Community guidelines for accessing forestry voluntary carbon ... - FAO

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Chapter 6: Identifying, managing and quantifying risks validity – they expire after five years. After they expire, the holder of the tCERs (usually the registry of an industrialized country with emission reduction commitments under the Kyoto Protocol) has to either buy new credits or reduce its emissions directly. Industrialized countries with emission reduction commitments do not face this issue with non- A/R CERs and this is one of the reasons why the demand for credits from A/R CDM projects is depressed, and why the growth of forestry projects under the CDM has been slow. The permanence risk is addressed differently under the VCM. Investors in the VCM do not want two different types of credit. They want permanent credits which are fully ‘fungible’ (inter-exchangeable) with credits from other sectors. VCS therefore developed its “AFOLU nonpermanence risk tool”. It is the most powerful and widely accepted approach to ensuring fungibility of credits from forestry VCM projects and can be downloaded from: http://www.v-c-s.org/sites/v-c-s.org/files/ AFOLU%20Non-Permanence%20Risk%20Tool%2C%20v3.1.pdf This tool outlines procedures for analyzing the risk of non-permanence (reversal) and determines what proportion of the carbon benefits are exposed to this risk. This proportion of carbon credits are put in a ‘buffer’ that provides insurance against the risk of reversal. However, if these risks do not occur as the project progresses, some credits will be released from the buffer and can then enter the market. Some risks are permanent and therefore a certain proportion of credits will never be released for sale. The minimum buffer is always 10 percent, regardless of the risk assessment of the project. Projects can also undertake specific activities to mitigate risk – for instance by putting a good fire detection system in place – which will reduce the proportion of credits that need to be placed in the buffer. The tool helps project proponents, implementing partners and VVBs to assess the risks and determine the appropriate changes to the buffer. The tool sets a very high standard. This is necessary considering the level of investment in the VCM and the importance of the VCM to retain credibility as a valid approach to climate change mitigation. However, it 141
Community guidelines for accessing forestry voluntary carbon markets does add to the complexity of undertaking forestry VCM projects, and therefore adds to the transaction costs for project developers. There are various types of risk to consider that may affect a forestry VCM project. The VCS has categorized these types as follows: • Internal risks (Table 6): risks originating from the project design; • External risks (Table 7): risks relating to social, economic and political factors beyond the control of the project managers; and • Natural risks (Table 8): environmental hazards. Internal and external risks are quantified based on risk ratings and possible mitigation measures, while natural risks are assessed by a combination of the likelihood of the hazard occurring and the severity of its impact on carbon credit generation. The alternative to using the AFOLU non-permanence risk tool of the VCS is to negotiate the price of credits directly with investors. Risk is a major factor in the price that investors are willing to offer. However, if an objective and widely-recognized tool such as the VCS tool is not used, there is increased potential for disputes over liability in case of actual reversals or project failure. It is up to the project developer and investor together to decide how to deal with risk. However, it is clearly in the interest of smallholders and local communities to use the VCS tool 38 to level the playing field in negotiations with investors. Some risks may lead to permanent destruction of the capacity of the project area to generate carbon credits, for instance, in case of a landslide. Other risks, such as some types of forest fires, may only temporarily reverse carbon uptake as the forest may regenerate over time in the same area. Some trees can even withstand fire and may 38 The version used here is version 3.1 from 1 February 2012. Always verify that that is indeed the most up to date version! 142
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RAP PUBLICATION 2012/16 Community g
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Foreword The impacts of climate cha
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Table of Contents Foreword iii Acro
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List of Boxes Box 1: Grouped projec
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SFE SFM SOC SOP UNFCCC USAID VCM VC
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Afforestation, Reforestation & Re-v
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Climate Change Adaptation 5 Adjustm
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minimum threshold values at maturit
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(PD) is an official term under one
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obtaining and maintaining project r
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Community guidelines for accessing
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1 Forests and climate change 19
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ANNEX II Annex II: VCS PD template
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ANNEX III Annex III: Example outlin
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ANNEX III 3.4.5. Non-timber forest
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ISBN 978-92-5-107322-3 9 7 8 9 2 5
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