INFORMAL WORKSHOP ON NON-PERMANENCE 1 ALTERNATIVE APPROACHES TO ADDRESSING THE RISK OF NON- PERMANENCE IN LULUCF ACTIVITIES
Mar 28, 2015
INFORMAL WORKSHOP ON NON-PERMANENCE 1
ALTERNATIVE APPROACHES TO ADDRESSING THE RISK OF NON-PERMANENCE IN LULUCF ACTIVITIES
INFORMAL WORKSHOP ON NON-PERMANENCE 2
The Subsidiary Body for Scientific and Technological Advice to initiate a work programme to consider and, as appropriate, develop and recommend modalities and procedures for alternative approaches to addressing the risk of non-permanence under the clean development mechanism with a view to forwarding a draft decision on this matter to the Conference of the Parties …;
Decision 2/CMP.7 Land use, land-use change and forestry.
Context
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• In response to the decision.2/CMP.7, BioCarbon Fund in September 2011 initiated analytical work on the topic in collaboration with Duke University, USA
• Two expert workshops were organized in Washington DC during November 2011 and April 2012 to discuss the analytical work
• Peer reviewed report was finalized in November 2012
• Print copies are available • Electronic version of the report is
available at the website noted below
Analytical work
https://wbcarbonfinance.org/Router.cfm?Page=BioAltAR
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Alternative Approaches
Tonne year accounting
Credits are tied to the number of
years carbon stock stays
intact
Buffer and credit reserves
Credits are set aside into an account to
cover potential reversals
Insurance
Allows commercial third party insurance
contracts to cover reversal
risks
Country guarantee
Countries take
responsibility for
replacement of credits for
projects implemented
Exceptions for low risk
activities
Credits originated
from projects with minimal
risk of reversal are notified as
permanent
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• Reversal risk profile that contributes to non-permanence can be assessed
• Risk profile can be used to identify different approaches or their combinations
• Risk pooling and risk management adequately address reversal risks• Sellers and buyers can choose from a menu of approaches to address
reversal risks• Approaches to address reversal risk can be integrated into monitoring
system• Environmental integrity and economic viability of land use mitigation
activities can be balanced
Rationale for Alternative Approaches
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Unintentional Reversal• Risks: Natural disturbances - Fire and wind• Data: Data on fire events and area affected in Chile• Geographic: Comuna-level fire event data • Time period: Fire events from 1984-85 • Loss estimates: Field research data on fire effects• Model: LANDCARB Ecosystem simulation model
Intentional Reversal• Risks: Conversion to agriculture; Project abandonment• Data : Yield (tonnes/ha/yr) and price ($/tonne) data of A/R and commodities of
alternative land use; site productivity; other economic factors• Time period: Cost and revenue data annualized over a 40-year period
Modeling Reversal Risk Fire event data in Chile from 1964-65
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• Credits are issued incrementally over time upon meeting permanence requirements
• Features– Credits are issued for a portion of carbon pools that meet permanence requirements – Avoids the need to reclaim credits after they are issued and subsequently reversed– Project length and permanence influence the number of credits.– Translates into lower NPV relative to other approaches– No residual liability for credits, e.g. credits are not issued before permanence
requirements are met
• Implementation issues• What is the project length? • What is the permanence period? e.g. permanence period of 100 years result in issuance of
1% of permanent credits per year from cumulative carbon stored• Whether the approach is viable for implementation?
Tonne Year Approach
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• Permanence period (N) in years; Permanence factor = (1/N)• Annual carbon storage (tonnes CO2)• Cumulative tonne years of carbon storage = [n*(n+1)]/2*Annual carbon stored• Permanent emission reductions = Cumulative tonne years * permanence factor
Variables Influencing Tonne Year Approach
Example : Tonne year with a permanence period, N = 100 years (permanence factor = 0.1)
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• Buffer set aside of a percentage of credits issued in a separate account to address risk of reversal
• Features– Buffers are generally effective in addressing unintentional reversals.– Project length and withholding rates affect buffer integrity and financial return. – Buffer pool through aggregation can reduce the risk of buffer failure.– Buffer performance in relation to intentional reversal depends on replacement
requirements
• Implementation issues– What percent of buffer to set aside?– How to manage buffer to avoid being overdrawn?– What types of reversals are to be covered (unintentional, intentional, both) ?– What scales of activity are to be considered - project or program level?– How to replenish buffer if it runs low?
Buffer Approach
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• Entities: Project/program implementing entities • Risk: Type and magnitude of reversal risk influence buffer size• Project stage : Risk of loss is low in early stages of forest growth translating in a
small buffer size• Use: Can be used as stand alone or in combination with other approaches, e.g.
