sinks in the cdm: assessment of carbon accounting options
DESCRIPTION
XVIII Meeting of the Subsidiary Body for Scientific and Technological Advice Bonn (Germany) 4-13 June, 2003. Side event organized by the Swiss Delegation 6 June 2003, 6:00-8:00 PM. Sinks in the CDM: Assessment of Carbon Accounting Options. Lucio Pedroni* - PowerPoint PPT PresentationTRANSCRIPT
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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