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Sinks in the CDM:Sinks in the CDM:Assessment of Carbon Assessment of Carbon

Accounting OptionsAccounting Options

XVIII Meeting of the Subsidiary Body for Scientific and Technological Advice

Bonn (Germany) 4-13 June, 2003

Lucio Pedroni*Lucio Pedroni*

*CATIE*CATIE, , Tropical Agricultural Research and Higher Tropical Agricultural Research and Higher Education CenterEducation Center

Side event organized by the Swiss Delegation 6 June 2003, 6:00-8:00 PM

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1. Issues at stake

2. Accounting methods

3. Comparison of accounting methods

•Scenario analysis of hypothetical project

•Case study

4. Conclusions and recommendations

ContentContent

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• Carbon accounting = paradigm to address non-permanence of carbon in forests ( energy projects).

• Carbon accounting will impact on project viability and scale.

• Project scale is relevant: Equity & participation Impacts Leakage Investment requirements

• AR-CDM project viability is relevant.

Issues at stakeIssues at stake

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Accounting methodsAccounting methods

Stock-change:Credits = Difference between stock at time t and stock at time t+i (measured in CO2 equivalents).

Ton-year: Credits = annual stock divided by the equivalence time (Te) [or multiplied by Ef = 1/Te].

Equivalence-adjusted average storage: Credits = average stock stored during the project lifetime adjusted for Te.

Temporary crediting:

Credits with finite lifetime.

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Equivalence time (Te)Equivalence time (Te)

“Length of the period of time that 1 t CO2 must be stored as carbon in the biomass or soil for it to prevent the cumulative radiative forcing effect of a similar quantity of CO2 during its residence time in the atmosphere” (IPCC, 2000)

Length of Te?

for ever?

100 years?*

55 years?

* 100 years is the reference used to calculate the global warming potentials of non-CO2 GHGs.

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Ton-year accountingTon-year accounting

Credits generated at a year t:

CERsyear t = (CO2 project – CO2 base line)t / Te

Credits generated during a period of time i:

t=x+i

CERsperíodo i = (CO2 project – CO2 base line)t / Te

t=x

70 100

025 50 75

50

100

150

200

250

300

350

years

tC/h

aTon-year credits

Te = 55Pinus patula plantation managed in 25 year harvesting cycles

Ton-year creditsTe = 100

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Ton-year accounting...Ton-year accounting...

Advantages:

• Safe for the climate: there are no risks at the time of credit issuance.

• Credits do not expire.

Disadvantages:

• Projects earn credits very slowly.

• An agreement on the length of Te is required.

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Equivalence-adjusted average carbon storage accounting (ACS)

t=n

(CO2 project – CO2 baseline)t

t=1

Te

Te -adjusted average carbon storage =

100 100

025 50 75

50

100

150

200

250

300

350

years

tC/h

a

ACS credits, n = 100, Te = 100

ACS credits, n = 50, Te = 100

Running average storage

Average C storage n = 100

Average C storage n = 50

Pinus patula plantation managed in 25 year harvesting cycles

110 100

025 50 75

50

100

150

200

250

300

years

tC/h

a

Average C storage n = 100

Average C storage n = 50

ACS-crediting requires special provisions (insurance, risk discount, buffer, banked TCERs or a combination) to cover the risk of carbon re-emission

during the “uncertainty time” (time between verification and project end)

“Uncertainty time”

“Uncertainty time”

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ACS-accounting...

Advantages:• Projects earn more credits earlier.

• Credits do not expire.

• No need to create a new currency.

Disadvantages:• Risks for the climate

(“uncertainty time”, not really ex-post).

• Requires provisions to address the risk of carbon re-emission during the “uncertainty time”.

• An agreement on the length of Te is required.

• Requires monitoring and periodical verification during the entire planned project duration.

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Temporary crediting

Credits with finite life-time.

Appealing (non-permanence is fully recognized).

Critical questions:

• Length of life-time?

• Quantification?

• Renewal?

• Expiring or not expiring?

• Market viability?

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How to quantify TCERx?

t-x t

b

a

TCERx = a+(b-a)/2

b

a

t-x t

TCERx = b

t-x t

b

a

TCERx = a

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b

a

t-x t

TCERx = b

(TCER-1) (TCER-2)

Uncertainty time (= x/2)

How to quantify TCERx?

t-x t

b

a

TCERx = a+(b-a)/2

t-x t

b

a

TCERx = a

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(T)CERs are two-dimensional: f (tCO2, time)

TCERs are less valuable and more expensive to produce than CERs

1 CER = 1 t CO2 “forever”1 tCO2

Energy:

1 verificationtime

1 TCER 1 TCER 1 TCER 1 TCER 1 TCER1 tCO2

LULUCF:

Periodical verifications for the same ton of CO2

time

17Crediting period

Are new TCERs and renewed TCERs

something different?

time

tCO

2 New TCER

Renewed TCERVerif. & Certif.