Insurance, guarantee• Project period: Short duration projects may need small buffer amounts relative
to projects of long duration• Withholding rate: Periodic risk screening/assessment needed to assess the
adequacy of buffer withholding rate• Management: Project specific buffer vs. program or system wide buffer may have
different management needs. Management of pooled buffer may be cost effective
• Robustness: Buffer approach is effective against unintentional reversals. Measures to deal with the risk of intentional reversals need to be adopted to avoid run on buffer due to intentional reversals
Variables Influencing Buffer Approach
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Effectiveness of Buffer Approach to Intentional Reversals
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• Premiums are paid to an insuring entity that guarantees against reversal risk by replacing credits affected by reversal.
• Features– Liability for loss transferred to a third-party– Covers one or more categories of unintentional risks and loss magnitudes– Unlikely to cover intentional reversal risks– Premiums linked to type of risk, deductible and loss limits
• Implementation issues– What are the enabling factors for use of insurance ?– What characteristics of insurance products suit project/program contexts?– How to get insurers into the market?– What measures are needed if insurers withdraw from market, cancel policies?
Insurance Approach
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• Entities: Third parties that collect premium to underwrite coverage• Coverage: Can be full value replacement, catastrophic loss limit; buffer
insurance• Use: For use as stand alone or in combination with other approaches, e.g.
buffer, guarantee• Project stage: Projects in early stage may have lower premium as magnitude of
loss is low• Project period: Premiums increase with project period as risk of loss increases• Premium and deductible: Depend on multiple factors influencing risk• Policy length: Insurance policy is short - annual or periodic• Policy renewal: Premium and deductible are subject to review and revision at
policy renewal
Variables Influencing Insurance Approach
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• Host country acts as a fiduciary backstop to address reversals unresolved at the project or subnational levels.
• Features– Host country or an authorized third party can guarantee or backstop project against
reversal risks– Improves flow of credits to projects as risk is shared by host country or authorized entities– Can be combined with other approaches – buffer, insurance – Lowers reversal risk impacts on projects– Institutional failures or lack of funds can prevent a country from realizing its guarantee
• Implementation Issues– What factors influence host country guarantee?– What are ways to promote host country capacity to support guarantee?– How to ensure the credibility of host country guarantee?– How can external guarantees complement host country guarantee – e.g. Partial risk
guarantee?
Host Country Guarantee
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• Entities: Host country or third parties that provide similar guarantee• Coverage: Losses beyond those covered under other approaches • Risk profile: Projects with diverse risk profile maximize the effectiveness of
guarantee • Policy and legal: Existence of policies and legal measures to implement guarantee• Capacity: Institutional and financial capacities needed in support of guarantee• Monitoring: National accounting and monitoring systems needed to track
performance of activities in order to trigger guarantee against reversal risk• Implementation: Terms and conditions that support implementation of
guarantee
Variables Influencing Host Country Guarantee
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• Categorical exceptions for certain low risk activities result in issuance of permanent credits
• Features– Risk analysis based on historical data to demonstrate low risk – Exceptions are defined based on a range of criteria - project type, risk
profile, geographic variables etc. – Low risk of activities to be confirmed through risk screening tools and
independent audit – Low monitoring burden for activities that are identified as having low risk
• Implementation issues– What are the criteria for defining low risk activities? – What are the safeguards to minimize the impact in case risks materialize,
e.g. management plans for addressing relevant risks? – How can national guarantee include provisions governing exceptions for low
risk activities?
Exceptions to Low Risk Activities
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Prevailing Approaches to Address Non-permanence risk under UNFCCC : Case of Carbon Capture and Storage (CCS)
Modalities for Addressing Non-permanence risk
Potential Applicability to LULUCF context
Placement of 5% of credits in a reserve account (buffer)
Risks may require buffer withholding rates, customized to the risk.
Permanence after 20-year monitoring period Monitoring periods for forests are typically longer than 20 years.
Host country guarantee of reversals in excess of the reserve (optional) or Annex I country responsibility for reversals if host country does not guarantee
Host or Annex I country guarantee may be feasible if countries assess risks, their capacity to back risks, and to determine type of guarantee to back the project.
Pool reserve across multiple projects or projects within the umbrella of an ER program
Diversification by pooling credit reserves from projects may make them collectively more resilient than managing them separately.
