3.18) poses major questions concerning the monitorability of all forests included in the trading system. This would mean that a large number of forest owners would need to report and verify the change of the carbon content of their forests. The costs for monitoring would have to be covered by all the participating forest owners. Proportionally, the monitoring costs would be higher for smaller forest parcels.

THE FACTS

The EU ETS currently covers around 12,000 installations, lxviii all of which require monitoring. To limit monitoring and compliance costs, the EU ETS excludes installations that do not meet specified thresholds (eg, in terms of minimum power generation). Similar criteria could be designed for the forestry sector by including in the EU ETS only forests meeting certain thresholds (eg, in terms of land area). This approach, like that in the industrial sectors, would limit the amount of forestry "installations" covered by the scheme.

In addition, EU countries already engage in monitoring land use change in their calculations of national inventories for reporting to the UNFCCC. In fact, the land use sector is projected to account for about 12% of the reductions needed for the EU 15 to reach its Kyoto targets. lxix

As for monitoring costs being greater for smaller forest parcels, economies of scale apply to the forest sector like any other industry.

18. FUTURE INTERNATIONAL TREATMENT OF LULUCF

DG Environment's Staff Working Document

Allegation

Uncertainties are high concerning the future treatment of LULUCF on the international level. Currently, the use of LULUCF credits for compliance with Kyoto targets is only acceptable in the first Kyoto period. Therefore, a recognition of LULUCF in the ETS now would increase the uncertainties about future supply. This contradicts one of the main objectives of the ETS: predictability of carbon credit supply. Any solution to this problem is likely to incur considerable higher costs compared to the current situation.

THE FACTS

In terms of the Kyoto Protocol, there is, at present, only one commitment period for all Kyoto credits as the Protocol's trading periods ends in 2012. Therefore, future supply of credits is equally uncertain among all sectors, not specifically for LULUCF.

However, one of the main results of the UNFCCC COP 13 at Bali is the consensus on the increasing importance and certainty of LULUCF, lxx particularly in relation to reducing emissions from deforestation and forest degradation ("REDD").

A cap and trade system functions through the demand being set by the cap, and the market responding to the cap to meet the targets. One of the consequences of this arrangement is an inherent uncertainty of supply. This is best illustrated in the EU ETS by the number and volume of HFC-23 projects, particularly from China which accounted for 61% of the volume transacted in the CDM market in 2006, of which HFC-23 projects contributed 34% (down from 67% in 2005). lxxi

REFERENCES

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ii Communication from the Commission to the Council and the European Parliament, Building a Global Climate Change Alliance between the European Union and Poor Developing Countries Most Vulnerable to Climate Change (September 2007).

iii "Reducing emissions from deforestation in developing countries: approaches to stimulate action, draft conclusions proposed by the Chair", COP 13, FCCC/SBSTA/2007/L.23/Add.1/12 December 2007 Rev.1. Available on the Internet at (http://unfccc.int/documentation/decisions/items/3597.php). See Forests Now Declaration, available on the internet at (http://www.forestsnow.org/).

iv Hancock Timberland Investor, 2nd Quarter 2003, "Risk from natural hazards for timberland investments", published on the Internet at (http://www.htrg.com/research—lib).

v IPCC, Land use, land-use change, and forestry: a special report of the IPCC (Cambridge & New York: Cambridge University Press, 2000).

vi Hancock Timberland Investor, 2nd Quarter 2003, "Risk from natural hazards for timberland investments", published on the Internet at (http://www.htrg.com/research—lib).

vii Norby, R J et al, (2005) "Forest response to elevated CO₂ is conserved across a broad range of productivity", Proceedings of the National Academy of Sciences 102.

viii Woods Hole Research Centre, available on the Internet at (http://www.whrc.org/carbon/missingc.htm).

ix Norby, R J et al, (2005) "Forest response to elevated CO₂ is conserved across a broad range of productivity" Proceedings of the National Academy of Sciences 102: 10.

x Woods Hole Research Centre, available on the Internet at (http://www.whrc.org/carbon/missingc.htm).

xi Stern N (2006), Stern Review: The Economics of Climate Change, published on the Internet at

(http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_report.cfm).

xii Bali Action Plan, published on the Internet at (http://unfccc.int/documentation/decisions/items/3597.php)

xii http://ji.unfccc.int/index.html).

xiii (http://ji.unfccc.int/index.html).

xiv (http://unfccc.int/cop9/latest/sbsta—l27.pdf).

xv Submission by Germany on Behalf of the European Union to SBSTA, Views on issues related to further steps under the Convention related to reducing emissions from deforestation in developing countries: approaches to stimulate action (February 2007), available on the Internet at

(http://unfccc.int/resource/docs/2007/sbsta/eng/misc02.pdf).

xvi Frelish, (2002) "Forest Dynamics and Disturbance Regimes", Cambridge Studies in Ecology.

xvii See (http://cdm.unfccc.int/methodologies/ARmethodologies/approved—ar.html).