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If this would be an Energy project...tC

O2 CERs

Verif. & Certif.

Crediting periodtime

19Crediting period

Are new TCERs and renewed TCERs

something different?

time

tCO

2 New TCER

Renewed TCERVerif. & Certif.

?

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Price of TCERs:Price of TCERs:

• Obviously less than permanent CERs.

• An economic approach to estimate the price

of TCERs would be:

$CERp2

$TCER = $CERp1 - (1+i)LT

$TCER= Price of TCER

$CERp1 = Today price of permanent CER

$CERp2 = Price of permanet CERs in LT years i = Discount rateLT = Life time of TCERs

Temporary crediting...

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Advantages:• More credits in less time.• Buyer liability.• Moderate or zero risk for the climate

(depending on the lenght of “uncertainty time”).

Disadvantages:• Economic risk of TCERs, particularly

their price (projects could be unviable).

• Need to create a new currency.• More complex international book-

keeping.

Temporary crediting...

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Comparison of accounting methods

Model:What is the minimum project area at

which:Revenues from (T)CERs = Transaction

costs?

Case study:Viability of two potential projects

in Nicaragua and Honduras

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Minimum project area = function of:

• Biophysical and management features:

– Growth, thinning-harvesting regime, ...

• CDM modalities:– Accounting methods, crediting period, ...

• Carbon-market and its rules:– Price of CERs, transaction costs (design,

validation, monitoring, verification, share of proceeds), economic discount rate, ...

Logic of the Model

COP-9

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The Model

Present value

of benefitsNet benefitsminus

Present value

of transaction costs

Inp

ut:

P

ara

mete

rs

Variable area

Output: Minimum project area

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• 4 accounting methods (ton-yr, ACS, TCER-1, TCER-2)

• CER price: 3, 6, 9 or 12 US$/tCO2

• Annual variation rate of CER price: -3%, 0%, +3% yr-1

• Time interval between verifications: 5 or 10 years

• Crediting period: 10, 30 or 50 years• Risk discount factor: 0%, 1% or 2% yr-1

• Cost Factor F: 1, 2, 3, 4 or 5– Design and validation:

• F * US$ 40.000– Monitoring costs:

• F * US$ 2000 / monitoring event• F * US$ 0,1 / ha / monitoring event

– Verification costs:• F * US$ 15.000 / verification event

• Economic discount rate: 3%, 6% or 9% yr-1

Totaling 7,776 simulations.

Input parameters

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• Baseline = 0

• Leakage = 0

• Project duration: 75 years

• Harvesting cycle: 25 years

• Equivalence time: 100 years

• National and international share of proceeds: 7%

• Risk discount = f (duration of “uncertainty time”,

annual risk discount factor)

• Price of TCERs:

$TCER(t) = $CER(t) - $CER(t+5)/(1+r)5

Model suppositions

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Minimum project area, all 7776 scenarios

% of scenarios allowing the CDM to be profitable

Minimum Project Area (ha)

% of simulations allowing CDM to beprofitable for projects with this area

0%

20%

40%

60%

80%

5000 10000 15000 20000

Minimum Project Area (ha)42001000500

50%

18.5%

7.1%

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MethodMedianvalue

% of scenarios allowing projects smaller than 500 ha to be profitable with the CDM

% of scenarios allowing projects smaller than 1000 ha to be profitable with the CDM

Ton-year 11,000 ha 0% 2.8%

ACS 3,000 ha 5.1% 17.7%

TCER1 2,300 ha 13.7% 30.2%

TCER2 3,250 ha 9.7% 23.1%

Frequency distribution according to the carbon accounting method

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Net present benefits of carbon selling (constant CER price)

Ton-Year

ACS

TCER1 TCER2

-100

-50

0

50

100

150

500 1500 2500 3500 4500 5500 6500

Net Present Benefits of Carbon Selling (US$/ha)

Area (ha)

TCER price estimated with constant CER price

Net present benefits of carbon selling (US$/ha)

Area (ha)

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Ton-Year

ACS

TCER1

TCER2

-50

-40

-30

-20

-10

0

10

20

30

500 1500 2500 3500 4500 5500 6500

Net Present Benefits of Carbon Selling (US$/ha)

Area (ha)

TCER price estimated with increasing CER price

Net present benefits of carbon selling (increasing CER price)

Net present benefits of carbon selling (US$/ha)

Area (ha)

