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

INFORMAL WORKSHOP ON NON-PERMANENCE 1

ALTERNATIVE APPROACHES TO ADDRESSING THE RISK OF NON-PERMANENCE IN LULUCF ACTIVITIES


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


• 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


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


• 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


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 1984-85 • 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 1964-65


• 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


• Permanence period (N) in years; Permanence factor = (1/N)• Annual carbon storage (tonnes CO2)• 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)


• 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


• 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


Effectiveness of Buffer Approach to Intentional Reversals


• 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


• 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


• 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


• 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


• 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


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.


Comparison of ApproachesApproach Nature of

LiabilityAddressing Unintentional risks

Addressing Intentional risks

Risks to Project Risks to System Feasibility

Temporary Credits (tCERs/lCERs)

Buyer liability Yes, as temporary credits

Yes, as temporary credits

Lower market value, but no long-term liability

Little or none long-term (default scenario assumes loss of carbon)

Limited feasibility on financial grounds

Tonne-year/ Rental

No residual liability

Yes, upon meeting permanence criteria

Yes, , upon meeting permanence criteria

Slow to credit, but no long-term liability

Low economic viability

Limited feasibility on financial grounds

Buffers Project must contribute to buffer

Yes, depends on size of buffer

Variable, depends on reversal and replacement provisions; and back up in case of default

May require replenishment of buffer

Buffer may be overwhelmed

Feasible in situations with institutional capacity to manage effectively

Insurance Project must purchase insurance; Insuring entity liable

Yes, depends on the capacity of insuring of entity

Generally not cover intentional risks

Limited coverage or poorly capitalized insuring entity could prevent repayment

Moral hazard; poorly capitalized insuring entity could prevent repayment

Feasible with strong financial and legal institutions

Host Country Guarantee

Sovereign or third party liability

Potentially effective, depending on type of guarantee

Policy and legal provisions to limit the risk of intentional risk

Low as risks are shared by host country or third part guarantee

Providing guarantees that are difficult to implement

Feasible with strong policy, legal and institutional capacity

Exceptions to low risk activities

None for certain low risk categories

Additional safeguards required

Generally not cover intentional risks

None - provided projects comply with relevant provisions

Providing exceptions for activities that have substantial risks

Limited to situations with very risk


Approaches Adopted in Different StandardsStandard 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

CAR Intentional Implementation Agreement Project CAR credits account debited to compensate for “avoidable” reversals (negligence, gross negligence, or willful intent).

100 years

Unintentional CAR 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

ACR Distinction Pooled 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 Vivo No Distinction Buffer 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 .

CDM No 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, 30-60 years

No Distinction Host 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


Approaches for Addressing Reversal and Scale

National

Project

Sub-nationalProject•Buffer•Insurance•Tonne-year•Temporary credits

Sub-national & National

•Pooled buffers•Insurance•Host govt. guarantee


• Location matters

• Scale matters

• Diversification matters

• Type of risk matters

Policy Insights


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


RAMA CHANDRA REDDYEMAIL: [email protected]

FOR MORE INFORMATION ON THE BIOCARBON FUND, PLEASE CONTACT:

ELLYSAR BAROUDYEMAIL: [email protected]

WWW.CARBONFINANCE.ORG

Thank you


Additional Slides: Examples


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


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


Example: InsuranceInsurance coverage of a 20,000 ha project of 40 years length – full value coverage, catastrophic loss limit, and buffer insurance

Documents

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