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A policy analysis of forest carbon offset system alternatives for Japan Takahashi, Shingo 2005

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A policy analysis of forest carbon offset system alternatives for Japan by Shingo TAKAHASHI Bachelor of Agriculture, Kyoto University, Japan, 1996 Master of Agricultural Science, Kyoto University, Japan, 1998 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE in THE FACULTY OF GRADUATE STUDIES (RESOURCE MANAGEMENT AND ENVIRONMENTAL STUDIES) THE UNIVERSITY OF BRITISH COLUMBIA AUGUST 2005 © Shingo TAKAHASHI 2005 Abstract Forest resources provide us with various kinds of environmental benefits^ water purification, biodiversity, and carbon sequestration among others. Enhancing sustainable forest management and avoiding deforestation have become increasingly important in the context of global warming issues. The Kyoto Protocol (KP) was established for abatement of climate change in 1997, and came into effect in February 2005. Annex I countries wi l l have to reduce their Greenhouse gas (GHG) emissions to meet their assigned targets. Japan wi l l also have to reduce its G H G emissions by 6% below the 1990 levels by 2010. In order to meet the Kyoto target, additional policy countermeasures need to be implemented in Japan. Under the KP, Japan is allowed to figure in a 3.9% emission reduction (l3Mton-C: 47.7Mton-C02e) for a potential increase in the carbon storage (carbon sink) associated with forests, which is achievable through changes in forest management. Hence, increasing carbon storage through forest management has become an increasingly important issue in Japan. Forest degradation is another important issue in the Japanese forest sector. The Japanese forest sector has been in a long-term slump since the 1970s. The domestic timber prices have remained low because of the massive supply of low-price imported timber. It is obvious that additional policy measures need to be implemented for the forest sector to recover from the long slump. Creating a carbon offset system is considered one potential policy countermeasure to address both these issues. In this research, based on three case study results, a policy analysis regarding the introduction of a forest carbon offset system in Japan is conducted. Policy variables associated with the introduction of a carbon offset system are identified, and possible policy alternatives are discussed. Finally, the best policy option suggested for Japan is one that starts with the "Rigid and conservative" strategy, estabhshing a rigid system at the initial stage, and that gradually adds flexible mechanisms to provide economic incentives to stakeholders. In conclusion, several policy recommendations for introducing a carbon offset system in Japan are discussed. i i Table of contents Abstract i i Table of contents i i i List of Tables iv List of Figures vi Acronyms vii Acknowledgements : viii 1 Introduction 1 1.1 Background and context 1 1.2 Research objectives and questions 2 1.3 Research methodologies 3 1.4 Overview of the thesis 3 2 Forest and the Environment 5 2.1 Forest environmental services 5 2.2 Climate change and forest carbon sinks 7 2.3 Emerging issues in the forest sector 15 3 Theories and methodologies 18 3.1 Theories and principles of carbon offset systems 18 3.2 Methodologies applied for a policy analysis on carbon offset systems 22 4 Forest sector and forest carbon sink issues in Japan 30 4.1 Current status in the Japanese forest sector 30 4.2 Forest carbon sink issues in Japan 37 5 Policy analysis on a carbon offset system 41 5.1 Recognize a decision problem (Clarify the decision to be addressed) 42 5.2 Specify values (Structure objectives) 44 5.3 Create alternatives (Create strategies) 52 5.4 Evaluate alternatives (Compare strategies in terms of consequences) 67 5.5 Select an alternative (Identify value trade-offs) 71 6 Conclusion 77 6.1 Summary of the policy analysis 77 6.2 Policy recommendations for introducing a carbon offset system in Japan 79 Appendix: Case studies of other carbon offset systems : 84 A.1 The Carbon Offset System in Canada 86 A.2 California Climate Action Registry (US) 96 A 3 Afforestation/Reforestation C D M projects under U N F C C C 118 References 129 iii List of Tables Table 2-1 Main categories of forest environmental services 5 Table 3'1 Kyoto Protocol Provisions related to Emissions Trading Schemes 19 Table 4-1 Forest land areas in Japan by ownership (March 2002) 33 Table 4-2 Annual estimated value of multi-ecosystem services provided by forest in Japan 37 Table 5-1 Key stakeholders and their interests in a carbon onset system for the forest sector 45 Table 5-2 A sample mapping of possible key stakeholders' roles in a carbon offset system 46 Table 5-3 Fundamental objectives (ends) in the introduction of a carbon offset system 47 Table 5-4 Main issues on implementation of Clean Development Mechanism 53 Table 5-5 Policy variables on a carbon offset system for the forest sector 54 Table 5-6 Eligibility criteria for offset projects 59 Table 5-7 Overview of possible alternative strategies 62 Table 5-8 Policy variables according to possible alternative strategies 63 Table 5-9 Evaluation criteria for introducing a carbon offset system 68 Table 5-10 Consequences table on introducing a carbon offset system 70 Table 6-1 Summary of decision problems in the introduction of a carbon offset system in Japan 77 Table 6-2 Summary of fundamental objectives in the introduction of a carbon offset system in Japan 78 Table 6-3 Summary of the policy alternatives in the introduction of a carbon offset system in Japan 78 Table 6-4 Summary of the trade-off relationships found in designing a carbon offset system 79 Table 6-5 Specific situations associated regarding creating a carbon offset system in Japan 79 <Appendix> Table A" 1 Countries included in Annex B of the Kyoto Protocol and their emissions targets 86 Table A"2 Potential emission reductions and associated federal costs 89 Table A-3 Public engagement mechanisms outlined in the 2005 Plan 90 Table A 4 Main principles of the Carbon Offset System in Canada 94 Table A^5 Eligibility criteria for offset projects 95 Table A"6 Contributors for the California Climate Action Registry program 97 Table A'7 Member's benefits in California Climate Action Registry 98 Table A-8 Annual Fee Schedule* in the California Climate Action Registry 100 Table A"9 Affiliates' benefits in the California Climate Action Registry 101 Table A-10 Information included in an emissions report in CARROT 103 Table A-11 Information included a limited G H G related information in CARROT 103 Table A-12 Certification requirements in the California Climate Action Registry 104 Table A-13 "Best-case" assumptions regarding operation status of project participants 105 Table A-14 Estimated costs associated with certification processes in the California Climate Action Registry. 106 Table A-15 Prepared protocols in the California Climate Action Registry 107 Table A-16 Key components of Forestry Sector Protocol 109 iv Table A-17 Key components of Forestry Project Protocol 110 Table A-18 Key components of Forestry Certification Protocol '. I l l Table A-19 Forest workgroup members in the California Climate Action Registry I l l Table A-20 Power/Utility workgroup members in the California Climate Action Registry 112 Table A-21 Action items for developing protocols in progress 113 Table A-22 Roles assigned to Approved Certifiers 113 Table A-23 Last of Approved Certifiers in the California Climate Action Registry 114 Table A-24 Roles assigned to Approved Technical Assistance Providers 114 Table A-25 List of Approved Technical Assistance Providers in the California Climate Action Registry 115 Table A-26 C D M project activities that have been registered by the C D M Executive Board 119 Table A-27 Authorized methodologies by sectoral scope 120 Table A-28 Proposed methodologies for Afforestation and Reforestation projects, as of July 18, 2005 122 Table A-29 Approved methodologies for small'scale C D M project activities 126 V List of Figures Figure 2-1 Forest environmental services 6 Figure 2-2 Global carbon stocks and flows in different ecosystems 8 Figure 2-3 An estimate of the human-induced change in the global carbon cycle in the 1990s 9 Figure 2-4 The potential of various land-management activities to mitigate global emissions 10 Figure 2-5 Estimated costs of carbon sequestration options by level of reduction 11 Figure 2-6 Magnitude of carbon emissions and sequestration 12 Figure 2-7 Carbon tax needed to reach the emission reduction target under the Protocol 14 Figure 3-1 Basic principles of emissions trading 21 Figure 3-2 Overview of value-focused thinking 23 Figure 3-3 The influence of "value-focused thinking" on the process of decision-making 24 Figure 3-4 A sample of fundamental objectives hierarchy 26 Figure 3-5 Asample of