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CDM AR did not fail and is not dead

Articles - By Unna Chokkalingam & S. Anuradha Vanniarachchy on Jun 07, 2011

Really? Thought few CDM AR projects, long-winded process, complicated methods, no demand, no future? Did something change? How does it compare to other CDM sectors and to voluntary forest carbon standards?

It is generally believed that CDM AR is a failure – both compared to other CDM sectors and compared to the voluntary carbon markets which provide the main foothold for forest carbon projects. CDM refers to the Clean Development Mechanism under the Kyoto Protocol that allows developed countries to meet their mandated emission reduction targets by financing greenhouse gas emission reduction projects in developing countries. Afforestation Reforestation activities (CDM AR) are one of the permitted project types. CDM AR is criticized for its scarcity of registered projects linked to its long and tedious bureaucratic process, complicated methodological requirements and issuance of temporary credits.

We set about to investigate the truth or otherwise behind these commonly-held perceptions. First some numbers.

How many CDM AR projects are there really?
Many people would say 1 − this was the case when they last checked in early 2009, or perhaps 11 – the case when they last checked in early 2010. The right answer as of end May 2011 is 22 registered CDM AR projects and 4 requesting registration.

How does this compare to CDM overall?
“The Clean Development Mechanism registers its 3000th project,” read the headline on 5 May 2011. Of the 3000 projects registered, the 22 forestry projects make up a meager 0.007%. The first CDM project was registered in January 2005 while the first CDM AR project was registered in China in November 2006. It only took 3 months for the second CDM project to be registered while it took 26 months for the second CDM AR project to be registered. The other 14 sectors have 2600 projects overall in the validation pipeline while CDM AR has 48 projects in the pipeline.

These numbers do suggest that CDM AR is a miserable failure compared to the other sectors under the CDM mechanism. But just a minute, shouldn’t we be comparing numbers sector by sector? The top five sectors have substantial numbers of projects: 2459 energy industry projects, 544 waste handling, 176 manufacturing, 163 fugitive emissions from fuels and 140 in agriculture. However, the numbers (0-70) of registered projects in the other 9 sectors are just as modest as CDM AR. The transport sector has just 6 projects, mining/mineral production has 47 and construction has zero.

Why slow start and low numbers of projects for CDM AR?
Forestry methodologies and requirements were complicated and took time to develop and verify. “Everyone had to learn how to do it – the project developers, the validators and the CDM Executive Board,” says Kai Windhorst of UNIQUE GmbH, a forestry consulting company. “The national authorities had to get into action too.” Windhorst has been working on CDM AR projects in Uganda since 2005. The Project Design Document (PDD) for their 5 community forest timber projects was drafted in 2006 but the first project was registered only in 2009. The other 4 projects are expected to come on board quickly within this year.

Sebastian Hetsch of TÜV SÜD, an approved validator or certifying body for CDM AR and other project types, confirms that the average timeline for AR projects was very long before. “Some of it had to do with national bottlenecks such as pending authorization of the projects from the host country, or in some cases forest definitions and land cover mapping issues which are important for determining land eligibility. Besides methods were complex, developers had to learn what was needed and there were few certification companies for CDM AR projects in the first years.”

In Asia, China and India actively pursued CDM and CDM AR while other countries showed little motivation or drive to develop projects. There was a lack of national regulations and support, there were few technical consultants and developers focused on CDM AR, and some “prime REDD countries” like Indonesia focused primarily on their REDD potential. And CDM AR looked difficult, almost impossible.

CDM AR moves from pipeline to assembly line in 2009
CDM AR broke through the barriers in 2009 when 10 projects were registered followed by 7 more in 2010, 4 so far in 2011, 4 requesting registration and many more expected to come online before the end of the year. What happened to change the deadlock?

In the 4 years, more methodologies and tools became available and they got simplified and streamlined. The first consolidated methodologies appeared in 2009. There are now 19 approved AR methodologies and 15 tools available.

“Once the first projects came out, people know what it is and what hoops they have to jump through,” observes Windhorst. “Capacity increased on the developer and DOE sides,” says Hetsch, “There is more experience and lessons learned. And more validators (meaning more companies and more staff) came into the field when they learnt that CDM AR projects were also feasible.”

