Carbon Finance for Agriculture, Forestry and Other Land ...Carbon Finance. achieve a common understanding of carbon finance and the different markets and mechanisms understand the

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Resources for policy making

Carbon Finance for Agriculture, Forestry and Other Land-Use Sectors

About the FAO Policy Learning Programme

This programme aims at equipping high level officials from developing countries withcutting-edge knowledge and strengthening their capacity to base their decisions onsound consideration and analysis of policies and strategies both at home and in thecontext of strategic international developments.

Related resources

• See all material prepared for the FAO Policy Learning Programme

• See the FAO Policy Learning Website: http://www.fao.org/tc/policy-learning/en/

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By

of the

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS


Christina Seeberg-Elverfeldt, Climate Change and Environment Officer,

Natural Resources Management and Environment Department

Carbon Finance – for Agriculture, Forestry and Other Land-Use Sectors

About EASYPol

The EASYPol home page is available at: www.fao.org/easypol

This presentation belongs to a set of modules which are part of the EASYPol Resource package: FAO Policy Learning Programme : Specific Policy Issues: Carbon finance

EASYPol is a multilingual repository of freely downloadable resources for policy making in agriculture, rural development and food security. The resources are the results of research and field work by policy experts at FAO. The site is maintained by FAO’s Policy Assistance Support Service, Policy and Programme Development Support Division, FAO.

http://www.fao.org/tc/easypol�

http://www.fao.org/easypol/output/browse_by_training_path.asp?pub_id=504&id=504&id_elem=504&id_cat=501�



http://www.fao.org/tc/policy-support�

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Introduction

Carbon Finance

How does it work? And how do you use it in the agriculture, forestry and other land use sectors?

Some TerminologyWhat is the Carbon Market?Requirements for Carbon ProjectsCarbon Projects and their DevelopmentAgriculture and Forestry Case Studies

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Carbon Finance

achieve a common understanding of carbon finance and the different markets and mechanisms

understand the opportunities and challenges of the carbon market

learn about the requirements and procedures how carbon projects are developed

see the reality of three case studies developed in the agriculture and forestry sector

deduct the relevance of carbon finance for agricultural policy

Objectives

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Some terminology: glossary

Abbreviation Explanation

MtCO2e Metric ton of carbon dioxide equivalent

GHG Greenhouse gas

AFOLU Agriculture, Forestry and Other Land-Use

REDD Reducing Emissions from Deforestation and Forest Degradation

A/R Afforestation and Reforestation

CDM Clean Development Mechanism

CER Certified Emission Reductions

VER Verified Emission Reductions

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Carbon market: Virtual financial place where people buy and sell carbon credits

Carbon credit: Currency for trading carbon emissions. The unit for one carbon credit is equivalent to one tonne of carbon dioxide (CO2) emissions

Carbon offset: Using carbon credits to balance the total emissions that result from a defined activity measured in carbon dioxide equivalent (CO2e)

Carbon finance means to find the lowest cost emission reduction possibilities

Some terminology: definitions

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Trading of carbon credits in- Standard unit= metric tonne CO2e = 1000 kg of CO2e- 1 tonne CO2~ 1m3 wood ~ one 30 cm diameter tree

There is no single carbon market - No global standard to measure emissions- No single agreement for emitters- Standards differ for carbon credits and are valid under different markets

Value of a carbon credit is driven by:- Legislation/Regulation- Expectation of legislation- Public awareness/commitments- Cost of reducing emissions in operational entities- Costs of projects to generate credits /offsets

What is the Carbon Market?

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Regulatory = compliance market

- Used by companies and governments that by law have to account for their GHG emissions and it is regulated by mandatory national, regional or international carbon reduction regimes

- Under cap-and-trade, a regulated entity can meet its emissions cap through allowances or offsets

- “Allowances” =“Emission rights” = right to emit a ton of CO2

- “Carbon credits”= “carbon offsets” = “project-based” from non-regulated entities that reduced emissions or sequestered carbon relative to a baseline

Kyoto Protocol: Clean Development Mechanism (CDM), Joint Implementation (JI) and the EU Trading System (ETS)

Regulatory and voluntary markets

Carbon markets 1/4

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Industrialised countries implement projects in developing countries that reduce emissions and obtain carbon credits

In the developing country a carbon offset project is established, e.g. afforestation, energy efficiency or composting project

Aim is to support sustainable development within the host country and contribute to act against global warming

Rules under CDM allow only for afforestation and reforestation (A/R) projects

Currently only 1.1% of all CDM projects, 6 projects registered and 43 projects have been submitted for validation (July 2009)

Carbon credits: Certified Emission Reductions (CER)

Clean Development Mechanism

Carbon markets 2/4

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Increasing importance for AFOLU projects: “The story behind the credits…”

Personal concern & Corporate social responsibility

Product-based: products become carbon neutral

Can be combined with payments for non-carbon ecosystem services

Carbon credits: Verified Emission Reductions (VER).