means-ends objectives network 27 Figure 3-6 Asample of influence diagram 28 Figure 4-1 Domestic and imported timber supply and self-sufficient rate of timber in Japan 31 Figure 4-2 The stumpage price of Sugi in Japan 32 Figure 4-3 Current forest ownership status in Japan and Canada (by forest area) 34 Figure 4-4 The number of forestry households in Japan by size of forest land area (Year 2000) 35 Figure 4-5 Average revenue and expenditure per year of forestry households in Japan 36 Figure 4-6 Greenhouse gas emissions in Japan (1999-2003) 38 Figure 4-7 Estimated carbon storage achieved from forest management in Japan for 2010 40 Figure 5-1 Means-objectives (ends) network on designing a carbon offset system 49 Figure 5-2 Influence diagram on a forest carbon offset system 51 Figure 5*3 LAfecycle of a G H G emission reduction/removal project 52 Figure 5-4 Relationship between baseline emissions and project-case emissions in a project 55 Figure 5-5 Relationship among three case studies conducted in this thesis 65 Figure 5_6 Alternative forest activities for enhancing forest carbon sequestration 72 Figure 6-1 Current and prospective market condition of the forest sector in Japan 83 <Appendix> Figure A-1: Trends on greenhouse gas emissions for Canada (1990 to 2002) 87 Figure A-2: Interactive relationship between the Carbon Offset System and the L F E System in Canada 92 Figure A-3 General system procedures and protocols in the California Climate Action Registry 102 Figure A-4 Three year life cycle of certification in the California Climate Action Registry 104 Figure A-5 Main procedures for all types of CARROT users 117 Figure A-6 General procedures involved prior to registration of a C D M project : 124 Figure A-7 Afforestation and Reforestation C D M project activities 128 vi Acronyms A A U s Assigned amount units A R D Afforestation, reforestation, and deforestation A / R Afforestation and Reforestation C D M Clean Development Mechanism C E R Certified emission reductions 1CER long-term C E R t C E R Temporary C E R C O P Conference of the Parties to the Convention on Climate Change E R U Emission reduction unit E U European Union E U - E T S European Union Emission Trading Scheme F M forest management G H G Greenhouse gas I P C C Intergovernmental Panel on Climate Change JI Joint Implementation K P The Kyoto Protocol to the United Nations Framework Convention on Climate Change L F E Large Final Emitter L U L U C F Land use, land use change and forestry N G O s Non-governmental organizations R M U Removal unit for carbon sinks U N F C C C The United Nation's Framework Convention on Climate Change V & V Validation and Verification vii Acknowledgements The writing of this thesis involved a lot of personal inspiration, but also tremendous support from my supervisors, friends and family. This research could not have been completed without the help of many people, some of whom are acknowledged below. First of all, I would like to express my gratitude to my academic supervisor at University of British Columbia, Prof. Timothy McDaniels, and the research committee, Prof. Stewart Cohen, and Mr. Tony Lempriere, for their precious advice and commitment and mspiring creative input. My appreciation also goes to Ms. Judith Hul l , who has collaborated with me, readily agreed to being interviewed by me, and always been kind enough to respond to my requests for more information. I am also indebted to Prof. Gary B u l l and Prof. Hadi Dowlatabadi for many insightful discussions. Finally, I owe special gratitude to my wife and daughter, Wakana and Rumi, for being a source of strength and personal support during my academic pursuits. v i i i 1 Introduction 1.1 Background and context Forest resources provide societies with various kinds of environmental benefits, all of which have an impact on our daily lives: water purification, biodiversity, and carbon sequestration among others (Pagiola, Bishop, & LandeU-Mills, 2002). In particular, forest carbon sink issues have recently drawn much attention from various stakeholders such as governments, forest land owners, companies, NGOs, and the public in the context of global warming issues (Takeuchi, 2004). The Kyoto Protocol (KP) was established at the 3rd Meeting of the Conference of the Parties (COP3) of the United Nations Framework Convention on Climate Change (UNFCCC) in 1997. Following Russia's ratification of the K P in November 2004, the K P came into effect on February 16, 2005. Consequently, Japan wi l l have to reduce its Greenhouse gas (GHG) emissions by 6% below the 1990 levels in 20101 (UNFCCC, 1997). However, Japan's G H G emissions in 2003 were 8.3% above the 1990 level (Greenhouse Gas Inventory Office of Japan, 2005). Hence, in order to meet the Kyoto target, additional policy countermeasures need to be implemented in Japan. Under the KP, Japan wi l l have to reduce their G H G emissions by 6% below its baseline emissions. Out of the 6% of the baseline G H G emissions, Japan is allowed to figure in up to 3.9% (l3Mton-C: 47.7Mton-C02e) carbon storage achieved through forest management as emission reductions. However, according to recent research results by Japan's Forest Agency, Japan has faced a shortfall of the carbon storage achieved through forest management for achieving its Kyoto target (Ministry of Agriculture Forestry and Fisheries of Japan, 2002). Accordingly, enhancing forest management and storing additional carbon in forests have become increasingly important in Japan as domestic policy countermeasures. Forest degradation is another important issue in the Japanese forest sector. The Japanese forest sector has been in a long-term slump since the 1970s. The market price of domestic timber has remained low because of the massive supply of low-price imported timber. Besides, approximately 90% of private forest owners in Japan hold forests of less than 10 haJ the features that small scale owners make up of the majority of forest land owners in Japan make it difficult to improve the productivity of the forest sector in Japan Hereafter, the G H G emission reduction targets assigned to countries under the KP is called "Kyoto targets" 1 (Ministry of Agriculture Forestry and Fisheries of Japan, 2004). Accordingly, it is obvious that additional policy measures need to be implemented for the forest sector to recover from the long slump. Creating a carbon offset system is considered one potential policy countermeasure to address these issues, because it is expected to provide cost-effective G H G emission reductions (OECD, 2001). However, since the concepts associated with a carbon offset system are very new, few policy analyses have been conducted regarding the objectives, policy alternatives, and outcomes, of creating a carbon offset system. In this research, a policy analysis for designing a forest carbon offset system wi l l be conducted and the potential policy options that could be introduced to Japan wi l l be examined. 1.2 Research objectives and questions 1.2.1 Research objectives The overall objective in this research is to help inform decisions in designing and selecting the best possible carbon offset system for Japan. This objective wil l be achieved by conducting a policy analysis, including specifying policy objectives, creating alternative strategies, and estimating possible consequences, as a basis for a comparative analysis to identify aspects of a preferred system. Case studies of several carbon offset systems conducted in other countries wi l l be examined as one source of information for the policy analysis. 1.2.2 Research questions To achieve the objectives mentioned above, the following research questions wi l l be addressed in this research. Policy design options for introducing a forest carbon offset system wi l l be of primary focus here. • What are important variables for policy design in the introduction of a forest carbon offset system? • How would choosing different options, based on the policy design variables, influence possible consequences? (What benefits and costs would the forest carbon offset system alternatives bring to stakeholders?) • What would the best possible policy design options be to maximize stakeholders' interest? 