Bioenergy and the Climate Bond Standard

Transcription

1 Bioenergy and the Climate Bond Standard Background Paper to eligibility criteria Bioenergy Technical Working Group 1

2 Table of content TABLE OF CONTENT PURPOSE OF THIS DOCUMENT INTRODUCTION BIOENERGY PATHWAYS SUSTAINABILITY ASPECTS TO CONSIDER SUSTAINABILITY OF CLIMATE BOND CERTIFIED BIOENERGY INVESTMENTS VOLUNTARY SUSTAINABILITY STANDARDS PERFORMANCE OF VOLUNTARY STANDARDS PROPOSED ELIGIBILITY CRITERIA FOR CBI CERTIFIED BIOENERGY BONDS IMPLEMENTATION OF THE SUSTAINABILITY REQUIREMENTS RISK ANALYSIS BIBLIOGRAPHY ANNEX 1 ABOUT THE CLIMATE BOND STANDARD AND CERTIFICATION SCHEME ANNEX 2 - MEMBERS OF THE BIOENERGY TECHNICAL WORKING GROUP ANNEX 3 COMPARISON OF VARIOUS VOLUNTARY STANDARDS RELEVANT FOR THE SUSTAINABILITY OF LIQUID BIOFUELS ACCORDING TO WWF (WWF 2013) ANNEX 4 - USE OF VOLUNTARY SUSTAINABILITY STANDARDS BY FINANCIAL INSTITUTIONS ANNEX 5 EXAMPLE OF GHG CALCULATORS (NOT AN EXHAUSTIVE LIST) Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 2

3 1. Purpose of this document The Climate Bonds Initiative (CBI) is an international, investor-focused not-for-profit organization aiming to develop tools to mobilize the bond market for climate change solutions. The Climate Bonds Standard is a screening tool for investors and governments which allows them to easily prioritize climate and green bonds with confidence that the funds are being used to mitigate and/or adapt to climate change. The purpose of this document is to propose eligibility criteria for bioenergy 1 investments under the Climate Bonds Standard. The development of the eligibility criteria was guided by the following fundamental principles: The criteria should be sufficiently robust to ensure that bonds issued under the standard contribute to tangible carbon emissions reductions without adverse environmental or socio-economic impacts; The criteria should take into account and align with current academic research and international policy; The criteria should be practically applicable taking into account the structure of the current bioenergy/biofuels industry and the debt capital market; The criteria should be designed with rigor but with sufficient flexibility to allow for iterative review and updating as research and markets develop. 1 Bioenergy includes all forms of biomass based energy. 3

4 2. Introduction Energy derived from biomass accounted for roughly 10% of world total primary energy consumption in 2009, primarily in developing countries for heat and fuel. Liquid biofuels consumption has experienced a significant growth from 16 billion litres in 2000 to more than 100 billion litres in 2011, stimulated by policy and incentives encouraging renewable resource use in transport. At the same time modern applications of biomass for heat and electricity has grown, especially in Europe. The IEA Biofuel Technology Roadmap (IEA 2011) suggests that in order to achieve significant emission reductions in the energy sector, sustainably produced bioenergy will have to play an increasing role in the future with demand increasing three-fold to Biofuels could provide 27% of total transport fuel and contribute in particular to the replacement of diesel and jet fuel. Similarly the IEA Bioenergy Technology Roadmap for Heat and Electricity (IEA 2012) has projected that by 2050, about 7.5% of the global electricity production and 15% of the global heat production in the building sector could come from bioenergy. The more recent IEA Energy Technology Perspectives (IEA 2014) assumes for the 2DS scenario (restricting global warming to 2 C by 2100) that biofuels could contribute 28% of all transport fuels by 2050 (with electricity about 10%), and biomass would further contribute 8% to electricity generation, and 32% to heating. In total, bioenergy would have a share of 24% of the global energy demand. It is also worth noting, that other organizations, such as WWF, estimate even higher dependency on bioenergy, if climate change mitigation policies are to prevent average global temperature rise above 2 C 0. The WWF Energy Report (WWF 2011) examining the technical, environmental and financial feasibility for the world to run on 100% renewable electricity concluded that by nearly 50% of the energy consumption could be bioenergy based. A number of other organizations have developed similar scenarios and bioenergy tends to have a significant contribution in most of them. The expansion of the bioenergy technologies is driven by a number of interests, some of them relate to climate change mitigation, others are linked to rural development interests, security of supply, or reducing fossil fuel import bills. Most of these scenarios recognize that considering current technologies, bioenergy is the only renewable alternative for certain sectors. Sectors dependent on liquid fuels (aviation, long haul trucks) or high heat industrial applications currently have no renewable alternatives. If we are to decarbonize them, bioenergy looks like the only viable option in the time horizon up to Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 4

