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Memorandum submitted by CMIA Communications (FOR15) 1 Executive Summary · Measures to address deforestation, afforestation and reforestation should be a key element of climate change policy, given the contribution to global greenhouse gas emissions resulting from deforestation, and the scale of the sector's potential to achieve carbon sequestration. · The CMIA anticipates that progress will be made at international level to develop more workable financial mechanisms to incentivise afforestation and to halt deforestation, but notes that the existing regime has been wholly inadequate in this regard. · To achieve maximum effectiveness, a range of policy tools and both public funding and private sector finance is likely to be required. Public funding should be focused on policy development and capacity building in relevant developing countries, with private finance focusing in the short term on pilot projects and thereafter on larger scale project and programmatic activities. · To attract private investment, any scheme will need to develop robust but useable modalities and methodologies, that apply standards equivalent in terms of rigour to those applicable in non-forest related CDM. In that context, forest related credits should be valued no differently from those derived from industrial projects. Given the location of these projects, in order to attract private sector engagement, it will be important to ensure direct project crediting, instead of or in conjunction with country-level crediting. 2 The role financial mechanisms might have in helping to address emissions from land use change 2.1 To bear any realistic prospect of success, policies aimed at mitigating climate change have to address the forestry sector, and the potential solutions that this sector offers. According to the IPCC[1], "forestry" accounts for 17.4% of global annual greenhouse gas emissions, essentially as a result of the burning or decomposition of tropical forests. The proportion associated with the broader category of landuse change is around 30%. Modelling undertaken for the UK's Eliasch Review suggests that the global economic cost of climate change caused by deforestation could reach $1 trillion a year by 2100. It is therefore a material part of the problem. However, if engaged upon at scale and in an effective manner, reduced deforestation, afforestation and reforestation could provide a relatively rapid contribution to the global portfolio of low carbon measures required to reduce GHG emissions. 2.2 For both positive and negative reasons, therefore, deforestation, afforestation and reforestation should be a key element of climate change policy. Notwithstanding this, the international policy community has been very slow to grasp the nettle. Accordingly, current investment levels in relation to activities in the productive forestry sector that can make a contribution to climate change mitigation (tree plantations and sustainable management of natural forests) are far too low to have any meaningful impact. For non-productive tree planting and forest conservation only philanthropic funding exists, which is not nearly enough to change global deforestation trends. 2.3 Carbon markets can provide an effective incentive for increased investment in productive forestry activities, non-productive tree planting and forest conservation through the creation of a tradable asset: the certified CO2 emission avoidance from forests or removal into forests, also called 'carbon credit'. CMIA believes that the engagement of the carbon markets is critical to the success of mitigation action in relation to land use change and forestry. This conclusion is one that has also been reached by Mr Eliasch. 2.4 There was some debate in the recent Accra meetings as to whether actions in this area should be financed through public or private funding. The CMIA anticipates that significant contributions from both will be required. Public funding will be very important for initial capacity building and the development of national programmes, while the private sector offers the only realistic long term source of finance, at the scale needed to achieve climate stabilisation and also offers the potential for near term project-specific and programmatic funding. There are likely to be some circumstances in this sector where public and private co-financing could prove particularly effective. For example, a facility drawn from public funds could be used to partly underwrite private sector investments in cutting edge (and therefore inherently high risk) avoided deforestation, afforestation or reforestation projects. Such combined approaches might leverage a much larger amount of money from private investors than would otherwise be the case. 2.5 Forest-based carbon credits are an effective policy tool to support sustainable forestry around the world. Given the size of the carbon market relative to public finances such as official development assistance, a market-based regime offers the greatest potential source of financing for forest conservation. Forest-based carbon credits offer the most effective and flexible means of providing the necessary incentives and investment for developing countries to curb deforestation and also engage in the necessary sustainable reforestation and afforestation. Private sector buyers, particularly in the wake of recent market instability, are also likely to focus more heavily on diligencing the assets they are acquiring, thereby increasing the reliability of the overall approach. 3 Barriers to an effective market 3.1 That said, in order to participate at scale, the private sector needs a reasonably clear and straightforward regulatory framework to generate forest based carbon credits (whether that framework is genuinely regulatory, or quasi regulatory through a voluntary standard to address quality assurance issues). It also requires secure contracts with its sellers and certainty that credits will be issued at the appropriate juncture. 