2 1.3 Research methodologies 1.3.1 Literature review and interviews with experts and policy-makers To collect related information on the forest sector in Japan and carbon offset systems developed in several other countries, a literature review and interviews with policy-makers were conducted. Through this process, the following information was collected and analyzed. • Current status and historical background of the Japanese forest sector • Theories and principles of carbon offset systems • Case studies on carbon offset systems (Canada, US, and U N F C C C ) - The Carbon Offset System in Canada - California Climate Action Registry (US) - Afforestation/reforestation projects in Clean Development Mechanism (UNFCCC) • Methodologies on a policy analysis 1.3.2 Policy analysis on introducing a forest carbon offset system In this research, a "value-focused thinking approach (Keeney, 1992)" wil l be applied as a core methodology in conducting a policy analysis on carbon offset systems. According to this approach, the following five steps wil l be taken: • Recognize a decision problem (clarify the decision to be addressed) • Specify values (structure objectives from different viewpoints) • Create alternatives (create different strategies) • Evaluate alternatives (compare strategies in terms of consequences) • Select an alternative (identify value trade-offs) 1.4 Overview of the thesis In this thesis, the following sections are discussed after the introduction. Chapter T-"Forest and the Environment" discusses broad concerns associated with forests and the environment. Chapter 3: "Theories and methodologies" discusses theories, principles, and methodologies employed in this thesis for analyzing the effectiveness of a carbon offset system and for conducting a policy analysis on a carbon offset system. 3 Chapter 4'- "Forest sector and forest carbon sink issues in Japan" reviews the history of the forest sector in Japan and discusses emerging issues associated with forest related activities and climate change issues in Japan. Chapter 5^  "Policy analysis on a carbon offset system" comprises the main part of this thesis. It demonstrates a policy analysis on a carbon offset system and discusses the potential policy options to be introduced in Japan. Chapter 6: "Conclusion" summarizes al l the information on a policy analysis of a carbon offset system and makes suggestions. Finally, Appendix-' "Case studies of other carbon offset systems" presents case studies regarding designing carbon offset systems being considered in Canada, the United States, and the Clean Development Mechanism (CDM) under the United Nation's Framework Convention on Climate Change (UNFCCC). These serve the basis of a comparative analysis in Chapter 5. 4 2 Forest and the Environment 2.1 Forest environmental services Forests are commonly known for the goods that they provide, such as timber, fuel wood, fodder and other non-timber forest products. Less commonly known is the fact that forests also provide a number of crucial ecosystem services, for example, their role in sequestering carbon from the atmosphere, protecting upstream watersheds, conserving biodiversity and gene-pools for future generations and in providing landscape beauty ( IUCN Forest Conservation Programme, 2005). Pagiola et al. divide forest environmental services into the following three main categories^ watershed protection, biodiversity, and carbon sequestration CPagiola et al., 2002). Table 2-1 shows organization of the main categories. Table 2-1 Main categories of forest environmental services Categories Description Watershed protection Forests can play an importance role in regulating hydrological flows and reducing sedimentation. Changes in forest cover can affect the quantity and quality of water flows downstream, as well as their timing. Biodiversity Forests harbor a significant proportion of the world's biodiversity. Loss of habitat, such as forests, is a leading cause of species loss. Carbon sequestration Standing forests hold large carbon stocks, and growing forests sequester carbon from the atmosphere. Source-' Pagiola, S., Bishop, J., & Landell-Mills, N. (Eds.). (2002). Selling forest environmental services-' Market-based mechanisms for conservation and development Pagiola et al. have also illustrated a conceptual diagram of forest environmental services shown in Figure 2-1. They noted that "though the causes of deforestation are many and complex, market failure plays a key role on situations." They pointed out that "even in the absence of perverse public policies, such as agricultural subsidies that encourage unsustainable logging, those forest environmental services would be under supplied by the market, in most cases due to their nature as 'externalities' or 'public goods'.(Pagiola et al., 2002)" 5 In most cases, when trees are cut down for practical purposes forest environmental services are not likely to be taken into account because foresters do not recognize the loss of those services as immediate costs. Cutting down the trees increases the risk of downstream flooding and temporarily decreases water quality. However, the loss of environmental services often happens in places apart from where the trees have been cut down. Therefore, such environmental costs due to cutting forests are ignored for the most part (Pagiola et al., 2002). Figure 2-1 Forest environmental services Source: Pagiola, S., Bishop, J., & Landell-MUls, N. (Eds.). (2002). Selling forest environmental services'-Market-based mechanisms for conservation and development 6 2.2 Climate change and forest carbon sinks Recently, global warming and climate change issues have recently drawn much attention from various stakeholders such as national and local governments, private companies, NGOs, and the general public. As a result perspectives on forest carbon sink issues have been diverse and have raised enormous controversial debates (Takeuchi, 2004). 2.2.1 Potential of forest carbon sinks (1) Carbon sequestration potential on a global scale The global carbon cycle consists of the various stocks of carbon in the earth system and the flows of carbon between these stocks. Carbon in the atmosphere is sequestered into terrestrial ecosystems through the photosynthetic process in plants and returned through oxidization processes such as plant respiration, decomposition, and combustion. According to the IPCC, the amount of carbon stock in forests is 1,146 Gt"C (Figure 2-2), which is significant when compared with carbon stock in the atmosphere (760 Gt-C); in grasslands, savannas, croplands (765 Gt"C); in wetlands (240 Gt-C); in products (5-10 Gt"C) (IPCC, 2001). These numbers show that carbon stock in forests is relatively high, compared with other ecosystems, and, in general, the potential of forest carbon sequestration projects is also considerable as a G H G mitigation option. 7 Figure 2-2 Global carbon stocks and flows in different ecosystems Source: IPCC. (2001). Climate change 200V Mitigation, p307 8 As specified in Articles 3.3 and 3.4 of the Kyoto Protocol, each country is permitted to use "the net changes in G H G removals by forest sequestration resulting from direct human-induced land use change and forestry activities (UNFCCC, 1997)." Figure 2-3 shows an estimate of the human-induced change in the global carbon cycle in the 1990s. According to the estimation, carbon sequestration in "tropical vegetation (1.9 ± 1 . 3 [PgC/year])" and in "temperate and boreal vegetation (1.3±0.9 [PgC/year])" has a relatively large capacity, compared with "carbon flux from atmosphere to oceans (1.7 ± 0 . 5 [PgC/year]) (Swingland, 2003)." These numbers show that the human-induced carbon sequestration in tropical, temperate, and boreal vegetation has relatively high capacities, though the accuracy of those numbers is lower than that of other human-induced activities. Figure 2-3 An estimate of the human-induced change in the global carbon cycle in the 1990s Fossil-fuel combustion and cement production 6.4±0.4 r m Land-use change (mainly tropical deforestation) 1.7+0.8 J f \ Carbon flux from atmospheric to oceans 1.7±0.5 Sink in tropical vegetation 1.9±1.3 Sink in temperate and boreal vegetation 1.3±0.9 1 [Note] An estimate of the human induced carbon cycle in the 1990s (units are PgC/yr). The carbon flows from fossil-fuel emissions to the atmosphere and the net carbon flows to the ocean and land are known with relatively high confidence. The partitioning of the net land sink between human activity and 'natural' carbon sinks is less certain, as is the partition between tropical and temperate regions. Source-' Swingland, R. I. (Ed). (2003), Capturing carbon & conserving biodiversity: The market approach, p29 9 Figure 2-4 shows the potential of various land-management activities to mitigate global C02 emissions. For example, afforestation, regeneration, and agroforestry activities increase the carbon sequestration potential of forestry and agriculture, and slowing deforestation and land management activities reduce emissions at their source (Swingland, 2003). According to the estimates provided by the IPCC, a maximum mitigation of 100 PgC could be achieved between 2000 and 2050 (IPCC, 2001). The potential of carbon sequestration through forest-related activities makes up two thirds of the total potential. This means that enhancing forest carbon sequestration has a substantial potential as a GHG mitigation option. Figure 2-4 The potential of various land-management activities to mitigate global emissions agricultural management 33% temperate af forestat ion 13% slowing deforestat ion 14% tropical