5 The potential climate mitigation role of bioenergy, including liquid biofuels, is also acknowledged by the latest IPCC report (IPCC 2014). If feedstock production does not lead to the conversion of high carbon stocks and biodiverse areas, and if best land and water management practices are implemented, bioenergy could play a critical role in climate change mitigation (IPCC 2014). It is estimated that over 60 countries have enacted legislation on promoting the use of bioenergy production and use. The EU, US and Brazil are the largest producers and consumers of biofuels. The US is also a significant producer of wood pellets for heat and electricity production. However most of the US production is consumed in the EU. As mentioned a number of other countries/regions have adopted bioenergy policies, aimed at accelerating the development and commercialisation of this technology. However their contribution towards the production and consumption of bioenergy remains relatively modest. Much of the developments described in this paper are linked to the EU policy developments. This is not to say that the efforts in other geographies are to be ignored, however the promotion of voluntary sustainability standards has been mainly the feature of the European legislation. Please note that while the paper is based on the latest scientific evidence and informed by the experts of the Bioenergy Technical Working Group, it must be recognised that there are a number of uncertainties. The science on indirect impacts and lifecycle analysis for Bioenergy continues to evolve and our understanding of the sustainability challenges is also improving. In the meantime, however, sustainable supply chains should be developed and supported based on the best available information. 3. Bioenergy pathways The focus of this paper is on modern bioenergy 2 - liquid biofuels, biogas, and solid biomass used for heat and electricity. Traditional biomass use is not included in the scope of the paper due to the very different nature of the drivers and supply chains. It was also considered that traditional biomass markets represent no or very little interest for financial bonds. 2 refers to biomass converted to higher value and more efficient and convenient energy carriers, such as e.g. pellets, biogas, and biodiesel. Beyond this, future technologies are emerging to make biofuels use even more efficient, cleaner, and provide greater greenhouse gas reductions (the so-called second generation biofuels) 5

6 Furthermore this document has been developed using a technology neutral approach. Based on the various energy scenarios reviewed for this paper, it is likely that the future bioenergy mix is going to be based on a variety of feedstock and technologies. While certain technologies, such as second generation biofuels, are sometimes considered environmentally and socially less risky than first generation technologies, their performance will largely depend on where and how the feedstocks are produced and converted into useful energy carriers. Thus, this document will not express a preference for certain technologies or feedstocks but it will rather propose a framework that will promote responsible production. 4. Sustainability aspects to consider It is not the intent of this document to provide a complete overview of the environmental and social impacts of bioenergy production. However considering the objectives of the exercise, it is worth recapitulating the key topics that the proposed sustainability criteria should address: GHG: bioenergy use in most cases is driven by climate change mitigation needs as a viable solution to decarbonize certain sectors. Different feedstocks and conversion pathways will have significantly different greenhouse gas (GHG) profiles. In addition to determining the minimum GHG savings threshold, one needs to also determine the fossil fuel baseline and choose a lifecycle calculation methodology. Environmental sustainability: the main aspects to consider are the previous land use, species selection and the management practices used to produce bioenergy feedstocks. While most of the focus is on land, one should not forget that water is likely to become an even more limited resource in the future. Depending on these variables, the environmental performance of the various supply chains will be very different. Social sustainability: equally or even more complex than the previous two categories. While the impact of bioenergy on food prices are probably the best known issue, land and water rights, health and safety challenges are equally important. Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 6

