ALTERNATIVE APPROACHES TO ADDRESSING THE RISK OF
NON-PERMANENCE IN LULUCF ACTIVITIES
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Context
The Subsidiary Body for Scientific and Technological Advice to initiate
a work programme to consider and, as appropriate, develop and
recommend modalities and procedures for alternative approaches to
addressing the risk of non-permanence under the clean development
mechanism with a view to forwarding a draft decision on this matter to
the Conference of the Parties …;
Decision 2/CMP.7 Land use, land-use change and forestry.
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Analytical work
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In response to the decision.2/CMP.7,
BioCarbon Fund in September 2011
initiated analytical work on the topic
in collaboration with Duke University,
USA
Two expert workshops were organized
in Washington DC during November
2011 and April 2012 to discuss the
analytical work
Peer reviewed report was finalized in
November 2012
Print copies are available
Electronic version of the report is
available at the website noted below
https://wbcarbonfinance.org/Router.cfm?Page=BioAltAR
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Alternative Approaches
Tonne year
accounting
Credits are
tied to the
number of
years carbon
stock stays
intact
Buffer and
credit reserves
Credits are set
aside into an
account to
cover potential
reversals
Insurance
Country
guarantee
Allows
commercial
third party
insurance
contracts to
cover reversal
risks
Countries
take
responsibility
for
replacement
of credits for
projects
implemented
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Exceptions for
low risk
activities
Credits
originated
from projects
with minimal
risk of reversal
are notified as
permanent
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Rationale for Alternative Approaches
• Reversal risk profile that contributes to non-permanence can be
assessed
• Risk profile can be used to identify different approaches or their
combinations
• Risk pooling and risk management adequately address reversal risks
• Sellers and buyers can choose from a menu of approaches to address
reversal risks
• Approaches to address reversal risk can be integrated into monitoring
system
• Environmental integrity and economic viability of land use mitigation
activities can be balanced
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Modeling Reversal Risk
Fire event data in Chile from 1964-65
Unintentional Reversal
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Risks: Natural disturbances - Fire and wind
Data: Data on fire events and area affected in Chile
Geographic: Comuna-level fire event data
Time period: Fire events from 1984-85
Loss estimates: Field research data on fire effects
Model: LANDCARB Ecosystem simulation model
Intentional Reversal
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Risks: Conversion to agriculture; Project abandonment
Data : Yield (tonnes/ha/yr) and price ($/tonne) data of A/R and commodities of
alternative land use; site productivity; other economic factors
Time period: Cost and revenue data annualized over a 40-year period
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Tonne Year Approach
• Credits are issued incrementally over time upon meeting
permanence requirements
• Features
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Credits are issued for a portion of carbon pools that meet permanence requirements
Avoids the need to reclaim credits after they are issued and subsequently reversed
Project length and permanence influence the number of credits.
Translates into lower NPV relative to other approaches
No residual liability for credits, e.g. credits are not issued before permanence
requirements are met
• Implementation issues
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What is the project length?
What is the permanence period? e.g. permanence period of 100 years result in issuance of
1% of permanent credits per year from cumulative carbon stored
Whether the approach is viable for implementation?
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Variables Influencing Tonne Year Approach
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Permanence period (N) in years; Permanence factor = (1/N)
Annual carbon storage (tonnes CO2)
Cumulative tonne years of carbon storage = [n*(n+1)]/2*Annual carbon stored
Permanent emission reductions = Cumulative tonne years * permanence factor
Example : Tonne year with a permanence period, N = 100 years (permanence factor = 0.1)
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Buffer Approach
•
Buffer set aside of a percentage of credits issued in a separate account to address
risk of reversal
•
Features
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–
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•
Buffers are generally effective in addressing unintentional reversals.
Project length and withholding rates affect buffer integrity and financial return.
Buffer pool through aggregation can reduce the risk of buffer failure.
Buffer performance in relation to intentional reversal depends on replacement
requirements
Implementation issues
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What percent of buffer to set aside?
How to manage buffer to avoid being overdrawn?
What types of reversals are to be covered (unintentional, intentional, both) ?
What scales of activity are to be considered - project or program level?
How to replenish buffer if it runs low?
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Variables Influencing Buffer Approach
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Entities: Project/program implementing entities
Risk: Type and magnitude of reversal risk influence buffer size
Project stage : Risk of loss is low in early stages of forest growth translating in a
small buffer size
Use: Can be used as stand alone or in combination with other approaches, e.g.
Insurance, guarantee
Project period: Short duration projects may need small buffer amounts relative
to projects of long duration
Withholding rate: Periodic risk screening/assessment needed to assess the
adequacy of buffer withholding rate
Management: Project specific buffer vs. program or system wide buffer may have
different management needs. Management of pooled buffer may be cost
effective
Robustness: Buffer approach is effective against unintentional reversals.
