ForestCarbonOpportuni0esforMinnesota

WorkingForests&CarbonJune9,2010Palisade,MN

Outline

1. What is an offset and why does it matter? –  Offset quality criteria

2. What does a registry do? 3. Minnesota offset opportunities

–  Focus on forest management

4. ACR Forest Carbon Project Standard v2.0

AmericanCarbonRegistry

•  First and largest U.S. private voluntary GHG registry –  Founded 1997 by Environmental Defense Fund and

Environmental Resources Trust –  Over 30 million tons issued to date –  2008: most widely used voluntary registry in the world

(State of the Voluntary Carbon Market 2009) •  Established industry standard system of

transparent on-line reporting and serialization of verified project-based offsets

•  Since 2007 part of non-profit Winrock International

Winrockcarbonexper0se

•  Internationally recognized team of forest carbon experts –  Nobel prize winners for contributions to Intergovernmental Panel on

Climate Change reports –  CDM Afforestation/Reforestation Working Group

•  Terrestrial carbon analyses, methodologies, protocols, methods manuals for – –  USDA, U.S. Forest Service, USDOE 1605(b) –  Two DOE Regional Carbon Sequestration Partnerships –  USAID, World Bank, International Tropical Timber Organization –  Electric utilities and conservation groups

•  For USEPA: –  Scoping and ranking ag/forestry GHG mitigation activities –  Developing new Climate Leaders methodologies

Whatisanoffset?

•  Reduction / removal / avoidance of GHG emissions that is used to compensate for GHG emissions that occur elsewhere

•  Project-based GHG reductions occurring in uncapped sectors, used by regulated entity for compliance –  Critical for cap-and-trade cost containment

•  One offset represents the reduction or removal from the atmosphere equivalent to one metric ton of carbon dioxide –  Specific project type and vintage –  Verified and serialized

Voluntaryandpre‐complianceoffsets

Voluntary –  Value based on

perceived quality –  Buyers want “the story”

behind the project –  Marketing or reputational

benefit –  Regulatory approval not

necessary –  May not be verified,

registered or retired –  Variable quality

Pre-compliance –  Value based on compliance

recognition –  Registered in approved early

action program –  Meet rigorous set of

standards –  Independently verified –  Players want to gain

experience, hedge against future requirements, help shape regulations

WhatisCapandTrade?

Market-based mechanism to efficiently reduce emissions –  Government sets cap on emissions for covered sectors –  Program administrator (EPA) creates allowances and

distributes via allocation or auction –  Each year capped entities must hold allowances = prior

year emissions –  Compliance:

•  Reduce GHG emissions on system •  Purchase allowances from other regulated entities •  Purchase allowances from Government at auction •  Purchase offsets

AmericanPowerAct

Source: Environment Northeast

Sec.734“Posi0veList”

•  Projectsthatreduce,flareorusemethane:–  Methanefrommines,landfills,naturalgas–  Reducefugi0veemissionsinoil&gassector–  Manuremanagement,anaerobicdiges0on,wasteaera6on

•  ProjectsthatreduceCO2emissionsorincreasesequestra6oninagriculture,livestock,forestry,landuse:–  Afforesta0on/reforesta0on,improvedforestmanagement,reduceddeforesta0on,urbanforestry–  Agricultural,grassland,andrangelandsequestra0onandmanagement–  Avoidedconversionofgrassland/rangeland/forest–  Management/restora0onofpeatlandsandwetlands–  Conserva0onofmarinecoastalhabitats–  N2Oemissionreduc0on(fer0lizerproduc0onand/oruse)

–  Biocharproduc0onanduse

•  Recyclingandwasteminimiza6on

•  CarbonCapture&Storage(withorwithoutenhancedoilrecovery)

•  Destruc6onofozone‐deple6ngsubstances•  Smalloff‐gridrenewableelectricity

•  ProjectsreducingtheGHGintensityofagriculturalproduc0on

EarlyAc0onOffsets

•  Sec. 740 Early Offset Supply –  Criteria for Qualified Early Offset Programs: fair, but less than

ideal clarity –  Projects started back to 2001; crediting for 2004 through 10

years later or applicable Crediting Period –  Offsets usable (bankable) for compliance pre-compliance

investments creating offset supply overlapping into early years of program

•  Sec. 788 Early Action Recognition –  1% of 2013-15 allowances = 45 million tons/year –  1/3 for early offsets (under Sec. 740 programs) and entity-level

reductions, distributed per formula –  2/3 for state cap-and-trade programs, distributed pro rata –  Trade-in for allowances

