Bringing forest carbon projects to the market

Bringing forest carbon projects to the market

What is the place of forestry in the carbon markets ? What are the trends to anticipate ? How can forest carbon projects be financed and credits sold ?

Clément CHENOST

Lead author, ONF International

June, 2010. Washington

C. ChenostJune, 2010Bringing Forest Carbon Projects to the Market

Brief presentation of ONFI

ONF International is a subsidiary of the French Forestry Commission (ONF)

12,5 millions ha of forests (mostly owned) 15 million m3 of wood sold per year 11000 people

ONFI consists of around 50 collaborators specialized in various sectors : forestry, climate change, bionenergies, etc.

International negociations, REDD+ strategies and capacity building

CCNUCC & Kyoto Protocol negocations National REDD+ Strategies of 5-10 countries MRV

Development of forest carbon projects 2 validated CDM methodologies Technical assistance to more than 30 forestry projects (PDD, VCS, CDM, CCBs, etc.) Financial assistance : carbon credits sale, funds raising


Table of contents

Introduction to the guidebook

The place of forestry in the carbon markets

How can forest carbon projects be financed and credits sold ?

Post-2012 signals

Conclusion



Context : Weak development of forestry projects in the carbon market despite a tremendous potential to mitigate climate change Technical and methodological barriers are falling down Financial barriers remains very important for project developers and investors

Objective : instruct project developers and financial investors on how to develop and bring profitable forest carbon projects to the market (AR, REDD, IFM)



Part 1 : The place of forestry in carbon markets Types of forestry projects The place of forestry in regulated and voluntary markets Global overview of 434 forestry carbon projects

Part 2 : What will the post-2012 forestry carbon market look like?

UNFCCC negotiations for REDD+ EU-ETS and USA-ETS Other markets Impacts for market actors

Part 3 : How can forest carbon projects be financed and credits sold ? Project cycle overview Economy and risks associated Project financing Standards choice Definition of credit property Contracting (ERPA)

Supported by a survey of 434 forestry projects and 5 case studies


Table of contents




Post-2012 signals

Conclusion


CDM pipeline (in validation) : 2839

1725469

505

68

39 924

Industrial gas

Renewables

Methane (coal mine, waste, etc.) & cement

Energy effi ciency

Fuel switch

Afforestation & reforestation

Others

A slow takeoff under the CDM

Limited to AR projects 0,4 % of registered projects

Source : UNEP CDM pipeline, October 2009

1,4 % of projects in the pipeline No credits (tCER / lCER) issued till now


Reasons for exclusion from regulated markets Limited demand for credits (EU-ETS exclusion) Delays in definition of modalities and procedures but …

… fast evolution since methodologies are available 13,4 MtCO2e in the pipeline before 2012

Source : ONFI / UNEP

2001 2002 2003 2004 2005 2006 2007 2008 2009 Decisions on modalities and procedures

Other sectors X AFOLU X

Approved methodologies - cumulative - Other sectors 10 32 61 83 104 115 132

AFOLU 1 5 13 15 16

Registered projects (projects in validation for AR projects) - cumulative - Other sectors 2 143 586 1146 1723 1834

AFOLU 1

(4) 1

(13) 1

(36) 8

(52)


Maturation in the Voluntary Markets In 2008, forestry represented 7 % of credits exchanged in VCM: 5 MtCO2e (36,8 MUS$)

Various reasons, especially environmental & community benefits

+140 % between 2007 and 2008 (essentially due to CCX) but … … OTC market share in sharp decline : 30 % (2006), 8 % (2007), 7 % (2008)


Maturation in the Voluntary Markets Criticisms towards the integrity of voluntary projects

Higher demand for high quality offset and emergence of standards

Diversification of portfolio with non forestry projects …

… but strong movement towards standardisation of forestry projects

0

10

20

30

40

50

60

CDM & JI CCB

CCX CCAR

CarfonF

ix

Greenh

ouse Fri

endly

NSW GGAS

Oregon

VCS

Plan Vivo

VER+

FSI -

NZ

In validation

Registered

434 projects inventoried in 2009

61

75

298

Projects registered with atleast one standard

Projects in the process ofregistration

Projects without standard

15 projects aimed double or triple registration

Standards considered : CDM, J I, CCBs, CCX, CCAR, Carbonfix, Greenhouse Friendly, Oregon Standard, VCS, Plan Vivo, VER +, GGAS, FSI

Source : ONFI


Maturation in the Voluntary Markets This could reinforce the place of forestry projects in the VCM

Strong demand for forestry credits regulated by a demand for high quality offset

Markets flooding is not observed, even in a « small » voluntary market …Régulés

Volontaires

-

1,0

2,0

3,0

4,0

5,0

6,0

pre-2002

2 002 2 003 2 004 2 005 2 006 2 007 2 008 Jan-Juin2009

Kyoto (UA)

NZ ETS

MDP

GGAS

CCX

OTC


Table of contents




Post-2012 signals

Conclusion


Financing forest carbon projects

Carbon credits remunerate environmental services provided by forests

Source of revenues (among others assets : wood products, etc.), not a source of funding

Barriers to investment are particulary important : large up-front investment, returns on investment after deferred lengths of time, high risks (technical and political, lack of market visibility, etc.)

