Forest carbon markets


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Forest carbon markets

  1. 1. Forest Carbon Markets: Potential for Indonesia Dr Hanafi S Guciano March 08
  2. 2. Topics Covered <ul><li>The markets </li></ul><ul><li>The voluntary (OTC and CCX) carbon market </li></ul><ul><li>Voluntary vs. mandatory market demand and prices for forest offsets </li></ul><ul><li>Forest Carbon Offset Project </li></ul><ul><li>CCX managed forest offset rules and costs </li></ul><ul><li>10 elements for managed forest offset policy </li></ul><ul><li>Drivers for demand and supply for forestry offsets </li></ul>
  3. 3. The facts <ul><li>Carbon trade 10 million Metric ton 2004 </li></ul><ul><ul><li> 600 million Metric ton 2007 </li></ul></ul><ul><li>Market size $ 10 billion </li></ul><ul><ul><ul><ul><ul><li> $ 45 billion/year from 2008-2012 </li></ul></ul></ul></ul></ul><ul><li>Investment fund for carbon market $ 22 trillion (UNEP forum 21/2/08) </li></ul>
  4. 4. The Voluntary Carbon Market <ul><li>􀂄 Primarily a North American Market </li></ul><ul><li>􀂅 Not Driven by Regulation, e.g. the Kyoto Protocol </li></ul><ul><li>􀂄 Highly Fragmented </li></ul><ul><li>􀂅 Over-the-Counter vs. Chicago Climate Exchange (CCX) </li></ul><ul><li>􀂅 Multiple standards - all have their own forestry offset project </li></ul><ul><li> standards </li></ul><ul><li>􀂄 Multiple Registries and Programs </li></ul>
  5. 5. Voluntary Carbon Market <ul><li>Over-the-Counter (OTC) + Chicago Climate </li></ul><ul><li>Exchange (CCX) </li></ul><ul><li>2006 value = $US 91 million </li></ul><ul><li>2006 volume = 23.7 million MTCO2 </li></ul><ul><li>􀂄 forecasted to be > 1300 million MT globally by 2012 </li></ul><ul><li>U.S. accounted for 68% of demand </li></ul><ul><li>Businesses accounted for 80% of demand </li></ul><ul><li>Forest projects accounted for 35% of demand </li></ul>
  6. 6. Voluntary Carbon Neutral Market <ul><li>Companies/individuals wants to do “the right thing” by calculating their GHG footprints </li></ul><ul><li>Its becoming an environmental commodity market after they can sell the offset, and make the household carbon neutral </li></ul><ul><li>Small payment to credit card ($100/year at $10/ton) </li></ul><ul><li>Carbon neuttality offers ibdividuals, businesses and other institutions (govt offices/universities) the opportunity to take personal responsibility of their lifestyles. The sale of carbon neutral products and services offer companies a way to develop competitive advantage with comsmers. </li></ul><ul><li>The retail market for voluntary carbon neutrality is moving full speed ahead. </li></ul><ul><li>Top performing retail offset providers: AgCert/DrivingGreen (ireland); Atmosfair (Germany), CarbonNeuralCompany/Climate Care/CO2balance (UK), Climate Trust, Native Energy, SustainableTravel/MyClimate (US). </li></ul>
  7. 7. Voluntary Carbon Market Suppliers <ul><li>􀂄 Over-the-Counter (OTC) </li></ul><ul><li>2006 value = $54.9 million </li></ul><ul><li>􀂅 Project developers, aggregators, retailers, and brokers </li></ul><ul><li>- Conservation Fund, Pacific Forest Trust, Ducks </li></ul><ul><li>Unlimited, Climate Trust, Terrapass, New Forests </li></ul><ul><li>􀂄 Chicago Climate Exchange (CCX) </li></ul><ul><li>2006 value = $36.1 million </li></ul><ul><li>􀂅 Aggregators and project developers </li></ul><ul><li>- Forecon EcoMarket Solutions, National Carbon Offset Coalition, Sustainable Forestry Management , LTD, Eco-Securities, Natsource </li></ul>
