Voluntary Carbon Markets

Management of Kyoto-Compliance

Anna Burzykowska, LL.M.
YGT European Space Agency
Washington D.C.

Within the glossary of terms, bodies and working groups associated with the United Nations Framework Convention on Climate Change (UNFCCC) negotiations is a well-known reference to satellite Earth Observations. The UNFCCC Subsidiary Body for Scientific and Technological Advice (SBSTA) annually endorses the goal of cooperation in “systematic observation” of the climate system to identify causes and effects of global change. The Global Climate Observing System (GCOS) secretariat of the World Meteorological Organization (WMO) and other specialized agencies and organizations participating in WMO’s Climate Agenda are in charge of on-going research and implementation of “Essential Climate Variables” needed for climate monitoring and prediction, many taken from Earth observations.

The role of Earth Observations in the process is no less important to practical management of statutory and emerging voluntary “carbon markets.” This is because effective mapping and monitoring of carbon stored in land-based ecosystems is key to any mechanism that compensates countries for reducing their greenhouse gas (GHG) emissions through land use and forestry.

Figure 1

Figure 1 This radar Envisat acquisition highlights Indonesia’s Kalimantan region in the southern part of tropical Borneo in Southeast Asia. Borneo, the world’s third largest island, was once covered in dense rainforests. However, in the 1980-1990s, these forests were cleared for their timber at an alarming rate. Soon after, the global demand for palm oil increased and what was left of Borneo’s forests started being cleared for palm plantations (visible as square green patches). This image was acquired on April 23, 2009, by Envisat’s Advanced Synthetic Aperture Radar (ASAR) instrument. Credit: ESA Envisat www.esa.int.

The UNFCCC negotiation block called LULUCF (land use, land use change and forestry), which treats forests and other types of vegetation as global carbon stocks, provides for a wide array of activities that could mitigate carbon emissions. Because the international finance sector has established certified carbon emissions reductions as a traded commodity, those activities can also generate carbon credits to be further exchanged in the international carbon market.

As much as one quarter of the CO2 mitigation potential may lie in afforestation and reforestation, preventing deforestation and forest degradation, cropland management, grazing land management, revegetation, grasslands and agroforestry. Therefore, it is widely expected that future arrangements on climate change will maximize the role of LULUCF in the climate agenda by providing “large, stable, predictable and long-term financial flows” to the carbon market stakeholders; hence, a “large, stable, predictable and long-term” marketplace for geo-referenced data is also forthcoming.

The necessity to use the remote sensing techniques and other geospatial tools to help shape carbon markets has been clearly reflected within the framework of the UNFCCC process. The International Panel on Climate Change (IPCC) Guidelines for Agriculture, Forestry and Other Land Uses (AFOLU) of 2003 is the most important and widely recognized material developed to assist in the implementation of carbon sequestration and carbon conservation projects. The specific methodologies based on those guidelines are developed under the UNFCCC mechanism compliant to Kyoto Protocol through the Clean Development Mechanism (CDM) and Joint Implementation (JI)), and within the voluntary carbon markets outside Kyoto Protocol, especially through the strategy usually referred to as “Reducing Emissions from Deforestation and Forests Degradation” or REDD.

Despite developing dedicated instruments, procedures and methods, the volume of transactions in this area is relatively small. The parties to the Kyoto Protocol limited their certified CO2 emissions reductions to projects pertaining to afforestation and reforestation (A/R) only, thus excluding carbon sequestration in soils, non-forest biomass and agricultural land use, or carbon conservation through avoided deforestation. Moreover, the Kyoto-compliance carbon market for LULUCF is marginal—under the Protocol it does not exceed 1% of the total carbon credits traded within the market.

The change for the LULUCF negotiation block is, however, forthcoming, and it is expected from three directions. First, a variety of the land-based carbon credits are welcomed in the voluntary carbon market. Second, the learning-by-doing experience from design, monitoring and verification of the forestry CDM/JI projects is growing. Third, innovative carbon financing can really make a difference to the least-developed countries in achieving their abatement potential, especially if it will help them reform the CDM/JI system.