7 What is the Climate Bond Standard definition of sustainable bioenergy? Is it not the intention of this document to re-define what sustainable bioenergy is. A number of definitions exist, spelled out in either legally binding legislation or voluntary standards. The Climate Bond Standard approach on bioenergy will rely on other existing, credible tools. However, it has been agreed that it would be useful to spell out the high-level sustainability principles that are at the basis of the CBI framework for sustainable bioenergy: - GHG savings of at least 60 (liquid biofuels) or 70 (solid biomass) %; - Maintenance or enhancement of conservation, biodiversity, ecosystem values; - Maintenance or enhancement of water, soil and air resources; - Worst forms of employment (including forced and child labour) as defined by ILO are avoided; - Direct impacts on food security are avoided; - Long term economic viability; - When possible, use of degraded land, waste products and integration of various land uses. While direct impacts (such as converting natural forests to make place for bioenergy feedstocks production) are usually under the direct control of the actors involved in the bioenergy supply chain; indirect impacts can act beyond the farm gate, borders or across crops. Mitigating, avoiding these indirect impacts has proven controversial and in many cases difficult. At the moment none of the voluntary standards address indirect impacts. Legislative developments have been stalled by disagreements in the EU. In other countries, such as the USA (certain states, such as California) have enacted legislation to address indirect impacts. Contrary to the legislative developments, at least in the EU, some of the voluntary standards such as the RSB has continued to work on a practical mechanism to address indirect impacts risks. It is expected that the RSB will publish in 2015 a certification module specifically for the certification of bioenergy feedstocks that are certifiably low risk. A consortium of organizations, that included WWF, RSB and the Ecofys 3 (a leading energy consultancy based in the Netherlands) have developed and published a methodology for the certification of biofuels that resulted from low indirect impacts pathways. 3 More information is available on: 7

8 In the case of forest based biomass, another aspect has been added to the debate. This is the so-called carbon debt, that relates to the long production cycles and the resulting uncertainties with regards to the net carbon benefits of using such biomass in the short-term. While there is ongoing research, at the moment there is no agreement with regards to the extent of this problem, although there is consensus that it is not relevant for some forest products 4. Similarly to indirect impacts, research shows the risks could be reduced. As mentioned above, this document aims to propose eligibility criteria for Bioenergy investments (liquid biofuels, biomass for heat/electricity production and biogas) to be certified under the Climate Bonds Standard. In terms of the feedstocks there are fundamental differences between these sectors. Liquid biofuels are produced using a range of agricultural feedstocks, while most of the biomass used for heat and electricity generation comes from forest management. Biogas is mainly produced through the fermentation of various waste products, but considering the German example, commodities such as corn are also used. The sustainability challenges of these sectors, while interlinked, are significantly different and as a result the proposed solutions will also have to be different. Additional issues to consider: Bioenergy in many cases is one of a range of possible end-uses for the commodities in question and in some cases it represents a relatively low economic value; While there is a growing international market for bioenergy, in many cases the resources are used locally and the market, especially in case of solid biomass can be very fragmented; In some cases on top of the legislation on bioenergy, there are additional requirements to comply with such as public procurement rules or EU Timber Regulation. 5. Sustainability of Climate Bond Certified bioenergy investments The Climate Bond Standard is an environmental standard and therefore needs to ensure that the bioenergy investments certified under the Standard deliver on: GHG mitigation potential, environmental and social sustainability. The Climate Bond Standard could employ a number of tools to ensure that sustainability requirements are complied with. A couple of aspects could guide the decision: 4 Forests, bioenergy and climate change mitigation Workshop May 19-20, 2014 Outcome statement Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 8

9 Table 1 Aspects to consider for the design of a Bioenergy Climate Bond Standard Aspects Do not reinvent the wheel Robust system Minimum transaction costs Level playing field Multi-stakeholder support Continuous improvement Explanation Climate Bond Standard does not want to redefine what sustainable bioenergy is, but rather rely on existing credible definitions endorsed by stakeholders where possible. The proposed system has to be robust to maintain the credibility of the Climate Bond Standard trademark. High transaction costs run the risk of low uptake in the bond market. Keeping the costs of the system down while maintaining robust implementation of the sustainability requirements is important. The proposed solution should ensure that all possible market players have the option to access Climate Bond certified bonds. The system should not discriminate against certain groups of producers (such as small holders) or geographies. Climate Bond Initiative (CBI) brand is supported by key stakeholders. The proposed criteria should maintain its credibility in the market place. The CBI has an interest in supporting continuous improvement in the market place and promoting the most ambitious efforts. Considering the above issues and the results of the Bioenergy Technical Working Group discussions, it is proposed that leveraging existing, credible proxies may be the best path forward. There are a number of legally binding and voluntary tools that could be considered. Given the fragmented legislative landscape, relying on legislation as a proxy, is considered not only insufficient but a potential risk to the CBI brand. It has been agreed that credible voluntary standards, independently verified by credible third party organizations are likely to provide a robust framework for CBI. 6. Voluntary sustainability standards Following the adoption and implementation of the EU Renewable Energy Directive (EU RED) the landscape of voluntary standards have changed significantly. In addition to the existing standards, the bioenergy industry has developed a number of standards, leading to competition and confusion in the marketplace. While the use of voluntary standards has been considered in other jurisdictions, the EU remains the only region where compliance with binding bioenergy 9