regenerat ion 18% temperate agrofores try 1% tropical a f forestat ion 15% tropical agroforestry 6% [Note] The potential of various land-management activities to mitigate global emissions of C 0 2 by increasing the carbon-sink potential of forestry and agriculture or reducing emissions at source (reducing deforestation). Estimates provided by the I P C C suggest that a maximum mitigation of 100 PgC could be achieved between 2000 and 2050. Source: Swingland, R. I. (Ed.). (2003), Capturing carbon & conserving biodiversity: The market approach, p35 10 As identified above, enhancing forest carbon sequestration is a significant alternative in the mitigation of G H G emissions. Figure 2-5 shows indicative curves of costs by emissions reduction or carbon sequestration options (IPCC, 2001). The slopes of the curves diverge sharply from each other, depending on the options and the groups of countries involved. "Forestry in O E C D countries" options are the most expensive, even more so than "renewable energy" options. Following those two options, the "Forestry in eastern Europe" options come in as the third most costly, which place "energy savings and efficiency" and "fuel switch" as less expensive options. According to the results, in developed countries, forest management options are more costly than other mitigation options including "renewable energy" options. However, "forestry in developing countries" options are the least expensive. This is mainly because many low-paid workers and low-cost lands are available in developing countries. Therefore, forest carbon sequestration projects through the Clean Development Mechanism have strong potential for success as a G H G mitigation option. Figure 2-5 Estimated costs of carbon sequestration options by level of reduction Level of reduction (MtC) Source: IPCC. (2001). Climate change 200V Mitigation, p329 11 (2) Carbon sequestration potential by country As detailed in Figure 2-5, generally, forest carbon sequestration options are not cost-effective in developed countries. However, the situation is quite different form country to another. Figure 2-6 shows the magnitude of carbon emissions and sequestration by different countries (IPCC, 2001). According to the results, for large-emission countries such as the United States, Japan, and the E U , the amount of carbon storage achieved through forest management is not particularly significant when measured against the large amount of G H G emissions. On the other hand, for Canada and Australia, the annual sequestration through activities in forestry is more proportionate to the total amount of their G H G emissions. These countries have vast forest lands with relatively low G H G emissions. Therefore, forest carbon sequestration options can play an important role in meeting their targeted reductions under the Kyoto Protocol. Figure 2-6 Magnitude of carbon emissions and sequestration © 5800 4800 3800 2800 1800 800 -200 -1200 • Emissions 1990 (MtCO^j • Annual sequestration through activities in forestry (low estimates) • Annual sequestration through activities in forestry (high estimates) USA Canada Australia Iceland Japan EU [Note] Indications of the magnitude of the carbon sink i n case study countries for a set of forest management measures (MtC02eq, adapted after Nabuurs et a l . 2000). The values for the three bars for Iceland are 2.6, 2.8, and 2.9, respectively. The figure is based on the forest part of the model "Access to Country Specific Data" (ACSD). Source: IPCC. (2001). Climate change 2001- Mitigation, p317 12 (3) Relevance of carbon sequestration Enhancing forest carbon sequestration has been recognized as a potentially valuable mitigation option, especially for countries such as Canada, the United States, Australia, and Japan, who possess extensive forest areas and who also have high marginal costs to meet their targeted emissions reductions (IPCC, 2001). To understand the relevance of carbon storage opportunities to mitigate G H G reductions, Pohjola, Kerkela, & Makipaa conducted research on the cost reduction available from implementing carbon credits. In the research, based on the agreements regarding forest carbon sinks, which were established in the COP 6 bis (Bonn) and the COP 7 (Marrakesh), the following three scenarios were created and used to evaluate the importance of carbon credits from forest sequestration (Pohjola, Kerkela, & Makipaa, 2003): • No sink case: Annex I countries, excluding the USA, reduce their emissions as assigned in COP3 in Kyoto 1997; • Common rule case: As above, but carbon sinks are credited and the amounts to be credited are calculated by common accounting rules, thus also applying to Canada , and Japan; • Larger for C A N / J P N case: As in 'Sink: common rule', but larger carbon sinks are allowed for Canada and Japan as agreed in COP6b in Bonn 2001. Source^ Pohjola, J., Kerkela, L., & Makipaa, R. (2003). Credited forest carbon sinks-' How the cost reduction is allocated among countries and sectors. CUmate Policy, 3(4), 445-461 Figure 2-7 shows the estimated rate of carbon tax needed to reach the targeted emission reduction under the Protocol without the United States' participation (Pohjola et al., 2003). According to the research results, in almost all countries, the economic burden would be reduced in the "common rule case" and "larger C A N / J P N case." In particular, Canada and Japan, who are given a greater allowance to count the amount of carbon storage achieved through forest management under the Marrakech Accords, clearly benefit from those cases. 13 Figure 2-7 Carbon tax needed to reach the emission reduction target under the Protocol (Annex I countries without U S participation) Sink • no I I common rule • larger for C.AM/JPN EU SWE FIN EFT CEA FSU USA CAN JPN AUS NZL [Note] ETJ: European Union (except for Sweden and Finland), S W E : Sweden, F I N : Finland, E F T : E F T A (European Free Trade Association, which includes Iceland, Norway, and Switzerland), C E A : Central European Associates (transition countries), F S U : Former Soviet Union, C A N : Canada, J P N : Japan, A U S : Austral ia , N Z L : New Zealand Source-' Pohjola, J., Kerkela, L., &Makipaa, R. (2003). Credited forest carbon sinks'- How the cost reduction is allocated among countries and sectors. Climate Policy, 3(4), 445-461 14 2.3 Emerging issues in the forest sector 2.3.1 Forest carbon sink issues in the Kyoto Protocol Under the Kyoto Protocol, some of Annex I countries are permitted to count carbon credits achieved from forest activities to meet their own G H G emission reductions targets (UNFCCC, 1997). The two key articles in the Kyoto Protocol, Articles 3.3 and 3.4, address forest carbon sequestration. a. Land use change and forestry (Article 3.3) Article 3.3 under the Kyoto Protocol allows Annex I countries to use "the net changes in greenhouse gas emissions from sources and removals by sinks resulting from direct human-induced land use change and forestry activities, hmited to afforestation, reforestation, and deforestation2 since 1990," to meet part of their targeted emission reductions. Those allowances shall be measurable and verifiable during the commitment period (UNFCCC, 1997). Article 3.3 The net changes in greenhouse gas emissions by sources and removals by sinks resulting from direct human-induced land-use change and forestry activities, limited to afforestation, reforestation and deforestation since 1990, measured as verifiable changes in carbon stocks in each commitment period, shall be used to meet the commitments under this Article of each Party included in Annex I. The greenhouse gas emissions by sources and removals by sinks associated with those activities shall be reported in a transparent and verifiable manner and reviewed in accordance with Articles 7 and 8. Source-' UNFCCC. (1997). Kyoto protocol to the united nations framework convention on climate change, http-'//unfca;.int/essential_background/kyoto_protocol/items/1678.php b. Additional human-induced activities (Article 3.4) Article 3.4 requests that each party submit data to establish its level of carbon stocks in 1990 and enable an estimate of carbon stock changes in the subsequent years. It also specified that negotiations would occur to define rules and guidelines as to how and which 2 "Afforestation" is the direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural seed sources. "Reforestation" is the direct human-induced conversion of non-forested land to forested land through planting, seeding and/or the human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land. For the first commitment period, reforestation activities will be limited to reforestation ciccurring on those lands that did not contain forest on 31 December 1989. "Deforestation" is the direct human-induced conversion of forested land to nonforested land (UNFCCC, 2002). 