  8. 8. CCX and OTC Demand and Prices for CO2 <ul><li>􀂄 Over-the-Counter (OTC) </li></ul><ul><li>Demand and prices are determined by offset project quality characteristics that include project design elements for conservation co-benefits </li></ul><ul><li>Buyers are not driven by compliance requirements </li></ul><ul><li>􀂄 Chicago Climate Exchange (CCX) </li></ul><ul><li>Demand and prices are established by the CCX rules and the demand for a fungible commodity </li></ul><ul><li>􀂄 quality characteristics are already built into the rules and </li></ul><ul><li> are not distinguished from other offset projects </li></ul><ul><li>􀂄 fungible commodity – “a ton is a ton” </li></ul><ul><li>Buyer are CCX members driven by emission reduction compliance requirements </li></ul>
  9. 9. Voluntary vs. Mandatory Market Forest Offset Prices <ul><li>Voluntary Market 2006 value = $91 million </li></ul><ul><li>􀂅 OTC Prices in U.S. for Forestry Offsets: </li></ul><ul><li>$4 - $13 per MTCO2e (Clean Air - Cool Planet, December 2006) </li></ul><ul><li>$10 - $18 per MTCO2e (Ecosystem Marketplace, July 2007) </li></ul><ul><li>􀂅 CCX Prices for Offsets (fungible commodity) </li></ul><ul><li>$2 per MTCO2e in October 2007 (CCX) </li></ul><ul><li>Mandatory (Kyoto) Market 2006 value = $30 billion </li></ul><ul><li>􀂅 EU ETS Prices for Offsets (fungible commodity) </li></ul><ul><li>$35 per MTCO2e in October 2007 (Point Carbon) </li></ul>
  10. 10. Consideration in developing forest offset projects: Accounting Issues <ul><li>1. Additionality : the net additional carbon that is removed from the atmosphere as a result of the carbon transaction. (Additionality is a big challenge for forest offset projects, and the rule book isn’t written yet. Best practice: projects that are good for the climate, good for biodiversity, and good for local communities. ) </li></ul><ul><li>2. Baseline : the net amount of carbon that would be captured in the absence of the carbon transaction. </li></ul><ul><li>3. Permanence : the time period that the carbon stays sequestered. </li></ul><ul><li>3. Leakage : carbon that is wittingly or unwittingly lost to the atmosphere but was supposed to be sequestered by the offset project. </li></ul><ul><li>4. Monitoring : measurement of the additional carbon sequestered (instantly or over time, depending on the type of project). </li></ul><ul><li>5. Registration : measurement of the additional carbon sequestered (instantly or over time, depending on the type of project). </li></ul><ul><li>6. Verification : an independent entity verifies that the carbon calculations are correct (akin to sustainable forestry certification). </li></ul><ul><li>7. Cobenefit : additional societal benefits provided by the offset project. </li></ul><ul><li>8. Cost : the cost to the landowner for doing the offset project. </li></ul>
  11. 11. Basic Types of Forest Carbon Offset Projects <ul><li>(1) Afforestation : planting trees where trees are not now </li></ul><ul><li>growing. </li></ul><ul><li>(2) Avoided deforestation : preventing emissions of CO2 as a result of converting forest to some other land use, e.g., pastureland, ag land, housing development. </li></ul><ul><li>a) Forest might be designated as reserve, or for active </li></ul><ul><li>forest management. </li></ul><ul><li>(3) Active forest management </li></ul><ul><li>a) Reforestation (accelerating regeneration) </li></ul><ul><li>b) Enhanced growth (through silviculture) </li></ul><ul><li>c) Enhanced product storage (e.g. lumber) and product </li></ul><ul><li>energy substitution </li></ul>
