The BioCarbon Fund & Experience in relation to LULUCF

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1 The BioCarbon Fund & Experience in relation to LULUCF Ellysar Baroudy, World Bank Paris, September 24-25, 2009 Harnessing the carbon market to sustain ecosystems and alleviate poverty

2 World Bank Carbon Funds & Facilities Total funds pledged = US$ 2.2 billion (16 governments, 67 firms) Prototype Carbon Fund. $180 million (closed). Multi-shareholder. Multi-purpose. Netherlands Clean Development Mechanism Facility. (closed). Netherlands Ministry of Environment. CDM energy, infrastructure and industry projects. Community Development Carbon Fund. $128.6 million (closed). Multi-shareholder. Smallscale CDM energy projects. BioCarbon Fund. $91.9 million (Tranche 1 and 2 closed). Multi-shareholder. Mainly CDM LULUCF projects; some REDD and soil carbon. Italian Carbon Fund. $155.6 million (closed). Multi-shareholder (from Italy only). Multipurpose. Netherlands European Carbon Facility. (closed). Netherlands Ministry of Economic affairs. JI projects. Spanish Carbon Fund. $282.4 million (closed). Multi-shareholder (from Spain only). Multipurpose. Danish Carbon Fund. $69.4 million (closed). Multi-shareholder (from Denmark only). Multipurpose. Umbrella Carbon Facility. $737.6 million (Tranche 1 closed 2 HFC-23 destruction projects in China). Carbon Fund for Europe. $65 million. Multi-shareholder. Multi-purpose. Managed with EIB.

3 How the Fund Works Technology Technology $ $ Finance Finance Industrialized Governments and Companies EITs and Developing Countries CO Equivalent 2 Emission Reductions CO Equivalent 2 Emission Reductions

4 Portfolio First Window Forest restoration Community forestry Agroforestry Assisted natural regeneration Bioenergy plantations Timber plantations

5 Projects with Signed ERPAs - A/R 1. Albania Assisted Natural Regeneration 2. China Guangxi Pearl River Watershed Management I 3. China Guangxi Pearl River Watershed Management II 4. Colombia San Nicolas Agroforestry 5. Colombia Silvopastoral Rehabilitation 6. Costa Rica Coopeagri 7. Democratic Republic of Congo Ibi Bateke 8. Ethiopia Humbo Assisted Regeneration 9. Honduras Pico Bonito 10. India Improving Rural Livelihoods 11. Kenya Green Belt Movement 12. Madagascar Biodiversity Corridor 13. Mali Acacia Plantations 14. Moldova Soil Conservation 15. Moldova Community Forestry 16. Nicaragua Precious Woods 17. Niger Acacia Community Plantations 18. Trinidad and Tobago Nariva Wetland 19. Uganda Nile Basin Reforestation * UNFCCC Registered projects and Submitted formally for registration

6 UNFCCC A/R Registered Projects Facilitating Reforestation for Guangxi Watershed Management in Pearl River Basin Moldova Soil Conservation Project 3. India: Small Scale Cooperative Afforestation CDM Pilot Project Activity on Private Lands Affected by Shifting Sand Dunes in Sirsa, Haryana 4. Viet Nam Cao Phong Reforestation Project 5. India Reforestation of severely degraded landmass in Khammam District of Andhra Pradesh, India under ITC Social Forestry Project 6. Bolivia carbon sequestration through reforestation in the Bolivian tropics by smallholders 7. Uganda Nile Basin Reforestation #3 8. Paraguay Reforestation of croplands and grasslands in low income communities of Paraguarí Department

7 Portfolio Second Window Reducing Emissions from Deforestation & Degradation (REDD) Reduced tillage Agricultural improvements

8 Projects with Signed ERPAs non-cdm LULUCF 1. Colombia San Nicolas Agroforestry 2. Honduras Pico Bonito 3. Madagascar Biodiversity Corridor Expected in next months: 1. 2 additional REDD projects Soil carbon pilots All these projects will be submitted for validation through the Voluntary Carbon Standard (VCS)

9 Several Tranches Tranche 1 (operational since May 2004, closed to new Participants) Tranche 2 (operational since March 13, 2007, closed to new Participants) Tranche 3 (may be opened in the future)

10 Participants Tranche 1 ($53.8 million) Operational since May 2004 Okinawa Electric, Government of Canada, Government of Italy, Tokyo Electric, Eco-Carbone, Agence Française de Développement, Government of Spain, Government of Luxembourg, Idemitsu Kosan, Sumitomo Joint Electric Power Co., Sumitomo Chemicals, Japan Petroleum Exploration, Japan Iron and Steel Federation, Suntory Tranche 2 ($38.1 million) Operational since March 2007 Agence Française de Développement, Consensus Business Group, Government of Ireland, Government of Spain, Natsource, Syngenta Foundation, ZeroEmissions Carbon Trust

11 BioCF Mandate (1/3) Contracts signed 19 ERPAs signed for A/R first ever under the CDM 6 more A/R under negotiation 3 ERPAs signed for REDD 3-5 more under negotiations for REDD and soil/ag carbon Methodologies & Tools 10 A/R methodologies approved, of which the Bank was involved in 7 First REDD methodology developed by the BioCF First soil carbon methodology developed by the BioCF TARAM: Tool for Afforestation / Reforestation Approved Methodologies, calculates equations found in each A/R methodology, both for large scale and small scale projects Public domain