Pre-compliance market

Voluntary at first, buyers anticipate they may use credits for complying with regulatory requirements in the future

Voluntary market

Carbon markets 3/4

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Regulatory versus voluntary markets

Carbon markets 4/4

Regulatory Voluntary

Total volume in 2006 US$ 31 billion US$ 148 million

Total volume in 2007 US$ 64 billion US$ 265 million

Total volume in 2008 US$ 126 billion1 US$ 705 million2

Expected future volume US$ 1 trillion in 20073 US$ 50 billion in 20123

Offset Price range US$ 5-15 /t CO2e US$ 1.20 – 46.90/t CO2e (2008 avg. $7.34/t CO2e)2

-Strongly regulated-Strict and lengthy approval process under CDM

- Fragmented standardsQuality and price varies due to:-Additionality-Accuracy of initial and on-going monitoring-Potential for double counting-Permanence

AFOLU projects Only A/R All AFOLU projects, including REDD

1. State and Trends of the Carbon Market, World Bank May 2009; 2. Ecosystems Marketplace –State of the Voluntary Carbon Market 2009; 3. Environment Finance “A trillion dollar marketplace”, by G. Phillips and A. Razzouk, March 2009

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Standards are crucial for insuring the project and credit quality

High integrity for carbon accounting- CDM: 10 methodologies

- Voluntary market standards under development: Voluntary Carbon Standard (VCS). Methodological tool, applicable to determine the land eligibility for 1. Afforestation, Reforestation and Revegetation; 2. Agricultural Land Management; 3. Improved Forest management; 4. REDD.

To ensure community and biodiversity co-benefits- Climate, Community and Biodiversity (CCB) Standards

- Vehicle to introduce non-carbon ecosystem services

Other standards covering AFOLU are less used or less rigorous- CarbonFix, VER+, CCX, Plan Vivo, Social Carbon

Quality standards and methodologies

Requirements for Carbon Projects

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Precondition: - In-country capacity exists to successfully implement and maintain project

(government, community, local NGO, technical implementation expertise)

- Project plan is “relatively” developed and partially funded (land tenure, detailed plan of project actions, budget for overall project activities, project development funding)

Developing carbon projects…

Carbon Project Development

Precondition

1. Project Idea

2. Feasibility

3. Standard and methodology selection

4. Methodology Development

5. Project Document

6. 3rd part validation

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Project Design and Start-up Phase:1. Project Idea

-Broad carbon project type

-Define potential project area and stakeholders

-Goals for co-benefits

2. Feasibility-Perform initial eligibility screen (since when no forest; additionality)

-Define project area with exact GPS coordinates

-Create project and management plan

-Develop initial carbon cost and revenue flows


Carbon Project Development 1/3

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3. Standard and Methodology Selection- Selection of appropriate standard(s) given project type and

eligibility

- Selection of appropriate methodology which defines detailed carbon accounting

4. Methodology Development - If no existing methodology can be applied, a new methodology

must be developed or an existing methodology adapted



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5. Project Document- Compile or acquire detailed project data (biomass inventory,

participatory rural appraisals, remote sensing analysis)

- Execute calculations according to methodology (baseline calculation, ex-ante predictions of project carbon, leakage)

- Document all information (“Project Document” (VCS) or “Project Design Document” (CDM) & Monitoring plan)

6. Third Party Validation - Submit the Project Document for Third Party Validation



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Project Implementation Phase

1. Monitoring–Detailed log of all activities

–Annual monitoring of biomass

–Annual participatory appraisal

–System for stakeholder feedback at all levels

2. Calculation of Ex-post Credits–Integrate all information from monitoring

–Calculate actual gross carbon project


1. Monitoring2. Calculation of ex-

post credits3. 3rd Party Verification

4. Issuance of credits

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3. 3rd party Verification−Submit the monitoring report for third party verification

4. Issuance of Credits−Validator submits the results of the verification to the standards’ board

−Standards’ board notifies registry to issue carbon credits

−Registry places buffer credits in the VCS reserve pool account

Implementing carbon project


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Start-up costs need to be considered and the project implementation costs vary for different type of projects

Carbon payments usually based on actual carbon delivered

Until a project is registered, minimum of 1.5 years

Carbon Finance is an interesting option for smallholders implementing agricultural and forestry projects, but needs good planning and up-front financing

Agriculture offers opportunities for climate change mitigation & adaptation and needs to be incorporated into the climate change agreement in Copenhagen in December

see FAO Policy Brief on Agriculture and Climate Change: http://www.fao.org/forestry/foris/data/nrc/policy_brief_sbstabonn.pdf

To consider...