Measures to deal with the risk of intentional reversals need to be adopted to
avoid run on buffer due to intentional reversals
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Effectiveness of Buffer Approach to Intentional Reversals
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Insurance Approach
•
Premiums are paid to an insuring entity that guarantees against reversal risk by
replacing credits affected by reversal.
•
Features
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•
Liability for loss transferred to a third-party
Covers one or more categories of unintentional risks and loss magnitudes
Unlikely to cover intentional reversal risks
Premiums linked to type of risk, deductible and loss limits
Implementation issues
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What are the enabling factors for use of insurance ?
What characteristics of insurance products suit project/program contexts?
How to get insurers into the market?
What measures are needed if insurers withdraw from market, cancel policies?
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Variables Influencing Insurance Approach
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Entities: Third parties that collect premium to underwrite coverage
Coverage: Can be full value replacement, catastrophic loss limit; buffer
insurance
Use: For use as stand alone or in combination with other approaches, e.g.
buffer, guarantee
Project stage: Projects in early stage may have lower premium as magnitude of
loss is low
Project period: Premiums increase with project period as risk of loss increases
Premium and deductible: Depend on multiple factors influencing risk
Policy length: Insurance policy is short - annual or periodic
Policy renewal: Premium and deductible are subject to review and revision at
policy renewal
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Host Country Guarantee
•
Host country acts as a fiduciary backstop to address reversals unresolved at the
project or subnational levels.
• Features
– Host country or an authorized third party can guarantee or backstop project against
reversal risks
– Improves flow of credits to projects as risk is shared by host country or authorized entities
– Can be combined with other approaches – buffer, insurance
– Lowers reversal risk impacts on projects
– Institutional failures or lack of funds can prevent a country from realizing its guarantee
• Implementation Issues
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What factors influence host country guarantee?
What are ways to promote host country capacity to support guarantee?
How to ensure the credibility of host country guarantee?
How can external guarantees complement host country guarantee – e.g. Partial risk
guarantee?
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Variables Influencing Host Country Guarantee
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Entities: Host country or third parties that provide similar guarantee
Coverage: Losses beyond those covered under other approaches
Risk profile: Projects with diverse risk profile maximize the effectiveness of
guarantee
Policy and legal: Existence of policies and legal measures to implement guarantee
Capacity: Institutional and financial capacities needed in support of guarantee
Monitoring: National accounting and monitoring systems needed to track
performance of activities in order to trigger guarantee against reversal risk
Implementation: Terms and conditions that support implementation of
guarantee
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Exceptions to Low Risk Activities
• Categorical exceptions for certain low risk activities result in
issuance of permanent credits
• Features
– Risk analysis based on historical data to demonstrate low risk
– Exceptions are defined based on a range of criteria - project type, risk
profile, geographic variables etc.
– Low risk of activities to be confirmed through risk screening tools and
independent audit
– Low monitoring burden for activities that are identified as having low risk
• Implementation issues
– What are the criteria for defining low risk activities?
– What are the safeguards to minimize the impact in case risks materialize,
e.g. management plans for addressing relevant risks?
– How can national guarantee include provisions governing exceptions for low
risk activities?
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Prevailing Approaches to Address Non-permanence risk under UNFCCC :
Case of Carbon Capture and Storage (CCS)
Modalities for Addressing Non-permanence Potential Applicability to LULUCF context
risk
Placement of 5% of credits in a reserve
account (buffer)
Risks may require buffer withholding rates,
customized to the risk.
Permanence after 20-year monitoring
period
Monitoring periods for forests are typically longer
than 20 years.
Host country guarantee of reversals in
excess of the reserve (optional) or Annex I
country responsibility for reversals if host
country does not guarantee
Host or Annex I country guarantee may be feasible if
countries assess risks, their capacity to back risks, and
to determine type of guarantee to back the project.
Pool reserve across multiple projects or
projects within the umbrella of an ER
program
Diversification by pooling credit reserves from
projects may make them collectively more resilient
than managing them separately.
