Harnessing the carbon market to sustain ecosystems and alleviate poverty BioCarbon Fund Experience Insights from A/R CDM Host Country Committee meeting, Barcelona May 2011

Table of contents I.The BioCarbon Fund experience in carbon finance in Afforestation and Reforestation (A/R) – Lessons learned II.Recommendations III.Looking ahead

Promoting several aspects of the forest carbon market The BioCF: promotes carbon markets for land-based projects $90M mobilized to conserve and sequester carbon in forest- and agro-ecosystems Linking buyers and sellers The BioCarbon Fund  Buyers: BioCF Participants  6 governments and12 private companies  Investments in exchange for carbon credits  Investments in ‘infrastructure’  Some seek credits to comply with regulations and others for voluntary purposes  As a trustee, the BioCF invests in projects to generate carbon credits  Sellers: Project developers  They sign an ERPA with the BioCF  BioCF covers a portion of project development costs – subsequently deducted from emission reductions payments  BioCF pays emission reductions on-delivery upon validation completion and based on project implementation reports  Developing methodologies and tools to support project preparation  Producing training material on forest carbon to facilitate project preparation and implementation  Generating lessons learned  Facilitating communication between UNFCCC bodies and project developers  Strengthening capacity and supporting negotiators for A/R and the inclusion of other land-based activities in the Kyoto Protocol

Forest carbon markets A/R CDM: a small portion of forest carbon markets A/R CDM credits have an important niche in the voluntary carbon market Volume and value of forest carbon markets (2009, US$ million) Transaction volume by project type, ( OTC, 2009)

The BioCarbon Fund Tackling an inequitable distribution: BioCF is largely supporting projects in sub-Saharan Africa compared to the CDM overall… …and is also bringing the carbon market to rural communities

The BioCarbon Fund Mitigating climate change through a variety of land use activities – examples Assisted Natural Regeneration Ethiopia Humbo – farmer managed natural regeneration on severe degraded community lands Albania – assisted natural regeneration of degraded lands Afforestation / Reforestation DRC Ibi Bateke – agroforestry on degraded savannah, and charcoal & fuelwood production Kenya Greenbelt – restoration of degraded forests and community lands Madagascar – biodiversity conservation on degraded lands subject to shifting cultivation Niger – restoration of vegetative cover and production of Arabic gum with multiple farmers Uganda – timber production on degraded lands involving multiple farmers Chile – timber production on severely degraded lands REDD+ Madagascar – creation of a sustainable use protected area, with local conservation and management activities Sustainable Land Management Kenya – adoption of sustainable agricultural land management practices by small-holder farmer groups to increase crop yields, farm productivity and soil carbon sequestration

A/R CDM a powerful tool for sustainable rural development Lessons learned  GHG emission reductions from A/R projects can be measurable, verifiable and reportable  Carbon finance catalyzes underlying investment by improving project viability  Additional socio-economic and environmental benefits from projects are substantial:  Poverty alleviation  Local good governance and land tenure security promotion  Land restoration and biodiversity conservation  Opportunities to improve forest project performance But some barriers need to be removed to scale up from pilots to common practice Generally observed opportunities Generally observed challenges  Complex rules for project development and low local capacity to apply them  Lack of data availability and technology constraints  Forest credits: low price and low demand due to the approach to non-permanence  Lack of innovative financing to support projects in covering upfront costs Forest growth from natural assisted regeneration has been exceptional Besides some small bush, Humbo was devoid of any trees before this project Pre

Lessons learned Identifying challenges and good practices in key topics CDM regulations The challenge of pursuing forest carbon credits with environmental integrity, efficiency, and effectiveness Challenges and opportunities Land-related issues The rigor and practicality Imbalance GHG accounting The temporary crediting approach to non- permanence, a narrow window of opportunity for A/R Non permanence Catalyzing underlying investment for forest projects Finance Taking advantage from early lessons on project development and implementation Under-delivery risk An opportunity for creating synergies – significant potential Co-benefits A key success factor for effective project development and implementation Institutional framework