15 additional human-induced activities related to changes in greenhouse gas emissions and removals shall be added to, or subtracted from, the assigned amount for Parties included in Annex I counties (UNFCCC, 1997). Article 3.4 Prior to the first session of the Conference of the Parties serving as the meeting of the Parties to this Protocol, each Party included in Annex I shall provide, for consideration by the Subsidiary Body for Scientific and Technological Advice, data to establish its level of carbon stocks in 1990 and to enable an estimate to be made of its changes in carbon stocks in subsequent years. The Conference of the Parties serving as the meeting of the Parties to this Protocol shall, at its first session or as soon as practicable thereafter, decide upon modalities, rules and guidelines as to how, and which, additional human-induced activities related to changes in greenhouse gas emissions by sources and removals by sinks in the agricultural soils and the land-use change and forestry categories shall be added to, or subtracted from, the assigned amounts for Parties included in Annex I, taking into account uncertainties, transparency in reporting, verifiability, the methodological work of the Intergovernmental Panel on Climate Change, the advice provided by the Subsidiary Body for Scientific and Technological Advice in accordance with Article 5 and the decisions of the Conference of the Parties. Such a decision shall apply in the second and subsequent commitment periods. A Party may choose to apply such a decision on these additional human-induced activities for its first commitment period, provided that these activities have taken place since 1990. Source^ UNFCCC. (1997). Kyoto protocol to the united nations framework convention on climate change, http://unfccc.int/essential_background/kyoto_protocol/items/1678.php c. The Marrakesh Accords (Decision 11 /CP.7) A n important agreement, called "the Marrakesh Accords," was established in the COP 7 in Marrakesh. The agreement regarding forest carbon sinks specified the definition of Afforestation, Reforestation, and Deforestation (ARD) and forest management, gave all Annex I countries the option of including forest management, and specified caps on credits achieved through forest management (UNFCCC, 2002). 2.3.2 Carbon offset system as a policy option Under the Kyoto Protocol, countries who are assigned the Kyoto targets to wi l l have to reduce their G H G emissions during the first commitment period (2008-2010) (UNFCCC, 1997). Under Articles 3.3 and 3.4 of the Kyoto Protocol, al l Annex I countries must account for the net changes in greenhouse gas emissions by sources and removals by sinks resulting from A R D activities. And also, all Annex I countries can count credits achieved through forest management, i f they choose. Accordingly, carbon sink issues have become 16 controversial in the countries which have to meet their Kyoto target. In order to enhance forest carbon sequestration, new policy schemes under the heading "carbon offset system" are currently being considered in several countries, including Canada, the United States, Australia, and Japan. Generally, a carbon offset system is defined as a system which awards offset credits for verified emissions reduction or removals by eligible projects (Government of Canada, 2003). The detail description of a carbon offset system wil l be discussed in Chapter 3. A carbon offset system has the potential to provide economic incentives for project participants, who would then be able to obtain carbon credits through the successful implementation of their projects and also sell the credits to make profits in a new carbon market. Therefore, a carbon offset system is an attractive option in terms of economic efficiency (OECD, 2001). However, since the policy schemes for a carbon offset system are quite new there still remain a lot of obstacles to be addressed in the system design, for example, baseline issues, non-permanence issues, accounting methodology issues, and so on. At this moment in July 2005, except for European Union Emission Trading Scheme (EU-ETS), only pilot projects or voluntary schemes have been conducted in various countries (European Commission Environment DG, 2005). In this paper, a policy analysis on carbon offset systems is based on the various pilot projects currently being carried out. There are bound to be differences as well as similarities between the on-going pilot projects in different countries, because each carbon offset system can be customized to be the most suitable to domestic conditions in each country. 17 3 Theories and methodologies This chapter discusses theories and methodologies employed in this research. In seeking to establish the benefits of introducing a carbon offset system as a policy scheme to abate G H G emissions in Japan, two topics are addressed in this chapter: effectiveness of a carbon offset system and policy analysis methodologies. 3.1 Theories and principles of carbon offset systems 3.1.1 Overview According to "Offset System Discussion Paper" created by the government of Canada, a "carbon offset system" is defined as a system which awards tradable credits for verified emissions reduction or removals achieved through eligible projects (Government of Canada, 2003). It has two main functions: one is supplying carbon credits to those who carry out the project and the other is providing a market to trade credits between stakeholders, such as governments, private companies, NGOs, and the public. A carbon offset system can be regarded as a G H G emissions trading scheme, one of the "flexibility mechanisms" suggested in the Kyoto Protocol (KP). Article 17 in the K P describes the overall basic rules on emissions trading schemes. Besides that, Articles 3.10 and 3.11 define sub-information associated with operating emissions trading schemes in a practical manner. Table 3-1 shows Article 3.10, 3.11, and 17, which are Kyoto Protocol Provisions related to emissions trading schemes (Oberthiir & Ott, 1999). 18 Table 3-1 Kyoto Protocol Provisions related to Emissions Trading Schemes Article number Description Article 3.10 Any emission reduction units, or any part of an assigned amount, which a Party acquires from another Party in accordance with the provisions of Article 6 or of Article 17 shall be added to the assigned amount for the acquiring Party. Article 3.11 Any emission reduction units, or any part of an assigned amount, which a Party transfers to another Party in accordance with the provisions of Article 6 or of Article 17 shall be subtracted from the assigned amount for the transferring Party. Article 17 The Conference of the Parties shall define the relevant principles, modalities, rules and guidelines, in particular for verification, reporting and accountabihty for emissions trading. The Parties included in Annex B may participate in emissions trading for the purposes of fulfilling their commitments under Article 3. Any such trading shall be supplemental to domestic actions for the purpose of meeting quantified emission limitation and reduction commitments under that Article. Source^ UNFCCC. (1997). Kyoto protocol to the united nations framework convention on climate change, http://unfccc.int/essential_background/kyoto_protocol/items/1678.php A carbon offset system creates market incentives for project participants to undertake projects that reduce emissions or enhance removals, because project participants can generate profits by achieving, buying and selling tradable credits through the system. Generally, creating a carbon offset system enables society to achieve emission reductions or removals in the most cost-effective manner. This can be explained by the assumption that entities with high marginal abatement costs can achieve their emission reductions through the system by purchasing carbon credits achieved by other entities with low marginal costs. Therefore, the entity with high marginal abatement costs can achieve their emission reduction goals at lower costs than i f it tried to reduce emissions by itself. In short, the cheapest emission reductions are made first within the whole society (OECD, 2001). Picking up examples conducted in the world, international emissions trading schemes in Europe were officially initiated in January 2005 (European Commission Environment DG, 2005). In other developed countries, such as Japan or Canada, pilot projects for introducing domestic emissions trading schemes have been established (Ministry of Environment of Japan, 2003) (Government of Canada, 2003). So far, except for E U emission trading schemes, no international G H G emissions trading scheme has been established. 