xviii See New South Wales Greenhouse Gas Abatement Scheme, "Greenhouse Gas Benchmark (Carbon Sequestration) Rule No 5 of 2003.

xix "The Framework for a New Zealand Emissions Trading Scheme," Ministry for the Environment and the Treasury, September 2007.

xx "Voluntary Carbon Standard—Guidance for Agriculture, Forestry and Other Land Use Projects".

xxi See (http://www.chicagoclimateexchange.com/) and (http://www.maf.govt.nz/forestry/pfsi/).

xxii Submission by Germany on Behalf of the European Union to SBSTA, Views on issues related to further steps under the Convention related to reducing emissions from deforestation in developing countries: approaches to stimulate action (February 2007), published on the Internet at

(http://unfccc.int/resource/docs/2007/sbsta/eng/misc0,.pdf).

xxiii Brown, S, O Maseru, J Sathaye (2000) "Project-based activities" in R Watson, I Noble, and D Verardo (Eds), Land Use, Land-Use Change and Forestry; "Special Report to the Intergovernmental Panel on Climate Change", (Cambridge and New Your: Cambridge University Press), Chapter 5; See also The Revised 1996 IPCC Guideline for National Greenhouse Gas Inventories; and MacDicken (1997) "A guide to monitoring carbon storage in forestry and agroforestry projects". (Winrock International Institute for Agricultural Development).

xxiv IPCC, (2003) Good Practice Guidance for Land Use, Land-Use Change and Forestry, published on the Internet at (http://www.ipcc-nggip.iges.or.jp/public/gpglulucf/gpglulucf.htm).

xxv Submission by Portugal on Behalf of the European Union to SBSTA, December 2007, Views on issues related to further steps under the Convention related to reducing emissions from deforestation in developing countries: approaches to stimulate action, published on the Internet at

(http://unfccc.int/methods—and—science/lulucf/items/3896.php).

xxvi Canadian Forest Service, available on the Internet at (http://carbon.cfs.nrcan.gc.ca/definitions_e.html).

xxvii Canadian Forest Service, available on the Internet at (http://carbon.cfs.nrcan.gc.ca/definitions_e.html).

xxviii (http://www.epa.gov/sequestration/leakage.html).

xxix For CDM approved methods See (http://cdm.unfccc.int/methodologies/ARmethodologies/approved—ar.html). For details of forestry carbon under the Chicago Climate Exchange,

See (http://www.chicagoclimatex.com/content.jsf?id=242).

xxx (http://www.fan-bo.org/pacuk).

xxxi SGS, Summary, Validation and Verification Report, Programa Nacional de Cambio Climatico Noel Kempff Climate Action Project (27 November 2005).

xxxii Chomitz, K (1999) "Evaluating carbon offsets from forestry and energy projects: how do they compare?" World Bank Policy Research Working Paper No 2357.

xxxiii "Cost Curve for Greenhouse Gas Reduction", The McKinsey Quarterly, (February 2007).

xxxiv European Commission, Limiting Global Climate Change to 2 Degree Celsius (January 2007), published on the Internet at (http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/07/16).

xxxv "A Cost Curve for Greenhouse Gas Reduction", The McKinsey Quarterly (February 2007).

xxxvi European Commission Communication to the Council and the European Parliament Limiting Global Climate Change to 2 degrees Celsius: The way ahead for 2020 and beyond (January 2007); Stern, N (2006) Stern Review: The Economics of Climate Change; Meinshausen Malte "On the Risk of Overshooting 2 degreesC" Proceedings from International Symposium on Stabilisation of Greenhouse Gas Concentrations—Avoiding Dangerous Climate Change, (Exeter, 1-3 February 2005), published on the Internet at (www.stabilisation2005.com/programme.html).

xxxvii IPCC (2001) The Scientific Basis (Cambridge University Press); Meinshausen, Malte "On the Risk of Overshooting 2 degrees C" Proceedings from International Symposium on Stabilisation of Greenhouse Gas Concentrations—Avoiding Dangerous Climate Change (Exeter, 1-3 February 2005), published on the Internet at (www.stabilisation2005.com/programme.html).

xxxviii Stern, N, (2006) Stern Review: The Economics of Climate Change.

xxxix "A Cost Curve for Greenhouse Gas Reduction", The McKinsey Quarterly, (February 2007).

xl Ibid.

xli Ibid.

xlii Vattenfall, (2007) Global Mapping of Greenhouse Gas Abatement Opportunities up to 2030.

xliii IPCC, 2001, Climate Change 2001: Mitigation, Cambridge University Press.

xliv Ibid.

xlv "Emissions Target Threat to EU Industry", Financial Times, 9 January 2007.

xlvi Page 255 of the IPCC Fourth Assessment Report 2007: Mitigation of Climate Change. Available on the Internet at (http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter4.pdf).

xlvii Page 543 of the IPCC Fourth Assessment Report 2007: Mitigation of Climate Change. Available on the Internet at (http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter9.pdf).