3.2 The key barrier to private sector engagement in this aspect of the climate change agenda lies in the aggregate effect of the following factors: · the opportunity cost associated with avoiding or reducing deforestation, relative to pricing of credits, · the lack of demand for forest-based carbon credits resulting from their exclusion from the EU-ETS. · the absence to date of any regulated market at all for REDD, and virtually no such market for A/R projects (and the temporary crediting system for CDM A/R), · the lack of the necessary legal framework, institutional knowhow and credible contracting parties in many relevant developing countries. 3.3 The opportunity cost of reduced deforestation was considered in a study carried out by Lord Stern. He concluded that global estimates of the opportunity cost of halving deforestation ranged between $3 billion and $33 billion annually.[2] Internationally, nationally and at local level there are a range of well-established drivers for deforestation, including the demand for commodities such as timber, palm oil and other crops, and local needs for subsistence farming or for employment in these cropping businesses. In addition, the fixed costs associated with forest related carbon projects are significant and front loaded. They involve systems to permit the development of baselines, protection of the territory, monitoring, enforcement and other institutional costs. [3] 3.4 Reform of the Clean Development Mechanism insofar as it addresses forestry is essential to increase the flow of investment in reforestation, afforestation and avoided deforestation in the developing world. At present, the CDM rules might best be described as showing institutional bias against the forest sector. Existing rules make it virtually impossible to pursue afforestation and reforestation projects on anything other than a charitable basis. For example, · Capping afforestation and reforestation to just one percent of an Annex-I country's annual compliance requirement over the first commitment period has discouraged investment in these projects. · The issuance of temporary credits in which the buyer maintains a liability makes tCERs unattractive to most buyers.[4] This is a route that has been rejected by most national and regional schemes that accept forestry related credits. · Limiting A/R projects to lands deforested or in agricultural use prior to 1990 which remain deforested at a project's inception excludes from the system any credit for regeneration or replanting of forests destroyed since 1990. Between 125-195 million hectares of deforested land is now ineligible for crediting. · Overly tight definitions of "forest" which includes many areas where projects might usefully be located; and · More generally, the time in the Kyoto Protocol First Commitment Period is too short for projects in the A/R forestry sector, which sequester most of the relevant carbon only a number of years after the start of planting. 3.5 With regard to avoided deforestation, rules need to be developed which avoid the unnecessary complications associated with the existing A/R regime and address issues associated with contracting with least developed countries. It is essential that market regulators create long-term market certainty and apply robust rules and modalities to address some of the issues inherent in avoided deforestation. In particular, to generate credits project activities need to show a proven climate benefit by reducing greenhouse gas emissions. Carbon credits exchanged in a market must be independently verified according to rules and modalities that ensure that each credit truly represents the emission reduction or removal of one tonne of CO2e. Private sector engagement will also mean that the regime needs to allow direct project crediting, instead of or in conjunction with country-level crediting. 3.6 Africa is more affected than any other region by the limitations imposed on crediting carbon sequestered through forestry and agriculture. Africa emits less greenhouse gases than any other continent and is likely to suffer significantly from the effects of climate changes attributable to emissions from industrialized countries. The carbon market has largely bypassed Africa. The lack of African CDM projects is due in large part to the rules of the carbon market which so heavily regulate agricultural and forestry projects. 3.7 Many developing countries, particularly in Africa, currently lack much of the infrastructure they need to ensure the full realisation of the potential of carbon markets for them. In order to be market-ready for a post-2012 carbon market, they urgently need to develop their own capacity to reap those benefits, and many are fully aware of this. There are some essential elements to a functioning market and capacity building should focus on them: · Assistance to measure, monitor and verify their carbon stocks; · Assistance to develop and implement systems of land tenure and registration; · Assistance with administration, provision for pass through of credit related income to local communities and public accountability; · Assistance with law enforcement; The public sector and multinational institutions have a key role to play in relation to this and a role in which they have extensive expertise. If the available resources from the public sector were utilised for this purpose, the developing world, and in particular the least developed countries, would be better placed to benefit from a scaled-up carbon market. 3.8 There are a range of other technical issues associated with forestry related credits, such as non-permanence (principally relevant to afforestation and reforestation rather than avoided deforestation), leakage and additionality. These can be effectively addressed through project design and/or carbon accounting solutions. Sufficient literature and experience now exists, in large part as a result of experience developed on individual projects in the voluntary market, for these issues to be important but not excluding factors for forestry solutions in carbon markets. It should be recognised however that leakage will be an issue particularly in the rollout of any avoided deforestation national programmes. 