Transaction costs of forest carbon projects By Mary Milne Center for International Forestry Research (CIFOR) Bogor, INDONESIA Report submitted to the University of New England, as part of the ACIAR Project ASEM/1999/093, The role of carbon sequestration credits in influencing the economic performance of farm forestry systems. Working Paper CC05. ACIAR project ASEM 1999/093, http://www.une.edu.au/febl/Econ/carbon/ 1 Table of Contents 1 Introduction _____________________________________________________6 2 Methodology_____________________________________________________6 3 Review of transaction costs of setting up carbon-sequestration projects______7 3.1 Definition and types of transaction costs_________________________________ 7 3.2 Identification of transaction costs in the project cycle______________________ 8 3.3 Review of studies on the size of transaction costs_________________________ 10 3.4 Energy projects ____________________________________________________ 10 3.5 Forest projects _____________________________________________________ 13 4 Case studies of AIJ forest carbon projects ____________________________14 4.1 Selection of case studies _____________________________________________ 15 4.2 Quantification of project transaction costs ______________________________ 16 4.3 Project goals and partners ___________________________________________ 18 4.4 FACE-PROFAFOR_________________________________________________ 20 4.4.1 Design ______________________________________________________________23 4.4.2 Approval ____________________________________________________________23 4.4.3 Information and search (local participants) __________________________________23 4.4.4 Pre-validation_________________________________________________________23 4.4.5 Contract negotiation and approval_________________________________________24 4.4.6 Contract implementation ________________________________________________24 4.4.7 Monitoring___________________________________________________________25 4.4.8 Enforcement__________________________________________________________25 4.4.9 Insurance ____________________________________________________________26 4.4.10 Internal verification ____________________________________________________26 4.4.11 Certification and sale of credits ___________________________________________26 4.4.12 Estimation of project transaction costs _____________________________________27 4.4.13 Factors influencing the size of transaction costs ______________________________27 4.5 Scolel Té carbon sequestration project _________________________________ 28 4.5.2 Design ______________________________________________________________30 4.5.3 Search ______________________________________________________________30 4.5.4 Negotiation __________________________________________________________31 4.5.5 Validation ___________________________________________________________31 4.5.6 Project implementation _________________________________________________31 4.5.7 Monitoring___________________________________________________________32 4.5.8 Enforcement of contracts________________________________________________32 4.5.9 Insurance ____________________________________________________________32 4.5.10 Verification __________________________________________________________33 4.5.11 Registration and administration of carbon credit sales _________________________33 4.5.12 Estimation of project transaction costs _____________________________________34 4.5.13 Reduction of transaction costs ____________________________________________34 4.6 Klinki Forestry Program ____________________________________________ 35 4.6.2 Design of the Program__________________________________________________35 4.6.3 Search costs for Program partners _________________________________________36 4.6.4 Negotiation __________________________________________________________36 4.6.5 Approval ____________________________________________________________37 4.6.6 Information and search costs for donors ____________________________________37 4.6.7 Search (program to farmer) ______________________________________________37 4.6.8 Negotiations of projects_________________________________________________38 2 4.6.9 Project administration __________________________________________________39 4.6.10 Establishment of projects________________________________________________39 4.6.11 Technical assistance____________________________________________________40 4.6.12 Monitoring___________________________________________________________40 4.6.13 Enforcement__________________________________________________________41 4.6.14 Insurance ____________________________________________________________41 4.6.15 Reporting to donors ____________________________________________________41 4.6.16 Verification and certification_____________________________________________41 4.6.17 Estimates of transaction costs ____________________________________________42 4.7 Costa Rica/Norway Reforestation and Forest Conservation Project _________ 44 4.7.1 Pre-implementation transaction costs ______________________________________45 4.7.2 Design ______________________________________________________________45 4.7.3 Implementation of contracts _____________________________________________45 4.7.4 Monitoring and verification______________________________________________46 4.7.5 Enforcement__________________________________________________________46 4.7.6 Verification of emission reductions________________________________________46 4.7.7 Certification of CERS and of sale of credits _________________________________46 4.7.8 Estimates of transaction costs ____________________________________________47 4.8 SIF Carbon Sequestration Project_____________________________________ 48 4.8.1 Search for funding _____________________________________________________48 4.8.2 Design ______________________________________________________________49 4.8.3 Negotiation with project partners _________________________________________49 4.8.4 Validation and approval_________________________________________________49 4.8.5 Contracting __________________________________________________________49 4.8.6 Monitoring___________________________________________________________50 4.8.7 Enforcement__________________________________________________________50 4.8.8 Insurance ____________________________________________________________51 4.8.9 External verification ___________________________________________________51 4.8.10 Certification of CERS and of sale of credits _________________________________51 4.8.11 Estimates of transaction costs ____________________________________________51 4.9 RUSAFOR: Saratov Afforestation Project ______________________________ 53 4.9.1 Information and search _________________________________________________53 4.9.2 Design ______________________________________________________________53 4.9.3 Negotiation __________________________________________________________54 4.9.4 Monitoring___________________________________________________________54 4.9.5 Enforcement__________________________________________________________54 4.9.6 Verification and certification_____________________________________________54 4.9.7 Estimation of transaction costs ___________________________________________54 4.10 Summary _______________________________________________________ 55 5 Institutional arrangements________________________________________57 5.1 Institutional capacity and policy environment ___________________________ 57 5.2 Minimising transaction costs _________________________________________ 58 5.2.2 Search and information costs_____________________________________________60 5.2.3 Design ______________________________________________________________61 5.2.4 Negotiation __________________________________________________________63 5.2.5 Validation ___________________________________________________________63 5.2.6 Implementation of contracts _____________________________________________63 5.2.7 Monitoring___________________________________________________________64 5.2.8 Enforcement__________________________________________________________64 5.2.9 Insurance ____________________________________________________________65 5.2.10 Verification and certification_____________________________________________66 5.2.11 Sales of carbon credits__________________________________________________66 6 Summary_______________________________________________________68 7 References _____________________________________________________69 3 8 Appendix 1: Studies on the estimation of project transaction costs_________74 9 Appendix 2: Pre-implementation steps for PCF projects_________________75 4 Acknowledgements I would like to thank project managers Luis Fernando Jara, Herster Barres, and Gus Hellier who kindly agreed to participate in a phone survey on the transaction costs of their respective projects. Thanks also must go to Susan Subak and Michelle Golodetz who both reviewed project case studies and to Oscar Cacho who reviewed the entire document and provided invaluable comments throughout the duration of the study. 5 1 Introduction To date, research on transaction costs of carbon markets has focused on energy projects and international emissions trading (IET). Limited analysis has been performed on the transaction costs of forest carbon projects, especially regarding the viability of small-scale ventures. Most studies suggest that transaction costs for carbon projects, especially small scale, have been significantly high. Research is therefore needed to determine: (i) the