10 sustainability requirements are mainly met through the use of voluntary standards. Most of the voluntary sustainability standards that were established prior to the developments in the bioenergy sector, focused on certain commodities or groups of commodities and offered certification solutions for all the end users. The bioenergy sector has developed a number of standards that focus narrowly on bioenergy, even though most of the commodities certified under these schemes have other end-uses too. This is especially true to the liquid biofuels sector and to some extent the solid biomass sector. A number of organizations have developed comparisons aimed at advising stakeholders about the strengths and weaknesses of various standards. IEA Bioenergy Platform (Pelkmans, et al. 2013), IUCN (Proforest 2013) and WWF (WWF 2013) are among the organizations that have recently considered this topic. These studies highlight that the landscape of the voluntary standards is not uniform and harmonized. There are ongoing efforts to improve the compatibility of various standards. These are either driven by developments related to the implementation of the EU RED or by efforts of various standards, enjoying broad stakeholder support, under the umbrella of ISEAL 5. It is unlikely and in some cases undesirable to advocate for greater harmonization between all standards. Certain standards supported by the same stakeholders and with comparable environmental and social requirements and robust, third party independent auditing might move towards integration especially when there is a niche in the certification market. For example, the RSB has developed an endorsement system for FSC specifically for 2 nd generation advanced fuels based on FSC certified wood products. Costs are an important consideration. Generally speaking, when it comes to certification there are 3 types of costs to be considered: Certification costs, the costs associated with the certification body confirming compliance with the standard requirements. These are determined by the market and it will depend on the size and complexity of the operations and aren t publicly available fix costs; License fees, most of the standards will charge certificate holders a fix annual fee during the lifetime of the certificate. Examples are available on the FSC website and the RSB; 5 ISEAL is a non-governmental organization whose mission is to strengthen sustainability standards systems for the benefit of people and the environment. Ver sio n 1 : Au t hor: Ope n for p u bl ic comm e nt Marc h László Ma the 10

11 Costs associated with updating the management system of the applicant to comply with the standard requirements, for example new equipment, new monitoring system, health and safety equipment. Based on anecdotal evidence in most cases the last cost category is the most significant one. The extent of this category will depend on how far the current performance of the certificate holder is from the expectations of the standard. 7. Performance of voluntary standards Determining which voluntary standards to accept under the Climate Bond Standard is likely to be one of the most important issues to be considered by the expert group. Determining which standard is credible to deliver the environmental, social and GHG requirements should consider the following areas: Table 2 Possible areas to consider for determining the credibility of standards Areas to consider Standard development Environmental sustainability Social sustainability Implementation Indicators (examples) Representation of key stakeholders Decision making Transparency Consultation All key impacts should be addressed Requirements should be preferably measurable, objective Science based All key social impacts should be addressed Free, prior and informed consent at the basis of consultations and agreements Certification based on third party independent audit Credible implementation of standard requirements Transparency Stakeholder consultation Robust accreditation requirements Standards reviewed periodically Continuous improvement The requirements related to standard development and implementation are generally called process requirements and ISEAL has developed extensive guidance on what constitutes a credible process. CBI is affiliated with ISEAL and is committed to work with standards that have 11

12 been developed and operate in line with the ISEAL guidelines. The reports reviewed for this paper concluded that there are significant differences between the standards created specifically as a response to the EU RED implementation and the multistakeholder processes developing sustainability standards independently from the legislative requirements. The multistakeholder standards are, generally speaking, more ambitious when it comes to the environmental and social criteria but also perform better on the process requirements. Annex 2 presents the comparative table of the WWF report, presenting the strengths and weaknesses of various standards used by the biofuels industry in the EU, both for domestic production but also imported feedstocks. IUCN, based on the comparison prepared by Proforest, concluded that: RSB covers more sustainability criteria, with greater detail, and with more breadth in terms of level of assurance than any of the other VSS. NTA8080, Bonsucro, RTRS and RSPO also meet a good level of quality in all comparisons made. ISCC, Proterra 6 and Greenergy can be considered to be of overall medium quality. REDcert and 2BSvs fall in the low quality segment, with 2BSvs having the overall lowest quality 7. In case of solid biomass (wood chips, wood pellets mainly) the standard landscape looks differently. The proliferation of standards has been less of a problem, even though various stakeholders have set up a number of standard setting processes. Additionally, compared with liquid biofuels, the standards that are relevant for solid biomass have not been analysed to the extent that the liquid biofuel standards have been by comparative studies. Similarly to the standards discussed previously, some of the standards used to certify solid biomass have been created prior to the developments in the bioenergy sector to cover forest products in general, FSC 8 and PEFC 9 are the two largest. Others such as Green Gold Label (GGL) 10, NTA or the SBP 12 have been specifically created for the bioenergy sector. There are other ongoing initiatives, but at the moment the standards listed above are probably the most important ones. These standards are building on the forest certification schemes. 6 Certification according to the ProTerra Standard is available worldwide, for `all agricultural commodities. More information: 7 Page 5, Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 12