4 The environmental and social risks and benefits of using such financial mechanisms These mechanisms will require effective management of the environmental and social issues associated with land use. Forest initiatives can really work only if there is local buy-in to them and if local communities have income earning opportunities associated with the project for the life of the project, through sharing in carbon and other revenue flows and/or through the inclusion of sustainable timber sales or other crops. Unless this is planned into a project, the opportunity cost of deforestation will not have be adequately addressed and the project will be at risk directly or through leakage. In this regard the evolving interest in other eco-system services (biodiversity offsets, watershed rights, water resource rights, eco-tourism and pharma) offers additional income and the potential to create environmental and social benefits. The CMIA consider that carbon credits exchanged in a market should credibly demonstrate net positive environmental and socio-economic impacts. The translation of this requirement into contractual terms varies. Some of the sustainability requirements imposed, for example, under World Bank funds can be very onerous, since these typically involve a representation that IFC Performance Standards (a set of detailed requirements focused on private sector relatively large scale industrial projects) have been satisfied. It may be that more focused, simpler sustainability principles should be adopted and more rigorously enforced. Projects may also have the ability to deliver other important environmental benefits, notably ecosystem services, including soil protection, erosion control, water purification, reduced flooding, agricultural pollination, local rainfall and biodiversity protection and human development benefits such as increased resilience to climate change. From an investor perspective such additional benefits offer some attractions given that a monetary value is likely to be put in future years and that they increase the sustainability credentials of the project. It is essential for the proper operation of any carbon market that carbon credit producers and sellers should also possess clear legal title to the credits. This is a relatively big ask in many developing countries. It requires host countries to ensure that land tenure and relevant laws regarding carbon credit ownership are clear and transparent. Land tenure, government rights, informal rights and clan rules on eligibility for land rights can be very sensitive in many jurisdictions. There can also be competing drivers, with the government wanting to retain valuable rights to grant timber or mineral concessions, and a need to clarify how these interrelate with land, tree and carbon ownership. These sensitive issues are unlikely to be resolved rapidly, particularly in some of the least developed countries where clan conflicts have arisen. The growing market for timber, biomass and agricultural crops also has to be factored into any designs for forest related carbon mechanisms in order to enable sustainable timber and agricultural production. 5 The use of land use change credits in carbon markets and in meeting emission targets 5.1 It is important to be clear that sustainable forestry and agriculture are not substitutes for the deep reductions that industrialised countries will have to make. However, the combination of new market-based mechanisms for deforestation and an effective regime for crediting afforestation and reforestation under the UN Framework Convention on Climate Change will greatly increase the ability of developing countries to contribute to climate change mitigation. An effective regime will also provide these countries with an important source of income that will enhance their own prosperity, stability and their long-term transition to sustainable development and low carbon economies. 5.2 To develop this market, the CMIA considers that it is essential that regulators create a robust demand for forestry credits through enabling market liquidity. Sellers should be able to access a broad number and range of buyers. Linkages between markets and, exchangeability or 'fungibility' of forestry credits with credits from other sectors are essential to achieve this. The latter requires credits from this sector to be accepted as permanent while ensuring that non-permanence risk is dealt with in a prudent way through risk-discounting, buffering, replacement commitments and/or insurance solutions. 5.3 The CMIA endorses the recommendation of the Eliasch Review as to the need for inclusion of the forest sector in global carbon markets. We anticipate that this is feasible provided that stringent emission limits and supplementarity limits are applied. It would have the effect of accessing significant funding from the public and private sectors. Eliasch suggests that $7 billion could be generated in relation to the forest sector in the carbon markets in 2020, leaving $11-19 billion to be sourced elsewhere (e.g. public funding) with a view to halving deforestation. 5.4 In this context the CMIA welcomes the recommendation from the European Parliament's environment committee that countries should be allowed to offset up to 5% of their total emission reduction commitments through carbon reductions achieved in forest related CDM projects. Provided the rules, modalities and methodologies for forestry projects are robust, the CMIA believes that the eligibility of resulting credits should not be capped. While historically concerns were raised about the risk of the market being flooded with forest related credits, this concern does not appear rational given the hurdles associated with valuing forests for their global environmental contribution outlined in the rest of this submission. 