Offsetqualitycriteria

•  Additional: Offsets must be in addition to reductions and removals that would have occurred under current laws and regulations, current industry practices, and without carbon market incentives

•  Surplus: Project action is beyond regulatory requirements

•  Real: Project action yields after-the-fact, quantifiable and verifiable GHG emissions reductions and/or removals

•  Permanent: Atmospheric benefit is permanent, or reversal risk is assessed and mitigated to make non-permanent offsets fungible with other offsets, on-system reductions and allowances

Offsetqualitycriteria

•  Net of leakage: Leakage is an increase in GHG emissions or decrease in sequestration outside the project boundaries that occurs because of the project action

•  Direct: Project Proponent owns or has control over the emissions sources or sinks

•  Independently verified: Verification by an approved third-party verifier accredited for the relevant scope –  Have the rules been complied with? –  Is the GHG assertion free of material misstatement?

•  Serialized: Transparent accounting and tracking of all issuances and transactions ensures the same reduction is used only once

Whydoesitma^er?

Whatdoesaregistrydo?

•  Bank with accounts for depositing, transacting, retiring offsets –  Serial numbers for tracking –  Tons can be bought and sold many times but only used (retired) once

•  Gatekeeper on quality –  Set standards for what can get on registry –  Certify requirements have been met –  Buyers know what they’re getting – that it’s real, has compliance

value, etc.

•  Publish standards, protocols, methodologies –  Cookbook project proponents must follow to register a project

•  Manage third-party verification •  Provide public transparency on standards, project

documents, issuances, transactions, retirements

Andnotdo?

•  Develop projects •  Own or transact offsets •  Broker or serve as intermediary in transactions

–  Buyers and sellers –  Project proponents/aggregators and landowners

•  Set prices •  Create derivatives, futures, options, etc. •  Verify projects

Issuanceandtransac0onvolumesthrough2009

Total Tradable ERTs 24,866,694

Registry Activity ERTs Issued ERTs Retired ERTs Traded

2009 2,928,335 395,867 1,579,658 2008 7,938,812 1,684,387 2,609,753 2007 5,847,510 423,432 1,570,477 2006 11,027,146 7,705 350,938 2005 2,580,358 369 3,000

Total 30,222,161 2,405,276 5,868,669

Metric tons CO2 equivalent

Projecttypes(registeredandinpipeline)

•  Forest carbon: afforestation/reforestation, Improved Forest Management, U.S. avoided conversion, REDD

•  Various agricultural and rangeland activities •  Livestock manure management •  Landfill gas •  CCS / enhanced oil recovery •  Fuel switching •  Industrial gas substitution •  Truck stop idling •  Fugitive methane in oil & gas production,

processing, transmission

19

Voluntaryandquasi‐voluntaryprograms

Program Description

U.S. tons to date (million metric)

CCX Membership Program with commitment to emissions reductions; use of exchange platform for trading

82.3

ACR Founded 1997 by EDF and ERT. Since 2007 part of Winrock International, headquartered in Arkansas.

30.3

CAR Founded in 2008 as a parent organization to CCAR, a California-based non-profit established in 2001.

5.2

VCS Founded in 2006 as a non-profit incorporated in Switzerland. Washington D.C. headquarters established in 2009.

3.2

Protocoldevelopmentprocess

•  ACR publishes general and sector-specific standards

•  Flexibility in methodology choice –  Use ACR-published methodology –  Use approved CDM methodology –  Propose/modify existing methodology (e.g. EPA, VCS) –  Submit new methodology for approval

•  Public consultation and anonymous scientific peer review of all standards and methodologies –  Shortest time to market and lowest cost –  Emphasis on scientific rigor –  Balance environmental integrity with commercial flexibility

Recentandforthcomingstandards,methodologiesandtools

ACR Standard v2.0 Published Feb 2010

Forest Carbon Project Standard v2.0 Published Jun 2010

Livestock Manure Management Project Standard & Methodology Public comment closed, peer review in progress

Conversion of High-Bleed Pneumatic Controllers in Oil & Gas Systems Published March 2010