  12. 12. CCX <ul><li>> Of the three markets available, the only one for trading forestry offset credits is the CCX. </li></ul><ul><li>> 350 members – the largest emissions trading </li></ul><ul><li>market globally, surpassed Germany in October 2007 </li></ul><ul><li>Located in Chicago, Montreal (2007), New York (RGGI- 2009), London/Amsterdam (ECX/2005), California </li></ul><ul><li>(AB32 – 2012) </li></ul><ul><li>> Forest management organizations can be aggregated </li></ul><ul><li>TIMO’s, NIPF’s, Tree farm groups, FSC groups, Land trusts </li></ul><ul><li>Those who reduce below the targets have surplus allowances to sell or bank. </li></ul><ul><li>> Those who emit above the targets comply by purchasing </li></ul><ul><li>CCX offset contracts called Carbon Financial </li></ul><ul><li>Instrument™ (CFI), such as forest offset projects. </li></ul>
  13. 13. CCX Forest Offset Rules Update <ul><li>Managed forest rules were developed in September </li></ul><ul><li> 2007 – and 6 projects approved </li></ul><ul><ul><li>Harvested wood products rules for managed forest offsets and products from mills </li></ul></ul><ul><li>Afforestation rules were revised in August 2007 </li></ul><ul><li>Forest Conservation and Protection (avoided </li></ul><ul><li>deforestation) rules are being refined </li></ul><ul><li>Verification protocols and auditor qualification rules </li></ul><ul><li>are being refined </li></ul>
  14. 14. Managed Forest Offsets within the CCX <ul><li>Commitment Period: Through Phase II - 2010 </li></ul><ul><li>Accounting and Reporting: Annually for project owner </li></ul><ul><li>Carbon Pools: Above and below ground </li></ul><ul><li>Baseline Setting: Base-year approach </li></ul><ul><li>Discount: based on inventory precision and error </li></ul><ul><li>Sustainable Forestry: FSC, PEFC endorsed standard like SFI, CSA, ATF Group, or other approved </li></ul><ul><li>Market Access: Trading for compliance as member or aggregated as a project or pool </li></ul><ul><li>Insurance Reserve Level: 20% of annual net change </li></ul><ul><li>Harvested Wood Products: Long-lived for 100 years </li></ul><ul><li>Verification: Annually </li></ul><ul><li>Payback Provision: Within the commitment period </li></ul><ul><li>Quantification: Growth models </li></ul>
  15. 15. Sustainably Managed Forests <ul><li>􀂄 Restricted opportunity globally, new and evolving opportunity in the US </li></ul><ul><li>􀂄 Not currently accepted by some buyers and in some registries, i.e. RGGI. </li></ul><ul><li>􀂄 Offsets may not work well for all working forests. </li></ul><ul><li>􀂄 May provide modest revenues with low added costs to existing management programs. </li></ul><ul><li>􀂄 Economics favor large projects or aggregation of </li></ul><ul><li>many landowners. </li></ul><ul><li>􀂄 Requires a robust inventory system, and a carbon accounting system. </li></ul>
  16. 16. Project <ul><li>Project owners must understand and be willing to assume the risks associated with entering the carbon market. </li></ul><ul><li>Project owner must have sufficient ownership control to have influence over carbon stocks and sequestration levels for the future </li></ul><ul><li>Project must be capable of sequestering levels of carbon capable of generating gross revenues in excess of market start up and participation costs. </li></ul><ul><li>Project owner must be willing to commit to maintaining carbon stocks for the commitment period associated with the CCX market (to end of current pilot period) </li></ul><ul><li>Project must have been certified as sustainable by an independent third party </li></ul><ul><li>Project owner must be able to track and report on carbon stocks annually in conformance with market rules. This includes the use of a CCX approved growth model. </li></ul><ul><li>Project owner must disclose any significant emissions sources under their influence, ownership, or control. </li></ul><ul><li>Carbon stocks and net sequestration must be disclosed on all interests associated with the project owner. For instance, all lands owned must be accounted for and disclosed to the market. </li></ul><ul><li>Project baselines must be developed using a site specific inventory with statistical standards of +/- 10% at 95% confidence for total tree volume. </li></ul>