13 Should the Climate Bond Standard include PEFC? When it comes to the certified forest area, PEFC outweighs FSC in terms of numbers. Nonetheless as a member of ISEAL, CBI aims to develop credible, robust standards that have broad stakeholder support. WWF has conducted a comparison of FSC and PEFC in 2008 and concluded that there are a number of key differences between the two standards. PEFC has scored low on a number of areas. WWF is currently finalising an updated comparison and as soon it is available the Bioenergy TWG will consider the outcomes of this exercise. Figure 1 Analysis of the FSC and PEFC (WWF,2008) FSC is the only standard that offers broad stakeholder support. While the international PEFC standard closely follows the FSC standard on environmental and social requirements, implementation of the standard at national, regional level remains fragmented. There are significant qualitative differences between various PEFC labels. For example, a number of EU countries continue to not accept MTCS (Malaysia Timber Certification Scheme) certified timber, one of the national standards endorsed by PEFC due to concern about certified operations being involved in forest conversion. It has to be noted that none of the forest management standards incorporate specific GHG lifecycle assessment tools. This means in practice that economic operators have to either rely on default values or use other tools such as Biograce. The RSB has developed a joint certification system with FSC that provides a possible solution for the certification of wood based bioenergy. PEFC has also been considering the possibility of including a GHG lifecycle assessment tool. GGL was originally set up by the Dutch utility Essent and continues to have relatively low support from various stakeholders. It is likely that with the launch of the Sustainable Biomass Partnership (SBP) its role will decrease and as a result it is unlikely that it will be suitable to include under the Climate Bond Standard. 13

14 NTA8080 is another Dutch initiative, created following the adoption of the Cramer Criteria. Is generally well regarded by stakeholders, but has low market share. While the environmental and social requirements are relatively ambitious, implementation including auditing, transparency and accreditation does not provide adequate confidence. SBP is probably the most important initiative in Europe if we consider possible market share. The SBP is a partnership of large European utilities that represent over 70% of the EU wood pellets market. The standards are not yet finalized, however the process was mainly industry driven. Considering the potential large market share the Bioenergy TWG will analyse after the launch of the system if SBP complies with the Climate Bond Standard requirements. Another aspect the Bioenergy TWG recommends considering when selecting the different standards to be leveraged by the Climate Bond Standard is the market share of various certification schemes. The Climate Bond Standard aims to address the mainstream market, but it wants to do so by ensuring robust implementation of the sustainability criteria. Table 3 Market share of various standards Standards liquid biofuels Market share RSPO Over 1000 certificates, representing approx. 15% of the global market and covering over 1,7 million hectares of plantations (RSPO n.d.). RTRS Over 480 thousand hectares producing around 873 thousand tones of certified soy (RTRS n.d.) RSB BONSUCRO ISCC NTA8080 GREENERGY RED TRACTOR 15 valid certificates, slowly growing market share (RSB n.d.). 38 production certificates, representing 3,6% of global sugarcane surface, over 2,6 million m3 of certified ethanol (Bonsucro n.d.). Over 2600 certificates, no further details on area or volumes (ISCC n.d.). 31 certificates (including biofuels, solid biomass, biogas) no further details with regards to volumes or certified area (NTA8080 n.d.). No publicly available information. There are over 78,000 UK farmers (the majority of these is for food production) certified, but no information with regards to biofuel share, area or volumes (RED Tractor n.d.). Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 14

