Carbon Markets, Institutions, Models

Carbon Markets, Institutions, Models December 2004 USFS Workshop Gary Bull, Faculty of Forestry, UBC Oaxaca, Mexico

Objectives • State and evolution of the market for carbon • Institutional frameworks • Carbon – land use models Carbon Markets, Networks and Models

What is a carbon market? • There is no single carbon market, defined by a single commodity, a single contract type or a single set of buyers and sellers. • What we call “carbon market” is a loose collection of diverse transactions through which quantities of greenhouse gas (GHG) emission reductions are exchanged. • Information is limited, especially on prices, since there is no central clearinghouse for carbon transactions. As such, it is difficult to compare prices/quantities over whole market. Carbon Markets, Networks and Models

How to look at this market • By commodity traded • Project-based GHG emission reductions (ERs), created and exchanged through a given project or activity • GHG Emission Allowances, as defined, or expected to be defined under international, national, regional or firm-level regulationsExamples: UK trading system, BP or Shell internal trading • By volumes • Wholesale: Large transactions, usually > 1 MtCO2eExamples: most projects to date • Retail: Deals are in the ’000s of tonsExamples: Carbon-neutral events, non-carbon intensive corporations,etc. • By types of contracts(e.g. spot, forward, options, swaps) • By timeframes(most contracts: 10-14 years; some 50+ years) Carbon Markets, Networks and Models

Carbon market Carbon Markets, Networks and Models

Volumes Exchanges and Number Per Market Segment Carbon Markets, Networks and Models

Market Buyers Carbon Markets, Networks and Models

Location of Emission Reduction Project (share of volume) Carbon Markets, Networks and Models

Location of Project by Type of Buyer (Jan 2003 – May 2004) in million tCO2E Carbon Markets, Networks and Models

Market Value (million US per year nominal) Carbon Markets, Networks and Models

Share of Emission Reduction, by Type of Project Carbon Markets, Networks and Models

Agricola Super Ltd, Chile 400 000 tons annual reduction $20 million technology investment to reduce methane 10 years gives 4 million ton credit Transalta, Canada Releases 30 million tons CO2E annually Not sure what its obligations are under Kyoto So purchased 1.75 million tons CO2E for 9 million $US What a deal looks like? Carbon Markets, Networks and Models

Frameworks • Are they necessary? • Yes • What is the experience so far? • Lots of mistakes are made • Bureaucrats can botch it badly and have frequently ignored the market players • How do we build one? • Start with a diagram of stakeholders Carbon Markets, Networks and Models

What the carbon markets could look like by 2006 Regional Markets- EU International Pre-Compliance National market Denmark National MarketUnited Kingdom US Market Retail Market SUB-NATIONAL MARKETS Massachusetts NSW New Hampshire National Markets –Japan, Canada, Australia Carbon Markets, Networks and Models

Influence of Government (to date) • can kill or establish markets • can make the operation of markets very expensive or reasonably priced • will likely share in the risks if it is carbon sequestration • bureaucrats are resistant to the use of markets by nature • can be buyers of carbon credits Carbon Markets, Networks and Models

FOREST GROWER VERIFICATION AGENT RISK MGM’T AGENCY NATIONAL CARBON OFFICE EMISSIONS CLEARING HOUSE UNFCCC National Carbon Framework Carbon Markets, Networks and Models

Responsibilities of the National Carbon Office • Provide public relations and extension services • Conduct broad scale forest inventory • Maintain national carbon registry • Oversee risk management agencies • Accredit verification agents • Oversee emissions trading Carbon Markets, Networks and Models

FOREST GROWER VERIFICATION AGENT RISK MGM’T AGENCY NATIONAL CARBON OFFICE EMISSIONS CLEARING HOUSE UNFCCC Responsibilities of the Forest Grower • Stage 1: Design and Evaluation of Project • Stage 2: Project Implementation Carbon Markets, Networks and Models

Stage 1: Design And Evaluation of the Forest Project 1. Develop project proposal. 2. Preliminary carbon yield projections. 3. Define and measure the ‘business-as-usual’ baseline. 4. Project evaluation and registration. 5. Locate suitable trading partner. Carbon Markets, Networks and Models

