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I NFORMAL WORKSHOP ON N ON - PERMANENCE 1 A LTERNATIVE A PPROACHES TO A DDRESSING THE R ISK OF N ON - PERMANENCE IN LULUCF A CTIVITIES.

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Presentation on theme: "I NFORMAL WORKSHOP ON N ON - PERMANENCE 1 A LTERNATIVE A PPROACHES TO A DDRESSING THE R ISK OF N ON - PERMANENCE IN LULUCF A CTIVITIES."— Presentation transcript:

1 I NFORMAL WORKSHOP ON N ON - PERMANENCE 1 A LTERNATIVE A PPROACHES TO A DDRESSING THE R ISK OF N ON - PERMANENCE IN LULUCF A CTIVITIES

2 I NFORMAL WORKSHOP ON N ON - PERMANENCE 2 The Subsidiary Body for Scientific and Technological Advice to initiate a work programme to consider and, as appropriate, develop and recommend modalities and procedures for alternative approaches to addressing the risk of non-permanence under the clean development mechanism with a view to forwarding a draft decision on this matter to the Conference of the Parties …; Decision 2/CMP.7 Land use, land-use change and forestry. Context

3 I NFORMAL WORKSHOP ON N ON - PERMANENCE 3 In response to the decision.2/CMP.7, BioCarbon Fund in September 2011 initiated analytical work on the topic in collaboration with Duke University, USA Two expert workshops were organized in Washington DC during November 2011 and April 2012 to discuss the analytical work Peer reviewed report was finalized in November 2012 Print copies are available Electronic version of the report is available at the website noted below Analytical work https://wbcarbonfinance.org/Router.cfm?Page=BioAltAR

4 I NFORMAL WORKSHOP ON N ON - PERMANENCE 4 Alternative Approaches Tonne year accounting Credits are tied to the number of years carbon stock stays intact Buffer and credit reserves Credits are set aside into an account to cover potential reversals Insurance Allows commercial third party insurance contracts to cover reversal risks Country guarantee Countries take responsibility for replacement of credits for projects implemented Exceptions for low risk activities Credits originated from projects with minimal risk of reversal are notified as permanent

5 I NFORMAL WORKSHOP ON N ON - PERMANENCE 5 Reversal risk profile that contributes to non-permanence can be assessed Risk profile can be used to identify different approaches or their combinations Risk pooling and risk management adequately address reversal risks Sellers and buyers can choose from a menu of approaches to address reversal risks Approaches to address reversal risk can be integrated into monitoring system Environmental integrity and economic viability of land use mitigation activities can be balanced Rationale for Alternative Approaches

6 I NFORMAL WORKSHOP ON N ON - PERMANENCE 6 Unintentional Reversal Risks: Natural disturbances - Fire and wind Data: Data on fire events and area affected in Chile Geographic: Comuna-level fire event data Time period: Fire events from Loss estimates: Field research data on fire effects Model: LANDCARB Ecosystem simulation model Intentional Reversal Risks: Conversion to agriculture; Project abandonment Data : Yield (tonnes/ha/yr) and price ($/tonne) data of A/R and commodities of alternative land use; site productivity; other economic factors Time period: Cost and revenue data annualized over a 40-year period Modeling Reversal Risk Fire event data in Chile from

7 I NFORMAL WORKSHOP ON N ON - PERMANENCE 7 Credits are issued incrementally over time upon meeting permanence requirements Features – Credits are issued for a portion of carbon pools that meet permanence requirements – Avoids the need to reclaim credits after they are issued and subsequently reversed – Project length and permanence influence the number of credits. – Translates into lower NPV relative to other approaches – No residual liability for credits, e.g. credits are not issued before permanence requirements are met Implementation issues What is the project length? What is the permanence period? e.g. permanence period of 100 years result in issuance of 1% of permanent credits per year from cumulative carbon stored Whether the approach is viable for implementation? Tonne Year Approach

8 I NFORMAL WORKSHOP ON N ON - PERMANENCE 8 Permanence period (N) in years; Permanence factor = (1/N) Annual carbon storage (tonnes CO 2 ) Cumulative tonne years of carbon storage = [n*(n+1)]/2*Annual carbon stored Permanent emission reductions = Cumulative tonne years * permanence factor Variables Influencing Tonne Year Approach Example : Tonne year with a permanence period, N = 100 years (permanence factor = 0.1)

9 I NFORMAL WORKSHOP ON N ON - PERMANENCE 9 Buffer set aside of a percentage of credits issued in a separate account to address risk of reversal Features – Buffers are generally effective in addressing unintentional reversals. – Project length and withholding rates affect buffer integrity and financial return. – Buffer pool through aggregation can reduce the risk of buffer failure. – Buffer performance in relation to intentional reversal depends on replacement requirements Implementation issues – What percent of buffer to set aside? – How to manage buffer to avoid being overdrawn? – What types of reversals are to be covered (unintentional, intentional, both) ? – What scales of activity are to be considered - project or program level? – How to replenish buffer if it runs low? Buffer Approach