19 .1.2 Theories and principles Creating a carbon offset system could work efficiently i f they adhere to the principles detailed as follows (OECD, 2001). A carbon offset system, a market-based instrument used for environmental protection, has been recognized as one of the primary tools in the reduction of greenhouse gas (GHG) emissions. By using emissions trading schemes, project participants, such as private companies who have been assigned emission reduction targets, wi l l be able to reduce their own G H G emissions in an economically efficient way. The basic principles of emissions trading are shown in Figure 3-1. The marginal cost of emission reduction for Entity-A, who is a buyer of emission permits, is shown on the left. Suppose Entity-A needs to achieve emission reduction (QA-Q*A ) to comply with its emission reduction target. If Entity-A undertakes reductions by itself, it wi l l incur a marginal cost (PI-J?2_QA_Q*A) . But with tradable permits ( P * ) , the only cost would be for the permits bought (PI_P3_QA_Q*A) . Area-A (pi_j?2_j)3) represents the cost savings achieved through buying permits. On the other hand, the same logic applies for Entity B, who is a seller of emission permits, shown on the right. Entity-B reduces emissions below the objective ( Q * B " Q B ) and sells the surplus permits at a profit. Area-B (p4_ps_p6) represents the benefit from the trade. 20 Figure 3-1 Basic principles of emissions trading Cost/Price per Cost/Price per tonne of C Marginal cost of emission tonne of C • reduction for the buyer A Avoided reductions Additional reductions => permits bought => permits sold Source^ Author, based on OECD. (2001). International emission trading'-From concept to reality, p26 21 3.2 Methodologies applied for a policy analysis on carbon offset systems This research employs "value-focused thinking approach (Keeney, 1992)" as a policy analysis framework for analyzing a carbon offset system, which wi l l be discussed later in Chapter 5. This section describes the overview and the basic concept of the value-focused thinking approach. 3.2.1 Rationality of applying a policy analysis framework As described in the Introduction (Chapter 1), the overall objective of this research is to help inform decisions in designing and selecting the best possible carbon offset system for Japan. To achieve this overall objective, a policy analysis that considers several potential carbon offset systems is discussed in Chapter 5. The policy analysis is created based on case studies of carbon offset systems in several countries. Since a carbon offset system is a new concept in the emerging policy schemes to abate climate change, there are very few examples of such a system operating in a practical situation yet. To conduct a policy analysis on carbon offset schemes, employing a concrete framework for the policy analysis makes sense. In this research, the "value focused thixudng" approach, created by Ralph Keeney, has been adopted for a policy analysis on a carbon offset system. The approach is carefully described in his volume entitled "Value-Focused Irnnking: A Path to Creative Decisionmaking (Keeney, 1992)." Although this approach was originally developed for decision-making, it can also be applied to many policy analyses in practical cases such as electric utihty planning (McDaniels, 1994), wastewater management (Keeney, McDaniels, & Ridge-Cooney, 1996), and ecological risk assessment (McDaniels, 2000) among others, since policy analyses follow the same basic steps. Most policy problems are resolved based on consistent decision-making by stakeholders, like policymakers, private companies, NGOs, and members of the public. Consequently, this "value focused thinking" approach is properly applicable to a policy analysis on a carbon offset system. The decision-making analysis described in Keeney's book focuses on placing value on certain decision outcomes. Keeney asserts "the values relevant to a given decision situation indicate what information is important. Once you have specified your values, you should then collect information on alternatives only i f the information wil l help you judge the alternatives in terms of achieving those values." Therefore, according to this "value- focused thinking'' approach, identifying values takes a central role in a policy analysis. Figure 3-2 shows an overview of value-focused thinking. 22 Figure 3-2 Overview of value-focused thinking Source: Keeney, "Value-focused thinking: Apath to creative decision making, "p.24 3.2.2 Applying value focused thinking for a policy analysis Keeney's "value-focused tMnking" approach is a useful decision analysis methodology. The main characteristic of this approach is the careful attention to the values involved in a decision problem. In short, thinking about values should come first, before considering alternatives on a decision problem. In the "value-focused thinking" approach, the following five steps for addressing decision problems need to be executed: • Recognize a decision problem, • Specify values, • Create alternatives, • Evaluate alternatives, and • Select an alternative Source: Keeney, "Value-focused thinking: A path to creative decision making, "p.49 23 Figure 3-3 shows the influence of "value-focused thiriking" on the process of decision-making. As described, thinking about values, which includes analyses on identifying and structuring objectives, measuring objectives, and quantifying objectives, comes first in the whole process. The next step is to create alternatives and to improve the decision-making processes (note that these two points are interrelated.) Ultimately, conducting policy and decision analyses result in better consequences. Figure 3-3 The influence of "value-focused thinking" on the process of decision-making Thinking about values # identifying and structuring objectives # measuring objectives # quantifying objectives # uncovering hidden objectives # creating alternatives # identifying decision opportunities Improvinq the decision-makinq process # guiding information collection # evaluating alternatives # interconnecting decisions # improving communication # facilitating involvement in multiple-stakeholder decisions # guiding strategic thinking Source^ Keeney, "Value-focused thinking-'A path to creative decision making, "p.269 What follows is the description regarding the application of the five steps of the value-focused thinking approach. 24 Recognize a decision problem (Clarify the decision to be addressed) When faced with problems to be solved, people need to clarify the problems to be addressed. In many cases of issues associated with policy development, problem definitions are often difficult, because conditions change continually and many stakeholders get involved in the problems with different opinions. Therefore, recognizing decision problems is important to initiate a policy analysis. Concrete definition of a decision problem wi l l give a sound guidance for a policy analysis. Specify values (Structure objectives from different stakeholders' viewpoints) Carefully considering values in a decision problem from different viewpoints leads to clearly defined objectives. As Keeney states, 'The process of structuring objectives results in a deeper and more accurate understanding of what one should care about in the decision context." This emphasis on structuring "helps to clarify the decision context and to define between the fundamental objectives." Through "Specify values" processes, objectives can be clearly organized and those objectives can be separated into the fundamental objectives and the means objectives. Usually, an initial set of proposed objectives in a decision problem includes both means objectives and fundamental objectives. By analyzing values on a decision problem, objectives can be separated correctly into means objectives and fundamental objectives. Keeney recommends several analysis tools for specifying values: • Fundamental objectives hierarchy method(Figure 3-4) • Means-ends objectives network method (Figure 3-5) • Influence diagram method (Figure 3*5) Fundamental objectives hierarchy method Fundamental objectives hierarchy methods are useful in identifying and separating out the fundamental objectives among all the objectives associated with a decision problem. The common ways to apply this method are to ask repeatedly of each objective such questions as "why the objective is important and should be conducted in the decision context." Structured objectives provide the basis for any use of quantitative modeling. The fundamental objectives hierarchy indicates the set of objectives over which attributes should be defined (Keeney, 1992). Also, clearly defined fundamental objectives provide 25 appropriate guiding principles for decision making and point in the right direction toward the desired goals. Figure 3-4 shows a sample of a fundamental objectives hierarchy, regarding maximizing safety in a society. Figure 3-4 A sample of fundamental objectives hierarchy Minimize loss of Life to children Minimize loss of life to adults Minimize serious Injuries to children Minimize serious Injuries to adults Minimize minor injuries [Note] issue: maximizing safety in a society Source-' Keeney "Value-focused thinking-'A path to creative decision making, "p. 70 Minimize loss of life Maximize safety Minimize serious injuries b. Means-ends objectives network method Once an initial list of objectives are created, means objectives should be separated from ends objectives (fundamental objectives) to more clearly delineate values on a decision problem. The means-ends network indicates the objectives that should be considered in developing a model to relate the alternatives to their consequences. Keeney also suggests practical methods to compile a concrete means-ends objective network: "why is it important' test must be given to this objective in turn to ascertain whether it is a means objectives or a candidate for a fundamental objectives." Figure 3"5 shows a sample of means-ends objectives network. 