Wednesday, March 14, 2012

BioCF Makes Recommendations for CDM A/R Offsets

The World Bank's BioCarbon Fund (BioCF) has released a report detailing its experience supporting afforestation/reforestation (A/R) offset projects under the CDM since 2004. The BioCF functions as the primary World Bank vehicle for funding A/R projects under the CDM, with approximately 80% of its resources going to support 21 such projects. The report makes 4 overall recommendations for the CDM and stakeholders:

  1. Improve the regulatory process

  2. Increase access to finance

  3. Strengthen capacity

  4. Increase demand for credits
These are general recommendations, but some of their more specific aspects deserve further attention.

The CDM project validation and verification process is notoriously complex, and this applies equally to A/R projects as it does to other project types. Among other problems, this unwieldy process is difficult for project developers, national authorities, and independent auditors to navigate; threatens to postpone credit issuance, which is particularly troublesome for A/R projects where upfront costs are high and there is a great need for early, reliable cash flow; is subject to constant revision by the CDM Executive Board (EB), creating a significant regulatory monitoring burden for stakeholders; and adds considerable transaction costs to any project, discouraging many otherwise compelling proposals from being made in the first place. Simplifying the project cycle is one of many items on the agenda of the high-level CDM Policy Dialogue, currently underway.

A/R is unique in the CDM in that credits issued for A/R projects are distinct from normal Certified Emission Reductions (CERs). Ordinary CERs are considered permanent, but because forestry projects are regarded as "non-permanent" (due to natural events or possible logging), A/R credits are considered temporary. A/R project participants must choose to receive either "temporary CERs" (tCERs), good for 5 years, or "long-term CERs" (lCERs), good for 20-40 years. Buyers of tCERs and lCERs are obligated to replace them with regular CERs before the former expire. For this reason, A/R credits sell at a discount in the carbon market, resulting in reduced demand. The BioCF strongly backs innovative efforts to make temporary A/R credits more fungible in the broader carbon market.

Lastly, although depressed demand in the carbon market is ultimately attributable to structural features of the EU ETS (see ZEP to Rescue CCS in Europe?, 3/1), European policymakers could provide a minor boost to A/R CDM credits by tweaking institutional rules. Currently, the EU prohibits use of tCERs and lCERs in the European market out of concerns over the permanence of forest carbon sequestration. As the European market is the largest in the world, this puts A/R credits at another distinct disadvantage vis-a-vis other offset credits. Many safefuards against non-permanence in A/R projects have been proposed. EU authorities could lift the prohibition on A/R credits and instead work constructively to help develop mechanisms to ensure against non-permanence, thereby boosting the prospects of A/R credits in Europe and globally.

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