Lessons learned The challenge of pursuing forest carbon credits with environmental integrity, efficiency, and effectiveness (contd.) CDM regulations Validation PDD quality determines the cost and time spent on validation Designated Operational Entities (DOEs) with relevant experience in the sector still scarce: The accreditation of entities started late relative to other sectors Once accredited DOEs have to build their own expertise based on experience gained through validation DNAs and project entities’ delay the provision of the documentation essential for project validation – due to poor coordinating capacities and/or bureaucratic procedures Registration Most projects have failed completeness checks because project developers: disregard the importance of presenting required documentation to succeed in registration get overwhelmed with validation completion; and have low capacity to track the changes introduced by the CDM EB in documentation and formats Delays at registration are expected to be significant due to stringent scrutiny by the CDM EB → projects will reduce their chance of getting CERs before the end of the first commitment period of the Kyoto Protocol

Lessons learned The challenge of pursuing forest carbon credits with environmental integrity, efficiency, and effectiveness (contd.) CDM regulations Verification Project developers and field teams often disregard the importance of strictly following the PDD at implementation This is compounded by the live nature of A/R projects, and sometimes, the fact that project developers and field teams are not involved in the preparation of the PDD Monitoring is also complex as it requires to assess many variables Significant deviation from the PDD at project implementation will increase the number of formal processes since a revised monitoring plan must be approved by the CDM EB Deviation from the PDD is happening in projects. The CDM EB must decide criteria to consider when deviation can be addressed by re- stratification To overcome this challenge it is important to further simplify monitoring rules and increase local capacities

Lessons learned Land related issues: Challenges and opportunities Land issues 2 Land eligibility and project boundary Complying with these rules is a challenging task for project developers Demands human and technical capacity to interpret satellite imagery and resources to invest in technologies The 1990 rule excludes areas with significant potential for A/R and results in scattered planting plots The challenge is greater in projects in tropical climates where vegetation quickly (and temporarily) reaches the country’s forest definition and validators classify the land as ineligible Developers struggle with demonstrating the temporary nature of such re-vegetation (complex studies) Selecting eligible lands can be an iterative long process, complicating the integration of farmers to the project → costly, socially difficult to implement and can have ecological implications The “control over two-thirds of the land” rule helped to a certain extent, but it has to be further simplified to support this projects and to allow A/R CDM be an tool for REDD+ The CDM EB has introduced too many changes to the land eligibility rule, creating ambiguity, confusion, and generating different interpretation of the rules by validators and project developers

Lessons learned Land related issues: Challenges and opportunities Land issues Land tenure The land tenure rule can exclude farmers with no formal land title from participating in CDM A/R BioCF Participants were willing to invest in projects in areas with a lower level of land tenure security as long as adequate institutional mechanisms are put in place to ensure emission reductions permanence and legal transferability of carbon rights There is evidence of carbon finance contributing to increasing land tenure security in a number of projects However, complications with land tenure requirements have reduced the feasibility of some projects. Delays in completing land tenure clarification and security processes have in some cases discouraged farmers from participating in projects; the process also can be costly A strong relationship between the project entity and the government facilitates this process Increased land tenure security in an African BioCF project Before After

Lessons learned The rigor and practicality imbalance GHG accounting 3 The level of complexity of early methodologies made them less accessible to project developers Training of project developers is required to strengthen their capacity for GHG accounting Lack of available data on native species negatively affects projects with a biodiversity focus Estimation of activity-shifting leakage is time and information intensive Practical challenges arise in monitoring biomass growth

Lessons learned The temporary crediting approach to non-permanence, a narrow window of opportunity for A/R Non- permanence 4 tCERs are more flexible commodities than lCERs; they also provide a greater stream of revenues for project developers The replacement credit rule increases the risks for buyers of forest credits The non-permanence approach results in delayed carbon revenue Temporary crediting as an approach to address non-permanence of A/R projects has limited effectiveness and reduces the demand for forest credits (e.g., banned from largest EU-ETS market) Lessons learned from A/R CDM projects can be enriched with experiences from the voluntary carbon market where other approaches to non-permanence are used BioCF projects preferred tCERs over lCERs

