63616 BioCarbon Fund Experience Insights from Afforestation and Reforestation Clean Development Mechanism Projects SUMMARY The BioCarbon Fund Housed within the Carbon Finance Unit of the World Bank, the BioCarbon Fund (BioCF) is a public-private initiative mobilizing resources for pioneering projects that sequester or conserve carbon in forest- and agro-ecosystems, mitigating climate change and improving local liveli- hoods. The overall goal of the Fund is to demonstrate that land-based activities can generate high-quality emission reductions with strong environmental and socio-economic benefits for local communities. The BioCF became operational in 2004 with Participants providing funds for both Afforestation and Reforestation projects (A/R) under the Clean Development Mechanism (CDM) and other land-based projects currently excluded from the CDM (e.g., Reducing Emissions from Defor- estation and Forest Degradation-Plus (REDD+) and sustainable agricultural land management). The Fund has two tranches. The first tranche became operational in 2004 with total capital of $53.8 million; because of the high level of interest in land-based carbon a second tranche, capi- talized at $38.1 million, was opened in 2007. Participants investing in the BioCF include six public entities and 12 private companies. Most of the BioCF resources (about 80 percent) have been earmarked to A/R CDM projects (first windows of each tranche); the remainder has been allocated to REDD+ and sustainable land management projects (second windows). The Emission Reductions (ERs) generated by these projects are purchased by the BioCF on behalf of its Participants and are subsequently trans- ferred to them pro rata their financial participation in the Fund. The contractual undertakings of a project entity and the BioCF for the sale and purchase of ERs are contained in an Emission Reductions Purchase Agreement (ERPA). As of May 2011, the BioCF had contracted 8.6 million Emission Reductions from 21 A/R CDM projects. These projects are located in 16 countries and five regions of the world. The BioCF resources are allocated to projects on degraded lands: half to projects with environmental resto- ration purposes, 25 percent for fuel-wood and 21 percent for timber. All of the projects directly benefit poor farmers; in 17 of them, farmers are planting their own lands. At the time of writing, nine BioCF projects have been registered under the CDM, one is under review at registration, two are requesting registration, six are undergoing validation, and three are under preparation. Registered projects are preparing for verification. Projects duly validated start receiving carbon payments as per ERPA provisions. Acknowledgments This report was prepared by a World Bank team consisting of Zenia Salinas and Ellysar Baroudy (lead authors), Leticia Guimaraes, Marco van der Linden, Rama Chandra Reddy and Mirko Serkovic, with important contri- butions from André Rodrigues de Aquino, Adrien de Bassompierre, Uma Bhamidipati, Franka Braun, Neeta Hooda, Liu Jin, Daigo Koga, Saima Qadir, Monali Ranade, Sebastian Scholz, and Nuyi Tao. The report benefitted greatly from the valuable comments and suggestions from several peer reviewers with significant experience and expertise in carbon finance, forest carbon, and Kyoto Protocol mechanisms: Philippe Ambrosi, Veronique Bishop, Benoit Bosquet, Joëlle Chassard, Keith Grocock, Charles E. Di Leva, Jonathan Mills Lindsay, Ian Noble, and Klaus Oppermann. The team is also grateful for the support and input of many other World Bank colleagues throughout the research and drafting process. This report would not have been possible without the support of the BioCarbon Fund’s Participants; their con- stant guidance, insights, and feedback are much appreciated. For more information contact the World Bank Carbon Finance Unit at helpdesk@carbonfinance.org The full version of this report can be found on the website of the World Bank’s Carbon Finance Unit: www.biocarbonfund.org Washington, DC, May 2011 BioCarbon Fund Experience: Insights from A/R CDM Projects | i Uganda Nile Basin Reforestation Project Executive Summary The Clean Development Mechanism (CDM) of the United Nations Framework Convention on Climate Change (UNFCCC) is one of the flexible mechanisms of the Kyoto Protocol intended to reduce the concentration of greenhouse gas (GHG) emissions in the atmosphere in a cost effective manner. The CDM allows developed countries to use Certified Emission Reductions (CERs) generated from sustainable development projects in developing countries to meet part of their emission reductions targets under the Kyoto Protocol. Developing countries in return receive investments in clean technology and revenue from the sale of these emission reductions, once they are generated. Emission reductions are certified by the Executive Board of the CDM (CDM EB). One CER is equivalent to one tonne of carbon dioxide (tCO2e). The land use, land-use change, and forestry Afforestation and Reforestation (A/R) as one (LULUCF) sector is responsible for about of the 15 sectors that are eligible to generate 17 percent of global anthropogenic GHG emis- emission reductions and offset credits under the sions.1 The UNFCCC has recognized the impor- CDM. A/R projects remove carbon from the tance of this sector for stabilizing concentrations atmosphere through planting trees and assisting of GHG in the atmosphere, and has included in the natural regeneration of degraded lands. Quantification of emission reductions is done 1 IPCC (Intergovernmental Panel on Climate Change), 2007. Climate Change 2007: Synthesis Report. Contribution of by applying baseline and monitoring method- Working Groups I, II and III to the Fourth Assessment Report ologies approved by the CDM EB. of the Intergovernmental Panel on Climate Change. Geneva. BioCarbon Fund Experience: Insights from A/R CDM Projects | 1 Box 1 Processes for A/R CDM Projects A/R CDM projects follow the same processes as projects in other CDM sectors: project preparation, validation, registration, monitoring, verification, and issuance of certified emission reductions. The crediting period of an A/R project is either a 30-year or a 20-year period that is renewable twice. FIGURE 1 PROCESSES AND STAKEHOLDERS INVOLVED IN THE A/R CDM PROJECT CYCLE PROJECT DEVELOPER STAKEHOLDERS DNA DOE CDM EB PREPARATION 1 2 3 PDD Local Confirms Development stakeholders* whether the participate in project project design furthers the country’s sustainable development goals 4 5 Validation Global stakeholder process 6 IMPLEMENTATION Registration 7 Monitoring 8 Local 9 10 stakeholders* Verification Credit participate in