Environmental and social benefits reinforce the viability of projects


5 successful case studies Juma frontier REDD project (590 000 ha) is situated in state of Amazonas in Brazil. It is financed by by the

environmental support of Marriott International and pre-paid credits to the hotel’s clients

Ibi Batéké is an afforestation project covering 4,000 ha on the Batéké plateau (DRC). Supported by a private company, Ibi Batéké is principally financed by borrowing and equity

The Magdalena Bajo Commercial reforestation project reforests 4,000 ha of land in Colombia. The project is financed by a consortium of Colombian public bank actors and private forestry enterprises

The restoration project of the Ankeniheny-Zahamena-Mantadia Corridor is a reforestation project that covers 975 hectares. The project is mainly financed by the World Bank which buys a portion of the credits via the BioCarbon Fund. The project also has REDD conservation component, protecting 376,000 ha of native forests. The project is principally supported by Conservation International


Three major types of financing Voluntary offsetting and companie’s environmental support programs :

donations, payments in advance of carbon credits (debt), loans at preferential rates, etc. Direct or indirect (through offsetters, NGOs, etc.)

Public funding : subventions, payments in advance of carbon credits, loans at preferential rates, guarantee funds to reduce risks, etc.

Limited access to the « usual » finance but very fast growing interest of investors due to positive market signals

These different types of financing can be combined


Table of contents




Post-2012 signals

Conclusion


Post-2012 market signals A re-integration into the post-Kyoto framework ? Under what modalities ?

Regional markets: NZ-ETS US-ETS ? EU-ETS ? AUS-ETS ? JAP-ETS ?

These evolutions could greatly impact forest carbon finance

Intermediate€ 1.2 – 2.25 billionPhases

2007 2020

Preparation€ 200-250 million

Payments for results, Emission reductions* that

are measured against a baseline scenario with a

transparent system of MRV

Information, consultationInventory, Policy definition

Framework implementationImplementation tools for

measurement, reporting & validation (MRV)

Institutional reform, Pilot programs, Progressive improvements of MRV, Defining the baseline

scenario

Objectives of financing

Sources of financing

Ongoing support for REDD: FCPF, UN-REDD, bi-lateral initiatives ;Development assistance ;International taxes on fossil fuels and raw materialsRevenues from auctioned allowances of greenhouse gas emissions in developing countries, and taxes on CDMVoluntary markets and philanthropy

Same as intermediate phase and/or using regulated markets: Kyoto, EU, U.S., Japan, New Zealand, and Australia ETS

* And carbon sequestration if the scope of REDD includes forest regeneration and/or AR

Norway’s International Climate and Forest Initiative

Australia’s International Forest Carbon Initiative

Congo Basin Forest Fund

FCPF – Readiness Fund FCPF – Carbon FundFIP

UN-REDD

Voluntary Market Projects

Existing initiatives

Final€ 17 – 33 billion/year


Table of contents




Post-2012 signals

Conclusion


Conclusion While forestry projects have long been on the back-burner of climate change mitigation strategies, they can now take advantage of new opportunities

After a slow start in the CDM market by forestry projects, there is now a groundswell of movement in AR

Although financial obstacles remain, the voluntary markets enables the development of innovative forestry projects especially those that are exemplary in terms of environmental and social development co-benefits. Moreover, the quality of voluntary emission reductions can now be readily guaranteed by numerous accepted standards


Conclusion

Some of them propose effective alternatives in difficult institutional contexts and may serve as role models for the rest of the market

More global projects (such as REDD) are already supported by "pilot" mechanisms such as BioCarbon Fund, CBFF, the CASCADe program (UNEP, FFEM) or UN-REDD

A possible opening of the carbon market to post-Kyoto credits enabling REDD and other forestry sectors not currently supported would drastically change the carbon forest market landscape, stimulating investment and induce maturation in this still nascent market


Additional information

Guidebook available in three languages (English, French, Spanish): www.unep.fr/energy/activities/forest_carbon

Contact ONF International

Clément Chenost : [email protected] www.onfinternational.org

Bringing forest carbon projects to the market

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