Kyoto2 and forestry

This short paper was initially written as notes for a presentation to the Oxford Forestry Society on 8 May 2007, and subsequently to the WWF-UK Forest Team on 27 July 2007. It has since received minor amendments, updates and additions.

The Kyoto Protocol is notable for three things:

it has done little if anything to reduce greenhouse gas (GHG) emissions generally, which have carried on rising since it came into effect. Indeed it has been calculated that the Montreal Protocol has had a greater impact in reducing global warming than the Kyoto Protocol.
the main "success" of the Kyoto Protocol has been to create a thiving "carbon trading" business sector. Some operators such as Ecosecurities, Point Carbon, etc, have done very well out of it, and the greatest winner of all are the power companies of Europe who secured € billions at the expense of consumers. Gerard Wynn, writing for Reuters on 24 August 2007 in Carbon market windfall profits (subscribers only) states that "a quirk of the European carbon market means that European power companies will directly earn from the scheme nearly $30 billion a year in windfall profits. These power companies are also Europe's biggest carbon emitters."
it has been especially ineffective as regards forestry. Forest destruction and associated CO2 / CH4 emissions have not been diminished by the protocol. No forestry projects have been approved under the CDM. Lengthy, tortuous, complex and highly technical discussions about forestry have yielded no useful result - though some useful ideas have emerged. Deforestation and forest degradation is a major contributor to climate change, estimated to contribute about 20 percent of current GHG emissions.

But perhaps the worst aspect of the Kyoto Protocol is that this deeply flawed, ineffective and unreformable instrument has come to define the landscape for carbon regulation. From that point of view, it would have been better had the Kyoto Protocol never happened. Now, as we look forward to a post-2012 settlement, most people are thinking within the context of the Kyoto Protocol, and how it might be updated ... say to include China, India, Brazil, Mexico.

However for environmental groups including WWF this is a counsel of despair. There is no reason to believe that a "reformed" or updated Kyoto Protocol will be any more effective than the one we have already got. We need to begin again from the ground up and develop a framework for a new Protocol which really will be effective - as well as equitable and compatible with a successful global economy. This is what Kyoto2 is all about.

At present we have a conundrum:

on the one hand a carbon market yielding €/$ tens of billions every year for speculators and GHG polluters;
on the other, a dismal failure to fund even minimal measures to assist vulnerable, poor countries to adapt to climate change. Or to finance the necessary shift to a global low-carbon, low GHG economy.

Kyoto2 aims to resolve this conundrum by using the carbon market to raise these funds, so desperately needed but as yet unforthcoming. Thus it proposes to raise significant funds from the sale of greenhouse gas (GHG) production rights (Rights) within a global cap defined for each year. Each Right would grant the owner the right to produce 1 tonne of CO2, or equivalent. In the specific case of fossil fuels, the Rights would be applied to the production of the fossil fuels, in terms of their carbon content, and would thus be assessed close to the point of production, or "upstream".

Based on current carbon prices in the various markets active today such as the EU-ETS and the CDM, the global sale would raise in the region of $500 billion to $1,000 billion a year. These funds would then be applied to dealing with the causes, and the consequences, of climate change - in other words, climate change mitigation and adaptation.

The preferred way of selling the Rights is by way of an Ascending Clock Auction, subject to both reserve and ceiling prices, creating what economists know as a "hybrid instrument", that is to say a system that combines the pure "price" approach - a carbon tax - and the pure "quantity" approach - an auction.

Under this hybrid approach, a failure to achieve the reserve price for a given allocation would cause the supply to be cut until the reserve was achieved - so sending a firm minimum price signal to guide long term investments. Conversely, the ceiling price would trigger additional releases of Rights for sale - so limiting the economic impact of a very high Rights price.

Note that the parties needing to obtain Rights would not be Governments as under the existing Protocol, but the producers of fossil fuels and of non-fossil GHGs, such as the producers of PIGGs, cement producers (calcination of lime) and airlines (non-CO2 GHGs such as NOx, particulates, steam). The main role of Governments would be to adminster the system within their terrotories.

Back to forests ... Current estimates (quoted for example in the Stern Report) are that about 20 percent of current GHG production arises from deforestation. In addition, climate change itself may lead to significant deforestation as a result of changes in rainfall and temperature. So it is appropriate to devote a significant portion of the funds raised to both preventing deforestation, and to recreating lost forests.

The UNFCCC's Report on the second workshop on reducing emissions from deforestation in developing countries relating to the 26th session of the Subsidiary Body for Scientific and Technonological Advice in Bonn, 7-18 May 2007 quotes the World Bank's estimate that "to achieve a 10-20 percent reduction in rates of deforestation, the amount of financing required would be in the range of $2-25 billion per year".

The figure is useful - though the objective laughably inadequate. If we are to save the world from catastrophic climate change, we need to deploy all possible means to the greatest achivable extent. Our objective would be to bring about a halt to deforestation, indeed to reverse deforestation and bring about a net recreation of forests.