Issuance monitoring * If involved in projects Steps 1 and 2: Following CDM rules, project developers and local stakeholders produce a Project Design Docu- ment (PDD). To do this they have to apply a CDM-approved baseline and monitoring methodology. Steps 3, 4, and 5: The PDD is validated by a Designated Operational Entity (DOE), an independent auditor. This assessment aims to ensure PDD conformity with the A/R CDM rules and stakeholder comments, as well as the project’s contribution to the host country’s sustainable development goals. The latter is confirmed by a Desig- nated National Authority (DNA). Step 6: With a positive validation report, the DOE submits the PDD for registration under the CDM. Before reg- istration, the CDM EB checks the completeness of documentation submitted by the project and reassesses it to address concerns if any were brought up by at least three of its members or a project participant. Steps 7 and 8: The monitoring plan is implemented by the project developer and local stakeholders. Such a plan is designed based on the GHG accounting methodology selected for the project. Steps 9 and 10: At verification, the DOE verifies the monitoring report submitted by the project developer; a positive verification report will result in the issuance of Certified Emission Reductions. 2 | Executive Summary The BioCarbon Fund (BioCF), housed within the project developers still lack the capacity to apply to- Carbon Finance Unit (CFU) of the World Bank, is day’s rules for greenhouse gas accounting effectively. a public-private initiative mobilizing resources for The A/R CDM rules and procedures need to be further pioneering projects that sequester or conserve carbon simplified to become more pragmatic and to accom- in forest- and agro-ecosystems, mitigating climate modate realities on the ground. Moreover, communi- change and alleviating poverty. Most of the BioCF cation between the CDM EB and project developers resources (about 80 percent) are earmarked for A/R needs to be more effective and the local capacity for CDM projects using different carbon sequestration developing forest carbon projects strengthened. technologies, including assisted natural regeneration, forest restoration, community reforestation, agrofor- The main insights from the BioCF experience in de- estry, and silvopastoral systems. veloping and implementing A/R CDM projects is presented in nine chapters: (i) CDM regulations, (ii) This report presents insights from the BioCF’s seven land-related issues, (iii) GHG accounting, (iv) non- years of experience designing and implementing A/R permanence, (v) finance, (vi) institutional arrange- CDM projects in 16 developing countries. All of the ments, (vii) under-delivery risk, (viii) co-benefits, and projects directly benefit poor farmers. The report is in- (ix) looking ahead.4 A summary of the main insights tended to inform project developers of the challenges from each section of this report is presented in this and opportunities that A/R CDM projects have en- Executive Summary. The report concludes with a countered on the ground. The insights presented here discussion of how this experience could inform the are also relevant for policymakers and negotiators cur- debate about the Reducing Emissions from Defor- rently involved in the debate to reform the CDM rules estation and Forest Degradation, the role of conserva- and for informing discussions on new market-based tion, sustainable management of forest, and enhance- strategies for climate change mitigation in the Agricul- ment of forest carbon stocks (REDD+) mechanism ture, Forestry, and Other Land Use (AFOLU)2 sector. and could promote synergies between the UNFCCC and other UN Conventions and development goals. The BioCF experience shows that initially A/R CDM To support the reader of the Executive Summary, the project developers encountered significant difficulties main technical issues pertaining to A/R CDM projects applying the methodologies approved by the CDM are briefly described in Box 2. EB and preparing their Project Design Documents (PDDs), a requirement for project registration under Regulatory Issues: The Challenge of the CDM. In response to feedback about these chal- Pursuing Forest Carbon Credits with lenges, the CDM EB has improved and simplified the Environmental Integrity, Efficiency, A/R CDM rules and procedures. As a result, some and Effectiveness project developers are now replicating and scaling up Designing a project and developing a PDD can their activities. Some governments are also working on be a time-intensive and costly task. Projects mainstreaming carbon finance into their national sus- developed by highly motivated entities with good tainable land-use strategy. BioCF projects have dem- managerial capacity in countries with a strong for- onstrated that forest carbon finance can contribute to estry sector have been the most effective in project climate change mitigation while achieving important preparation and PDD development. Developing a co-benefits in rural areas. forest carbon project–including writing the PDD– Despite its potential to mitigation and adaptation to requires a wide range of technical and managerial climate change, the A/R sector remains underdevel- expertise (e.g., forestry, forest carbon, financing, oped for two main reasons. First, the demand for for- land-use change, economics, institutional and le- est carbon credits is still very limited.3 Second, most gal, coordination). Gathering such multidiscipli- nary teams in rural areas of developing countries is 2 AFOLU is a term that superseded Land Use, Land-Use Change, and Forestry (LULUCF) in the latest guidelines of the Intergovernmental Panel 4 The report is based on an analysis of in-depth desk review of Project Idea on Climate Change (IPCC), integrating agriculture, land use, and forestry. Notes (PINs), PDDs, reports on environmental and social assessments, 3 The European Union (EU) excludes forest carbon credits from the cat- BioCF annual reports, World Bank evaluation reports, safeguard policy egories of eligible assets to be used by EU operators to comply with compliance, and CDM validation reports. The data collected were ana- their emission reductions commitments under the EU Emissions Trading lyzed with descriptive statistics, and illustrative examples were used as Scheme (EU ETS). case studies. BioCarbon Fund Experience: Insights from A/R CDM Projects | 3 Box 2 Key Rules for A/R CDM Projects L AND ELIGIBILITY Developers must demonstrate that the A/R project will not cause deforestation or prevent natural regeneration. To do this, they have to prove that the land remained deforested from December 