The average lead time tends to be shorter now. Matthias Seebauer, another UNIQUE consultant, started 2 projects in India in summer 2010 and expects it to be validated in 2-3 months from now. Documents have already been requested. “The registration process may not have changed but the validators are more efficient now,” states Seebauer. Hetsch says that not making available required documents on time can still lead to validation delays.

Approval from the DNA and the CDM Executive Board
On the national side, countries with small DNA (the Designated National Authority that oversees CDM projects) offices can take longer to approve projects due to limited staff and time. A new development indicated by Seebauer is the change in process initiated by the Indian DNA, “They now require a validation report upfront prior to issuing a LoA (Letter of Approval), perhaps because approved projects did not proceed further through validation leaving the country in a conflicting situation.” Hetsch confirms that several countries are now demanding validation reports prior to issuing LoAs and some are also requesting translation of all documents.

There has apparently not been much change on the long-winded process on the side of the CDM Executive Board (CDM EB) that supervises CDM projects. “Our first Uganda project took 6 months in the CDM EB registration queue in 2009 after fulfilling all formalities,” said Windhorst. Hetsch reports that procedural issues at the UNFCCC secretariat can lead to delays in registration. “I have the impression that the registration team at UNFCCCC is not always aware that CDM AR has a different set of requirements compared to regular CDM projects,” he says.

Characterizing the projects
There are equal numbers of small and large-scale CDM AR projects, with 35 of the 70 registered plus pipeline projects being small-scale and 35 large-scale. Expected average annual emissions reductions are 6704 tCO2 for small-scale and 138,433 tCO2 for large- scale projects. Total expected emissions reductions from these projects are 5 million tCO2 per year. Only looking at registered projects, there are 14 large-scale and 8 small-scale projects with total expected emissions reductions of 934,360 tCO2 per year.

Where are the projects located? Sixty seven CDM AR projects (registered plus pipeline) are almost equally divided between Latin America, Asia and Africa; and 3 are in developing countries of Europe. However, Latin America has more (10) registered projects than the other continents and Africa’s projects are largely in the pipeline (21). Asia is intermediate with 7 registered projects, 1 requesting registration and 14 in the pipeline. Asian projects are mainly in India and China.

Who developed the projects and why? We focus in on the 22 registered plus pipeline projects in Asia and find that:
•Chinese projects are mostly government-initiated, and 4 of the 6 government projects involve collaboration with American NGOs

•In India and elsewhere they are mostly company-initiated

◦A small number (4) are development and research agency-supported projects.

However, almost all projects are on local community or small farmer lands and aimed at environmental protection (biodiversity, watershed, soil) and providing income to local communities.

What did they plant? Mostly conventional timber species including exotic species such as Eucalyptus and Acacia in mixed or monoculture situations. Five of the 7 projects plan to generate income through both rotational timber harvesting and net carbon sequestered by the remaining biomass. An in-depth look at the projects may be needed to determine how much influence the farmers or communities had on species choice and project objectives, and what share they get of the benefits.

How does CDM AR compare to the voluntary forest carbon standards?
Voluntary carbon standards emerged to cater to a small but growing voluntary market for forest carbon credits across the globe. There are 26 forestry projects registered to voluntary carbon standards in developing countries, equivalent to the number (22) registered under CDM AR in developing countries. Developing country projects were registered to 4 different voluntary standards – 9 to Verified Carbon Standard (VCS), 8 to the now-defunct Chicago Climate Exchange (CCX), 5 to Plan Vivo and 4 to CarbonFix.

Voluntary carbon standards also register projects in developed countries, but since the goal of CDM AR is to help promote sustainable development in developing countries, we only compare projects in developing countries. Project numbers to date do not indicate a big surplus of voluntary standard projects over CDM AR projects in developing countries.

As compared to CDM AR’s 48 projects in the pipeline, the voluntary carbon standards have 14 forestry projects in developing countries. However, voluntary standard projects are likely under-estimated due to the absence of an accessible VCS pipeline database. And CDM AR pipeline project numbers are overestimated due to withdrawn projects and inactive projects that started a GSP (Global Stakeholder Process) continuing to appear on the database. Some projects appear multiple times after resubmission following say, a method change.

There are stark regional differences. All registered projects and almost all pipeline projects in Asia are CDM AR projects, whereas in Africa and Latin America bulk of the registered projects are voluntary carbon standard projects and bulk of the pipeline projects are CDM AR projects.