Improved Forest Management Forthcoming

Reducing Emissions from Deforestation and Degradation Forthcoming

Landfill Gas Combustion Project Standard & Methodology Forthcoming

Reducing N2O Emissions through Fertilizer Management Forthcoming

Improved Grazing Land Management In development

Biochar Scoping

Coastal Wetland Restoration In development

Panda Standard AFOLU specifications, IFM methodology, Grassland Improvement Methodology

In development

ACR Tool for Risk Analysis and Buffer Determination In development

ACR Tool for the Demonstration and Assessment of Additionality in Forest Carbon Project Activities

Forthcoming

Minnesotaterrestrialsequestra0onopportuni0es

•  Improved Forest Management •  Avoid conversion of forests and peatlands

–  Peat: 4.25 billion tonnes (750 tonnes/acre) stocks –  Forest: 1.6 billion tonnes (99 tonnes/acre)

•  Peatland and prairie restoration •  Convert marginal agricultural land to

grassland, forest, short-rotation woody crops

•  Agricultural soil sequestration (reduced till, cover crops etc.)

•  Fertilizer management to reduce N2O emissions

•  Livestock manure management •  Biomass to liquid biofuels and to

electricity/heat/steam (fossil fuel displacement)

•  Wildfire risk reduction

Minnesotaterrestrialsequestra0onopportuni0es

Minnesotaforests

•  ~16 million acres (over 30% of state)

•  Diverse forest types –  Aspen, northern hardwoods,

spruce, birch dominate

•  Significant public ownership –  58 State forests (4.1 million acres) –  County, municipal and local: 2

million acres –  Federal: 2 million acres –  Private non-industrial: 5.8 million

acres –  Forest industry:1.2 million acres

Minnesotaforests

MNforestharvest

MNforestharvest

MNcer0fiedforests

Million acres

All certified forests 8.4 Total FSC 6.7 Total SFI 7.2 Dual certification 5.5 Public FSC or SFI 7.4 Private FSC or SFI 0.9

Improvedforestmanagement

•  Extending rotation lengths in managed forest •  Increasing forest productivity by thinning diseased or

suppressed trees •  Managing competing brush and short-lived forest

species •  Increasing buffers or other set-asides (beyond

regulatory requirements) •  Increasing the stocking of trees on understocked areas •  Increasing carbon stocks in harvested wood products •  Improving harvest or production efficiency •  Shifting from shorter- to longer-term wood products

ACRForestCarbonProjectStandardv2.0

•  Published following public comment and scientific peer review

•  Supersedes v1.0 •  Used in combination

with approved methodologies and tools

Scope

•  Project location: worldwide •  Ownership: private, public (municipal, county,

state, federal, or other), and Tribal •  AR

–  Establishing, increasing and restoring vegetative cover through the planting, sowing or human-assisted natural regeneration of woody vegetation

•  IFM –  Activities to reduce GHG emissions and/or enhance GHG removals,

implemented on lands designated, sanctioned or approved for forest management

•  REDD –  Reduction in GHG emissions from the avoided conversion of forest to

non-forest use or avoided degradation of forests remaining as forests

Basiceligibilitycriteria

•  Start Date: generally November 1997 or later •  Minimum Project Term: 40 years •  Crediting Period (validity of baseline and

additionality): –  20 years for AR and most IFM, 10 years for REDD

•  Real: reductions/removals exist prior to issuance; no forward crediting

•  Direct emissions: Proponent owns/controls sources and sinks; clear land and offset title

Basiceligibilitycriteria

•  Land eligibility for AR: –  No clearing of trees in last 10 years –  Exclusion does not apply to fire, disturbance, or

removing vegetation for site preparation •  Additional •  Permanent •  Net of leakage •  Community & environmental impacts assessed;

any negative impacts documented and mitigated •  Independently verified

Accoun0ngguidance

•  Defining boundaries –  GHG sources and sinks –  Significance testing and de minimis guidance –  Physical and temporal boundaries

•  Precision target of ±10% of the mean at 90% confidence –  Uncertainty deduction if target not achieved –  Aggregated projects have same target, achieved at

level of project overall

Carbonpoolsincludedandexcluded

Carbon pools

Selected (Required, Conditional or Excluded) Justification / Explanation of choice

Above-ground biomass Required Major carbon pool subjected to the project activity