1989 until the project start date. Project developers must also demonstrate that any observed deforestation is not temporary. Evidence of this can include satellite images, aerial photography, and/or participatory rural appraisal results. Projects make this assessment based on the national definition of forest for the CDM, which delineates forest area, minimum tree height, and crown cover. PRO JECT BOUNDARY, CONTRO L O V E R T H E L A N D , A N D L A N D T E N U R E Project developers must delineate and provide geo-referenced coordinates of the discrete land areas where trees will be planted. The sum of discrete areas encompasses the project boundary. At validation, the project developer must provide the coordinates of the total project boundary and evidence of control over at least two- thirds of the lands; the remaining evidence must be provided at verification. Evidence of control over the land includes land-use contracts between the landowner and the project developers. Developers must also demon- strate clear legal title to the land, forest rights, and rights to the carbon credits. GHG ACCOUNTING The baseline and monitoring methodologies prescribe the procedures to estimate the ex-ante “net actual an- thropogenic emission reductions by sinks” achieved in projects, which is translated into tonnes of CO2e. In doing this, project developers deduct the GHG removals by sinks that would have occurred in the baseline from the actual emission reductions achieved in the project scenario. The emissions attributable to the project happening within and outside its boundary (leakage) must be deducted from the actual removals within the project bound- ary. The carbon stocks and changes in the baseline are estimated through sampling of the project area before project implementation. To estimate the carbon stock and changes in the project scenario, developers take into consideration the forest management plan and apply existing tree growth data. At monitoring, project develop- ers sample the project to estimate actual planting growth and calculate ex-post emission reductions, following the methodology. EM I S SIONS AND LEAKAGE Sources of emissions are, for example, the use of fossil fuels for project preparation and biomass burning. Sourc- es of leakage include activity displacement from the project area to agriculture, grasslands, and forest lands. Early versions of methodologies required project developers to account for several more sources of emissions and leakage. Most recent versions are simpler in this regard as they do not consider insignificant sources relative to the project’s total emission reductions. NON -PERMANENCE Reflecting the UNFCCC’s approach to non-permanence in the A/R sector, tonnes of CO2e produced in projects are accounted for as temporary credits. Conversely, credits originated in other CDM sectors are considered perma- nent. Temporary forest credits have a limited life: credits having a five-year life are called temporary CERs (tC- ERs) and those expiring at the end of the crediting period (30 years or 20 renewable twice) are called long-term CERs (lCERs). Buyers of tCERs and lCERs must replace them with permanent credits before their expiration date. SCA LE OF PROJECTS Projects producing less than 16,000 tonnes of CO2e per year are considered small-scale projects and are allowed to apply simplified modalities and procedures for A/R. Small-scale A/R projects have to be developed or imple- mented by low-income communities. Following defined rules, a project developer is allowed to bundle small- scale projects as a way to benefit from economies of scale. 4 | Executive Summary a challenging task. Reliance on external consultants difficulties in tracking CDM EB decisions are also remains high, increasing projects’ transaction costs. reflected in this poor performance. Moreover, ad- Lack of host countries’ forestry sector information ditional technical review may be required if at least for additionality has proven to be a major challenge three members of the CDM EB or a party involved for timely completion of PDDs. in the proposed project activity request it. As stated in the World Bank report 10 Years of Experience in DNAs can have an effect on the time projects Carbon Finance,5 this review was frequent in the spend on validation. DNAs must play a support- past. Although the CDM EB has made impor- ive role and focus on the analysis of the project’s tant improvements to revert this trend, some A/R contribution to the national sustainable develop- projects have been reviewed at registration. Extra ment objectives. In some countries, these entities examinations at registration and issuance may put have at times delayed the issuance of documen- A/R projects at risk of not getting credit issuance tation required by projects at validation. This is before the end of the first commitment period of sometimes due to the DNA’s lack of understanding the Kyoto Protocol because the queue of projects of its role in contributing to the project success for requesting registration and credit issuance is in- registration and overall project feasibility. It is im- creasing as 2012 approaches. portant to recognize, however, that DNAs are also on a learning curve; in some countries this chal- The verification process can be delayed when lenge has already been overcome. PDDs are not strictly followed. Project develop- ers and field teams often disregard the importance Validation is often delayed because many of strictly following the PDD at implementation. project developers do not fully grasp the rules This is compounded by the live nature of such for GHG accounting or lack the capacity to projects and, sometimes, the fact that project de- track the changes in rules, methodology ver- velopers and field teams are not involved in the sions, and required documents forms. Increased preparation of the PDD. Also, the monitoring of experience in PDD preparation and the develop- A/R projects has its own complexities as it requires ment of tools to facilitate GHG accounting have developers to assess many variables. Significant de- partially addressed these challenges. The CDM EB viation from the PDD at project implementation continues consolidating methodologies and pre- will increase the number of formal processes since senting rule changes in a more consistent manner. a revised monitoring plan must be approved by the Still, additional efforts are needed in this direction. CDM EB; this consequently will delay credit issu- In countries with minimal capacity this remains a ance. To overcome this challenge, it is important to problem. Also, project developers have serious dif- further simplify