10 I NFORMAL WORKSHOP ON N ON - PERMANENCE 10 Entities: Project/program implementing entities Risk: Type and magnitude of reversal risk influence buffer size Project stage : Risk of loss is low in early stages of forest growth translating in a small buffer size Use: Can be used as stand alone or in combination with other approaches, e.g. Insurance, guarantee Project period: Short duration projects may need small buffer amounts relative to projects of long duration Withholding rate: Periodic risk screening/assessment needed to assess the adequacy of buffer withholding rate Management: Project specific buffer vs. program or system wide buffer may have different management needs. Management of pooled buffer may be cost effective Robustness: Buffer approach is effective against unintentional reversals. Measures to deal with the risk of intentional reversals need to be adopted to avoid run on buffer due to intentional reversals Variables Influencing Buffer Approach

11 I NFORMAL WORKSHOP ON N ON - PERMANENCE 11 Effectiveness of Buffer Approach to Intentional Reversals

12 I NFORMAL WORKSHOP ON N ON - PERMANENCE 12 Premiums are paid to an insuring entity that guarantees against reversal risk by replacing credits affected by reversal. Features – Liability for loss transferred to a third-party – Covers one or more categories of unintentional risks and loss magnitudes – Unlikely to cover intentional reversal risks – Premiums linked to type of risk, deductible and loss limits Implementation issues – What are the enabling factors for use of insurance ? – What characteristics of insurance products suit project/program contexts? – How to get insurers into the market? – What measures are needed if insurers withdraw from market, cancel policies? Insurance Approach

13 I NFORMAL WORKSHOP ON N ON - PERMANENCE 13 Entities: Third parties that collect premium to underwrite coverage Coverage: Can be full value replacement, catastrophic loss limit; buffer insurance Use: For use as stand alone or in combination with other approaches, e.g. buffer, guarantee Project stage: Projects in early stage may have lower premium as magnitude of loss is low Project period: Premiums increase with project period as risk of loss increases Premium and deductible: Depend on multiple factors influencing risk Policy length: Insurance policy is short - annual or periodic Policy renewal: Premium and deductible are subject to review and revision at policy renewal Variables Influencing Insurance Approach

14 I NFORMAL WORKSHOP ON N ON - PERMANENCE 14 Host country acts as a fiduciary backstop to address reversals unresolved at the project or subnational levels. Features – Host country or an authorized third party can guarantee or backstop project against reversal risks – Improves flow of credits to projects as risk is shared by host country or authorized entities – Can be combined with other approaches – buffer, insurance – Lowers reversal risk impacts on projects – Institutional failures or lack of funds can prevent a country from realizing its guarantee Implementation Issues – What factors influence host country guarantee? – What are ways to promote host country capacity to support guarantee? – How to ensure the credibility of host country guarantee? – How can external guarantees complement host country guarantee – e.g. Partial risk guarantee? Host Country Guarantee

15 I NFORMAL WORKSHOP ON N ON - PERMANENCE 15 Entities: Host country or third parties that provide similar guarantee Coverage: Losses beyond those covered under other approaches Risk profile: Projects with diverse risk profile maximize the effectiveness of guarantee Policy and legal: Existence of policies and legal measures to implement guarantee Capacity: Institutional and financial capacities needed in support of guarantee Monitoring: National accounting and monitoring systems needed to track performance of activities in order to trigger guarantee against reversal risk Implementation: Terms and conditions that support implementation of guarantee Variables Influencing Host Country Guarantee

16 I NFORMAL WORKSHOP ON N ON - PERMANENCE 16 Categorical exceptions for certain low risk activities result in issuance of permanent credits Features – Risk analysis based on historical data to demonstrate low risk – Exceptions are defined based on a range of criteria - project type, risk profile, geographic variables etc. – Low risk of activities to be confirmed through risk screening tools and independent audit – Low monitoring burden for activities that are identified as having low risk Implementation issues – What are the criteria for defining low risk activities? – What are the safeguards to minimize the impact in case risks materialize, e.g. management plans for addressing relevant risks? – How can national guarantee include provisions governing exceptions for low risk activities? Exceptions to Low Risk Activities

17 I NFORMAL WORKSHOP ON N ON - PERMANENCE 17 Prevailing Approaches to Address Non-permanence risk under UNFCCC : Case of Carbon Capture and Storage (CCS) Modalities for Addressing Non-permanence risk Potential Applicability to LULUCF context Placement of 5% of credits in a reserve account (buffer) Risks may require buffer withholding rates, customized to the risk. Permanence after 20-year monitoring period Monitoring periods for forests are typically longer than 20 years. Host country guarantee of reversals in excess of the reserve (optional) or Annex I country responsibility for reversals if host country does not guarantee Host or Annex I country guarantee may be feasible if countries assess risks, their capacity to back risks, and to determine type of guarantee to back the project. Pool reserve across multiple projects or projects within the umbrella of an ER program Diversification by pooling credit reserves from projects may make them collectively more resilient than managing them separately.