xlviii Paragraph 45 of the Plan of Implementation of the World Summit on Sustainable Development of Johannesburg of 2002. Available on the Internet at

(http://www.un.org/esa/sustdev/documents/WSSD_POI_PD/English/WSSD_PlanImpl.pdf).

xlix Page 577 of the IPCC Fourth Assessment Report 2007: Mitigation of Climate Change. Available on the Internet at (http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter9.pdf).

l Page 576 of the IPCC Fourth Assessment Report 2007: Mitigation of Climate Change. Available on the Internet at (http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter9.pdf).

li Page 576 of the IPCC Fourth Assessment Report 2007: Mitigation of Climate Change. Available on the Internet at (http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter9.pdf).

lii Page 543 of the IPCC Fourth Assessment Report 2007: Mitigation of Climate Change. Available on the Internet at (http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter9.pdf).

liii Robert T Watson et al (Eds), Land Use, Land-Use Change And Forestry: A Special Report of the IPCC (Cambridge University Press: 2000). Available on the Internet at (http://www.grida.no/climate/ipcc/land_use/096.htm).

liv Robert T Watson et al (Eds), Land Use, Land-Use Change And Forestry: A Special Report of the IPCC (Cambridge University Press: 2000). Available on the Internet at (http://www.grida.no/climate/ipcc/land_use/101.htm).

lv Wangari Maathai, Climate Change A Pressing Issue for Africa (13 November 2006).

lvi Julia Glenday, (2006) "Carbon Storage and Emissions Offset Potential in an East African Tropical Rainforest", Forest Ecology and Management 235 72-83, page 81. Available on the Internet at (www.sciencedirect.com).

lvii See (http://cdm.unfccc.int/Statistics/Registration/RegisteredProjByScopePieChart.html).

lviii Project Design Document: "Facilitating Reforestation for Guangxi Watershed Management in Pearl River Basin, China".

lix Jung, Martina, (2003) The Role of Forestry Sinks in the CDM—Analysing the Effects of Policy Decisions on the Carbon Market (Hamburg Institute of International Economics).

lx (http://cdm.unfccc.int/Statistics/index.html)

lxi See Point Carbon, Global Carbon Market Value Grew 80% to 40 billion in 2007 (18 January 2008). There are 252 trading days per year.

lxii Wangari Maathai, Nobel Peace Prize Laureate and Founder of the Green Belt Movement, published on the Internet at

(http://www.forestsnow.org/news/pdf/ForestsNow-Declaration-PressRelease-26Oct07.pdf)

lxiii See (http://cdm.unfccc.int/Reference/Documents/cdmpdd/English/CDM_PDD.pdf).

lxiv Voluntary Carbon Standard—Guidance for Agriculture, Forestry and Other Land Use Projects (17 November 2007); and The Climate, Community & Biodiversity Alliance Standards, published on the Internet at (http://www.climate-standards.org/).

lxv See The Forest Now Declaration, published on the Internet at (http://www.forestsnow.org/endorsers/?filter=NGO+and+Research+Institutes). The Declaration has been signed by over 300 high-level endorsers, including Association of Indigenous Organisations of the Brazilian Amazon (COIAB), the Governors of Aceh, Indonesia, Papua, Indonesia, and Amazonas, Brazil, and President Oscar Arias of Costa Rica.

lxvi op cit. Stern.

lxvii See Tool for the demonstration and assessment of additionality for afforestation and reforestation CDM project activities, published on the Internet at (http://cdm.unfccc.int/methodologies/ARmethodologies/approved_ar.html).

lxvii (http://ec.europa.eu/environment/ets/).

lxviii http://ec.europa.eu/environment/ets/).

lxix See Climate change: EU on track towards Kyoto target but efforts must be maintained, projections show, published on the Internet at (http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/1774&format=HTML&aged=0%3Cuage=EN&guiLanguage=en).

lxx See Decision -/CP.13 Reducing emissions from deforestation in developing countries: approaches to stimulate action.

lxxi The World Bank, State and Trends of the Carbon Market 2007.

1 See Decisions COP 13, "Bali Action Plan," and "Reducing emissions from deforestation in developing countries: approaches to stimulate action". Back

2 See http://cdm.unfccc.int/Statistics/index.html, passim. Back

3 op cit. Decisions COP 13. Back

4 http://www.rainforestcoalition.org/eng/ Back

5 Point Carbon, Global carbon market value grew 80% to 40 billion in 2007 (18 January 2008). Back

6 See Commission for the European Communities, "Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community", 23 January 2008. Back

7 Attached as Schedule 1 is a rebuttal to the DG Environment's various rationales for the ban's continuance. Back

8 See Official Journal of the European Union, "Directive 2004/101/EC of The European Parliament and of The Council of 27 October 2004 amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol's project mechanisms". Back

9 op cit. Commission for the European Communities, 23 January 2008. Back

10 See "France, Germany Warn EU Climate Plan Risks Jobs", at http://www.planetark.org/dailynewsstory.cfm?newsid=47167 Back