the monitoring rules and increase ficulties tracking the latest versions of CDM EB local capacity. guidance to update their PDDs, and this is a major source of delay in validation. Because of this, devel- The A/R CDM Land-related Rules: opers continue to rely on external consultants for Challenges and Opportunities validation, which prevents total ownership of the Complying with the land eligibility and project project and has serious implications for effective boundary rules is a challenging task for project implementation of later stages of the project cycle developers. It demands both human and techni- (e.g., monitoring). cal capacity to interpret satellite imagery and re- Delays at registration and issuance are expect- sources to invest in technologies. Also, developers ed to be significant in A/R projects due to the have struggled with tracking the many changes that stringent scrutiny by the CDM EB. At registration, the CDM EB has introduced to the land eligibil- project documentation undergoes a “completeness ity rule. These changes have created ambiguity and check” process. Projects frequently fail this check generated different interpretation of the rules by as developers get overwhelmed with complying validators and project developers. Since consultants with the validation process and disregard the im- that are external to the project have usually been in portance of presenting the required documenta- 5 World Bank, 2010. 10 Years of Experience in Carbon Finance. Insights tion in a comprehensive and accurate manner. The from working with the Kyoto Protocol. Washington, D.C., 113. BioCarbon Fund Experience: Insights from A/R CDM Projects | 5 Albania Assisted Natural Regeneration on Degraded Lands Project charge of doing the eligibility assessment, the stake- were deforested and degraded in the 1990s and are holders involved in projects become increasingly therefore ineligible for A/R CDM projects. In some frustrated as the process of selecting eligible lands cases, areas neighboring the projects are excluded has to be repeated. from participating because of the same rule. This leads to “patchwork forests” negatively affecting the Project developers in tropical agriculture lands social, ecological, and financial aspects of projects. struggle with identifying eligible lands; this especially affects projects involving multi- Carbon finance can contribute to increasing ple farmers. Tropical vegetation may regenerate land tenure security in project areas. With the quickly, reaching the forest definition; if this coin- right institutional instruments in place different cides with validation, auditors may judge these lands land tenure systems can provide enough security as ineligible (even though these lands may be only for the development of sound forest carbon projects temporarily stocked with carbon). Developers find that ensure farmer’s long-term commitment. The it difficult to demonstrate the temporary nature of indicia of sufficient tenure security for project pur- land regeneration as this would require undertak- poses will differ from context to context. In some ing broader and more complex studies on land-use contexts, long-established customary rules may patterns and ecology. Often developers have to redo suffice even if individual parcels are not formally the land eligibility analysis until finding enough documented and registered, provided there is polit- eligible lands to ensure project viability, delaying ical and legal recognition of the legitimacy of those project implementation. Such delays affect eligible rules. In other contexts, the absence of clear records farmers’ willingness to participate in the project may be a real concern that needs to be addressed. as they lose their confidence in the potential ben- The possibility of achieving higher levels of land efits of committing their land and investing labor tenure security can be an additional incentive for and time in the project. The CDM EB simplified farmers to participate in forest carbon projects. this rule by allowing project developers to present evidence of control over the land for two-thirds of However, securing land tenure can be a costly the project area at validation, but they still have to and time-consuming process. Carbon finance has present the delineation of the total project boundary. contributed to increasing the level of land tenure security in five projects, but this came with a cost The “1990 rule” excludes areas with significant as it required time. Depending on the existing level potential for A/R and results in scattered plant- of land tenure security, the costs can be prohibitive. ing plots. Many areas in developing countries But, in some cases, the benefits of investing in land 6 | Executive Summary tenure security—both in terms of project perform- Lack of available data on native species nega- ance and improving local livelihoods—outweigh tively affects projects with a biodiversity focus. the costs. The information required for accounting emission reductions in A/R projects with a large number Accounting for Emission Reductions: of native species is rarely available. Projects that The Rigor and Practicality Imbalance propose to plant these species have to use default The level of complexity of early methodologies data from the Intergovernmental Panel on Climate made them less accessible to project develop- Change’s 2003 Good Practice Guidance or other ers. Only highly skilled professionals were able published sources. Use of default data, which is to understand and follow the first versions of the generally conservative, typically penalizes projects A/R CDM methodologies. As a result, the CDM (especially with regard to expansion factors). Lack EB and the BioCF developed tools to make these of suitable data may force some projects to change methodologies more user-friendly. Still, project the composition of species or to reduce the por- developers with low capacity need intensive help tion of the project area that is planted with native to apply them, increasing project transaction costs species. Alliances between project developers and and under-delivery risks. universities or research institutions are needed to produce and publish data to support these projects. The simplification initiated by the CDM EB has been helpful to a certain extent. The projects Estimation of activity-shifting leakage is time- registered using the early versions of methodologies and information-intensive. The information did not benefit from the simplifications and they required for estimation of leakage emissions as- still need to account for GHG emissions as pre- sociated with shifting of grazing