The Role of Sustainable Land Management for Climate ... - CAADP

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Transaction costs can prohibit the viability of many projects, especially small ones. Most
project developers responding to a recent study of the cost of AFOLU mitigation projects
indicated that the cost of registering carbon units with the CDM were greater than $200,000,
roughly twice the cost of certification in voluntary markets (Baalman and Schlamadinger 2008).
According to the project developers interviewed, the high costs of CDM registration are due
largely to the need to use expensive specialists to develop methodologies and project design
documents, because of the complexity of the issues and procedures involved (Ibid.). Among the
complex issues that must be addressed are the needs to show “additionality” of the investment
(i.e., that it increases carbon sequestration relative to what would have occurred in absence of the
project) and that “leakages” (shifting of carbon emissions to other locations as a result of the
project) are avoided. Simplified procedures are allowed for addressing these issues for small
scale projects (i.e., use of default values or assumptions to address them), but even so, the main
methodology used for small scale A/R CDM projects typically requires completion of a 30 page
document, comparable to large scale methodologies in other sectors (Ibid.). Besides the costs of
complying with such requirements, lack of availability of qualified experts to assist with
developing project methodologies and plans, or to validate and verify project plans and
implementation, can also be a major constraint, especially in SSA.
Because many of these transaction costs are relatively independent of project size, they
result in higher average costs per unit of emission reduction in smaller projects. According to
one study, transaction costs of CDM projects range from $1.48 per tCO 2 e for large projects to as
high as $14.78 per tCO 2 for small projects (Michaelowa and Jotzo 2005). With prices for CERs
falling below 10 Euros ($12.70) in late February, 2009
(http://www.carbonpositive.net/viewarticle.aspxarticleID=1472), it is clear that such high
transaction costs make many potential CDM projects non-viable. As a result, few new CDM
projects are being considered in the present depressed price environment (Ibid.).
The problem of high transaction costs relative to CER prices is worse for A/R projects
because A/R projects do not qualify for regular CERs, due to the impermanence of the emission
reductions achieved (since planted trees may be cut or destroyed by fires). Two separate types of
CERs are applied to A/R projects, either a temporary CER (tCER) or a long-term CER (lCER).
Current tCERs expire at the end of the current commitment period in 2012, while lCERs expire
at the end of the project crediting period (e.g., 30 years) (Jindal, et al. 2008). Neither type of
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