Lessons learned Catalyzing underlying investment for forest projects The role of carbon finance 5 Transaction costs of meeting CDM requirements were high in most BioCF projects Project developers’ capacity to develop, implement, and manage a forest carbon project strongly determines project viability Small-scale projects struggle with achieving project viability One of the most important contributions of carbon finance to A/R projects is its role in catalyzing underlying investment BioCF ratio of ERPA value to total underlying investment is 1:7.4 It helped improve the IRR of some projects by 5-6 percentage points Carbon revenue, depending on amount and timely delivery, can positively impact project viability World Band project development costs by technology ($/tCO 2 e) –Weighted average The price of permanent CDM credits determines the price of credits from A/R projects, which limits the potential of carbon finance to support project viability

Lessons learned A key success factor for effective project development and implementation Institutional framework 6 The integrity of the carbon asset and the permanence of the forest carbon project can also be assured by institutional and contractual instruments as they help clarify carbon ownership and ensure adequate project implementation: Emission Reductions Purchase Agreement Subsidiary agreements Land-use agreements, and Benefit sharing agreements Designing and creating equitable benefit- sharing schemes that effectively improve local livelihoods is essential for the long-term success of forest carbon projects Private-public partnerships with clear responsibilities for each partner seem to work best Investing in and sustaining local capacities can ensure the permanence of forest carbon initiatives Example: where project entity uses 100% of carbon revenues to cover its upfront costs, farmers are entitled to 100% of revenues from timber. Complex partnerships demand higher coordination and managerial capacities

Lessons learned An opportunity for creating synergies Co-benefits 8 All types of A/R projects have environmental, economic, social, and institutional co-benefits Co-benefits are an important incentive for local participation in forest carbon projects. Forest carbon projects also contribute to climate change adaptation by increasing the resilience of local environments and communities There is great potential for synergies between forest carbon projects and other development initiatives

Recommendations Regulatory Remove regulatory uncertainty. The uncertain regulatory environment that exists until UNFCCC negotiations are done is creating a dampening effect. In addition, where market signals have been given for post-2012 (as from the EU-ETS), A/R credits from the CDM remain disadvantaged despite significant livelihood implications Improve the fungibility of forest project credits by addressing the non- permanence of forest carbon in a broader way and allowing A/R projects to use alternative approaches to temporary crediting Further simplify rules and procedures for baseline determination and additionality demonstration Increase the current threshold of 16,000 tCO 2 e for small-scale projects and revisit the rule that low-income people that must be involved in this type of project

Recommendations Finance Innovative ways to finance activities Carbon finance is a payment on delivery, and yet the upfront investments needed for A/R projects are significant Economies of scale are not easily attained Forestry investments are long term and deemed high-risk in many developing countries Institutional arrangements for financial intermediation, recognition of carbon credits as part of credit options for agriculture and rural development, and ex-ante payments based on meeting performance benchmarks are highly needed Financial compensation for other benefits The BioCarbon Fund experience has shown that A/R projects encompass both mitigation, through removal of CO 2 from the atmosphere, and adaptation as they build up the resilience of the environment and communities to harsh environmental conditions Projects show an amelioration of living conditions, but the significant additional environmental and social benefits (besides carbon) are not rewarded

Recommendations Strengthening Capacity Strengthening capacity at the local level is needed to ensure successful forest carbon initiatives. The fact that A/R projects are useful tools to promote both adaptation and mitigation should be harnessed to build-up capacity and to strengthen programs in an integrated manner

Looking ahead Many of the lessons learned from A/R could be helpful in the development of REDD+ in order to avoid the same bottlenecks The interactions between different land uses need to be addressed; policymakers will need to address the interface of all land use activities (e.g., A/R, REDD+, and agriculture) in an integrated approach There is also a need to bring in the biomass-energy dimension The application of an approach that integrates land-use and energy sectors at a landscape level would be more practical and cost effective The BioCF will continue its support to land-use interventions and is planning to build on the experience to-date in A/R through scaled-up programs and exploring new areas. All of this is in line with the World Bank’s triple-win-for-farmers strategy in which the forestry, agriculture, and rural energy sectors are treated in a integrated way to: Increase food security Improve the rural poor resilience to cope with the impacts of climate change; and Mitigate climate change

Additional Resources WB Carbon Finance Unit: Lessons Learned from 10 years of Carbon Finance Brochure on CDM reform State and Trends of the Carbon Market BioCarbon Fund: Summary of all BioCF projects Links to some key papers on carbon projects – See “Useful Resources” How-to guides Thanks