Below-ground biomass Required Major carbon pool subjected to the project activity. Belowground biomass subsequent to harvest is not assessed with the simplifying assumption that all is immediately emitted

Dead wood Conditional Dead wood stocks can be conservatively excluded in all instances EXCEPT where slash stocks are burned as part of forest management. Alternatively, project proponents may elect to include the pool

Litter Excluded Litter is conservatively excluded as with-project stocks will either be higher than in the absence of the project, or changes in the litter pool will be de minimis as a result of the project

Soil organic carbon Excluded Soil organic carbon is conservatively excluded as with-project stocks will either be higher than in the absence of the project, or changes in the soil organic carbon pool will be de minimis as a result of the project

Wood products Required Major carbon pool subjected to the project activity

Addi0onality

•  GHG reductions and removals exceed those that would have occurred under current forestry laws and regulations, current forest industry practices, and under a business-as-usual scenario

•  Two paths to demonstrate: –  Regulatory surplus and exceeds performance standard –  Three-prong test:

•  Regulatory surplus •  Exceeds common practice for area, forest type, similar

landowners •  Faces at least one implementation barrier: financial,

technological, institutional

IFMperformancestandards

•  If regulatory surplus and exceeds benchmark, automatically additional –  E.g. credit carbon stocks

exceeding a regionally defined (e.g. FIA) average stocking level

•  Large “bump” of up-front credits

•  Over-crediting without under-crediting to balance

•  Possibly no change in practice

IFMintensity‐basedperformancestandard

•  Performance standard factor: emissions per unit output (tCO2/ft3) –  Derived from net emissions and net sequestration, by region and

forest type, representing common practice

•  Performance standard factor applied to actual with-project extracted volume to give baseline –  Defined regionally and updated periodically –  Avoids having to project business-as-usual into the future

•  Project activity directly monitored –  Changes in stocks in all carbon pools, harvest emissions, emissions

from biomass burning –  Deductions for leakage and uncertainty –  Compare to baseline

IFMunderperformancestandard

•  Any action to increase sequestration, decrease/delay removals, manage slash, improve milling efficiency, or shift to longer-term wood products lower emissions per unit output than the performance standard baseline

Permanence,riskmi0ga0onandfungibility

•  Minimum Project Term of 40 years –  Minimum term is to ensure activities maintained, monitored and

verified over relevant period –  Required of Project Proponent only; flexibility in landowner

contracts –  Balance time commitment with broad landowner participation –  Minimum term alone does not provide permanence

•  Risk assessment and mitigation makes forest offsets effectively permanent and fungible with other offsets, allowances and emission reductions

•  Focus on mitigating reversals so atmosphere “made whole,” rather than obligating landowner to monitor tons on site for 100 years

Riskmi0ga0onop0ons

•  Project-specific risk assessment •  Buffer contribution

–  From project itself –  ERTs of any other type and vintage

•  Unintentional reversal: –  Proponent pays “deductible”; ACR retires buffer tons for remainder –  Premium goes up

•  Intentional reversal (“buy-out option”): –  Proponent replace all issued ERTs for that portion of project

•  Alternate risk mitigation options accepted –  Insurance or other financial assurances that are equally effective in

mitigating losses

Leakage(IFM)

•  The displacement of GHG emissions from the project’s physical boundaries to locations outside of the project’s boundaries as a result of the project action.

•  Activity-shifting leakage: –  Project Proponent must document that harvest is not being shifted

to areas outside project boundaries but within entity landholding

•  Market effects leakage: –  If yield increases or is maintained (e.g. extending rotations shifts

harvest temporally), no market effects leakage deduction –  If timber production significantly decreased, standard deduction

based on where harvest likely to be shifted, and carbon stocks of those forests relative to forests in project area

Aggrega0onguidance

•  Key for transaction cost efficiencies (inventory, monitoring, verification, registration) and risk diversification

•  Proponent (here aggregator) commits to minimum term and reversal risk mitigation

•  For inventory and monitoring, precision targets applied at overall project level –  ±10% of the mean at 90% confidence –  Use stratification; does not require plots on every landholding

•  Verification (reasonable assurance; ±5% materiality) also at project level –  Risk-based approach and not all properties necessarily visited

FurtherInforma0on

NicholasMar0nChiefTechnicalOfficer,AmericanCarbonRegistry

nmar6n@winrock.orgwww.americancarbonregistry.org

(703)842‐9500