Economics of Terrestrial Carbon Sequestration

wrc.umn.edu

Economics of Terrestrial Carbon Sequestration

LULUCF Climate

Change Mitigation under

the Kyoto Protocol

Gao Pronove

EcoMarket Solutions

www.ecomarketsolutions.com


Topics

Why is LULUCF important in climate change

How LULUCF projects mitigate climate change

Projects eligible under Kyoto Protocol

Ensuring climate benefits

The Kyoto Carbon Market

Volume, Buyers, Sellers

Project types

Observations


LULUCF & Climate Change

LU - Land Use

LUC - Land Use Change

F - Forestry

LULUCF is a primary component in the

global carbon cycle


How LULUCF projects mitigate

climate change

Conservation of existing carbon stocks

Expansion of carbon stocks

Substitution of biomass for fossil fuels

Increase plant carbon storage

Increase soil organic carbon


Kyoto Protocol

current global response

Entered into force in Feb 2005

156 countries and regional organizations

representing 62% of global emissions

USA and Australia

Established quantified emission reductions for

industrialized countries at -5% of 1990 levels

Includes 3 market mechanisms: ET, JI, CDM


Kyoto Market Mechanisms

Emissions Trading

Trading permits and allowances

Joint Implementation

Trading offset credits from projects amongst

industrialized countries

Clean Development Mechanism

Trading offset credits from projects with developing

countries


Kyoto Markets Overview

Emissions Trading

EU ETS is open, allocations have been made

Joint Implementation

Projects online, moving to Green Investment

Schemes (GIS)

Clean Development Mechanism

Projects online, lower supply than expected


CDM Overview

CDM Project Activity

Sustainable Development

in developing countries

Certified Emission

Reductions

(CERs)

Remove or retire CER

from market (NGO)

Sell CER through market

INVESTORS

Use CER to comply with

present or future GHG

emission commitments


LULUCF Projects under Kyoto

Only afforestation and reforestation;

agricultural sinks are excluded (e.g. soil

organic matter enhancement)

Only lands that were not forests prior to

1990

Host defined - domestic definitions of

forest, afforestation, reforestation apply

under CDM

Project lifetimes: max 30 years or 20

years x 2


LULUCF Projects under Kyoto

Small-scale forestry projects (up to 8,000

tCO2), conditions to be decided in Dec.

Host countries evaluate issues of genetic

modification and alien species

Encourages use of IPCC Good Practices

Guidelines - peer review process

Methodologies by project proponents,

approval by Executive Board


“Actual net greenhouse gas

removal by sinks”

Difference between:

actual project net GHG removal

baseline net carbon stock changes

Leakage


Why invest and implement

LULUCF projects

Legal, ecological or social reasons

Critical watersheds

Forest reserves, conservation areas

Degraded lands

Economic motivations

Lower energy costs

Supply security

Environmental management


Ensuring Climate Benefits

Credible Baseline

Additionality - more than business as

usual

Leakage

Permanence

Temporary (compliance period) vs longterm

CERs (project lifetime)

Monitoring and verification


View of Global Carbon Market


40

Allowance Markets Exploding

(in million tCO 2 e)

35

30

25

20

15

10

5

0

2002 2003 2004 2005

(Jan.-March)


Offset Credits

JI / CDM


Volume Traded Through

Projects: Growing (in million tCO 2 e)

120

100

80

60

40

20

0

1998 1999 2000 2001 2002 2003 2004 2005

(Jan-Apr)


Main Buyers: European

Governments and Firms

In percent of volume purchased From Jan.04 to Apr.05

Japan

21%

USA

4%

Australia

3%

Canada

5%

New Zealand

7%

Gov. Netherlands

16%

Other EU

32%

UK

12%


Supply Concentrated in

Middle-Income Countries

In percent of volume sold from January 2004 to April 2005

Rest of Latin America

22%

OECD

14%

Transition

Economies

6%

Africa

0%

Brazil

13%

Rest of Asia

14%

India

31%


Non-CO 2 Gases Dominate

In percent of volume purchased from Jan.04 to Apr.05

N2O

4%

Other

7%

Landfill Gas

Capture

10%

Hydro

12%

HFC

25%

Wind

7%

Forestry

(LULUCF)

4%

Biomass

11%

Energy

Efficiency

2%

Animal

Waste

18%


$8.00

Prices Depend on Risks

(weighted average prices from Jan. 2004 to April 2005 in U.S.$ per

metric tonne of CO 2 e)

$6.00

$4.00

$2.00

$0.00

ER VER CER ERU


Price Differential

Large price differential:

EU Allowances: 7 up to 22 euros / tCO 2 e (spot and forward

contracts)

Project-based: 3 to 7+ dollars / tCO 2 e (forward contracts

on expected CERs)

Allowances and project-based contracts have very

different risk profiles:

Project and country risks: high in CDM, 0 in allowances

Compliance/regulatory risks: high in CDM, 0 in

allowances

Delivery risks: higher in CDM


Observations

The market is responding to Kyoto-driven

regulatory signals and is now a real compliance

environment

Volumes should increase rapidly for both project and

allowance markets

Important uncertainties still to be addressed

Overall supply / demand picture is unclear:

How much volume will JI/CDM deliver? Issue of project

lead-time

How many allowances will Russia and Ukraine bring to

market?