Challenges and key messages

http://www.fao.org/forestry/foris/data/nrc/policy_brief_sbstabonn.pdf�

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Agricultural Carbon Project on 60,000 ha in Nyanza and Western Provinces in Kenya

The project developer – the NGO “Swedish Cooperative Center-Vi Agroforestry (SCC-ViA)” –promotes the adoption of sustainable agricultural land management (cropland management & rehabilitation of degraded land) practices

BioCarbon Fund (World Bank) will purchase VER from the project developer

The project targets smallholder farmers and small-scale business entrepreneurs organized in common interest groups, primary level cooperatives, farmer groups and informal organizations

Funds flow back to the communities and farmers involved

http://www.sccportal.org/projects/Sustainable-agriculture.aspx

Agriculture

Case Studies 1/3

http://www.sccportal.org/projects/Sustainable-agriculture.aspx�

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Noel Kempff Mercado Climate Action Project in Bolivia

In the 1.5 mill ha of the National Park the forest is for 30 years from logging activities, and alternative income programs for communities are initiated

Government of Bolivia, the Friends of Nature Foundation (FAN), The Nature Conservancy and three energy companies (American Electric Power, PacifiCorp and BP Amoco) jointly implement US $11 million project

In 2005 it has been verified by a third party as the world´s first forest emission reduction project

http://www.noelkempff.com

REDD

Case Studies 2/3

http://www.noelkempff.com/�

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Biomass in Rajasthan, India – Electricity generation from mustard crop residues

Biomass-based power generation plant, mustard crop residue used as fuel

Generated electricity sold to the state grid with balance sold to third parties (large industrial customers)

Electricity will replace a mixture of coal and gas-based power generation

Implementation of the project leads to additional income and employment in the region

Project participants: Kalpataru Power Transmission Limited, Government of India and Dutch Government (purchaser of credits)

http://cdm.unfccc.int/Projects/DB/TUEV-SUED1112801052.32

Agricultural residues

Case Studies 3/3

http://cdm.unfccc.int/Projects/DB/TUEV-SUED1112801052.32�

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Carbon Finance means to find the lowest cost emission reduction possibilities

The carbon market is divided into a regulatory and a voluntary market

The Clean Development Mechanism (CDM) forms part of the regulatory market

The traded volumes on the regulatory vs voluntary market are much higher, both have increased tremendously over the last 3 years

Developing a carbon project, as well as implementing it, follows different steps until the issuance of carbon credits

Carbon projects exist in the agriculture and forestry sector, the majority of these projects are developed for the voluntary market

Conclusions

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Further readings

State and Trends of the Carbon Market, World Bank, May 2009; http://siteresources.worldbank.org/NEWS/Resources/State&Trendsformatted06May10pm.pdf

Ecosystems Marketplace – State of the Voluntary Carbon Markets 2009, May 2009; http://ecosystemmarketplace.com/documents/cms_documents/StateOfTheVoluntaryCarbonMarkets_2009.pdf

Environment Finance “A trillion dollar marketplace”, by G. Phillips and A. Razzouk, March 2009

Policy Brief: Anchoring Agriculture within a Copenhagen Agreement, FAO, May 2009; http://www.fao.org/forestry/foris/data/nrc/policy_brief_sbstabonn.pdf

http://siteresources.worldbank.org/NEWS/Resources/State&Trendsformatted06May10pm.pdf�

http://siteresources.worldbank.org/NEWS/Resources/State&Trendsformatted06May10pm.pdf�

http://ecosystemmarketplace.com/documents/cms_documents/StateOfTheVoluntaryCarbonMarkets_2009.pdf�





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Links to guidebooks and further information

Different CDM guidebooks (Legal Issues, CDM Information and Guidebook, Wind Power and CDM, PDD Guidebook, Baseline Methodologies for CDM projects, Guidebook to Financing CDM projects): http://www.cd4cdm.org/Guidebooks.htm

A guidebook for the formulation of A/R projects under the CDM can be found under http://www.itto.int/en/technical_report/

Information for forestry and land use projects development under CDM: http://www.cdmcapacity.org/index.htm

VCS Standard: http://www.v-c-s.org/ and the tool for Methodological Issues: http://www.v-c-s.org/docs/Tool%20for%20AFOLU%20Methodological%20Issues.pdf

Link to CCB Standards: http://www.climate-standards.org/

http://www.cd4cdm.org/Guidebooks.htm�

http://www.itto.int/en/technical_report/�

http://www.cdmcapacity.org/index.htm�

http://www.v-c-s.org/�

http://www.v-c-s.org/docs/Tool for AFOLU Methodological Issues.pdf�

http://www.v-c-s.org/docs/Tool for AFOLU Methodological Issues.pdf�

http://www.climate-standards.org/�

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