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Comparison of Approaches
Approach
Nature of
Liability
Addressing
Unintentional
risks
Temporary
Credits
(tCERs/lCERs)
Buyer liability
Yes, as temporary Yes, as temporary Lower market
credits
credits
value, but no longterm liability
Tonne-year/
Rental
No residual
liability
Buffers
Project must
contribute to
buffer
Yes, upon
meeting
permanence
criteria
Yes, depends on
size of buffer
Yes, , upon
meeting
permanence
criteria
Variable, depends
on reversal and
replacement
provisions; and
back up in case of
default
Insurance
Project must
purchase
insurance;
Insuring entity
liable
Sovereign or
third party
liability
Yes, depends on
the capacity of
insuring of entity
Generally not
cover intentional
risks
Host Country
Guarantee
Exceptions to
low risk
activities
Addressing
Intentional risks
Risks to Project
Slow to credit, but
no long-term
liability
May require
replenishment of
buffer
Limited coverage
or poorly
capitalized insuring
entity could
prevent repayment
Potentially
Policy and legal
Low as risks are
effective,
provisions to limit shared by host
depending on
the risk of
country or third
type of guarantee intentional risk
part guarantee
None for
Additional
certain low risk safeguards
categories
required
Generally not
None - provided
cover intentional projects comply
risks ON NON-PERMANENCEwith relevant
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provisions
Risks to System
Feasibility
Little or none longterm (default
scenario assumes
loss of carbon)
Low economic
viability
Limited
feasibility on
financial
grounds
Limited
feasibility on
financial
grounds
Feasible in
situations with
institutional
capacity to
manage
effectively
Buffer may be
overwhelmed
Moral hazard;
poorly capitalized
insuring entity
could prevent
repayment
Providing
guarantees that
are difficult to
implement
Feasible with
strong
financial and
legal
institutions
Feasible with
strong policy,
legal and
institutional
capacity
Providing
Limited to
exceptions for
situations with
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activities that have very risk
substantial risks
Approaches Adopted in Different Standards
Standard
Intentional v.
Unintentional
Reversals
Reversal
Mechanism
Mechanism Details
Minimum
Contract
Period
VCS
No Catastrophic vs non- Pooled Buffer Account
catastrophic used
Projects are required to guard against reversals by withholding 10%-60% of their
credits in a Pooled Buffer Account… based on project-specific risk evaluation…
using… project-specific risk factors (e.g., clarity of land tenure, local deforestation
pressure, financial viability). …
20–100 years
CAR
Intentional
Implementation Agreement
Project CAR credits account debited to compensate for “avoidable” reversals
(negligence, gross negligence, or willful intent).
100 years
Unintentional
CAR Pooled Buffer Account
Projects required to guard against “unavoidable” reversals (fire, pests) by withholding
a certain percentage of their credits in a Pooled Buffer Account… based on projectspecific risk evaluation
ACR
Distinction
Pooled Buffer Account
Similar to VCS including use of VCS risk analysis and buffer tool. a) Intentional
reversals- must all be replaced by the project entity; b) Unintentional reversals are
covered by the buffer pool like an insurable risk, though project must re-establish
buffer after conversion.
40 years, optout allowed if
credits replaced
Plan Vivo
No Distinction
Buffer Account
All projects must withhold minimum of 10% of credits. Must (1) undertake
comprehensive analysis of reversal risks, (2) implement risk management and
mitigation measures, and (3) withhold credits in a buffer to compensate for
unexpected losses based on a project-specific assessment of risks.
Not specified .
CDM
No Distinction
Temporary credits for A/R
project activities
… A/R projects are issued either temporary certified emission reductions (tCER)
Credits expire
…that expire each subsequent commitment period (e.g., after 5 years) and must be after 5, 30-60
replaced. lCERs expire after crediting period of either 30 years or 60 years and
years
require full replacement.
No Distinction
Host Country Guarantee for Introduced in the context of CCS activities; either host countries (if accepting
Carbon Capture and Storage obligation to address reversals) or Annex 1 Parties holding CERs issued by the
project (if host country does not accept obligation) must address reversals
unmitigated by project participants.
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20 years after
last crediting
period
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Approaches for Addressing Reversal and Scale
Project
Sub-national
Project
•Buffer
•Insurance
•Tonne-year
•Temporary credits
National
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Sub-national &
National
•Pooled buffers
•Insurance
•Host govt. guarantee
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Policy Insights
• Location matters
• Scale matters
• Diversification matters
• Type of risk matters
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Extensions of Analysis
• Improved data on risk profiles
– Multiple scales of coverage
– Risks from different disturbance types
• Other LULUCF examples
– REDD
– Agriculture
• Extension to multiple land uses
– Landscape contexts – REDD, A/R, SFM, Agriculture
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Thank you
RAMA CHANDRA REDDY
EMAIL: RREDDY1@WORLDBANK.ORG
FOR MORE INFORMATION ON THE BIOCARBON FUND, PLEASE CONTACT:
ELLYSAR BAROUDY
EMAIL: EBAROUDY@WORLDBANK.ORG
WWW.CARBONFINANCE.ORG
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Additional Slides: Examples
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Example: Modeling Unintentional Reversal
Ratio of reversals to credits issued in a 20,000 ha project implemented
over 40 years without approaches to address reversal
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Example: Buffer Approach
Mean buffer balance as percent of credits
earned in a 20,000 ha project with 10% buffer
Mean buffer balance as percent of credits
earned in a 20,000 ha project of 40 year
duration with 10% buffer
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Example: Insurance
Insurance coverage of a 20,000 ha project of 40 years length – full value
coverage, catastrophic loss limit, and buffer insurance
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