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Transaction Costs of Project-Based Carbon Sequestration: Preliminary Evidence from Forest Sector Camille Antinori and Jayant Sathaye Lawrence Berkeley.

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Presentation on theme: "Transaction Costs of Project-Based Carbon Sequestration: Preliminary Evidence from Forest Sector Camille Antinori and Jayant Sathaye Lawrence Berkeley."— Presentation transcript:

1 Transaction Costs of Project-Based Carbon Sequestration: Preliminary Evidence from Forest Sector Camille Antinori and Jayant Sathaye Lawrence Berkeley National Laboratory, Berkeley CA and Ken Andrasko ( Presenter) Office of Atmospheric Programs U.S. Environmental Protection Agency, Washington, DC USDA Symposium on GHGs & Sequestration in Agriculture & Forestry. Baltimore, MD 3/23/05 USDA Symposium on GHGs & Sequestration in Agriculture & Forestry. Baltimore, MD 3/23/05

2 Improving Information & Solving Technical Issues Are Critical to Ag & Forestry Mitigation l U.S. climate debate: a) science of climate change, b) stimulating technologies; c) sectors and scale of action?; d) rules & guidance for voluntary reporting. l Global sinks mitigation potential large, but uncertain: IPCC TAR: afforestation potential 200 – 584 MMTC/y in 2010, & avoided deforestation potential 1,790 MMTC/y in l CGE US and global climate economic models need improved representation of sinks. l But: Unresolved sinks technical issues have limited eligibility and investment: baseline setting, additionality, leakage, duration of GHG benefits, costs. l Voluntary registries could stimulate investment, if reporting is credible. l Solving key issues determines how much of biophysical potential is realized, and by whom: –- bundling heterogeneous land parcels, baselines, leakage, MMV –- costs, inc. transaction costs

3 Effects of economic, environmental and social- institutional factors on mitigation costs and potential (based on Raupach et al. 2004) Mitigation Potential = CarbonSequestered or GHG emissions avoided, as a fraction of technical potential mitigation Cost of carbon ($/ tCeq ) Technical Potential Baseline Potential Environmental factors Social and institutional factors Economic factors Sustainably Achievable Potential 01 Uptake proportion at given cost Mitigation Potential = CarbonSequestered or GHG emissions avoided, as a fraction of technical potential mitigation Cost of carbon ($/ tCeq ) Technical Potential Baseline Potential Environmental factors Social and institutional factors Economic factors Sustainably Achievable Potential 01 Uptake proportion at given cost Market Potential Economic Potential Socio-cultural Potential Technical Potential Transaction costs

4 Can We Estimate Competitive Potential for U.S. Ag & Forest Options: by Region, by C Price, by Reporting Rules? C price ($/tCeq) Soil carbon sequestration (mmtce) Biophysical Potential Economic Potential Land Use Competitive Potential Adapted From: B. McCarl and U. Schneider, presented 2001 EPA-USDA Forestry and Agriculture Greenhouse Gas Modeling Forum. Biophysical estimate from Lal et al., 1998 (mid-point) Example: U.S. Ag Soil Potential: Transaction costs ??

5 Note: net forest area declines to 2080, then increases Few Ag & Forest Models include Transaction Costs: e.g., GCOMAP, scenario for EMF 21 Exercise Do Transaction Costs Change Options??

6 China a, b, c: Weighted average for NE, SE & SW regions (Deying Xu et al, 2001). d: 40% of the product price goes towards harvesting and transport (Xu & Zhang, 2002). e, f: FAO Forest Products Year book, 2000 and Xu et al, g: Average , FAO 2000, Forest Products Yearbook. h: Long term plans to add 117 mi ha to Chinas Forestry, of which 63 mi ha will be for timber production. (PEER – Long term nationwide environmental restoration. From I – IV NFRI planting schedules adjusted for survival rate, minus the 11.5 mi ha of non- timber forests e.g. bamboos and orchards. i : FAO, 2000, GFPOS j: Current stated planting rate adjusted for survival rate of 80% (Zang, 2001). k: Original COMAP runs for wastelands. l, m: Weighted average for individual spp, with LR/SR decided on the basis of rotation age. India a: Investment Cost + Discounted value of costs in yrs 1 & 2 – Comap. b: Comap 500 Source: Ravindranath, c: Comap rate, Source: Ravindranath, d: 40% of millsite domestic log price for SR & 10% of LR price due to smaller size and price differential while cost of operations, machinery and fuel is still as high as that of LR. e: LR Average Teak, Sal & Shisan, girth cm, SR Average Sal, Eucs and Populus in Agra, Chandagar and Ambala. f: LR Average for Teak, Sal and Shisan Girth 151cm, SR Shorea Robusta at Agra, Barely & Shahampur: Source FRI Market Report, g: Average RWE for India exports 3% of WBP and 1% of Pulp output. h: National Action Plan propose to increase area under Forest Cover by 33% (21.8 mi ha) over 20 yrs. i: Sum of all areas under forest plantations up to j: Same target as NFAP of 1.09 mi ha/yr, adjusted by survival rate of 60% and existing LR: SR ratios. k: Mostly, shrub and grass wastelands (Ravindranath, 2001). l, m: Average for all major spp, weighted by area under each. : Proportions based on individual species Rotation ages in existing plantations. GCOMAP MODEL: Key Data Inputs: Monetary and Biophysical Data

7 Transaction Cost Components: Organizational, non-production l Project search costs: Identification and stakeholder consultation - May be spread over many projects l Feasibility studies: engineering, economic, and environmental assessments - GHG Baseline estimation and establishing additionality l Negotiations: obtaining permits, negotiating and enforcing contracts for fuel supply, arranging financing - Marketing GHG credits, carbon contracting and enforcement l Insurance – project risk insurance –GHG credit insurance (Difficult to get or too expensive today) l Regulatory approval (GHG): Project validation and government review –(May include both domestic and international validation costs) l Monitoring and verification (GHG) – During project implementation –Monitoring including equipment cost, verification and certification (Spread over many years of project life) Source: Based on OECD, 1997; Stratus Consulting, report to EPA, 2003; analysis work supported by Economic Analysis Branch, Climate Change Division, US EPA,

8 Transaction Costs: Affect Price and Quantity of Emissions Reductions Demand Supply Supply with transaction costs Cost Emissions Reduction from Climate Mitigation Projects Transaction cost range: Vary by: - Project size? - Type of project? - Nascent and mature markets? - Region?

9 This Study, in Progress : Methods: Collect Original Data on Forest Mitigation Projects l Forestry Project Identification: Actual projects, if possible –EPA/CCD cooperation w/ TNC via Stratus Consulting data collection –EPA cooperation w/ Climate Trust –LBNL cooperation w/ NR Canada & Indian Inst. Sc. l Thanks to: TNC, Climate Trust, NR Canada, Indian Inst. Sc. l Data: 11 projects (9 actual, 2 feasibility studies): –The Nature Conservancy: Bolivia, Belize, Brazil 5 projects –Oregon Climate Trust: Pacific NW, Ecuador3 –Natural Resources Canada: Chile 1 –Indian Institute of Science: India (feasibility)2 Transaction cost analysis work supported by Climate Analysis Branch (TNC) and Economic Analysis Branch (rest), Climate Change Division, US EPA,

10 This Study: Methods: 2 l Literature review to identify Transaction Cost components l Built spreadsheet model for comparability (Stratus; LBNL) l Defined 2 scenarios of project implementation & transaction costs, with and w/out insurance: –Nascent Market Scenario:  Project developers have minimal experience in baselines, leakage assessment;  Few GHG accounting tools;  Limited stringency of or guidelines for govt. approval –Mature Market Scenario:  Project developers experienced in C market;  GHG accounting, baseline etc. tools avail., inc. regional baselines or benchmarks;  Govt. guidance and requirements for MMV extensive Transaction cost analysis work supported by Climate Analysis Branch (TNC) and Economic Analysis Branch (rest), Climate Change Division, US EPA,

11 Descriptions of 5 TNC Belize, Bolivia and Brazil Projects Project Name Rio Bravo, Belize Noel Kempff Climate Action Project, Bolivia Guaraquecaba Climate Action Project, Brazil Atlantic Rainforest Restoration Project, Brazil Antonina Pilot Reforestation Project, Brazil Project type (AIJ Category) Forest preservation Forest restoration Host Country BelizeBoliviaBrazil Project developerTNC, PfB*TNC, FAN, GOB*TNC, SPVS* Carbon credit buyers US utility companiesAEP, Pacificorp, BP AmocoAEP, CCXGMTexaco Carbon sellers Private landownersBolivian GovernmentGOB Institutional status USIJI, AIJ Voluntary Project Size50,328 ha634,286 ha8,100 ha12,000 ha1,000 ha Non-GHG goals No Project duration (years) Initial Start Date Est. total carbon benefit — low tons (C)2.4 million6 million339,600660,000106,000 Est. total carbon benefit — high (tons C) 2.4 million8 million566, million162,000 Frequency of monitoring/ verification 3 yearsAnnual5 years *Abbreviations: PfB: Programme for Belize FAN: Fundacion de Amigos de la Naturaleza SPVS: Sociedade de Pesquisa em Vida Selvagem e Educacao Ambiental (Society for Wildlife Research and Environmental Education) GOB: Government of Brazil Transaction cost analysis work supported by Economic Analysis Branch, Climate Change Division, US EPA.