  17. 17. Project development <ul><li>Step 1 </li></ul><ul><ul><li>Fase 1. Penetapan Basline Karbon dan tingkat sekuestrasi </li></ul></ul><ul><ul><li>Fase 2. Analisa Ekonomi </li></ul></ul><ul><li>Step 2. Forest Offset Project Development, Verification, Registration, Trading/Marketing of Forest Carbon Credits </li></ul><ul><ul><li>Fase 3. Project Proposal (Dev. Ver. Agg. Trade & marketing) </li></ul></ul><ul><ul><li>Fase 4. Project Commitment – CCX Aggregation contract </li></ul></ul><ul><ul><li>Fase 5. Baseline Calculation & Devt of Carbon Accounting System </li></ul></ul><ul><ul><li>Project Verification </li></ul></ul><ul><ul><li>Project Aggregation, Baseline Registration and Trading </li></ul></ul>
  18. 18. Cost? <ul><li>Result: Annual costs per forested acre </li></ul><ul><li>􀂅 Start Up (Fixed) costs: $0.28 per forested acre </li></ul><ul><li>􀂅 Participation (Variable) costs: $1.26 per forested acre </li></ul>Start Up Cost Inventory? Certification? Project Preparation Proposal, Accounting, Modelling Participation Cost Annual Report And Verification Aggregator Fees Transaction Fees
  19. 19. Fee structures <ul><li>Consulting services provided in phases I through IV are either on a cost not to exceed or hourly rate schedule. Phases V through VII are a blend of hourly rates for some items, and an aggregation rate or commission fee for others. </li></ul><ul><li>Each project presents a unique set of circumstances. For some projects, all of Phase V through VII can be covered under a flat aggregation fee based on the market value of carbon credits as they are registered annually. </li></ul><ul><li>Other projects may require a different mix of hourly fees and a commission for aggregation. </li></ul>
  20. 20. Six Requirements of any High Quality Offset Standard <ul><li>􀂄 Real </li></ul><ul><li>􀂄 Measurable </li></ul><ul><li>􀂄 Permanent </li></ul><ul><li>􀂄 Additional </li></ul><ul><li>􀂄 Independently verified </li></ul><ul><li>􀂄 Unique (no double counting) </li></ul>
  21. 21. 10 Elements for Managed Forest Offset Policy <ul><li>􀂄 Project Eligibility </li></ul><ul><li>􀂄 Sustainability </li></ul><ul><li>􀂄 Inclusion of Forest Carbon Pools </li></ul><ul><li>􀂄 Harvested Wood Products </li></ul><ul><li>􀂄 Measuring and Monitoring </li></ul><ul><li>􀂄 Reporting </li></ul><ul><li>􀂄 Baselines and Additionality </li></ul><ul><li>􀂄 Leakage </li></ul><ul><li>􀂄 Permanence </li></ul><ul><li>􀂄 Equivalence </li></ul>
  22. 22. Demand and supply of forest carbon credits will be driven by: <ul><li>1. The level to which all forest offset projects participate, including managed forests. </li></ul><ul><li>2. The level of standardization of rules in voluntary and mandatory (compliance) markets </li></ul><ul><li>3. The level of risk, assuredness & equivalence </li></ul><ul><li>4. U.S. legislation (if Democrat wins, will voluntary become mandatory?) </li></ul>
  23. 23. The messages… <ul><li>􀀹 The rule book isn’t written yet (or, too many books are written) about what kinds of forest projects can be used to offset carbon. </li></ul><ul><li>􀀹 Now is the time to get it right. Its up to us to participate. </li></ul><ul><li>􀀹 Carbon offset projects are a matter of both technical and social legitimacy. </li></ul><ul><li>􀀹 If the net reduction to the atmosphere is not real, </li></ul><ul><li>will forest offset projects be socially legitimate? </li></ul>
  24. 24. THANK YOU
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