Taking a price at the upper end of the range offered by the World Bank, to reflect the fact that we would have to aim at high-hanging fruit as well as low, we assume that a 15 percent reduction in deforestation would cost $20 billion, and thus a 100 percent reduction would cost some $120 billion. Of course this is an order of magnitude estimate. But the cost could credibly come in in the region of $100 billion per year. This represents 10-20 percent of the sum that could be raised at the global Rights auction - a level investment that would therefore be available under the Kyoto2 approach.

The next question is how best to spend these funds to achieve the desired result. We need an approach which is simultaneously:

fair and equitable (so that all countries feel that they are receiving fair recompense)
effective (that is, that it really works)
efficient (so as to get the greatest possible result for the money spent)

A number of mechanisms have been proposed, which are set out in the UNFCCC report referred to above. These are known under the heading of REDD or "Reducing Emissions from Deforestation and Degradation". They include (from Vanuatu) the "carbon stock approach", the "sectoral crediting baseline approach", the "direct barter approach", (from Tuvalu) the "Forest Retention Incentive Scheme", (from India) "Compensated Conservation".

In the meeting, Brazil emphasised the need for "robustness, completeness, comprehensiveness, transparency and verifiability", Costa Rica, speaking on behalf of a number of Latin American countries, proposed an "Avoided Deforestation Carbon Fund" to cover specific activities that directly reduce emissions from deforestation and maintain forest cover in countries that have low rates of deforestation, and supported an "Enabling Fund" to support capacity-building and pilot activities. Papua New Guinea, on behalf of the Coalition for Rainforest Nations, suggested a REDD mechanism and two funds, the "Enabling Fund" and the "Stabilization Fund".

To try and cut through the complexity of the discussions, which I have barely begun to do justice to, there are two main approaches:

to pay countries for reducing deforestation relative to a baseline of past deforestation rates, and / or future projections of deforestation
to pay countries based on a fixed formula based on forest area and the carbon stock represented.

Both these have problems:

the first has the danger that it rewards most the countries who have historically deforested most, or who project the grandest plans for future deforestation.
the second has the danger that in order to prevent deforestation where it is most profitable, where there is existing transport infrastructure, fertile soil, water, and access to markets for logs and agricultural commodities, payments would need to be set at a very high level, far in excess of that needed to conserve remote forests that are under no threat.

Accordingly the approach now forming part of the Kyoto2 proposals is to develop Forest Agreements specific to individual countries or even regions of countries, which would incorporate both elements, and indeed others besides. These plans would include areas:

for pure conservation, with no exploitation save that of indigenous or long-established peoples
for limited, sustainable exploitation focussed on non timber products
for more intensive exploitation, including for timber but subject to certification for sound management
of plantation, but including measures to protect soils, water and biodiversity
of degraded / destroyed forest undergoing restoration / re-establishment to one of the above categories
for rational deforestation ... hopefully not too much in this category but it has to be there to provide flexibility to governments in achieving national development objectives.

The level of recompense payable under the Forest Agreements would be made based on such factors as:

area of forest land conserved / under restoration
carbon stocks held in the national forest estate
achievement of specific biodiversity objectives
achievement of forest restoration / re-establishment targets
adherence to social standards for local, traditional and indigenous peoples
specific, actual costs arising as a result of specific problems. For example, specific funding might be needed to pay for forest wardens, to establish sustainable agro-forestry projects, to buy farmland for the settlement of shifting / shifted agriculturalists, institutional support and capacity building, to buy out existing interests in forests (such as logging rights), to close off roads, to remove invasive exotic species ...

The Forest Agremeents would then take the form of a contract between the UNFCCC and the country in question. Payment would be made based on performance of the whole contract, giving a strong incentive to the recipient country to implement it in all parts. This principle would be interpreted sympathetically where the country was making best efforts to comply but was faced with unforeseen difficulties, but a country wilfully violating its contractual obligations would face the loss of a disproportionate element of its entire payment.

The main stumbling block to progress expressed in the Bonn discussions was where the finance would come from. For example, it could arise from a levy on transactions under the CDM, or a mechanism might be found to allow industrial (Annex 1) countries to offset their excess emissions by forest conservation. However these both have problems:

the first not would raise sufficient funds. The Adaptation Fund is already funded through this mechanism and has struggled to raise a few measly €/$ millions, in contrast to the need for €/$ hundreds of billions every year. In any case the CDM is part of the Kyoto Protocol approach which is deeply flawed in its entirety.
the second would raise funds for REDD only based on Annex 1 countries' failure to meet their own GHG reduction targets. This is inadequate because we need the Annex 1 countries to reduce their industrial emissions, and we need to bring a halt to deforestation, not either one or the other. In any case there is an incompatibility between offsetting the maintenance of a permanent carbon stock in forests, against excessive industrial GHG emissions, year on year.

The Kyoto2 proposals resolve these problems, raising sufficient finance to pay for the world to retain its forests without the need for dubious "offset" or CDM mechanisms. And they also offer a clear, equitable and resilient approach to resolve the problems of climate change in the broader global context.