Carbon Markets Forestry Offsets & Avoided Deforestation

C A R B O N C R E D I T S — O R I G I N A T I O N T O C O M M E R C I A L I S A T I O N

FAO Conference “The Future of Forests in Asia and the Pacific: Outlook for 2020” 16-18 Oct 2007 in Chiang Mai, Thailand

Johannes Ebeling

Overview

• Carbon Markets – Kyoto and Voluntary Carbon Markets • Forestry in Carbon Markets – Kyoto and the Clean Development Mechanism (CDM) – Voluntary Carbon Markets • Avoided Deforestation (REDD) and Future Climate Regimes • Avoided Deforestation (REDD) in the Asia-Pacific – Potential Benefits – Remaining Challenges

1 Who we are

EcoSecurities is a leading company in the business of sourcing, developing and trading carbon credits throughout the world.

Our carbon credit portfolio is the largest in the industry and consists of over 450 projects in 36 countries with the potential to generate over 185 million carbon credits.

¾ 10 years experience in developing carbon forestry projects ¾ Core business CDM market ¾ Increasingly involved in voluntary markets ¾ Leading climate consultancy services

Where we are

Dublin Tokyo* Oxford The Hague 2 Offices in China New York Bern* Kiev* - Beijing Rome* - Chengdu Portland Manila Los Angeles Madrid* Casablanca* Dubai Kuala Lumpur Mexico City Singapore* San Jose* Karachi* Jakarta Lima* Mumbai Johannesburg Rio de Janeiro Santiago de Chile Bangkok

Headcount Offices and Representatives June 2005 27 employees 5 Dec 2005 72 employees 15 Aug 2007 280 employees 28

(*) No legal presence but EcoSecurities has entered into contracts with individuals to act as EcoSecurities representatives

2 Carbon Markets

The Kyoto Protocol

• Industrialised countries (“Annex 1”) committed to – Reduce emissions of greenhouse gases by 5% until 2012 (compared to 1990 levels)

• Commitments can be reached domestically in member states or through “flexible mechanisms”: – Clean Development Mechanism (CDM): emission reduction projects in developing countries – Joint Implementation (JI) in other Annex-1 countries – Emissions Trading between Annex-1 countries

• No binding obligations for developing countries (“Non- Annex 1”) – Developing countries can host CDM projects

3 Parties to the Kyoto Protocol

Annex I Non-Annex I Not ratified

Emission reduction projects (“carbon offset” projects)

• Projects in developing countries (“Non-Annex 1”) that reduce emissions can sell CDM carbon credits to Annex-1 countries • Alternatively, projects can sell voluntary carbon credits to companies, individuals, and countries

Carbon Credits An offset project reduces emissions

Emission Actual target / cap emissions

Carbon finance ($)

Buyer Seller ( Annex-1 country / Company) ( Project in Non-Annex 1 country)

4 Carbon markets

• Slow growth of carbon markets until 2005 (only voluntary offsets & “pre-compliance”) • 2005 - Entry into force of Kyoto Protocol and EU Emissions Trading Scheme (EU ETS) create regulatory carbon markets • Established regulatory markets continue to grow • US$ 32 billon traded in 2006, of which • US$ 8 billion under Clean Development Mechanism (CDM), i.e. through projects in developing countries • Voluntary markets growing very rapidly • US$ 92 million in 2006 • Estimated close to US$ 200 million for 2007

Source: Point Carbon 2007 and WorldBank 2007

Carbon markets

• Project types: – Regulatory (CDM): Most projects in renewable energies

(forestry marginal), highest volumes from large non-CO2 projects (industrial gases) – Voluntary: Forestry and renewable energy dominate, smaller project sizes, non-carbon benefits matter

• Offset buyers: – Regulatory: Compliance buyers (companies, countries), intermediaries and traders – Voluntary: Any organisation or individual

5 Forestry Projects under the CDM

CDM Forestry - The Basics

• Eligible under the CDM is – the establishment of new forests on areas that were not forested in 1990 (in developing countries)

• Not eligible under the CDM are – Conservation of existing forests – Sustainable management of existing forests

