Developing Frameworks for Short and Long-Term Actions to Reduce Deforestation in Tropical Countries Ned Helme, President Center for Clean Air Policy ****** Inter American Development Bank Conference on Payment for Avoided Deforestation: Perspectives from Latin America and Caribbean ****** June 7, 2007

Presentation Overview l Forests are critical to post-2012 climate policy: »Key policy issues to resolve »Pros and cons of current proposed market and fund-based mechanisms l CCAP’s Hybrid Proposal to combine best elements of leading proposals for Reducing Emissions from Deforestation (RED) l Short-term actions for Developing Countries, Developed Countries, and International Financial Institutions (IFIs) to lay the groundwork for post-2012 RED strategy

About Center for Clean Air Policy Think-tank committed to advancing air quality and climate policy through analysis, dialogue, and education l International Future Actions Dialogue, EU Dialogue, domestic Climate Policy Initiative »Developed sectoral approach for GHG mitigation in electricity and industrial sectors in key developing countries l Analytical projects in developing countries including China, India, Brazil, and Mexico »Works with in-country partners to develop emissions scenarios, mitigation options, cost curve, and implementation strategies in key economic sectors l Developed initial design for IADB’s Sustainable Energy and Climate Change Initiative

CCAP Forest Sector Involvement l Reducing Emissions from Deforestation (RED) workgroup in Future Actions Dialogue »Aimed at developing workable post-2012 RED policy options l Ongoing Brazil LULUCF, ethanol, and biodiesel analyses »Drivers, mitigation costs, and implementation options l Climate-related analyses of forests, land-use change, and agriculture in Mexico, Central America, California l Helped to develop and negotiate UNFCCC LULUCF and CDM sink provisions for Marrakesh Accords

Figure 1. Global GHG emissions to meet 2°C increase with 50% probability (EC, 2007a)

The Importance of Post-2012 RED Mechanism l European Commission modeling to achieve target of holding temperature increases to 2°C assumes that cost effective path would include near-elimination of emissions from deforestation in 2020 l Deforestation and land-use change account for up to 25% of global carbon emissions l Two year discussion of policies/mechanisms for reducing emissions from deforestation already underway in UNFCCC »Rome 2006 and Cairns 2007 workshops »Cairns submissions represent over 60 countries and 15 NGOs

Post-2012 RED Policy Challenges: Crosscutting Needs l Effective incentives for participation of both developed and developing countries l Development of accurate inventories and baselines »Agreement on methodology, for example historical or virtual l Capacity building and monitoring »Inclusion of countries at different stages of development l Avoiding destabilization of CDM, EUETS and larger global carbon markets l Solutions to leakage and permanence l Consistent and adequate funding, probably $5 billion annually

Market Mechanism Proposals: Advantages l Coalition for Rainforest Nations (CFRN) (compensated reduction + capacity fund), Congo Basin (stabilization) l Premised on tough Annex I targets to create sufficient demand for forest credits l Pros »Can leverage significant private and public sector money by linking to CDM market »Not dependent solely on govts, empowers many players »Can generate lower-cost offsets, market-based »Supported by most countries, combined with a separate implementation fund

Market Proposals: Disadvantages Cons: l Large potential to destabilize CDM and global carbon markets, create price volatility l Baseline difficulties magnified when linked to CDM l Leakage due to non-participation and lack of mechanism to score negative performance l May not encourage systemic solutions (e.g. agricultural policy reforms)

Non-market Approaches: Advantages l Examples include Brazil RED mechanism which is modeled on Sustainable Development Policies and Measures (SDPAMS) concept l Implementation funds (CFRN) l Pros »Does not threaten stability of carbon market »Can fund implementation directly »Easier to include systemic solutions that may be more costly »Tracks both reductions and increases in deforestation and rewards only net reductions

Non-Market Approaches: Disadvantages l Cons »Source of and incentives for funding unclear (contributions voluntary) »Likely to be less attractive to Annex I nations and to private sector than CDM and thus unlikely to produce comparable funding to market approaches »Govt-driven programs on both investor and supplier sides »Requires new administrative structure and selection criteria »Lumps all developing countries together in single program – no incentives for policy competition