The Role of the Voluntary Carbon Market

The international finance sector has established certified carbon emissions reductions—carbon credits—as internationally traded commodities. As such, carbon transactions take place in the “Kyoto-compliance” and “voluntary” carbon markets. Currently most of the LULUCF-related credits are outside the Kyoto Protocol, mostly because land use and forestry are barred from the EU Emissions Trading System. Therefore, the credits and offsets from the LULUCF projects are traded primarily in the voluntary market, which initially emerged as an idea for “corporate and social responsibility” for climate change mitigation actions, but slowly turned into an alternative to Kyoto regulations.

Figure 2 Satellite image showing deforestation in Northwest Brazil (Rondonia) is an example of a multi-temporal product extract based on the combination of two ERS acquisitions (April 1996) showing radar backscatter (green) and radar backscatter changes over time (blue) over a region of active deforestation. Deforestation patterns are clearly visible from the structure and texture of the backscatter image layer in the Southeast portion of the image extract. This product extract has been designed and processed by Gamma Remote Sensing (CH). Credit: ESA/Gamma Remote Sensing.

The voluntary carbon market represents only 2.9% of the total volume of the carbon market and 0.6% of its value ($700 million USD in 2008); however, despite the relatively small volume, the array of activities producing carbon credits is quite extensive. The emissions reductions based on the avoided deforestation and forests degradation (REDD) has been, for example, firmly established there. Soil carbon sequestration has been included in the biggest U.S.-based international voluntary emission trading system, the Chicago Climate Exchange (CCX), and the California Action Reserve—the regional carbon offset market in the Western United States—comprises project types from agriculture to forestry. In 2004, as much as one-third of the voluntary market transactions were in the land-based sector, mainly within forestry. The volume of transactions fell in 2007 and 2008 to 16% and 11% respectively, but the market grew in size (it doubled in 2008) and the amount of certified emissions reductions, as well as the number of registered projects, has increased.

This trend will be further reinforced after the land use carbon credits are accepted under the future U.S. emissions trading scheme, the cap-and-trade system. The American Clean Energy and Security Act (formerly called the Waxman-Markey proposal) passed in the U.S. House of Representatives on June 26, 2009 and pending Senate's approval, calls for carbon offsets from afforestation, reforestation and other biological sequestration, including emissions reductions from forestry conservation in developing countries. As a result, it is likely that those voluntary markets will eventually pave the way to carbon sequestration/conservation in soils and forests as a part of the international carbon market in the post-Kyoto regime to be negotiated in Copenhagen.

Building up the voluntary carbon market capacity has other important advantages. The Kyoto system is very conservative in terms of LULUCF. It regards, for example, the REDD strategy as yet insufficiently developed to become extensively financed by market mechanisms. There are good reasons for this skepticism: the land-based CO2 mitigation (sequestration) strategy has to deal with the problem of leakage (or displacement of emissions to another location to avoid regulation) and non-permanence of emissions reductions, as well as with fears of “flooding the market with cheap carbon credits,” which would distract attention from regulating fossil fuel and other heavy industry sectors. Therefore, many LULUCF activities are simply not eligible for CDM financing under Kyoto. There is also little incentive to do the cumbersome research and preparations that are required for Kyoto-compliant CDM projects, which are generally regarded as expensive, too complicated and highly rigorous.

Voluntary market transactions, on the other hand, are much more inclusive when it comes to the types of supported activities, as well as much more flexible with regard to project design and implementation (although the carbon credits may be sometimes of a lesser value, depending on the type of activity). Therefore the voluntary carbon market grew not only as a place where the majority of interest in land-based carbon credits accumulated, but it consequently is also expected to contribute to the reduction of the complexity of the CDM methods. More so, the voluntary market has consequently become the best space for testing new products, services and methodologies in project design, monitoring and verification. The CCX, for example, has recently approved its first forestry carbon offset plan using innovative remote sensing monitoring techniques: aerial LIDAR and CIR remote sensing imagery. In effect, if the market potential of LULUCF is going to be shaped by an increasing confidence in emissions reductions (largely achieved by new science, technology and innovative remote sensing applications), these are the voluntary markets that will yield important results for the inclusion or exclusion of new methodologies and protocols for LULUCF projects implementation.

The most recent 2009 assessment of the CDM, the World Bank’s annual report on state and trends of carbon markets, has explicitly mentioned that the know-how from the U.S. voluntary domestic emission reduction schemes—especially under the California Climate Action Reserve (C-CAR) or the Voluntary Carbon Standard (VCS)—is seen as a guideline for addressing the problems of the permanence of emissions reductions in soils and biomass, and of simplifying the methodology for Kyoto-compliance transactions in the forestry sector.