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With all simulations

0%

20%

40%

60%

80%

100%

TonYear ACS TCER1 TCER2

Cases in which the

method allows benefits

to the smallest project

Methods

The “best method” in all simulations (“best method” = the one that allows the smallest projects to benefit from the CDM)

% of scenarios in which the method allows benefits to the smallest project

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Only with constant CER price

0%

20%

40%

60%

80%

100%

TonYear ACS TCER1 TCER2

Cases in which the

method allows benefits

to the smallest project

Methods

Only with increasing CER price

0%

20%

40%

60%

80%

100%

TonYear ACS TCER1 TCER2Methods

“Best method” with constant or increasing CER prices

% of scenarios % of scenarios

Only with increasing CER

price

Only with constant CER price

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Only with high risk

0%

20%

40%

60%

80%

100%

TonYear ACS TCER1 TCER2

Cases in which the

method allows benefits

to the smallest project

Methods

Only with zero risk

0%

20%

40%

60%

80%

100%

TonYear ACS TCER1 TCER2Methods

“Best method” with high or low risk discounting

% of scenarios % of scenarios

Only with high risk discounting

Only with low risk discounting

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Median value of minimum project areaExtreme condition

Ton-year ACS TCER1 TCER2All

methods

The crediting periodis only 10 years 275,000 14,200 3, 000 50,000 50,000

The CER price isonly 3 US$/tCO2 30,000 6,750 4,500 6,550 8,900

The transaction costfactor is the highest 18,550 5,650 3,700 5,000 8,300

Risk discountingis the highest (2% annual)

11,000 5,150 2,400 3,250 5,300

The CER price isforeseen to increase

3% annually11,000 3,000 14,550 30,000 7,300

Without any condition(all simulations) 11,000 3,000 2,300 3,250 4,200

Median value of minimum project area (ha) under “extreme

conditions”

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US$ / tCO2

min max min max

3 - + - +

ACS 5 + + + +

8 + + + +

3 - - + +

5 - - + +

8 - - + +

3 - - - -

Ton-yr 5 - - - -

8 - - - -

Reforestation 1800 ha, 15 m3/ha/yr

(Nicaragua)

Regeneration 51,063 ha , 2.4 m3/ha/yr

(Honduras)

+ = Project PNV > 0 - = Project PNV < 0

Case study

TCER (original

Colombian proposal)

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Conclusions

Ton-year: Excludes small projects from the CDM.

ACS: Is “better” if risks are low and prices of permanent CERs increase.

Can be environmentally integer if adequate provisions are taken to address the risk of C re-emission during “uncertainty time”.

TCERs: Are the “best” method only if the price of CERs does not increase in the future.

Critical issues have still to be clarified.

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Economic risk of TCERs is high, particularly if:

Price of CERs increases (likely!)

Crediting periods are short

No credit renewal after crediting period

TCERs expire once certified

TCERs are quantified as the stock existing 5 years before the certification

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Recomendations

TCERs = TCER-1 or TCER-2 (see slide 15), or “average storage between two verifications, multiplied by the time elapsed between the verifications and divided by credit lifetime”.

Long crediting periods Native species

Long-term C storage

Smaller-scale projects

New and renewed TCERs New TCERs only during crediting

period.

Renewed TCERs: as long as stocks exist and can be verified (see slide 19).

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Banking = Offset of future emissions = good for

climate

Makes AR-CDM more attractive

1% CDM-cap prevents from excessive banking

Not expiring TCERs could be used as insurance or buffer for other LULUCF-CDM projects

Two options:

1. TCERs without expiration date =Banking by developing countries(YES)

2. TCERs can by consumed in whatever commitment period =Banking by Annex-1 countries(NO)

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Flexible accounting regimeMinimizes economic risks of TCERs

Promotes LULUCF project portfolio allowing learning by doing

Requirements:• Each approved method shall be

equivalent in terms of “environmental integrity”

• Only approved methods (approval by EB or COP-MOP)

Start with:• TCERs

• Equivalence-adjusted average C storage

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TCERs:Not expiring TCERsNo banking by Annex 1Long crediting periodsPossibility to renew credits beyond the

crediting period

Equivalence-adjusted average C-storage:Risk discounting based on credible risk

assessmentCarbon discounting on projected flowsInsurance (or buffer or TCERs or combination)

until end of “uncertainty time”100 year equivalence timeTon-year to determine amounts to be covered

by insurance in case of C re-emission.

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Thank you

CATIE thanks the support provided by the Swiss CATIE thanks the support provided by the Swiss Government for the preparation and Government for the preparation and

organization organization of this side-eventof this side-event

Tropical Agricultural Research and Higher Education Center