15 SQC No publicly available information. 2BSvs REDcert RBSA Standards solid biomass 635 certificates, no further information with regards to area or volumes (2BSvs n.d.) Approximately 2000 certificates, but no further information about area or volumes (REDcert n.d.). No publicly available information. Market share FSC Over 180 million hectares of certified forests, in 80 countries and nearly 1300 certificates (FSC n.d.). PEFC NTA8080 RSB SBP 220 million hectares of certified forests ( (PEFC n.d.)) See above. See above. No certificates yet. 8. Proposed eligibility criteria for Climate Bond Certified bioenergy bonds Based on the Bioenergy TWG discussions and the analysis presented above, the following criteria are proposed for consideration: Table 4 Eligibility criteria for certified Climate bonds linked to liquid biofuels and biogas Sustainability area Environmental and social sustainability GHG Indirect impacts Recommendation Production and supply chain certified under one of the following standards: RSB, RTRS, RSPO, Bonsucro. At least 60 % lower GHG lifecycle emissions compared with fossil fuel baselines. * Operators should be encouraged to reduce the risk of indirect impacts by promoting the use of unused productive land, increasing yields on existing farmland, integration and using waste and byproducts (Ecofys, RSB and WWF 2012). Notes * The lifecycle should be determined using either a methodology approved by legislation (such as EU RED) or by the voluntary standards (such as the RSB GHG methodology). Fossil fuel baselines will be also either determined by legislation or the voluntary standards. The 60% 15

16 target was determined by the GHG savings trajectories defined by the EU RED. The legislation will require new plants to deliver at least 60% savings from 2018 onwards. The Bioenergy TWG recommends continuous improvement in performance in the bioenergy sector and as a result it has concluded that this target is appropriate. Table 5 Eligibility criteria for certified Climate Bonds linked to (wood based) solid biomass applications Sustainability area Environmental and social sustainability GHG Carbon debt and indirect impacts Recommendation Production and supply chain certified under FSC. At least 70% lower GHG lifecycle emissions compared with baseline. * Some evidence suggests that using certain material groups such as waste and byproducts, branches and tree tops and tree plantations established on low carbon stock lands will lead to almost immediate net carbon benefits (Lamers and Junginger 2013). These options should be promoted. Notes: * The lifecycle should be determined using either a methodology approved by legislation or by the voluntary standards. Baselines will be also either determined by legislation or the voluntary standards. The EU has proposed voluntary sustainability criteria for solid biomass use, including a target of 60% savings in 2018 for new installations. Similarly to liquid biofuels, to contribute to an ambitious climate mitigation potential, the Bioenergy TWG proposes 70% as an appropriate target. 9. Implementation of the sustainability requirements The implementation of the eligibility criteria under the Climate Bond Standard is described in Annex 1. The process consists of 7 simple steps, which results in the certification (or not) of the bonds based on the recommendation of an independent third party. The independent party will have to assess if the issuer can provide evidence that confirms the compliance of the proposed projects with the Climate Bond Standard requirements. Considering that the strategy is based on proxies, the implementation of the criteria and the related verification will rely mainly on examining the evidence provided by other organizations/institutions. Table 6 presents the type of evidence that could be considered as evidence by the third party verifier. Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 16

17 It will also be important to determine at what point bond issuers have to achieve full compliance with the eligibility requirements. One option is that compliance is required for the full portfolio at the beginning. This is probably the easiest option proposed. However it is unlikely that in the case of multiple projects within a portfolio, all participants are compliant from the beginning. It is also likely that some projects might temporarily loose their certificates. The bond issuer would need to demonstrate commitments to address the shortcomings. Table 7 presents some options. Table 6 Examples of evidence that could be accepted during the validation process Sustainability area Environmental and social sustainability GHG Evidence Certificates issued by certification companies, accredited to certify against the approved standards. GHG and baseline calculations performed by accredited organizations. See Annex 5. The implementation of the eligibility requirements will demand periodical verification. As opposed to the characteristics of other renewable energy projects, bioenergy feedstock production (agriculture and forestry) is not static and the performance of production can either improve or in some cases decrease. Organizations certified against the standards mentioned in this report are periodically audited by their certification companies. Table 7 Entry level and progress requirements Entry level/progress requirements Entry level Possible approaches a.) 100% of the bond issuer s project portfolio complies with eligibility requirements; or b.) 80% (for example) of the bond issuer project portfolio complies with the eligibility requirements, the remaining part should achieve certified status within 3 years. Surveillance (after the first year) a.) 100% of the project portfolio should comply with the eligibility requirements at all times; 17

18 or b.) The bond issuer should have a credible plan in place to ensure 100% compliance by the end of the 3 rd year including annual targets. Their continued status as a certified operator depends on the result of these surveillance audits. Certificates are usually issued for 5 years. Some standards issue certificates with shorter validity. The RSB certificates for example are issued for 2 years. Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 18