6 The World Bank's Forest Carbon Partnership Fund The CMIA welcomes the FCPF for the capacity building, staged approach it is adopting in relation to this area. There will be a need to ensure that the FCPF is flexible in its approach to different developing countries, such that the approaches agreed through its processes fit with the culture and objectives of the relevant state. Some developing countries have raised concerns about the lack of flexibility of the World Bank and other agencies and NGOs, causing them to explore other alternatives with the private sector. As indicated earlier, the CMIA believes that the FCPF and other initiatives offer a route to address and correct the lack of existing government capacity to manage these new markets in the least developing countries. However, as recommended by Lord Stern, there should be streamlining of such initiatives to minimise unnecessary duplication of effort. Over time, the responsibility for oversight of these initiatives should migrate to the UNFCCC. 7 The role of technologies such as remote sensing in the verification of land use change credits Technical concerns over the measurement of carbon biomass have been addressed over recent years. The science and technology is now both strong and coherent in accurately assessing long-term gains and losses of biomass carbon and other emissions from the forest 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 modelling. Measuring and monitoring deforestation emissions at the national level is practical, reliable, and cost-effective. A combination of remote sensing and field-based surveying is an appropriate methodology to ensure an adequate level of accuracy. In the last decade, advances in computer modelling have created the possibility for nearly every country to monitor its deforestation rates to a high degree of accuracy. Broad deforestation can be measured with a margin of error of just 0.5%, and up to a 10% error margin for illegal logging.[5] International coordination for measuring and monitoring forest carbon is already underway. The Group on Earth Observations (GEO) is linking together environmental monitoring systems, data sets, and models to produce the Global Earth Observation System of Systems (GEOSS), which will be the world's most scientifically and technologically advanced and robust monitoring system to ensure the availability and sustainability of repetitive long-term observations and reliable methodologies for measuring forest carbon. This global system aims to make its remote sensing tools and results universally available and importantly, will render national data in a comparable format.[6] The GEO comprises 73 countries and the European Commission. 8 The success or otherwise of Government efforts in reducing emissions from international land use change As indicated elsewhere, the treatment of emissions from land-use change to date has not been an area of great progress internationally. It is to be hoped that the increased focus that is now evident will generate a more effective international regime. In this context, the CMIA welcomes the Government's Eliasch Review published on 14 October into the potential for international financing to reduce forest loss and associate climate change impacts. The CMIA endorses the key conclusions of the Eliasch Review and its suggestion that the Government work to mobilise international action on the issue. 9 The Congo Basin Forest Fund The Congo Basin Fund concentrates a sufficiently large sum to have effect in an area of the world where it is difficult for the private sector to operate efficiently. The key question is how these funds will be used. If used to establish the necessary legal, administrative, technical and scientific infrastructure to enable the countries of the area to attract private sector capital to the forest and carbon forest sectors, it will create a very useful framework to enable further investment. It is particularly important that the granting and supervision of forest concessions is improved in order to ensure that sustainable use of this vital resource is achieved. This requires, above all, greatly increased efforts in relation to governance, enforcement and training as well as improvements in the environment for foreign investors. Land-use policy as a whole needs significant improvement in the Congo Basin not only as regards forest management but in respect of agro-forestry and agriculture in order to reduce pressures on existing forests and to increase agricultural yields. For true progress to be made, indigenous people, particularly forest dwellers, need to see direct benefits from the good stewardship of carbon-rich resources and be given the means to enforce their land rights. Non-timber forest products and services could be of a significant contribution but need to be the subject of substantial work. The eco-tourism potential in the area, for example, is material but requires the active participation of the private sector. The Congo Basin Fund, if focused on establishing the public sector framework necessary for the private sector, as opposed to trying to substitute for it, has the potential to be of significant benefit. However, to maximise its effect, it needs to be led and managed by people with private sector experience and skillsets. It could then be used to leverage private sector capital to enable the countries in the area to manage themselves towards low-carbon development, rather than relying on a new form of foreign aid and expertise. October 2008
[1] 2007 [2] Stern, Key Elements of a Global Deal on Climate Change, London School of Economics and Political Science, 2008 page 25 et seq. [3] Potvin, Guay, Pedroni, Is reducing emissions from deforestation financially viable? Climate Policy 8 (2008) 23-40 [4] Post-Kyoto: The international context for progress on climate change. http://www.iea.org/textbase/speech/2008/Philibert_TestimonyUKparl.pdf [5] Tollefson, Jeff, Nature, "Save the Trees," Volume 452, 6 March 2008 [6] See Group on Earth Observations, "How the Group on Earth Observations (GEO) is advancing global collaboration on monitoring forest carbon," June 2008 |