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Comparison of ApproachesApproach Nature of
LiabilityAddressing Unintentional risks
Addressing Intentional risks
Risks to Project Risks to System Feasibility
Temporary Credits (tCERs/lCERs)
Buyer liability Yes, as temporary credits
Yes, as temporary credits
Lower market value, but no long-term liability
Little or none long-term (default scenario assumes loss of carbon)
Limited feasibility on financial grounds
Tonne-year/ Rental
No residual liability
Yes, upon meeting permanence criteria
Yes, , upon meeting permanence criteria
Slow to credit, but no long-term liability
Low economic viability
Limited feasibility on financial grounds
Buffers Project must contribute to buffer
Yes, depends on size of buffer
Variable, depends on reversal and replacement provisions; and back up in case of default
May require replenishment of buffer
Buffer may be overwhelmed
Feasible in situations with institutional capacity to manage effectively
Insurance Project must purchase insurance; Insuring entity liable
Yes, depends on the capacity of insuring of entity
Generally not cover intentional risks
Limited coverage or poorly capitalized insuring entity could prevent repayment
Moral hazard; poorly capitalized insuring entity could prevent repayment
Feasible with strong financial and legal institutions
Host Country Guarantee
Sovereign or third party liability
Potentially effective, depending on type of guarantee
Policy and legal provisions to limit the risk of intentional risk
Low as risks are shared by host country or third part guarantee
Providing guarantees that are difficult to implement
Feasible with strong policy, legal and institutional capacity
Exceptions to low risk activities
None for certain low risk categories
Additional safeguards required
Generally not cover intentional risks
None - provided projects comply with relevant provisions
Providing exceptions for activities that have substantial risks
Limited to situations with very risk
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Approaches Adopted in Different StandardsStandard Intentional v.
Unintentional Reversals
Reversal Mechanism
Mechanism Details Minimum Contract Period
VCS No Catastrophic vs non-catastrophic used
Pooled Buffer Account Projects are required to guard against reversals by withholding 10%-60% of their credits in a Pooled Buffer Account… based on project-specific risk evaluation… using… project-specific risk factors (e.g., clarity of land tenure, local deforestation pressure, financial viability). …
20–100 years
CAR Intentional Implementation Agreement Project CAR credits account debited to compensate for “avoidable” reversals (negligence, gross negligence, or willful intent).
100 years
Unintentional CAR Pooled Buffer Account Projects required to guard against “unavoidable” reversals (fire, pests) by withholding a certain percentage of their credits in a Pooled Buffer Account… based on project-specific risk evaluation
ACR Distinction Pooled Buffer Account Similar to VCS including use of VCS risk analysis and buffer tool. a) Intentional reversals- must all be replaced by the project entity; b) Unintentional reversals are covered by the buffer pool like an insurable risk, though project must re-establish buffer after conversion.
40 years, opt-out allowed if credits replaced
Plan Vivo No Distinction Buffer Account All projects must withhold minimum of 10% of credits. Must (1) undertake comprehensive analysis of reversal risks, (2) implement risk management and mitigation measures, and (3) withhold credits in a buffer to compensate for unexpected losses based on a project-specific assessment of risks.
Not specified .
CDM No Distinction Temporary credits for A/R project activities
… A/R projects are issued either temporary certified emission reductions (tCER) …that expire each subsequent commitment period (e.g., after 5 years) and must be replaced. lCERs expire after crediting period of either 30 years or 60 years and require full replacement.
Credits expire after 5, 30-60 years
No Distinction Host Country Guarantee for Carbon Capture and Storage
Introduced in the context of CCS activities; either host countries (if accepting obligation to address reversals) or Annex 1 Parties holding CERs issued by the project (if host country does not accept obligation) must address reversals unmitigated by project participants.
20 years after last crediting period
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Approaches for Addressing Reversal and Scale
National
Project
Sub-nationalProject•Buffer•Insurance•Tonne-year•Temporary credits
Sub-national & National
•Pooled buffers•Insurance•Host govt. guarantee
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• Location matters
• Scale matters
• Diversification matters
• Type of risk matters
Policy Insights
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Extensions of Analysis
• Improved data on risk profiles– Multiple scales of coverage– Risks from different disturbance types
• Other LULUCF examples– REDD– Agriculture
• Extension to multiple land uses– Landscape contexts – REDD, A/R, SFM, Agriculture
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RAMA CHANDRA REDDYEMAIL: [email protected]
FOR MORE INFORMATION ON THE BIOCARBON FUND, PLEASE CONTACT:
ELLYSAR BAROUDYEMAIL: [email protected]
WWW.CARBONFINANCE.ORG
Thank you
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Additional Slides: Examples
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Example: Modeling Unintentional Reversal
Ratio of reversals to credits issued in a 20,000 ha project implemented over 40 years without approaches to address reversal
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Mean buffer balance as percent of credits earned in a 20,000 ha project with 10% buffer
Example: Buffer Approach
Mean buffer balance as percent of credits earned in a 20,000 ha project of 40 year
duration with 10% buffer
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Example: InsuranceInsurance coverage of a 20,000 ha project of 40 years length – full value coverage, catastrophic loss limit, and buffer insurance