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

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1 1 of 25 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 with cutting-edge knowledge and strengthening their capacity to base their decisions on sound consideration and analysis of policies and strategies both at home and in the context of strategic international developments. Related resources See all material prepared for the FAO Policy Learning Programme See the FAO Policy Learning Website:

2 2 of 25 Carbon Finance for Agriculture, Forestry and Other Land-Use Sectors By Christina Seeberg-Elverfeldt, Climate Change and Environment Officer, Natural Resources Management and Environment Department of the FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS About EASYPol The EASYPol home page is available at: 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.

3 3 of 25 Introduction Carbon Finance How does it work? And how do you use it in the agriculture, forestry and other land use sectors? Some Terminology What is the Carbon Market? Requirements for Carbon Projects Carbon Projects and their Development Agriculture and Forestry Case Studies

4 4 of 25 Objectives 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

5 5 of 25 Some terminology: glossary Abbreviation MtCO 2 e GHG AFOLU REDD A/R CDM CER VER Explanation Metric ton of carbon dioxide equivalent Greenhouse gas Agriculture, Forestry and Other Land-Use Reducing Emissions from Deforestation and Forest Degradation Afforestation and Reforestation Clean Development Mechanism Certified Emission Reductions Verified Emission Reductions

6 6 of 25 Some terminology: definitions 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 (CO 2 ) emissions Carbon offset: Using carbon credits to balance the total emissions that result from a defined activity measured in carbon dioxide equivalent (CO 2 e) Carbon finance means to find the lowest cost emission reduction possibilities

7 7 of 25 What is the Carbon Market? Trading of carbon credits in - Standard unit= metric tonne CO 2 e = 1000 kg of CO 2 e - 1 tonne CO 2 ~ 1m 3 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

8 8 of 25 Carbon markets 1/4 Regulatory and voluntary markets 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 nonregulated 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)

9 9 of 25 Carbon markets 2/4 Clean Development Mechanism 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)

10 10 of 25 Carbon markets 3/4 Voluntary market 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

11 11 of 25 Carbon markets 4/4 Regulatory versus voluntary markets 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 billion 1 US$ 705 million 2 Expected future volume US$ 1 trillion in US$ 50 billion in Offset Price range US$ 5-15 /t CO 2 e US$ /t CO 2 e (2008 avg. $7.34/t CO 2 e) 2 -Strongly regulated -Strict and lengthy approval process under CDM - Fragmented standards Quality 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

12 12 of 25 Requirements for Carbon Projects Quality standards and methodologies 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

13 13 of 25 Carbon Project Development Developing carbon projects Precondition 1. Project Idea 2. Feasibility Precondition: 3. Standard and methodology selection 4. Methodology Development 5. Project Document 6. 3 rd part validation - 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)

14 14 of 25 Carbon Project Development 1/3 Developing carbon projects 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

15 15 of 25 Carbon Project Development 2/3 Developing carbon projects 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

16 16 of 25 Carbon Project Development 3/3 Developing carbon projects 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

17 17 of 25 Carbon Project Development 1/2 Project Implementation Phase 1. Monitoring 1. Monitoring 2. Calculation of expost credits 3. 3 rd Party Verification Detailed log of all activities Annual monitoring of biomass Annual participatory appraisal System for stakeholder feedback at all levels 4. Issuance of credits 2. Calculation of Ex-post Credits Integrate all information from monitoring Calculate actual gross carbon project

18 18 of 25 Carbon Project Development 2/2 Implementing carbon project 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

19 19 of 25 Challenges and key messages To consider... 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 upfront 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:

20 20 of 25 Case Studies 1/3 Agriculture 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

21 21 of 25 Case Studies 2/3 REDD 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

22 22 of 25 Case Studies 3/3 Agricultural residues 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)

23 23 of 25 Conclusions 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

24 24 of 25 Further readings State and Trends of the Carbon Market, World Bank, May 2009; ces/state&trendsformatted06may10pm.pdf Ecosystems Marketplace State of the Voluntary Carbon Markets 2009, May 2009; s_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; _brief_sbstabonn.pdf

25 25 of 25 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): A guidebook for the formulation of A/R projects under the CDM can be found under Information for forestry and land use projects development under CDM: VCS Standard: and the tool for Methodological Issues: Link to CCB Standards: