1. Estimating Leakage from Forest and Agricultural Carbon Sequestration Projects Presented by Brian C. Murray RTI International Presented at 3rd USDA Symposium on Greenhouse Gases & Carbon Sequestration in Agriculture & Forestry March 23, 2005 Baltimore, MD RTI International is a trade name of Research Triangle Institute 3040 Cornwallis Road ■ P.O. Box 12194 ■ Research Triangle Park, NC 27709 Phone 919-541-6468e-mail bcm@rti.orgFax 919-541-6683

2. 2 Funding and Collaborators Funding: US EPA, Climate Change Division Collaborators: RTI: Brent Sohngen* Texas A&M: Bruce McCarl, Dhazn Gillig, Heng-chi Lee EPA: Ken Andrasko, Ben DeAngelo * On sabbatical from Ohio State University

3. 3 Project Based Approaches to GHG Mitigation Projects involve intentional activities or actions to reduce GHG’s The product of these projects may (may not) be used to produce GHG emission offsets Mitigation projects are voluntary, not required by law Development of mitigation projects contain nuances that are location and sector specific

4. 4 What is Leakage? Leakage: Emissions that occur outside the project boundaries as a result of the project activities themselves It is caused by the shifting of emitting activity elsewhere in response to reductions (sequestration) in the project area  Spatial  Local: aka “primary”  Distant: aka “secondary” or “market”  Sectoral/life cycle:  GHG effects up and down the supply chain

5. 5 * Important Point about Leakage Leakage is only a problem if the “leaked” (shifted) emissions fall outside some accounting framework, E.g., from a capped or monitored sector or region to an uncapped/unmonitored sector/region From a monitored project to an unmonitored activity Otherwise, its captured in the accounting and does not undermine net emissions reduction

6. 6 Why do we care about leakage at the project level? It erodes the GHG benefits of a project Can be difficult to measure Difficult to enforce due to incomplete contracts Potential to undermine a project-based offset system

7. Accounting for Leakage

8. 8 Leakage as an issue in forestry and agriculture projects Induced by economic forces: Supply/demand supplanted by the project is met elsewhere  Formal markets  Other institutional arrangements Leakage is not unique to forest and ag projects But, features of forestry and agriculture make them somewhat susceptible to leakage Fixed land base: Land use change has spillover effects Commodity markets are often broad in scope (regional, national, global)

9. 9 Emissions Shifting as a Spatial Concept Project “Secondary” “Primary” Local shifting: observable and contractable Regional, National, Global Markets

10. 10 How to Address Leakage at the Project Level ActionPrimarySecondary 1. Minimize leakage through project design Expand contract to include local activity near project boundaries Select activities that are not likely to have a lot of market leakage 2. Measure what you can’t minimize Extend monitoring to include area proximate to project boundaries Survey of local stakeholders Market modeling

11. 11 Project Leakage in a Market Context Project S0S0 S1S1 Q0Q0 Q1Q1 Q’ 0 P0P0 P 1 Leakage Market A (Commodity i, region x) Market BMarket CMarket D

12. 12 Estimating Leakage through Market Modeling Simple comparative statics of individual market equilibria L´ = Where e, E, γ, Φ, and Ci are market parameters n Sector models n Forest (e.g., Sohngen, Sedjo, Mendelsohn) n Forest and Ag (e.g., FASOMGHG) n CGE models

13. 13 Myth: Leakage only happens when projects are big enough to affect the market price Reality: Leakage can happen any time that a project involves goods and services exchanged in a market. In fact, leakage is proportionately larger for small projects than for large projects or policies Myths and Reality

14. 14 Leakage Estimates from Market Models International emissions leakage/energy: ~10-20% of targeted reductions are offset by leakage (from the literature) Forest carbon leakage Afforestation Program Leakage Estimates by Region (All Quantities Are Percentages) RegionLeakage Estimate (%) Northeast23.2 Lake states18.3 Corn Belt30.2 Southeast40.6 South-Central42.5 Source: Murray, McCarl, Lee. 2004. Estimating Leakage from Forest Carbon Sequestration Programs. Land Econ: 80(1):109-124

15. 15 Leakage Estimates from Market Models (II) Forest preservation (avoided deforestation, no harvesting*) RegionLeakage % PNW – East8.9 Northeast43.1 Lake States92.2 Corn Belt31.5 South-central28.8 Source: Murray, McCarl, Lee. 2004. Estimating Leakage from Forest Carbon Sequestration Programs. Land Econ: 80(1):109-124 * Leakage is moderately lower if harvesting is allowed

16. 16 Some recent leakage results comparing different forestry and agriculture activities* Leakage Estimates by Mitigation Activity at a GHG Price of $15/t CO 2 Eq. All quantities are on an annualized basis for the time period 2010–2110. Targeted Mitigation Activities A GHG Effects of Targeted Payment (Tg. CO 2 Eq.) B Net GHG Effects of All Activities (Tg. CO 2 Eq.) C Indirect GHG Effects from Nontargeted Activity a (Tg. CO 2 Eq.) D Leakage Rate b (%) Afforestation137104 –33 24.0 Agricultural Soil Carbon154145 –9 5.7 Biofuels8483 –1 0.2 a Indirect effects: C = (B – A). b Leakage rate: D = –(C/A) * 100; rounding occurs in table. Note: Negative leakage rate in D refers to positive leakage (i.e., additional mitigation outside targeted activity region). * Ongoing work, Murray and McCarl

17. 17 Regional dimensions of leakage * Regional Leakage Flows for Afforestation-Only Payment Scenario: $15/t CO 2 Eq. * Ongoing work, Murray and McCarl

18. 18 Leakage over Time Leakage time horizon A GHG Effects of Targeted Payment (Tg. CO 2 Eq.) B Net GHG Effects of All Activities (Tg. CO 2 Eq.) C Indirect GHG Effects from Nontargeted Activity a (Tg. CO 2 Eq.) D Leakage Rate b (%) 10 decades137.4104.4–33.024.0% 5 decades170.7129.7–41.024.0% 2 decades208.5127.7–80.838.8% Effect of varying the time horizon over which leakage is quantified. Afforestation program paying $15 per t CO 2

19. 19 How is leakage being handled in project accounting protocols? WRI/WBCSD: Screening, mitigation, quantification of primary and secondary leakage are prescribed but no specific requirements in place California Registry Draft Protocol (2004) Leakage categoryAssessmentQuantification Primary (onsite)Required Primary (offsite)RequiredStrongly encouraged Secondary (market)Strongly encouraged LifecycleRequiredEncouraged n Chicago Climate Exchange: leakage not explicitly considered n 1605(b) guidelines still in development

20. 20 Conclusions A project-based offsets/trading system seeks assurance that the emissions allowance correctly corresponds to the reduction by the project For Carbon sequestration projects, the main factors that may disrupt this correspondence are Permanence Additionality Leakage Methods are now being developed to address each of these factors, but there is debate about how far to go in terms of reporting standards, stringency, etc…

21. 21 Conclusions (II) Early empirical evidence suggests leakage could either be trivial (~0) or enormous (over 90%) depending on the activity, location, and time period considered Q: Is this enough to make these investments uneconomic?  Depends on the price and on the discounts applied to other offset credits First: design projects to minimize leakage Centralized efforts needed to harmonize approaches to address and quantify leakage