Learning-by-doing Experience

The most recent UNFCCC SBSTA meeting in Bonn, June 1-12, 2009, noted that the experience from real-life forestry projects is paramount for the REDD strategy to be included as an outcome of 2009 UNFCCC talks in Copenhagen. Significant progress in using remote sensing methods has been possible thanks to the lessons learned from the REDD projects run by, among others, the World Bank BioCarbon Fund, GOFC-GOLD, Tropical Forest Group and national forest research organizations, to name a few. The World Bank’s BioCarbon Fund (BCF), for instance, submitted to SBSTA a review of the methodology developed for the project in Madagascar dedicated to estimating and monitoring GHG emissions from mosaic deforestation. The Institute of Applied Ecology in its report to UNFCCC indicated improvements in using Earth observation technologies in forestry projects implemented in Peru, Congo, Madagascar, Indonesia, and Papua, New Guinea, but pointed to poor historical data for many tropical countries (of which India and Brazil are prominent exceptions) and to problems with time series consistency between the data from different satellites and sensors over time.

Figure 3 One of Russia’s largest reservoirs, the Tsimlyansk, is highlighted in this Envisat image acquired on September 27, 2008, over southern Russia. The reservoir is located at the great bend of the Don River near the town of Tsimlyansk in the province of Rostov. Many agricultural crops can be seen growing along the river, including wheat, rice, cotton, alfalfa, grapes and other fruits and vegetables. The darker brown areas around the reservoir indicate where crops have already been harvested. Earth observation satellites are used in agricultural monitoring for mapping and classifying land use, crop type, crop health, change detection, irrigated landscape mapping and crop area mapping. Credit: ESA.

The lessons learned within the Kyoto market, on the other hand, are at least twofold. The CDM/JI projects assessment by the UNDP (U.N. Development Programme) revealed that the costs of forestry projects monitoring and verification can be very high, in some cases up to 25% of project cost. This is because the accuracy levels are very high and the approach toward potential deficiencies in data is conservative.

In terms of CDM/JI projects planning, by August 2008 over 90% of the approved afforestation/reforestation projects were based on the historical land use data for estimation of land eligibility and the emissions reduction baseline. As a result, the Global Environment Facility (GEF) – the financial mechanism of the UNFCCC governed by the World Bank – indicated the need for wider accessibility of scientific research and GIS for the CDM/JI decisions planning.

The 2008 release of the historical Landsat imagery has been a major breakthrough in addressing those needs; nevertheless the basic information on land categorization for potential carbon stocks is still lacking in developing countries, especially in Africa, because the evidence of historical land use is often not available to them or is difficult to obtain, especially over tropical regions with a heavy cloud cover. It is expected that only the upcoming FAO Forest Resource Assessment (FRA 2010) will provide the first consistent global time-series of satellite data using imagery from MODIS (at 250-m resolution) and Landsat satellites from 1975, 1990, 2000 and 2005.

Innovative Carbon Markets Financing in Developing and Least-developed Countries

The UNFCCC has repeatedly raised the concern that between one-half and one-third of carbon abatement spending between 2000 and 2050 must occur in developing countries, but the immaturity of their carbon markets—the poor supply of offset credits under the CDM—poses a problem in achieving their mitigation potential. To overcome that difficulty, in 2007 the World Bank and its Carbon Finance Unit (CFU) introduced innovative financing mechanisms, which in the short term are aimed to buffer the low confidence in carbon transactions with those countries, help them to overcome barriers for CDM project development and implementation, and enable transfer of technologies and know-how.

The vehicles for those transactions are carbon funds managed by the World Bank, such as Prototype Carbon Fund, Netherlands JI and Netherlands CDM Facilities, Community Development Carbon Fund, BioCarbon Fund, Italian Carbon Fund, Spanish Carbon Fund, Danish Carbon Fund, the Umbrella Carbon Facility, Carbon Fund for Europe, the Forest Carbon Partnership Facility, and the Carbon Partnership Facility (CPF).

The CFU uses resources from those funds to set up projects within the CDM/JI framework, which would not normally be eligible for loans or commercial lending due to high transaction risks. Then the World Bank purchases carbon credits on behalf of the fund contributor, becoming a source of carbon market revenues in developing countries.