19 Figure 2 Process diagram for initial certification and surveillance Initial certification Annual surveillance Issuer links low carbon assets to proposed bond Issuer contracts approved 3 rd party verifier of the Climate Bond Standard Verifier checks compliance -Table 6&7 Verifier checks compliance -Table 6&7 Verifier confirms compliance to issuer Issuer submits application to CBI including supporting evidence Climate Bond Standard Board reviews application and bond issued with certification mark or rejected Certified issuer prepares report that confirms continued compliance with the Climate Bond Standard Issuer contracts approved 3 rd party verifier of the Climate Bond Standard Verifier checks compliance Verifier checks compliance Issuer submits evidence to CBI including verification statement Climate Bond Standard Board reviews the evidence and confirms continued compliance. 19

20 10. Risk analysis The implementation of the proposed eligibility requirements carries a number of risks. These are detailed in Figure 3 Figure 3 Risk analysis related to the proposed approach on bioenergy sustainability. Low Medium High Risks Probability Severity Mitigation measures The selection of standards is deemed too restrictive and results in low market uptake The selection of the standards is not seen credible by stakeholders The sustainability criteria are inadequate (weak or too demanding) ILUC is not addressed or is addressed with measures that are not seen credible Bond issuers are not required to demonstrate compliance for 100% of the project portfolio from the beginning. Progress requirements should enable more flexibility and market uptake. The proposed standards are generally considered to be the most demanding, CBI should communicate about the strengths of these standards. CBI should explain to its stakeholders the reason for adopting its approach and the need to strike a balance between robust sustainability and cost effective implementation. ILUC is likely to be a key area of concern for both NGOs and the industry. If it is not addressed, CBI is likely to draw criticisms. If addressed at this stage, it will probably result in additional entry barriers and potentially significant costs. The CBI should review its decision periodically and update its standard depending on the developments in the voluntary sector and Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 20

21 government regulation. Annual reporting and surveillance is seen to costly The third party verifiers will not be familiar with the standards and their operation. CBI should develop guidance and templates for bond issuers but also for its verifier to reduce the efforts needed for annual reporting. The CBI could develop guidance documents for verifiers to enable them to carry out the verification process. Unsurprisingly, ILUC, scores red on both probability and severity. As mentioned in this report, indirect impacts continue to be controversial. The CBI will align itself with the developments in the voluntary sector or legislation as soon as credible approaches become available. While some of the other aspects score high it is expected that the impacts of these will be minimised by CBI. 21

22 Bibliography 2BSvs. Economic operators. (accessed 09 09, 2014). BEI. (accessed 09 09, 2014). Bonsucro. In numbers. (accessed 09 09, 2014). Credit Suisse. Roundtable on Sustainable Palm Oil (RSPO). (accessed 09 09, 2014). Ecofys, RSB and WWF. "Low Indirect Impact Biofuel (LIIB) Methodology." FSC. Facts and figures. (accessed 09 09, 2014). HSBC. "HSBC Statement on Forestry and Palm Oil." IEA. Technology Roadmap Bioenergy for Heat and Power. Paris: IEA, IEA. Technology Roadmap Biofuels for Transport. Paris: IEA, IEA. Energy Technology Perspectives Paris: IEA, 2014 IPCC. "Chapter 11: Agriculture, Forestry and Other Land Use (AFOLU)." ISCC. Valid certificates. (accessed 09 09, 2014). Lamers, Patrick and Martin Junginger. "The debt is in the detail: A synthesis of recent temporal forest carbon analyses on woody biomass for energy." Biofpr, NTA8080. Register. (accessed 09 09, 2014). PEFC. Facts and figures. (accessed 09 09, 2014). Pelmans, Luc, Liesbet Goovaerts, Inge Stupak, and et. al. Monitoring Sustainability Certification of Bioenergy. IEA, Proforest. Betting on the best quality. IUCN Netherlands, REDcert. (accessed 09 09, 2014). RSB. Participating operators. (accessed 09 09, 2014). RSPO. Key statistics. (accessed September 09, 2014). RTRS. Certified volumes and producers. (accessed 09 02, 2014). Tractor, Red. FAQ. (accessed 09 09, 2014). WWF. "Searching for sustainability." WWF. "The 2050 criteria." WWF. THE ENERGY REPORT 100% RENEWABLE ENERGY BY Gland: WWF International, Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 22

23 2011. WWF. Analysis of the FSC and PEFC Systems for Forest Certification using the FCAG