6. Establish and manage the forest carbon project. 7. Design sampling system. 8. Conduct forest carbon inventory. 9. Submit forest inventory data to the registry and schedule independent verification. Stage 2 : Project Implementation- Inventory and Management Carbon Markets, Networks and Models

Risk Management Agency • Assess risk of the project • Provide ‘Risk Rebate’ in proportion to • risk evaluation and level of risk protection specified by grower • Provide a range of insurance products Carbon Markets, Networks and Models

FOREST GROWER VERIFICATION AGENT NATIONAL CARBON OFFICE EMISSIONS CLEARING HOUSE UNFCCC Verification Agent RISK MGM’T AGENCY • Obtain license to approve credits by the NCN • Conduct independent audits - all inventories • Submit official verification report to NCN Carbon Markets, Networks and Models

FOREST GROWER VERIFICATION AGENT RISK MGM’T AGENCY NATIONAL CARBON OFFICE EMISSIONS CLEARING HOUSE UNFCCC Emissions Clearing House • Obtain brokerage license from the NCN • Interface with Registry Data Determine no. of ‘carbon credits’; track carbon transactions • Conduct trade of carbon Carbon Markets, Networks and Models -

EMISSIONS CLEARING HOUSE NATIONALCARBONOFFICE PERMANENT COURT OF ARBITRATION INDEPENDENT THIRD PARTY CERTIFICATION MECHANISM UNFCCC CONFERENCE OF THE PARTIES (COP) International Institutions Carbon Markets, Networks and Models

Project Area Lignum IFPA Area: 610 000 ha (1 549 400 acres) Current Harvest: 900 000 m3 Biogeoclimatic Zones: AT, BG, ESSF, ICH, IDF, MS, SBPS, SBS Major Tree Species: Black Cottonwood, Trembling Aspen, Douglas-fir, Sub-alpine Fir, White Birch, Lodgepole Pine, Engelmann Spruce Red-listed Species: American White Pelican, Peregrine Falcon, Prairie Falcon, Brewer’s Sparrow, Yellow Breasted Sparrow, Lake Whitefish, Giant Pygmy Whitefish Carbon Markets, Networks and Models

FSOS Analysis Framework Growth/Yield Operability Silviculture Costs/Revenues Forest Cover Carbon Pool Curves Road Networks Development Plans Wildlife Habitat Water Quality Visual Quality Biodiversity Special Management Zones … MANAGEMENT INPUT DATA Habitat Creation Patch Objectives Block Size Targets Old Growth Management Age Class Goals Carbon Flow Targets Profit/Product Maximization Priority Weightings Simulation or Optimization Non-Spatial Reports Spatial Reports Treatments Forest Structure Carbon Markets, Networks and Models

FORECAST Carbon Curves >2,000 Yield Curves Forest Cover Area Age 125,000 Polygons FSOS Operability Roads … >200 Layers Defining Management Objectives Block Size Targets Patch Size Targets Carbon Markets, Networks and Models

Carbon Calculations in FSOS continued… Harvested Total Biomass = 0 Carbon In Litter = 78.7 Carbon in SOM = 49.6 Forest Polygon #103 Age = 100 Not Harvested Total Biomass = 64.1 Carbon In Litter = 16.6 Carbon In SOM = 52.3 For each period: Total Carbon In Biomass = (Carbon In Biomass) Total Carbon In SOM = (Carbon In SOM) Carbon Markets, Networks and Models Total Carbon In Litter = (Carbon In Litter)

Financial Analysis Scenario 4: No Discounting Carbon Markets, Networks and Models

Conclusions • Markets are real and they are growing • Forest and trees should play a role • For markets to move from projects to trading you need a national framework (and policy) • Framework design will be a critical determinant in deciding who wins and loses. Carbon Markets, Networks and Models

Further Information • International Carbon Accounting Framework • http://www.joanneum.ac.at/iea-bioenergy-task38/workshop/canberra.pdf (pp. 167-194) • International Third Party Certification • http://www.iiasa.ac.at/Publications/Documents/IR-01-055.pdf • Contact: Dr. Gary Bull • gary.bull@ubc.ca Carbon Markets, Networks and Models

Carbon Markets, Institutions, Models