Time running out for CDM forestry

Time is now short for forestry projects to deliver any worthwhile volume of carbon credits to the CER market by 2012. While the bottlenecks that have held back the afforestation and reforestation (A/R) sector in Kyoto’s Clean Development Mechanism (CDM) are now mostly resolved, it may be too late to help developed nations in their efforts to meet Kyoto emissions reduction targets.

This all comes at a time when the vital role of forests in the battle to halt climate change has never been clearer. Loss of forests is responsible for up to 20 per cent of the greenhouse gas emissions said to cause global warming. While this stark revelation has caused a clamour for new carbon markets around avoided deforestation, and justifiably so, the argument for reforestation of already-cleared lands has also never been stronger.

Yet four years before the end of the 2008-12 Kyoto period the A/R sector is still to take off, beset by long-standing constraints in the supply of carbon credits and major limitations on demand. Much of the project interest in this sector has switched to the voluntary carbon market in the hope of an easier path to project approval and credit verification.

According to data collated by the UNEP Risoe Centre, there were just 27 CDM afforestation and reforestation projects at various stages of development as of early October 2008 out of a total project pipeline of nearly 4000. No CERs have yet been issued and none are likely anytime soon. Only one A/R project has so far achieved registration with the CDM Executive Board, the Pearl River venture in Guangxi, China, one of the World Bank’s BioCarbon Fund portfolio of 16 forestry projects.

Beyond the standard bottlenecks in the CDM validation and registration process come the further complications of forestry activity. Rules for the sector were only finalised in 2006, putting it well behind the industrial sectors of the CDM, while the complexity of project methodologies needed to address extra risks and verification requirements in carbon bio-sequestration pushes out the project approval process further. On top of that, A/R CERs are not permanent as are other Kyoto offset credits. They are expiring, with a complex set of rules surrounding crediting periods and re-verification.

Because of these factors, price indicators are vague and set to stay that way – further inhibiting new project development plans. The quirks of the forestry CER crediting system mean credits can only be verified every five years. Project developers will get just one chance to have credits issued before 2012 and will wait until reductions mount up. “Most people will go for issuance much closer to the end of the commitment period to maximise the generation of CERs,” said Ellysar Baroudy, manager of the BioCarbon Fund. Pearl River is on track for its projected 340,000 CERs by 2012, Baroudy says.

Of the two classes of A/R CER credits, it is only temporary CERs (tCERs) that are of any real interest to buyers. tCERs are designed to generate for only one commitment period at a time. But at least this offers potential for the current Kyoto period. There is no certainty beyond 2012 anyway, as with many aspects of carbon markets which await a new global climate treaty.

Observers in the sector quote World Bank estimates in the range of $US3 to $4 for tCERs with little to suggest prices would get any higher – lower, if anything.
This is only a fraction of the prices enjoyed for permanent CERs, currently from $12 to $20 in forward purchase agreements and trading around $25 mark in the secondary issued market. What’s more, there is no price premium for CDM forestry over the voluntary market to give incentive to developers. VERs from A/R projects are now averaging $5, according to New Carbon Finance, and $8 or more when accredited to high standards.

“Bleak” best describes the outlook for CDM forestry, says Johannes Ebeling, a senior consultant with EcoSecurities. While acknowledging the supply constraints, he points to the demand side as the real problem. Not only have A/R offsets been excluded from the EU ETS up to 2012, denying access to the world’s biggest carbon market, the latest blueprint for the 2013-20 phase of the scheme also rejects them. “It’s not a final decision, and we hope it can be reconsidered,” Ebeling said.

But A/R credits are for the moment off the radar for the 7500 complying emitters in Europe, leaving only national governments in Annex 1 countries who could consider them. There have been suggestions Japan and Norway may be interested buyers but, despite offering low-cost Kyoto compliance, firm buying interest is unlikely to emerge until supply is clearer.

The outlook is not all negative, however. There are now 11 approved A/R project methodologies, including the first consolidated version making it much easier for new entrants. Martin Schröder, head of forestry at project validators TÜV SÜD in Germany, believes there is hope for a pick-up in activity. Growing experience among project developers and the availability of a consolidated methodology, along with a range of tools to aid project design, has significantly streamlined the approval process, Schröder says. Baroudy agrees, and says all BioCarbon Fund projects should be validated within a year. She’s hopeful of a couple achieving registration by the end of 2008.

The problem, of course, is that the sector has arrived late to this point and there is only four years before the end of the Kyoto commitment period. Projections from project design documents suggest a CER flow of up to 13 million tCERs by the end of 2012, but such numbers are highly unlikely. Schröder expects five to ten projects at most might achieve registration in the next 12 months but is doubtful any will be able to deliver significant CER flows by 2012. “There’s not a lot of time for the trees to grow and this is not helping the sector get more attractive,” he said.

Baroudy maintains there is a future for afforestation and reforestation in UN markets beyond 2012, most likely within integrated projects complementing emerging forestry activities like avoided deforestation and managing soil carbon. “A/R has been overshadowed recently by REDD but I don’t think it will be elbowed out,” she said. “A/R will stay on the map post 2012 - there is a shift in the discussions to being more inclusive, broadening the scope of activities you can have in this sector.”