CDM AR vs voluntary standards: Project typesCDM decided to only accept afforestation and reforestation projects in the forestry sector during the 1st Kyoto Protocol commitment period of 2008-2012 due to the difficulties of quantifying and accounting for forest-related emissions. Voluntary forest carbon standards other than CarbonFix decided to fill the demand and open up to other forestry activities as well. VCS and the new American Carbon Registry (ACR) also accept Improved Forest Management (IFM) and Reducing Emissions from Deforestation and Degradation (REDD) projects.

Despite opening up to other project types, most of the registered voluntary standard projects at present are also afforestation and reforestation projects. Seven of the 9 registered VCS projects involve AR and only 2 are REDD. The 5 registered Plan Vivo projects include a mix of agroforestry, AR, restoration and forest conservation activities. One includes avoided deforestation.

However, many REDD projects are expected to be developed and certified through VCS in the near future. Voluntary standard projects are just beginning to make their appearance across Asia with the start of REDD pilots for which no compliance standard is available at present.

CDM AR vs voluntary standards: How about process, methodologies, innovation?
“There is not much difference in methodologies between CDM AR and voluntary carbon standards,” says Hetsch, “however, REDD methodologies are more complex than CDM AR methodologies. Project validation process and time are similar but the registration process is quick and easy under the voluntary standards.”

Windhorst concurs that there is not much difference in the development and validation process between CDM AR and voluntary carbon standard projects, and that the process depends more on the experience of the validator in knowing what is required. He further states that governments have to acknowledge voluntary projects too in some manner, “Some standards ask for government signoff on the project to indicate that the government knows about it.”

“All standards started out copying and expanding on the basic requirements of CDM AR and all are now converging on what the buyer wants,” observes Windhorst. “Voluntary standards eased or resolved some challenging issues such as land eligibility and permanence, while they made other requirements such as risk assessments more rigorous in response to market demands.”

Land eligibility: CDM AR requires that the land should not have been forested prior to 1990. Finding out and providing proof of when the land was actually reforested has been a challenge as many developing countries have little historical data on land use and satellite imagery may not be available. Voluntary standards eased this requirement. VCS, ACR and CarbonFix require only 10 years back reference and Plan Vivo does not specify any time period.

Permanence: Carbon stored in forests can easily be extracted or burnt and therefore its permanence cannot be guaranteed. To deal with this problem, CDM AR issued temporary emission reductions credits that have to be re-issued at every verification. Voluntary carbon standards devised alternate systems for ensuring permanence whereby a percent of project credits are to be deposited into buffers or reserves based on risk assessments. They are also exploring other options.

Are there buyers for CDM AR credits?
The European Union Emissions Trading Scheme (EU ETS), the biggest market for credits related to the Kyoto Protocol, does not accept forestry credits. However, EU countries can still use CDM AR credits to meet their Kyoto targets outside of the EU ETS. Non-EU countries such as Japan can also use CDM AR credits to meet their Kyoto emissions reduction targets.

As per publicly available information, the World Bank’s multilateral BioCarbon Fund has so far signed up to receive credits from 36% of the 22 registered CDM AR projects and from 7 pipeline projects. Other CDM AR projects report selling credits directly to different European buyers for meeting their Kyoto targets or in the voluntary markets.

“Once the first projects came out, buyers started coming up from European and American markets both for CSR (Corporate Social Responsibility) reasons and to gain market experience for future compliance,” says Windhorst. “Buyers see CDM AR or forest-based projects as delivering a triple win – benefitting climate, forest conservation and communities. The temporary nature of the credits is not so restrictive, later vintages can be converted into voluntary standard credits. Prices depend on whether they are boutique credits or not.”

Ecosystem Marketplace reports average voluntary over-the-counter market prices for forest carbon credits in 2009 at US$ 5 per tCO2 for agroforestry and AR, US$ 7 for IFM and US$ 3 for REDD. Average voluntary market prices in 2010 were higher at US$ 10 per tCO2 for agroforestry, US$ 9 for AR, US$ 7 for IFM and US$ 5 for REDD. Prices for CDM AR credits have been lower, in the order of US$ 4-5 per tCO2. Developers expect higher demand and higher prices for CDM AR credits in end 2012 when countries rush to fulfill their 2008-12 Kyoto targets.