and fuel wood scribed in older versions of methodologies. Most collection is not available in many rural areas of recent versions of methodologies are shorter, but developing countries. Project developers need to the number of procedures, tools, and guidelines spend significant time and resources to collect this has increased. To further streamline the registra- data. There is a need to simplify the estimation of tion process, it is necessary to remove certain re- leakage emissions. In addition, projects located in quirements for estimation of project emissions and degraded areas often have very low leakage risk leakage which, relative to the minimal volume of because of the status of degradation of the sur- emissions measured, is time-consuming and costly rounding areas; they should be exempted from the to determine. The use of default data to calculate monitoring and estimation requirements. In situa- emissions and leakage based on robust research tions with a high probability of leakage, the guid- should be encouraged. ance for leakage assessment in A/R methodologies for large-scale projects should be simplified to allow Training of project developers is required to for the use of discount factors in the calculation of strengthen their capacity for GHG accounting. emission reductions (following the guidance pre- It is easier for project developers to apply proce- sented in the small-scale methodologies) to make dures that are closer to those that they are familiar the assessment of leakage more practical. with from traditional forestry projects (e.g., meas- urement of tree biomass growth). Many forest car- Practical challenges arise in monitoring bio- bon procedures, however, are not generally used in mass growth. The effort required for monitor- traditional forest inventory, including estimation ing the carbon component of the project exceeds of carbon stocks in the baseline as well as meas- the workload for monitoring a conventional forest urement of carbon stock changes in non-tree veg- project. Projects have to create a monitoring unit, etation, soil, litter, and deadwood pools. Similarly, build and sustain capacity, and maintain reliable project developers are usually unfamiliar with cal- records. Since the carbon credits that will be issued culations of project emissions and leakage, as well are calculated based on verified monitoring data, as principles of stratification, sampling, statistical activity that is not monitored will not earn credits. procedures of monitoring and measurement. BioCarbon Fund Experience: Insights from A/R CDM Projects | 7 The Temporary Crediting Approach The lessons learned from A/R CDM projects to Non-permanence: A Narrow presented in this section can be enriched with Window of Opportunity for A/R experiences in the voluntary carbon market CDM Projects where other approaches to non-permanence are used. The insights from A/R projects on non- Temporary CERs are more flexible commodities permanence should also contribute to the develop- than long-term CERs. In the BioCF experience, ment of the REDD+ mechanism. the shorter lifespan of tCERs is more compatible with the carbon market, land-use-change dynam- ics, and existing information on project risks. From Carbon Finance: Catalyzing the buyer’s perspective, determining prices for Underlying Investment for lCERs requires precise and long-term information Forest Projects on project risks, which can be difficult to obtain A project entity’s ability to secure investment is in certain areas and for certain project types. This critical to succeed in the A/R CDM. A large portion conclusion may point to the BioCF’s own strategy of project idea notes with the potential of emission of acquiring replacement credits; other buyers may reductions were submitted to the BioCF, but could arrive at a different conclusion depending on their not be considered because of lack of financing. willingness to take on additional risk. Projects were sometimes delayed at being accepted into the BioCF portfolio because project entities The replacement credit rule increases the risks struggled with closing a financial gap. Projects hav- for buyers of forest credits. The temporary cred- ing financial gaps were assessed case-by-case and ac- iting approach to non-permanence adopted by the cepted into the portfolio as long as they presented UNFCCC for A/R projects allowed this sector to strong evidence of alternatives to fill-in the gap. be included in the CDM—but it has also put forest Delays in closing the financial gap, however, nega- projects at a disadvantage. The price of forest car- tively affected the implementation of these projects. bon credits depends on future prices for permanent Efforts are needed to facilitate the access to financ- carbon credits, and these are difficult to estimate ing to developers of A/R CDM projects. given the uncertainty and volatility of carbon mar- kets. In addition, since forest credit prices are com- Carbon finance has contributed to catalyz- monly fixed in an Emission Reductions Purchase ing different types of underlying investment. Agreement, the willingness to pay for replacement BioCF projects with adequate access to finance credits is fixed as well. This leaves little opportunity have been able to catalyze underlying investment to accommodate variations in discount rates and from a variety of sources, largely because of the price uncertainties. opportunity to test the carbon certification proc- ess in improving the performance of A/R projects. The non-permanence approach results in de- Government and NGO-led projects have relied on layed carbon revenue. Projects can only under- grants from foreign public sources, equity invest- take one verification event per each commitment ment, and carbon finance; their financial structure period of the Kyoto Protocol. This has implications is not very sophisticated. Private sector-led projects for project viability. have managed to obtain short- and long-term loans from corporate financing institutions and local and Temporary crediting as an approach to address foreign banks. Some projects are even complement- non-permanence of A/R projects has a limited ing their financing with carbon revenue obtained effectiveness. The impossibility of renewing tem- from forward sales of carbon credits in the volun- porary credits beyond a project crediting period tary carbon market. However, more innovative fi- hampers long-term carbon sequestration goals. This nancing is required to help projects cover upfront could be a perverse incentive for some projects. For investment. example, reforestation projects with environmental goals depend on carbon revenues; the