26 Figure 3-5 A sample of means-ends objectives network Minimize accidents Maximize safety Maximize quality of driving Maximize use of safety features on vehicles Maintain vehicles property Motive purchase of safety features on vehicles Minimize driving under influence of alcohol Have reasonable laws Enforce the law Educate about safety Require safety features [Note] issue: maximizing safety in a society Source-' Keeney, "Value-focused thinking-'A path to creative decision making, "p. 70 c. Influence diagrams method Figure 3-6 shows a sample of an influence diagram associated with decision making about quality of life issues at B C Hydro (Keeney & McDaniels, 1992). Creating influence diagrams enables the clarification of the sequential causal relationships between one decision making process and another in a decision problem. Also, it presents the overall picture on a decision problem. 27 Figure 3-6 A sample of influence diagram financial performance interest coverage debt-equity ratio efficient pricing individual energy decision making technological innovation environmental impact flora fauna land use aesthetics public participation corporate citizen account for public values and attitudes public access to information Contribution to charities ,4 Quality-of-Life in British Columbia Economic Development costs liability funds to govt. Public Environmental Values Health and Safety public employee Equity pricing local impacts Corporate Image Learn public attitudes perceived risk risk communication public values (\ production of fundamental goods lower public debt regulatory complaints government relations human resource development best employer best employees authority to manage good planning manage IPP defensible resource allocation public support public trust public understanding public education perceived risk kjood communication! [Note] issue: decision-making at BC hydro Source: Keeney and McDaniels, "Value-focused thinking about strategic decisions at BC Hydro,' Interfaces 22 (6), p. 98 28 (3) Create alternatives (Create different strategies) To create alternatives, Patton and Sawicki suggest that the following should be considered in the design stage: cast, stabihty, rehabihty, invulnerabuity, flexibility, riskiness, communicabuity, merit, simplicity, compatibility, reversibility, and robustness. Also, they suggest that the following specific methods could be applied for searching alternatives (Patton & Sawicki, 1993): • No-Action analysis (Status Quo analysis) • Quick surveys • Literature review • Comparison of real-world experiences • Passive collection and clarification • Development of typologies • Analogy, metaphor, and synectics • Bramstorming • Comparison with an ideal Source^ Patton, V. C, & Sa wicki, S. D. (l993). Basic methods ofpoMcy analysis and planning (2nd ed.) p234 (4) Evaluate alternatives (Compare strategies in terms of consequences) In order to understand consequences of the possible alternatives, evaluation of those alternatives and strategies are conducted. Basically, in the research of this thesis, evaluation of alternatives and strategies wi l l be conducted on a qualitative basis rather than on a quantitative basis. The following shows some examples of qualitative analysis. <Qualitative analysis> • Development of evaluation criteria based on multiple account evaluation methodologies (policy & social/ economic/ environmental etc.) • Development of consequences table (matrix of objectives by alternatives) (5) Select an alternative (Identify value trade-offs) Ultimately, based on all the discussion generated through the above steps, the best possible policy design option is identified. In this final step, creating a consequences table is useful to conduct a comparative analysis between the possible policy alternatives. 29 4 Forest sector and forest carbon sink issues in Japan This chapter gives the historical background and the current status on the forest sector in Japan. Historically, Japanese people made use of forest resources in their daily lives, and forestry was once one of Japan's essential industries. However, currently, the forest industry in Japan has been in decay for several decades because of economic competition from other countries. In this chapter, the history of the forest sector in Japan is reviewed and several emerging issues in the forest sector are discussed. 4.1 Current status in the Japanese forest sector 4.1.1 History of the forest sector in Japan (after the 1950s) Historically, the Japanese people have utilized forest resources for such things as building houses and fuel resources. After the Second World War and up to the 1950s, in particular, Japanese domestic forest resources were being consumed at a certain amount, and forestry in Japan was maintained in a healthy industrial environment. However, since domestic demand for timber in Japan continued to rapidly increase after the Second World War II, the Japanese government decided to open the domestic timber market and introduced trade liberalization gradually during late 1950s and 1960s. Consequently, a great deal of imported timber began to flood the timber market, and the Japanese domestic timber industry lost its competitiveness in the market over time (Iwai, 2002). Figure 4-1 shows domestic and imported timber supply and the self-sufficiency rate 3 in Japan. As the figure illustrates, the self-sufficiency rate of timber in Japan was 94.5% in 1955. However, after the Japanese government started to encourage trade hberalization on the timber market, the rate decreased dramatically. As of 2002, the self-sufficiency rate for timber became 18.2% (Forest Agency of Japan, 2003). 3 Self-sufficiency rate is calculated by total domestic production divided by total domestic consumption of a good in a country. For example, as of 2002, the self-sufficient rate of timber in Japan was 18.2%, while that of rice in Japan was 94.0% (Ministry of Agriculture Forestry and Fisheries of Japan, 2003). 30 Figure 4-1 Domestic and imported timber supply and self-sufficient rate of timber in Japan [M m 3] 120 100 80 60 40 20 0 94.5 86.7 [%] 100.0 80.0 60.0 40.0 20.0 0.0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2002 p*—•» Domestic I I Imported -•—Self-sufficiency rate Source^ Forest Agency of Japan. (2003). Mokuzai jikyuhyo (timber self-sufficient rate tables) One of the main reasons the forest industry in Japan has been in decay for last several decades is the collapse of the domestic stumpage price. This price collapse was caused mainly by the influx of imported timber. Consequently, many forest land owners lost the incentive for mamtaining their forestry business, and an increasing number of forest land owners gave up and left their forest lands (Ministry of Agriculture Forestry and Fisheries of Japan, 2004). Figure 4-2 shows the following information: • Stumpage price of Sugi, Japanese cedar, • Area of mature forests (older than 51 years old) • Ratio of the area harvested in mature forests As shown in the figure, as of 1970, the stumpage price of Sugi, Japanese cedar, which is one of dominant tree species in Japan, was 22,707 [Japanese yen/m3]. Since then, the stumpage price has been decreasing sharply and it has reached less than one-forth of its 1970 price, 4,801 [Japanese yen/m3]. Although the area of mature forests O-brests older than 51 years) per forest land owner has been increasing, the ratio of the area harvested in mature forests remains low. This data implies that many forest land owners have less incentive to harvest forests, in spite of their forests being mature enough. This is mainly due to the long-term downtrend of domestic timber prices. 