Boutique markets for forest carbon
Seebauer of Unique GmbH is currently supporting the development of two CDM AR projects in India. One is a fruit and spice tree project on 3000 individual farmers’ plots of 1-2 hectares aimed at enhancing food security and livelihoods in more than 300 villages. Another is a mangrove restoration project for environmental protection in the Sundarbans. Local NGOs working in both areas for a long time initiated the projects and provide good extension support. Such extension support is critical for aggregated implementation and long-term maintenance on multiple small areas.

Seebauer and Windhorst indicate that such projects developing native or horticultural species for smallholder livelihoods and/or environmental protection in Asia and Africa are very attractive to boutique buyers. “Monocultures like eucalyptus for timber are not very attractive,” states Seebauer, “Who develops the project is also important – buyers are more interested in NGO-led community projects than a forest department run JFM project. Buyers are looking for a good story.”

Most of the registered CDM AR projects in Asia at present are on the right lands (smallholder/ community) with acceptable objectives (environmental protection and community income), but not the right proponent and species mix important for boutique markets as outlined by Seebauer and Windhorst. They are mostly company and government-driven projects that grow exotic species in monoculture or mixed crops for timber production.

All forward sales at present
All sales are currently forward sales of anticipated credits since no CDM AR projects have had their emissions reductions verified yet. CDM AR projects are verified only once in 5 years and project developers are waiting till end 2012 to conduct their first verifications.

Developers wish to capture all potential emissions reductions that would qualify under the current commitment period up to 2012, just in case the Kyoto Protocol is not extended. Voluntary standards are not time-constrained and verified credits have already been issued for different projects including the first VCS REDD project.

Future prospects
“Demand is suspended a bit because the climate change negotiations are stagnant and they are waiting for a new mechanism but they are still very interested in it,” says Seebauer. “There is lots of potential in India for such projects. Future demand in India and China may be more from domestic companies as a social business model and for pre-compliance experimenting.”

Developers are still hopeful that Kyoto will continue for another period. New CDM AR projects are still being developed in Africa, in India and some other countries in Asia under this expectation. “CDM AR projects are expected to at least double by 2017,” says Windhorst. Countries like Norway are already signing agreements for deliveries after 2012. If no post-2012 compliance market emerges, CDM AR projects are likely to switch to the voluntary markets.

Shattering the perceptions
The commonly-held perception that CDM AR failed and that it died is untrue. Yes, it is true that CDM AR has fewer registered projects than 5 other CDM sectors including energy but project numbers are comparable to those in 9 other sectors.

Yes, CDM AR took a long time to start up because forestry methodologies and requirements were complicated and took time to develop and verify. It was a learning process for all concerned and there were obstructions on different fronts. However by 2009, many of these issues were overcome from which point on more CDM AR projects began to flow through the pipeline. Numbers are rising now.

The voluntary carbon standards as compared to CDM AR projects have a similar number of registered projects, similar methodological requirements and similar process expect for easier registration. They follow the same basic guidelines though they improved on or eased some aspects while making others more rigorous. They also opened up to other forestry activities but registered projects to date are still mainly AR projects. Other project types are likely to pick up in the near future.

Once the projects started flowing, compliance and voluntary market buyers have been forthcoming for CDM AR credits though prices are relatively low. New projects are still being developed in the hope that the Kyoto Protocol will continue for another period. Buyers are signing agreements for deliveries after 2012. If the Kyoto Protocol does not continue, the projects look to switch to the voluntary markets. There may also be future domestic demand in countries like India and China.

What CDM AR accomplished
Far from being a failure, CDM AR served as a testing ground. It provided valuable lessons and set the basic guidelines and considerations that other standards now follow. It developed rigorous methods and streamlined them. Different stakeholders learnt a lot in the process and not just about project development. They were compelled to draw up effective forest management and monitoring plans, assess economic viability, and incorporate social and environmental considerations.

CDM AR finally matured and became operational but in that time, the discussion focus had already shifted to voluntary carbon standards and REDD. Project numbers are picking up and its future depends on the fate of the Kyoto Protocol and any agreement that replaces it. AR is considered part of the broader REDD+ concept and may be folded into it if and when it emerges. Either way, CDM AR has served to pilot and set the stage for designing and implementing forest carbon projects on the ground.

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