absence of Projects led by governments, public agencies, payments after the crediting period could lead to and non-profit organizations usually face more deforestation and forest degradation. barriers than private sector-led projects. Carbon 8 | Executive Summary finance mainly helped the former catalyze under- Project developers’ capacity to develop, im- lying public investment and overcome ecological, plement, and manage a forest carbon project technological, social, and institutional barriers. strongly determines project viability. Lack of Projects led by private entities, on the other hand, technical capacity to develop a project can lead to have used carbon finance not only to catalyze ad- poor management decisions that negatively affect ditional private investment but also, to a certain project viability. Strong managerial capacity is also extent, to improve their financial viability. required to ensure a stable flow of capital and coor- dination among partners. Carbon revenue, depending on its size and timely delivery, can positively impact project Small-scale projects struggle with achieving viability. In the BioCF portfolio, the poten- project viability. The limit imposed for small- tial for carbon sequestration ranges widely from scale projects on the annual emission reductions 3-22 tCO2e/hectare/year, depending on the design (16,000 tCO2e) is too low to achieve project vi- and objectives of the project and the productivity ability. The simplified modalities and procedures of the lands. The timely delivery of carbon revenue defined by the UNFCCC for these projects did not depends on the project entity’s capacity to secure reduce transaction costs in a significant manner, investments, develop a forest carbon project, and as expected. The transaction costs of some BioCF manage project risks. Delays put projects expect- small-scale projects are as comparable as those of ing carbon revenues to cover maintenance costs at large-scale projects. In addition, the rule concern- severe risk. Delays can also lead to changes in ex- ing the involvement of low-income communities pectations and land-use priorities. Project entities can further increase transaction costs where capac- have to manage the expectations of all project par- ity is low. In such cases, developers also struggle ticipants and design appropriate incentive schemes. with bundling projects to benefit from economies of scale. Therefore, the rules should be further sim- Transaction costs of meeting the CDM require- plified and the limit should be increased to facilitate ments were high in most BioCF projects. The small-scale projects. World Bank’s development costs for A/R projects are higher than for any other CDM sector, exceed- The Institutional Framework: A Key ing $1 per tCO2e. The transaction costs represent Success Factor for Effective Project from 0.5 to 20 percent of project total investment. Development and Implementation It is impossible at this point to compare the total Designing and creating equitable benefit-shar- transaction costs with the full potential for car- ing schemes that effectively improve local live- bon revenue since projects have only contracted a lihoods is essential to the long-term success of small portion of their emission reductions with the forest carbon projects. The BioCF experience BioCF. Project preparation costs have tended to de- shows that local farmers’ participation is driven by crease in more recent projects as project developers the benefits that they can recoup from participat- benefit from increased experience in the application ing in these projects and also from their trust in the of CDM requirements, an improved understand- project entity. Due to the CDM’s technical com- ing of project risks, and an enhanced CDM institu- plexity, getting local farmers to actively participate tional structure with approved methodologies and in all project activities may be an unrealistic goal. established DOEs. It is important nevertheless to keep them well- The price of permanent CDM credits determines informed throughout the process and to ensure the price of A/R credits, limiting the viability that local partners agree with the direction that the of projects. The non-permanence rule—forcing project takes. Project entities backed by local com- buyers to purchase replacement credits for each munities with knowledge in the project area have temporary credit purchased—makes the price of a fared better. forest carbon credit lower than the price of credits Investing in and sustaining local capacity can in other CDM sectors. This puts A/R projects at a ensure the permanence of forest carbon ini- disadvantage. tiatives. Forest carbon projects are long-term BioCarbon Fund Experience: Insights from A/R CDM Projects | 9 partnerships, at the core of which are the farmers/ tries with centralized governance. However, where communities and the project entity. These partner- the project entity is not the government, the success ships often need to be extended to bring in capacity of the project relies on a constructive collaboration where it is missing on project design, implemen- with governmental entities. This is because govern- tation, management, and funding. Developing ca- ments can facilitate the CDM process, and have pacity in forestry and project management at the the opportunity to promote replication of projects local level increases the partnership’s resilience to in other areas of the country, taking advantage of staffing changes. It also creates the potential for the synergies between forest carbon initiatives and communities to take over the project in the future other national development strategies. and to continue to invest in forestry activities—in- creasing long-term sustainability. Risk Measurement and Management: Taking Advantage Institutional agreements defining land use, from Early Lessons on Project carbon ownership rights, and benefit sharing Development and Implementation play a crucial role in the development of for- The under-delivery risk of A/R projects arises est carbon projects. When designed to follow rules from multiple aspects of the project and can be of good governance, these agreements help partners measured and managed. Understanding the risk understand their rights and responsibilities in the of A/R projects requires an integrated assessment project and reduce the potential for conflicts. Insti- that takes into account the fact that projects navi- tutional agreements also ensure that all participants gate at least three cycles: commercial, operational, share a clear and common vision of the project. and regulatory. The BioCF developed a risk