CDM Market


245 projects are under or after validation process (as of 13 Sep) -

project distribution per country and per project type

Other Latin

American Coutries

Argentina

2%

Chile

4%

onduras

4%

Mexico

6%

7%

Brazil

30%

Other Countries

7%

India

23%

Other Asian

Countries

7%

China

5% Renewable

energy

8%

Philippines

3%

Malaysia

2%

N2O reduction

1%

HFC reduction

2%

Energy-supply

relataed

5%

Hydroelectric

power

21%

Energy

conservation

4%

Transport

0%

Methane

recovery

30%

Biomass

utilization

23%


Projects under or after the validation process mt-CO2

distribution per country and per project type

390 mt-CO2 credits may be delivered until 2012

from projects under or after validation process (as of 13 Sep)

Energy-supply

Energy

Other Latin

American

Coutries

7%

Other Countries

3%

Republic of

Korea

18%

Renewable

energy

5%

Hydroelectric

related

3%

conservation

0%

Transport

0%

Argentina

4%

Mexico

9%

India

21%

power

6%

Methane

recovery

28%

Biomass utilization

7%

Brazil

31%

Other Asian

Countries

4%

China

3%

N2O reduction

24%

N 2

O reduction

26%


CDM Projects in Asia


Projects under or after the validation process

project distribution per country and per project type

98 projects are under or after validation process in Asia

(as of 13 Sep)

epublic of Korea

3%

Sri Lanka

3%

Viet Nam

2%

N2O reduction

Other Asian

Countries

HFC reduction

1%

5%

2%

Energy

conservation

6%

Transport

1%

Thailand

3%

Malaysia

5%

Energy-supply

relataed

6%

Methane

recovery

25%

Philippines

8%

India

Renewable

energy

11%

China

13%

58%

Hydroelectric

power

14%

Methane recovery

18%


Projects under or after the validation process

mt-CO2 distribution per country and per project type

180 mt-CO2 credits may be delivered until 2012

from projects under or after validation process in Asia(as of

Thailand

3%

iet Nam

4%

Malaysia

1%

Other Asian

Countries

2%

13 Sep)

Biomass

utilization

5%

Hydroelectric

power

3%

Others

6%

China

7%

India

44%

Energy-supply

relataed

6%

Republic of

Korea

39%

Methane

recovery

6% N2O reduction

32%

HFC reduction

42%


Officially registered CDM projects (17 as of 20 Sept.)

7.1 million t-CO 2 /year credits will be delivered from CDM

Date Type Host Annex I t-CO2/year

18-Nov-04 Landfill gas to energy Brazil Netherlands 670,133

11-Jan-05 Hydroelectric Honduras Finland 17,800

8-Mar-05 HFC Decomposition India Japan etc 3,000,000

24-Mar-05 HFC Decomposition Korea Japan 1,400,000

23-Apr-05 Hydroelectric Honduras 35,660

23-May-05 Micro hydroelectric Bhutan Japan 524

23-May-05 Biomass power generation India Netherlands 31,374

3-Jun-05 Hydroelectric Honduras 37,466

3-Jun-05 Landfill gas combustion Bolivia 82,680

26-Jun-05 Wind farm China Netherlands 51,429


Officially registered CDM projects (17 as of 20 Sept.)

7.1 million t-CO 2 /year credits will be delivered from CDM

Date Type Host Annex I t-CO2/year

18-Jul-05 Fuel switching Chile Japan 19,438

18-Jul-05 Hydroelectric India 16,374

6-Aug-05 Biomass power generation India 26,300

15-Aug-05 Landfill gas combustion Brazil Japan, UK 664,674

18-Aug-05 Hydroelectric Honduras Italy 37,032

27-Aug-05 Energy efficiency South Africa 6,580

2-Sep-05 Manure management Chile Japan, Canada 78,867

2-Sep-05 Manure management Chile Japan, Canada 247,428

2-Sep-05 Manure management Chile Japan, Canada 84,083

17-Sep-05 Landfill gas to energy Argentina Netherlands 588,889

17-Sep-05 Landfill gas to energy Bangladesh 80,000


Resources

www.earthcouncil.com

www.unctad.org/ghg

www.unfccc.int

Carbon Market

www.pewclimate.org

www.pointcarbon.com

www.environmental-finance.com

Convention & Kyoto

Survival Emissions by Mark J. Mwandosya, Michigan

State Univ Press

http://unfccc.int/essential_background/items/2877.php

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