12 BioCF Mandate (2/3) Project registration First two ever CDM A/R project registered (China, Moldova) More than half the ERPAs under validation with expectation for more registered projects ahead of Copenhagen COP Capacity building Over 25 project entities have been trained Countries have adopted forest definitions Submissions by DNAs to the UNFCCC concerning rules Testing different project models Community forestry Agroforestry Plantations Ecological restorations Assisted natural regeneration

13 BioCF Mandate (3/3) Lessons learned from approaches Land tenure Challenges facing small holders Financing Inclusion Rural world can participate in the CDM recent inclusion of soil carbon Africa > 1/3 of portfolio Learning by doing Show that CDM rules can work in practice Body of experience beyond theoretical debate Testing ground for post-2012, including avoided deforestation or REDD and agriculture and soil carbon

14 A/R s Potential pre-2012 Very small volume <1% of total CERs and ERUs A small fraction of the cap (1% of 1990 emissions) Rules Rules came late Some rules are not conducive Demand restricted: exclusion from EU ETS deterred private sector from buying; new focus with US Trees grow slowly What can still be done before 2012? Changes adopted now will pave way for post-2012 Submissions to UNFCCC e.g. WB Accra submission; numerous national submissions Countries need to speak up in the negotiations process leading up to Copenhagen

15 Issues affecting A/R Project perspective tcers and lcers No known lcer purchase One contract in BioCF portfolio where selected lcers BUT then changed to tcers Investor perspective (BioCarbon Fund) Some investors in BioCF T1 declined reinvesting in T2 because of temporary credits and replacement credits Limitation for investors impacts demand Investor perspective (EU-ETS) Forestry credits banned from EU-ETS Reasons cited include permanence and lack of fungibility of credits Limitation for investors impacts demand and price

16 Issues affecting A/R Replacement credits Investor perspective (BioCarbon Fund) Some investors in BioCF T1 and T2 have expressed concern over replacement credit rule Although in theory, tcers can be renewed through 5-year verifications for up to 60 years, most BioCF investors did not want to deal with that time span Mandated BioCF to purchase replacement credits on their behalf through BioCF funds Less money to spend on purchase of forestry credits But also restrictions on total cost: tcer + replacement credit CER Limitation for investors impacts demand and price

17 Issues affecting A/R 1% Cap Limit Market perspective Market share shows that limit is nowhere near reached; A/R represents much less than 1% of the market potential of A/R is closer to 1/20 th of the 1% potential Original concern over market-flooding by forestry credits was never realized Investor perspective Investors using a menu of option for compliance, CERs, tcers, AAUs, etc. Investors in BioCF could use more tcers to meet compliance targets but concern over costs of replacement credits

18 Issues affecting A/R Projects Only A/R Project perspective BioCF project in Madagascar example Project overall contains three components: afforestation, REDD and agriculture Approach has to be done in parallel Two PDDs, one for A/R under CDM and one for REDD under VCS; agriculture not credited as transaction costs too high. Both PDDs have international consultant assistance Average cost of a CDM validation is $25,000-30,000 (and increasing); Cost of the VCS validation is $50,000 (excludes cost of methodology approval and double review which BioCF will cover) Transaction costs can be very high Does not consider land realities and is therefore not always a practical approach

19 Issues affecting A/R Projects Project perspective 1990 rule In same project, some lands are eligible and some are not because of the cut-off date This has caused a problem in social relations how can one farmer be credited, the other not, when they are neighbors Does not make ecological sense Transaction costs are increased because of this

20 Issues affecting A/R Projects Project perspective Methodologies Not the simplest projects to undertake methodologies perceived as complex, needing large investments and inputs from international consultants Can this be made simpler yes Through consolidation of methodologies Tools to help choice of methodology and application However, trend is that once one project is done, easy to replicate (For BioCF China and Moldova undertaking CDM projects #2)

21 Change can be adopted Problem: Small-scale A/R projects were limited to 8,000 t CO 2 e per year. Hence, small-scale projects were overwhelmed by transaction costs, which are more or less fixed 8,000 t CO 2 e per year ~ 40,000 t CO 2 e by ,000 t CO 2 $5/t CO 2 e = $200,000 Fixed costs > $100,000 Net revenue < $100,000 Solution adopted compromise but not as open as energy rules A/R small scale ceiling raised to 16,000 t CO 2 e per year (compared with 32,000 t CO 2 e per year for energy projects) Limitation of having to prove low income involvement not necessary for energy, and again causes an unnecessary transaction cost for project

22 Why is LULUCF so important: Co-benefits Not only benefits to climate Social: Improve livelihoods People receive carbon payments New job creation Additional income from alternative activities Know-how Other environmental Conserve biodiversity Expand natural habitat Reconnect forest fragments Protect soil against erosion Protect savannah against fires Fight against desertification Moisture retention

23 Summary If Land Use, Land-Use Change and Forestry is important to your country and your communities then: Many improvements can be made to the rules and options are being put on the table now Life can and should be made simpler if anyone wants to pursue a LULUCF activity and this is not at the cost of environmental integrity Please make your voices heard at the ongoing negotiations now is the time!

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