assess- Careful planning at an early stage and avoiding com- ment methodology that is used to monitor indica- plex arrangements are crucial for project success. tors of project performance as the project moves Public-private partnerships with clear respon- through the several stages of these three cycles. sibilities for each partner seem to work best. Most of the operational risks can be antici- Having the government as the lead project entity pated and managed. Risky elements of projects may influence a project’s performance. In most can be effectively addressed through an appropriate cases, projects that have governmental agencies as forest management plan and sufficient human and their lead project entities have performed relatively financial resources. At the same time, designing and less well than others. The exception has been coun- Moldova Forestry Community Development Project 10 | Executive Summary implementing such a plan, requires project devel- Forest carbon projects also contribute to cli- opers with relevant forestry experience and mana- mate change adaptation by increasing the resil- gerial capacity. ience of local environments and communities. A/R CDM projects contribute to strengthening the Project potential threats to the local environ- natural capital of rural communities participating ment and the socio-economic conditions of in projects by recovering severely degraded lands, involved farmers must be anticipated and man- protecting water resources, and conserving biodi- aged. Some activities can pose a potential risk to versity. These projects therefore contribute not only local communities and the local environment. All to climate change mitigation but also to local com- BioCF projects assess this potential and propose munities’ adaptation to the adverse impacts of cli- actions to manage risks so that they can comply mate change. The fact that these projects are often with the World Bank safeguard policies and CDM undertaken precisely for these reasons also makes requirements. The World Bank safeguard policies them potentially more sustainable in the future. allow for potential risk identification, monitoring, and management throughout the project duration. There is great potential for synergies between The CDM requires developers to assess projects forest carbon projects and other development and undertake an in-depth impact analysis when- initiatives.A/R CDM provides the means for ever significant negative impacts are identified. achieving the objectives of other United Nations Also, as per national forest laws, some projects have Conventions, such as combating desertification and to undertake an impact assessment. Some projects promoting biodiversity conservation. A/R projects go a step further by undertaking voluntary assess- can also contribute to the Millennium Develop- ments to get additional certification. For example, ment Goals by alleviating poverty and promoting projects planting for commercial purposes usually the socioeconomic development of rural areas. seek independent certification (e.g., Forest Stew- ardship Council Standards) of their sustainable for- Conclusions and Looking Ahead: est management. In addition, some projects are also Building on CDM A/R and Learning voluntarily pursuing the Climate, Community and Lessons for REDD+ Biodiversity (CCB) certification, through which Overall, the BioCF experience with A/R CDM pro- they prove that their design will generate the ex- jects has been hugely valuable. It is clear that car- pected co-benefits. bon markets can work to bring in revenue streams to rural communities that otherwise have limited sources Co-benefits: An Opportunity of income. Furthermore, it has demonstrated that for Creating Synergies these initiatives are not only mitigating climate A/R projects have environmental, economic, so- change but also improving rural livelihoods, im- cial, and institutional co-benefits. The strength proving resilience to climate change, conserving bio- of these co-benefits stems from the type of project, diversity, and restoring degraded lands. the baseline project situation, the project develop- Scaling-up of A/R activities is therefore critical for ers’ goals, the level of participation by local com- bringing these benefits to millions of hectares of munities, and considerations made in project degraded lands. Whilst successful project enti- design and implementation. ties are willing to replicate their experiences, the Co-benefits are an important incentive for local overall number of CDM A/R projects remains lim- participation in forest carbon projects. GHG ited. The BioCF experience has shown that, in order emission reductions are an abstract concept for for projects to be successful in the current UNFCCC most local communities. The possibility of ben- regulatory environment, they need adequate access to efiting from greater land tenure security, employ- investment, high human capacity, and a strong insti- ment opportunities, and new sources of income in tutional framework for project implementation. In many cases are the main incentives for community some cases, carbon finance, in combination with fi- participation and long-term commitment to forest nancial support from various sources, enabled projects carbon projects. facing institutional barriers and low local capacity to BioCarbon Fund Experience: Insights from A/R CDM Projects | 11 2005 Ethiopia Humbo Assisted Natural Regeneration Project 2010 Images courtesy of World Vision 12 | Executive Summary overcome these challenges. However, projects located Increase the current threshold of 16,000 tCO2e in countries with weak forestry sectors and low levels for small-scale projects and revisit the rule that of governance still face prohibitive barriers to effective low-income communities must be involved project development and implementation. in this type of projects. Projects involving low- income communities with minimal capacity are Current regulatory rules are project-based and al- not benefiting from simplified modalities and pro- though opportunities to scale up activities through cedures. Their limited capacity is reflected in high Programmes of Activities exist, they remain to be transaction costs and inability to bundle projects tested under the CDM for A/R and are not likely to benefit from economies of scale. The threshold to address the scale needed to reinvigorate degraded must be increased for this type of project to be vi- lands. To facilitate the scaling up of A/R activities, able and benefit low-income communities. it is important that lessons are learned and that cor- rections to bottlenecks and unnecessary obstacles are Continue