18 I NFORMAL WORKSHOP ON N ON - PERMANENCE 18 Comparison of Approaches

19 I NFORMAL WORKSHOP ON N ON - PERMANENCE 19 Approaches Adopted in Different Standards Standard Intentional v. Unintentional Reversals Reversal Mechanism Mechanism Details Minimum Contract Period VCS No Catastrophic vs non- catastrophic used Pooled Buffer Account Projects are required to guard against reversals by withholding 10%-60% of their credits in a Pooled Buffer Account… based on project-specific risk evaluation… using… project-specific risk factors (e.g., clarity of land tenure, local deforestation pressure, financial viability). … 20–100 years CARIntentionalImplementation Agreement Project CAR credits account debited to compensate for avoidable reversals (negligence, gross negligence, or willful intent). 100 years UnintentionalCAR Pooled Buffer Account Projects required to guard against unavoidable reversals (fire, pests) by withholding a certain percentage of their credits in a Pooled Buffer Account… based on project- specific risk evaluation ACRDistinctionPooled Buffer Account Similar to VCS including use of VCS risk analysis and buffer tool. a) Intentional reversals- must all be replaced by the project entity; b) Unintentional reversals are covered by the buffer pool like an insurable risk, though project must re-establish buffer after conversion. 40 years, opt- out allowed if credits replaced Plan VivoNo DistinctionBuffer Account All projects must withhold minimum of 10% of credits. Must (1) undertake comprehensive analysis of reversal risks, (2) implement risk management and mitigation measures, and (3) withhold credits in a buffer to compensate for unexpected losses based on a project-specific assessment of risks. Not specified. CDMNo Distinction Temporary credits for A/R project activities … A/R projects are issued either temporary certified emission reductions (tCER) …that expire each subsequent commitment period (e.g., after 5 years) and must be replaced. lCERs expire after crediting period of either 30 years or 60 years and require full replacement. Credits expire after 5, years No DistinctionHost Country Guarantee for Carbon Capture and Storage Introduced in the context of CCS activities; either host countries (if accepting obligation to address reversals) or Annex 1 Parties holding CERs issued by the project (if host country does not accept obligation) must address reversals unmitigated by project participants. 20 years after last crediting period

20 I NFORMAL WORKSHOP ON N ON - PERMANENCE 20 Approaches for Addressing Reversal and Scale National Project Sub-national Project Buffer Insurance Tonne-year Temporary credits Sub-national & National Pooled buffers Insurance Host govt. guarantee

21 I NFORMAL WORKSHOP ON N ON - PERMANENCE 21 Location matters Scale matters Diversification matters Type of risk matters Policy Insights

22 I NFORMAL WORKSHOP ON N ON - PERMANENCE 22 Extensions of Analysis Improved data on risk profiles – Multiple scales of coverage – Risks from different disturbance types Other LULUCF examples – REDD – Agriculture Extension to multiple land uses – Landscape contexts – REDD, A/R, SFM, Agriculture

23 I NFORMAL WORKSHOP ON N ON - PERMANENCE 23 R AMA C HANDRA R EDDY E MAIL : R REDDY WORLDBANK. ORG F OR MORE INFORMATION ON THE B IO CA RBON F UND, PLEASE CONTACT : E LLYSAR B AROUDY E MAIL : E WORLDBANK. ORG WWW. CARBONFINANCE. ORG Thank you

24 I NFORMAL WORKSHOP ON N ON - PERMANENCE 24 Additional Slides: Examples

25 I NFORMAL WORKSHOP ON N ON - PERMANENCE 25 Example: Modeling Unintentional Reversal Ratio of reversals to credits issued in a 20,000 ha project implemented over 40 years without approaches to address reversal

26 I NFORMAL WORKSHOP ON N ON - PERMANENCE 26 Mean buffer balance as percent of credits earned in a 20,000 ha project with 10% buffer Example: Buffer Approach Mean buffer balance as percent of credits earned in a 20,000 ha project of 40 year duration with 10% buffer

27 I NFORMAL WORKSHOP ON N ON - PERMANENCE 27 Example: Insurance Insurance coverage of a 20,000 ha project of 40 years length – full value coverage, catastrophic loss limit, and buffer insurance


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