• Non-permanent credits (temporary CERs) – Unlike any other CDM project type

6 State of forestry CDM

Very delayed start • First (and so far only) CDM reforestation project registered in 2006 (in China) • Restrictions for use of forestry credits in certain countries and trading schemes

However • A lot of recent activity • 30-50 projects in the CDM pipeline

Æ Overall very slow progress and many apparent hurdles

Forestry in the Voluntary Carbon Markets

7 Forestry in the voluntary carbon markets

• Larger scope for forestry than under CDM – No restrictions on “eligible” activities – Less formalised requirements and less bureaucracy (so far…)

• Voluntary forestry projects were the first carbon offset projects ever

• Reforestation has been dominant voluntary offset type – High appeal of sector, concept easy to communicate

Forestry in the voluntary carbon markets

• Voluntary markets are not standardised and relatively intransparent – No broadly used standards (Ù CDM) – Quality and price of credits vary greatly (0.5 to 45 US$)

• General trend towards more stringent criteria and verification – Non-credible offsets are reputational risk for companies – Several initiatives to develop standards for “Verified Emission Reductions” (VERs), CDM is benchmark for high quality

8 Forestry in the voluntary carbon markets

• However, forestry offsets also received considerable criticism – General critique of offsets often directed at forestry – Some poor quality projects (e.g. non-permanence issue)

• General outlook is good & there are indications of increasing buyer interest – Quality assurances will be key (credible standards!)

Avoided Deforestation (REDD = Reducing Emissions from Deforestation and Degradation)

9 Avoided deforestation

• Deforestation is largest source of emissions in developing world – 2nd largest source globally after fossil-fuel use! • Tropical deforestation not covered by current climate regime (13 million ha per year) • Negotiations to include „Reducing Emissions from Deforestation and Degradation“ (REDD) in UN framework post-2012

Avoided deforestation / REDD

• Host country would receive compensation based on lowering deforestation emissions – Probably carbon credits • Crediting probably at national level – But projects are likely to play a key role

10 How is REDD different from the CDM?

• REDD is similar to reducing emissions from fossil fuels – reduces emissions (sources) by not converting or degrading forest – Ù creating sinks by sequestering carbon • Payment for REDD can start as soon as reductions have occurred – No need to wait for trees to grow • “Projects” probably mainly at national level

• The market for REDD is likely to be much bigger – Potential market for REDD may be between US$ 2-31 billion (if average emission reductions from deforestation are between 10 - 50 % and carbon prices between US$ 7-20 /t CO2) – This is much higher than the US$ 1.5 billion currently available to forestry in developing countries through ODA

How is REDD different from the CDM?

A/R CDM (sequestration)

REDD (emission reduction)

11 Avoided Deforestation (REDD) in the Asia-Pacific

Avoided deforestation in AP - Great opportunities ….

• Could become huge market and funding source for forest conservation and management (US$ 2-31 billion annually) • Several of biggest potential winners are in the AP region – Indonesia, PNG, … • Several pilot initiatives & funds focus on the region • REDD is at top of agenda during Kyoto negotiations for post-2012, e.g. Bali in December • Great potential for co-benefits – e.g. biodiversity and sustainable development

12 Avoided deforestation in AP …. but some challenges remain • Setting fair and realistic baselines for crediting – What about increasing forest cover? E.g. Vietnam, China • Governance challenge in host countries – Most (?) current emissions are from illegal activities! • Project-based versus national crediting • Carbon leakage (international) – E.g. Shifting of international timber and palm oil producers • Accounting for emissions from degradation – Particularly important for illegal logging, e.g. Indonesia • Measurement and monitoring systems

The Governance Challenge

• Some of the countries with the highest potential carbon income face severe governance issues !! • How realistic is it to implement REDD ??

13 Concluding remarks

• Several options for forestry projects to enter carbon markets

– Kyoto (CDM), Voluntary Markets, post-2012 initiatives (REDD)

• Complex project design process and rapid evolvement of markets and regulatory framework

• Positive outlook as carbon markets become more established and provide longer-term perspective

– Especially voluntary markets and future climate regimes have great potential for forestry

Thank you!!

• Carbon Markets –Kyoto and voluntary carbon markets • Forestry in carbon markets • Avoided deforestation (REDD) and future climate regimes • Avoided Deforestation in the Asia-Pacific