the simplification and consolidation removed. For this, three critical factors are essential: of large-scale methodologies, including allow- (i) regulatory improvements, (ii) access to finance, and ing project developers to use default values for es- (iii) strengthening capacity. Based on the lessons that timation of leakage (in line with the simplification were drawn from the BioCF portfolio, the following recently made for soil organic carbon) and facili- actions are recommended: tating the project monitoring process. Appropriate discounting could be included at the project level Regulatory Improvements to allow the use of default factors by project devel- Remove regulatory uncertainty. Much has opers with less access to sophisticated technology or been invested in building the institutional frame- lower institutional capacity. work to support A/R projects. Project developers are still interested in undertaking and developing Simplify the land eligibility requirements by such projects in many poor countries where these re-assessing the “1990 rule” and using more activities can make a difference in living condi- flexible criteria to eliminate incentives for de- tions. However, the prevailing uncertain regulatory foresting and subsequently reforesting lands. environment is creating a dampening effect. In ad- As the BioCF experience has shown, current land dition, where market signals have been given for eligibility requirements in the CDM tend to be so- post-2012 (as from the EU ETS), credits from the cially impractical and can create tensions in regions A/R CDM remain disadvantaged despite the sig- where neighboring farmers may be excluded. This nificant poverty alleviation implications. rule also leads to fragmented CDM-project areas, which are impractical from a project development Improve the fungibility of forest project cred- and ecological standpoint. its by addressing the non-permanence of for- est carbon in a broader way and allowing A/R Make the regulatory process more accessible projects to use alternative approaches to tem- and predictable by streamlining procedures porary crediting. This has already been recognized and following strict timelines. Finding the by UNFCCC negotiators proposing alternatives CDM EB’s latest decisions, guidelines, and versions alongside current tCERs and lCERs. A decision on of tools, as well as PDDs and methodology for- this issue is urgently required. mats, is challenging for most developers and favors specialized professionals. Following strict timelines Further simplify the rules and procedures for for registration and issuance will help increase the baseline determination and additionality dem- predictability of credit issuance. onstration. This could include allowing develop- ers to use standardized baselines established at the Recognize the contribution that A/R CDM national or sub-national level. Simplifying addition- projects make to the dual objectives of the ality requirements, without compromising environ- UNFCCC, sustainable development and climate mental integrity is also important. Projects involving change mitigation and broaden the scope of low-income communities with minimal capacity land-use activities: Policymakers should con- will greatly benefit from such a simplification. sider increasing the eligible land activities to cover BioCarbon Fund Experience: Insights from A/R CDM Projects | 13 croplands, grasslands, wetlands, and sustainable As the UNFCCC negotiations evolve, a larger-scale forest management, given the role in environmen- dimension—REDD+—is being discussed. Many of tal restoration and poverty alleviation. the lessons learned from A/R could be helpful in the development of REDD+ in order to avoid the same Access to Finance bottlenecks. Because of the interactions between dif- Innovative ways to finance activities are ferent land uses, policymakers will need to address the needed. Carbon finance is a payment on deliv- interface of all land-use activities (e.g., A/R, REDD+, ery, and yet the upfront investments needed for agriculture) in an integrated approach. There is also a A/R projects are significant. Economies of scale are need to bring in the biomass-energy dimension. The not easily attained. Forestry investments are long application of an approach that integrates land-use term and deemed high-risk in many developing and energy sectors at a landscape level would be countries. Institutional arrangements for financial more practical and cost-effective. intermediation, the role of carbon credits in financ- ing agriculture and rural development, as well as The BioCarbon Fund will continue its support to ex-ante payments based on meeting performance land-use interventions and is planning to build on benchmarks are highly needed. the experience to-date in A/R through scaled-up programs. The BioCarbon Fund will further work Financial compensation for other benefits on areas not yet fully-explored. Such pilots are should be addressed. The BioCarbon Fund ex- invaluable for showing the opportunities and chal- perience has shown that A/R projects encompass lenges that can arise in the application of regulatory both mitigation, through removal of CO2 from the rules for climate change projects. The BioCF is also atmosphere, and adaptation as they build up the re- working on developing new methodologies in areas silience of the local environment and communities. not yet developed, such as croplands. The fund is also Projects improve living conditions, but the signifi- exploring where methodological improvements can be cant additional environmental and social benefits made. These include undertaking methodologies and (besides carbon) are not rewarded. pilots in landscapes where various sectors (land-use or Strengthening Capacity energy) can be considered as a whole. The BioCF is Strengthening capacity at the local level is high- also working on innovative upfront financing mecha- ly needed to ensure successful forest carbon nisms to assist the scale-up of rural projects and on ap- initiatives.The fact that A/R projects are useful proaches to compensate projects for their co-benefits. tools to promote both adaptation and mitigation All of this is in line with the World Bank’s triple-win- should be harnessed by building up capacity and for-farmers strategy in which the forestry, agriculture, strengthening programs in an integrated manner. and rural energy sectors are treated in an integrated way to increase food security, to improve the rural poor’s resilience to cope with the impacts of climate change, and to mitigate climate change. 14 | Executive Summary 1818 H Street, NW Washington, DC 20433 www.carbonfinance.org