24 Annex 1 About the Climate Bond Standard and Certification scheme The Climate Bond Standard and Certification Scheme ( the Scheme ) is a project of the Climate Bonds Initiative with the cooperation of major investor groups, environmental NGOs and corporations from the financial sector. Its aim is to assure investors that their funds are being used to deliver a low-carbon, climate resilient economy. This is achieved through: - Supporting the credibility of the Scheme through the organizations publicly supporting and endorsing the project. - Transparent and stakeholderfocused governance - Ensuring the technical low carbon credibility of the Scheme across different sectors through evidencebased deliberation. - Ensuring the practicability and accessibility of the Scheme through easy-to-use, low-cost product offering. Deploying climate change solutions requires some $1 trillion of investment in energy, transport, industry and building sectors each year, above business as usual 13. Bonds are particularly suited for providing the capital for infrastructure required to build the climate economy, notably in buildings, energy, transport, waste and water. Bonds can provide the long-term, low-cost capital needed for deployment of proven technologies and also free up corporate balance sheets for new developments. In order for this market to grow, new tools need to be at hand to: - assist bond issuers in meeting investor demand for climate-themed bonds; - assist investors in recognising such bonds; and Climate Bond Standard and Certification Scheme - assist governments to easily support investments in such bonds. 13 World Energy Outlook Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 24

25 Certified Climate Bonds against an easy-to-use Climate Bond Standard will provide integrity and reduce reputational risks for all those involved in participating in a new asset class. How bond certification works In the prototype phase of the Scheme, we have proposed a straightforward 7-step process for bond certification as illustrated in the chart right. Issuers must firstly link the bond to low carbon project assets or activities. These activities are listed in Part B of the Climate Bond Standard. A prospective issuer of a Climate Bond would be required to secure a verification statement from a 3rd Party Verifier that the bond is in compliance with the Climate Bond Standard. The issuer then submits both an application for certification and the verification statement to the Climate Bond Standards Board and Secretariat for review. Beyond the prototype phase, the certification and assurance model of the Scheme will be finalised by a dedicated Assurance working group that will consider accreditation for verifiers; complaint resolution mechanisms; and the role of verifiers vis-à-vis the Standard Board. 25

26 Annex 2 - Members of the Bioenergy Working Groups Technical Expert Committee Barbara Bramble, National Wildlife Fund Dr. Ausilio Bauen, E4TECH Dr. Aziz Elbehri, FAO Dr. Birka Wicke, Utrecht University Jeremy Woods, Imperial College London John (Jack) N. Saddler, Department of Wood Science University of British Columbia, Vancouver. László Máthé, independent consultant. Molly Jahn, UW Madison Uwe R. Fritsche, IINAS Industry Group Hans Biemans, RaboBank Luc Pelkmans, VITO Richard Mills, Boeing Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 26

27 Annex 3 Comparison of various voluntary standards relevant for the sustainability of liquid biofuels according to WWF (WWF 2013) 27

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30 Annex 4 - Use of voluntary sustainability standards by financial institutions A number of financial institutions have recognized that the potential opportunities in using voluntary standards to ensure that that their financial instruments drive better environmental, social performance as opposed to deforestation and land conflicts. According to WWF (WWF 2013): The environmental and social risks associated with soft commodities supply chains are both systemic and acute, threatening cost structures, availability of key resources, reputational standing, and the overall viability of important markets and economies. A number of organizations have recognized these risks and there are a number of ongoing initiatives, with some concrete achievements: Barclays, BNP Paribas, Deutsche Bank, Lloyds Banking Group, RBS and Westpac have become the first banks to adopt the Banking Environment Initiative's Soft Commodities Compact. One of the main aims of the compact is to transform various soft commodity markets and supply chains in order to eliminate deforestation. The financial institutions made commitments to work with consumer good companies and their supplier of timber, palm oil, soy and beef to eliminate deforestation from these supply chains by 2020 (BEI n.d.); Credit Suisse is a member of RSPO and according to their policies is committed to support the implementation of the RSPO standard in the oil palm supply chains (Credit Suisse n.d.); Similarly HSBC support the implementation of RSPO, FSC and PEFC by requiring their clients to show commitment to sustainable development through independent certification (HSBC n.d.). There are a number of other examples with similar objectives, such as: United Nations Principles for Responsible Investment, The Equator Principles Financial Institutions and United Nations Environmental Program Financial Institutions etc. Ver sio n 1 : Marc h Au t hor: László Ma the Ope n for p u bl ic comm e nt 30

31 Annex 5 Example of GHG calculators (not an exhaustive list) Name Technical scope Origin EU RED Liquid biofuels and solid biomass EU BIOGRACE I Liquid biofuels EU BIOGRACE II Biomass for electricity, heating and cooling EU RSB GHG Calculator Liquid biofuels International Biomass and Biogas Carbon Calculator Solid biomass and biogas used for heat and electricity generation UK Greet Alternative fuels in transport US 31