Alternative: CCAP Hybrid RED Approach l The RED system would be a new and separate market from the current Kyoto carbon market l Developing and Developed countries commit to establishing and reporting national LULUCF inventory annually, to include tree cover by biome type, land-use changes, and emissions/sequestration. Could include net carbon flows to establish basis for long term monitoring. l Capacity building funding provided up-front to incent data collection l Annex One countries commit to dual post-2012 targets: »1) GHG reduction target via domestic action and flexible mechanisms and » 2) a CO2 equivalent reduction from contributions to reduced deforestation in developing countries, »For example, Europe commits to -25% below 1990 levels from KP system and -5% through RED by 2020

CCAP Hybrid RED program (2) l Annex I (A1) countries can meet their RED targets through government funds or through mandates on companies or through combination of the two l AI countries can elect to shift portions of their RED target as program develops to traditional Kyoto caps but not vice versa l Developing countries (DCs) have “no-lose” option to create programs – but A1 countries can switch support to other countries if programs falter l IF RED programs do not produce desired redux, A1 countries/companies can make up shortfall in subsequent years l After each commitment period, COP assesses dual targets system and makes necessary revisions l Precedents exist for dual markets in CO2 reduction – trading plus policies and measures - CAFÉ, RPS etc.

CCAP Hybrid: Advantages l RED credits would not be fungible with CDM market, thereby avoiding destabilization of carbon market l Hybrid can leverage private sector investment l Likely to encourage significantly more investment than non- market approach, comparable to “compensated reduction” l Funds capacity building, could fund systemic solutions l DCs compete to produce most attractive and highest integrity programs l Baseline and monitoring issues less problematic because program not linked directly to carbon market – allows learning by doing in DCs w/ less LULUCF capacity

CCAP Hybrid: Pros and Cons Pros (continued): l Establishes a minimum demand for RED programs l Creates incentive for early RED capacity building and DC program development Cons: l Some countries could dominate the RED market as in “compensated reductions” approach, less likely in non-market option l Separate RED market may not achieve targets, slow progress toward global stabilization goals l May be harder to get significant RED targets from A1 countries because of domestic opposition to transparent transfer of money to DCs for RED (e.g. current Canada and U.S. administrations opposition to CDM)

Pre-2012 Goals for Building RED program l Encourage unilateral RED actions in developing countries by identifying costs and benefits l Develop methodologies, implementation strategies l Develop data and monitoring systems l Try to build capacity of DCs who are not currently ready to participate in a RED program

Potential Short-Term Actions l Develop specific inventories and baselines l Build capacity in key countries and identify high priority areas l Conduct analyses of mitigation options, costs, reduction potentials and co-benefits l Analysis, education, and training in alternative or low- cost practices on the ground »Relocation of cattle, palm oil to degraded lands »Intensification of agricultural production l Pilot projects

Near-Term Role of Developed Countries l Use ODA and IFI funding for development of inventories, capacity, implementation of pilot projects l Work with developing countries to identify actions they can take unilaterally »Policy-based lending by IFIs could design policy options »Specific research projects and mitigation studies can support this l Promote global purchasing programs for sustainable forest products »E.g. palm oil, beef, soy

Conclusions l Short-term actions coupled with a hybrid approach to long-term RED policy can produce a meaningful program to reduce deforestation and help meet global carbon concentration goals post 2012 l Combining key elements of the current market and non-market proposals can avoid destabilizing the carbon market, insure adequate and consistent funding, and build on an SDPAMS concept l Preferred approach is a framework that creates separate Annex 1 commitments for reductions in the carbon emissions a la Kyoto with new commitments for investments in reduced deforestation post-2012 l Actions can be taken by DCs, A1 countries and IFIs before 2012 to lay the groundwork for a new RED program: »Funding inventories, monitoring, pilot projects, and research on mitigation options, »Building capacity in developing countries, and »Offering policy-based loans to create the policy framework in DCs

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