The Bank’s Carbon Finance Unit also has a role in capacity building. The Forest Carbon Partnership Facility, for example, dedicated $185 million USD to establish “readiness mechanism” for three purposes: reference scenarios for avoiding deforestation in 37 developing countries; national monitoring, reporting and verification systems for emissions and emission reductions; and national REDD strategy.

The CFU, in addition to that, also “systematically observes the CDM regulatory process and contributes to bottom-up rulemaking for CDM by interpreting regulatory decisions, providing input, and developing new methodologies, thus bridging the gap between general guidelines and methodologies with their application to real-world projects.” The openness of the CFU to new methodologies can generate a significant potential for the GIS community and facilitate a number of practical contributions of the remote sensing technology to the UNFCCC process, especially if it delivers novel but universal results to tweak the nuts and bolts of the Kyoto system.

New Science – New Opening for Carbon Markets

There is a growing dedication on behalf of space agencies around the world to introduce new science and technology and new global-scale research projects dedicated to land use and forestry, which will eventually allow more transactions in carbon markets with higher certainty of emissions reduction. The new remote sensing products and applications are forthcoming specifically to tackle the need for global, regional, and project-wise carbon accounting identified through the LULUCF negotiation block.

For example, in 2008 ESA released its GlobCover application, which provides the first global land cover map for 2004-2006 updated bi-monthly and based on ENVISAT MERIS data with 300-meter resolution. Currently developed forestry projects such as ESA/JRC TREES3, FAO FRA 2010 or NASA Landsat Pathfinder Humid Tropical Deforestation Project will be a novel and highly anticipated source of data on global emissions from deforestation, but no sooner than in 2010.

In terms of new sensors being developed, after 2013 the high-resolution hyperspectral, SAR and LIDAR satellites will open new chapters for remote sensing carbon accounting from space (due to NASA-planned decadal survey missions (DESDynI, HyspIRI and LIST), and a candidate ESA Earth Explorer Mission (BIOMASS) dedicated to taking global measurements of forest and land biomass). In terms of using the existing SAR imagery for land use and forestry applications, which is still uncommon, the ESA Climate Change Initiative of 2008 proposed research towards measurement of forest biomass by a combination of SAR and LIDAR measurements from ERS, ENVISAT, RADARSAT and JERS satellites, with the aim of reaching continental or even global scale forestry maps. See Figures 1-3.

The results of this study will be important, because these kinds of data have not yet been available with global coverage, and because there is little experience with using radar imagery for forest monitoring as an alternative observation method. If the mass market for forestry and land biomass applications indeed emerges, it will be the result of enhanced confidence in and improvements of optical satellite observations: multiplication and internationalization of satellite missions, lower price for high resolution imagery, and automatization of observations.

Yet before these new developments will deliver data, the current mitigation commitment will be provided by the existing systems such as Landsat (U.S.), CBRES (China-Brazil), TerraASTER (US-Japan), IRS (India), SPOT (France), DMC (Algeria-China-Nigeria-Turkey-UK), ERS, ENVISAT (ESA), mostly because the same methods for reference scenarios, monitoring and verification have to be used within one crediting period. New sensors will open the possibility for establishing new baselines and contribute with new monitoring and verification methods when the Kyoto second commitment period, from 2013 onwards, will be well advanced.

Note The author was a member of the Task Force to Poland’s Special Envoy/Climate Ambassador for the 2008 UNFCCC COP14 in Poznan, Poland. The views expressed here should not be attributed to any of those organizations.

Key sources World Bank: State and Trends of Carbon Markets 2009; Forest Carbon Partnerships Facility Brochure; Forests Sourcebook 2008. UNDP: Key issues on land use, land use change and forestry (LULUCF) with an emphasis on developing country perspectives. The Forests Dialogue’s Initiative: Beyond REDD. The Role of Forests in Climate Change. GOFC-GOLD: A Sourcebook of Methods and Procedures for Monitoring, Measuring and Reporting. FAO: FAO Global Forest Resources Assessment (FRA 2010), Remote Sensing Survey. Institute of Applied Ecology: Reducing Emissions from Deforestation of Developing Countries in a Post 2012 Climate Regime - a Quantitative Analysis.

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