12 Descriptions of India, Chile, Ecuador and US Projects Project Name Village Based Forest Restoration, India Integrated Sink Enhancement & Biodiv. Conservatn India Seedling Inoculation, Chile Rainforest Reforestation Project, Ecuador Pacific Northwest Forest Preservation Project Riparian Zone Reforestation Project, Oregon Project type (AIJ Category) Forest restoration AfforestationForest restorationForest preservationForest restoration Host Country India ChileEcuadorUSA Project developer Canadian Government Karnataka Forest Department Mikro-Tek, Instituto Forestal (Chile) Climate Trust Carbon credit buyers Open market Climate Trust partners Carbon sellers Local residents Local landowners Jatun Sacha Foundation, Conservation International Lummi Indian tribePrivate landowners Institutional status None Canada ’ s Voluntary Challenge & Registry Oregon CO 2 program Project Size2000 ha13,000 ha5000 ha275 ha700 ha830 ha Non-GHG goals YesNo Project duration (years) Initial Start Date Est. total carbon benefit — low tons (C) 100,000358,800600, Est. total carbon benefit — high (tons C) Same 1,440, Frequency of monitoring/ verification Annual Transaction cost analysis work supported by Economic Analysis Branch, Climate Change Division, US EPA.

13 Source: Data collated by LBNL and EPA from 3 US and 8 international projects of varying sizes TNC Brazil Transaction cost analysis work supported by Economic Analysis Branch, Climate Change Division, US EPA. TNC large, early projects Preliminary Results: Project Transaction Cost by Project Lifetime Carbon Benefits US

14 Preliminary Results: Preliminary Results: Trans. Costs for Study Projects are 6% - 18% of Total Costs (n=5 projects)

15 Preliminary Findings: Transaction Cost by Component, Mature Market: Low & Hi C (with Insurance), 11 Projects TR Cost, $ / tC TR Cost Components Transaction cost analysis work supported by Economic Analysis Branch, Climate Change Division, US EPA.

16 Preliminary Findings: 1) Transaction Costs (average) Decline with Project Size in GHG Tonnes. 2) Mature Scenario Costs < Nascent Market. supported by Economic Analysis Branch, Climate Change Division, US EPA Projects > 1 million t C over lifetime have TR costs < $0.50/ t C Mature Nascent

17 Comparison of Estimated Transaction Costs from Other Studies to This Study ReportProject TypeTC Estimates (2002 US dollars) Fichtner et al., 2003AIJ energy efficiency, renewable energy, forestry, afforestation, agriculture $ /tC (no average) Michaelowa et al., 2003 JI energy: Gas JI energy: Biomass $2.4 - $5.6/tC* $ /tC* Woerdman, 2001AIJ /JI energy sector AIJ/JI industrial sector % of initial investment % of initial investment Climate Trust, 2004Forestry % This study (note: cost varies by project size, & Scenario) Forestry NascentMature Low$2.58 /tC$2.18 /tC High$1.06 /tC$1.26 /tC * Assumes Swedish krona exchange rate of 8 krona per US dollar Average Values:

18 Preliminary Findings (work in progress): 1 l Methods: –Minimal data available: N = 11, w/ 2 only feas. studies –Potential self-selection & reporting biases of early-actor projects –Nascent market scenario ~ current conditions. –Mature market: only a scenario, using expert judgment –Study offers Comparability w/in dataset: Used consistent definitions of transaction cost categories: unique in literature. Possibly not comparable w/ other studies. l Scope of this study: Include tangible organization-type costs. - But valuation of unforeseeable or intangible costs not included: (eg, enforcement costs)

19 Preliminary Findings (work in progress): 2 l Economies of scale: –Find returns-to-scale phenomenon for transaction costs: Larger projects have lower transaction costs per ton of carbon. –Consistent w/ Michaelowa et al finding –Largely due to monitoring costs. –Differ from Michaelowa: we find search, regulatory, validation and approval costs show nonlinear variation with increasing project size. »(Michaelowa found these fixed costs across project size. )

20 Preliminary Findings (work in progress): 2 l Plotted project size vs. $/tC of transaction costs, & fit trendline of average total transaction costs per project. –Costs rise steeply for projects 100,000 TC size or smaller. –Pattern holds for nascent & mature markets. –Mature market: most transaction cost categories flatten at 2.5 million TC scale. –Data inadequate for econometric approach. l Costs lower in mature vs. nascent market: –True for all costs on average, except insurance costs. –Standardization is expected to lower trans. costs: - for calculating baseline and leakage, and carrying out monitoring and verification. l Insurance as Trans. Cost: –Significant cost if insurance not available & forestry projects must self-insure (with-insurance scenarios) –Suggests development of insurance markets, or risk reduction via portfolios, could lower transaction costs

21 Preliminary Findings (work in progress): 3 l Forestry appears low-cost investment in meeting GHG targets: $ $2.58 / tC (with insurance) –Forestry has low transaction costs vs. Micheolowa gas and biomass projects ($2 to $8 per tC). l Trans. Costs likely to vary across GHG program requirements (eg, 1605b, CDM, CCX): –not assessed yet in literature l Potential Next Steps in Analysis: –Increase n & universe of study: add c. 20 projects ? »Add ag sector, biofuels, & more U.S. projects –Sensitivity case: different GHG program requirements –Compare to energy and other sector project trans. costs: »EPA study on this in development (LBNL)


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