31 Figure 4-2 The stumpage price of Sugi in Japan [%1 fria/household] 5 2h 1970 (2) Area of forest >51 years per owner (1) Stumpage price of Sugi (Japanese cedar) [ 103 Japanese yen/m3] [103 Japanese yenftn3] 25 1 ha/F 420 (3) Ratio of cutting area within the area of forest >51 years [%T^& J. L^^J^^J^J I—™JL J U. 15 10 4 5 1985 1990 1995 2000 2003 Source-' Annual Report on Trends of Forest and Forestry, June 2004, Forestry Agency, Japan, http://www.hakusyo.maff.gojp/books_bA^0lHl50mtmm040107Mm 3 2 4.1.2 Small scale private forest land owners in Japan As of March 2002, the total forest land area in Japan covered about 25 million ha. National forests, public forests, and private forests make up 31%, 11%, and 58% of the total forest land areas respectively (Ministry of Agriculture Forestry and Fisheries of Japan, 2004). Table 4-1 shows forest land areas in Japan by ownership, as of March 2002. As Table 4-1 shows, one unique characteristic of forest land ownership in Japan is that private forests are dominant. For comparison, the current forest ownership status in Japan and Canada is shown in Figure 4-3. In Canada, provincial forests are dominant and private forests make up only 7% of the total forest land area (Natural Resource Canada, 2004). These structural differences between Japan and Canada must influence policy making processes in these countries. Table 4-1 Forest land areas in Japan by ownership (March 2002) Category Area (103 ha) Stock (103 m3) National forest 7,838 31% 1,011 25% Public forest 2,796 11% 433 11% Private forest 14,487 58% 2,596 64% Total 25,121 100% 4,040 100% Source^ Ministry of Agriculture Forestry and Fisheries of Japan. (2004). Shinrm ringyo hakusyo 33 Figure 4-3 Current forest ownership status in Japan and Canada (by forest area) Source: Natural Resource Canada. (2004). The state of Canada s forests 2003-2004 and Ministry of Agriculture Forestry and Fisheries of Japan. (2004). Shinrin ringyo hakusyo Another unique characteristic of forest land ownership in Japan is that small-scale private forest land owners are dominant in the private forest sector. As of year 2000, the number of forestry households who owned forest lands of less than 3 ha made up 59% of the total privately-owned forests. About 90% of the total number of forestry households have forest lands less than 10 ha (Ministry of Agriculture Forestry and Fisheries of Japan, 2004). These characteristics of the private forest lands ownership have caused structural problems which make it difficult to rationalize the forest sector in Japan, even though policy measures are being considered in order to improve economic status of the forest sector in Japan. 34 Figure 4-4 The number of forestry households in Japan by size of forest land area (Year 2000) 1 ~ 3 h a . 598(59%) 0% 20% 40% 2 0 ~ 3 0 h a 1 0 ~ 2 0 h a , | 21(2.1%) 72(7.1%) 3 0 ~ 5 0 h a , 15(1.5%) 3 ~ 5 h a , 164(16%) 5 ~ 1 0 h a , 140(14%) 5 0 ' ' 1 0 0 h a , 0.8%) 100haf 3(0.3%) 60% 80% 100% (N = 1019) Source: Ministry of Agriculture Forestry and Fisheries of Japan. (2004). Shinrin ringyo hakusyo 4.1.3 Revenues and Expenditures in forestry households of Japan As discussed in the previous sections, the forest sector in Japan has been in a recent decline mainly because it lost its competitive edge against imported lumber in the domestic market. The situation has directly affected management status of forestry households. Figure 4-5 shows the average revenues and expenditures per year in Japan's forestry households with forest lands between 20 and 500 ha, which consist of less than 5% of the total number of forestry households in Japan. The income status of smaller forestry households could be less than the one shown here. The annual gross margin per forestry household [(A)] has been decreasing down to about 1 million Japanese yen ($11,100 CAN) in 2003. On the other hand, annual operating costs [(B)] have remained constant! therefore, annual average income of forestry households [(A-B)] is 210 thousand Japanese yen ($2,330 CAN). Most forestry households depend on not only government subsidies, but also family labor. Taking the costs associated with family labor into account, the real average income should be reduced (Ministry of Agriculture Forestry and Fisheries of Japan, 2004). 35 Figure 4-5 Average revenue and expenditure per year of forestry households in Japan. [10 thousand yen/householdl 250 200 150 100 50 r (A) GrOSS marg in • • • • \ 030 Op + Fan crat ing cost — Sub sic raly labor cost ies _ ^ > — L 03) Operat — 1 ' '— ing cost ^ T * A ~ B * W A 1 \ Income A - B = 21 1970 1985 1990 1995 2000 2003 [Note] Survey scope: forest land owners wi th forest lands more than 20 ha and less than 500 ha The annual average income is calculated as (A) Gross margin subtracted by (B) Operating cost, and it is 210 thousand [JPY/ household]. Taking subsidies and family labor cost into account, the annual average is -10 thousand [JPY/ household]. Source-' Ministry of Agriculture Forestry and Fisheries of Japan. (2004). Shinrin ringyo hakusyo 36 4.2 Forest carbon sink issues in Japan 4.2.1 Environmental values of forest resources Traditionally, people in Japan have placed importance on the economic value of forests as resources for timber production. While the demand for domestic timber was maintained until the 1950s, plantations were established mainly by small-scale private land owners, and the areas of planted forests increased annually. However, after the 1960s, planting began to decrease (Iwai at al., p9). This is mainly because a massive amount of imported timber entered the domestic market, and the forest sector in Japan could no longer compete in the market. Over several decades, the economic value of forest resources has remained relatively low to forest land owners. Recently, there have been growing concerns associated with the environmental value of forest resources, in regards to such functions as water storage, flood control, water purification, sediment discharge control, and carbon sequestration. The Science Council of Japan has released research results on the annual estimated value of multi-ecosystem services provided by forests in Japan (See Table 4/2). According to the results, the total was 70,265 Billion Japanese yen (780.7 $CAN) (Science Council of Japan, 2001). Table 4-2 Annual estimated value of multi-ecosystem services provided by forest in Japan Service Category JPY [Billion] $CAN [Billion] Water storage 8,741 97.1 Flood control 6,469 71.9 Water purification 14,636 162.6 Sediment discharge control 28,257 314.0 Mudslides control 8,442 93.8 Recreation 2,255 25.1 Carbon sequestration 1,239 13.8 Substitute for fossil fuels 226 2.5 Total 70,265 780.7 (1$CAN=90.0JPY) Source: Science Council of Japan. (2001). Chikyuukannkyo-ningenseikatu nikakawaru nougyo oyobi shinrin no tamentekina Mnou no hyouka ni tuite (toushin), http://www.maff.go.jp/work/0-l.htm 37 4.2.2 Forest carbon sink issues As described in the previous section, forest carbon sink issues have recently drawn a lot of attention from various stakeholders. The Kyoto Protocol (KP) was established at the 3rd Meeting of the Conference of the Parties (COP3) as part of the United Nations Framework Convention on Climate Change (UNFCCC) in 1997 and it came into effect on February 16, 2005. Japan wi l l have to reduce its G H G emissions by 6% below 1990 levels by 2010. However, Japan's G H G emissions in 2003 were 8.3% above the 1990 level. Figure 4-6 shows the trend of greenhouse gas emissions in Japan during 1990-2003 (Greenhouse Gas Inventory Office of Japan, 2005). Figure 4-6 Greenhouse gas emissions in Japan (1999-2003) *8.3% • SF6 • PFCs 0HFCs IDN20 • CH4 • C O ! (Base Year) C02 1 CH4 > FY1990 N20 J HFCs 1 PFCs f CY1995 SF6 J [Note] The dotted line shows the Kyoto baseline emissions for Japan. Source-' Greenhouse Gas Inventory Office of Japan. (2005). The ghgs emissions data of japan (1990-2003), http://www-gio.nies.go.jp/database/db-e.html The Marrakech Accords, which were adopted at COP7 of the U N F C C C in 2001, allowed Japan to figure in a 3.9% emission reduction for carbon sequestration through forest management. Therefore, enhancing forest management has become increasingly important in Japan as one of its domestic countermeasures (Takeuchi, 2004). 38 Figure 4-7 shows estimated carbon storage achieved from forest management in Japan for 2010. The left-hand box depicts forest areas in Japan. Total forest area is 25.1 Mill ion ha, which consists of 11.6 million ha of planted forests and 13.5 million ha of natural forests. If the current forest management activities remain constant until the year 2010, managed planted forests are estimated to dip to 8.2 Mill ion ha, and managed natural forests to 5.9 Mill ion ha. The total managed forests area is estimated to total 14.1 Mill ion ha. The right-hand box shows the amount of carbon storage achieved in the managed forest based on current forest management activities. The total carbon sink due to forest growth is estimated to be 19.8 M [t-C] and, by subtracting 10.1 M [t-C] of lumber production, which should be counted as "emissions," the remaining 9.7 M [t-C] would be "eligible carbon sink," which would be figured into Japan's total for achieving the Kyoto target. According to the estimation, only 9.7 M [t-C], which is equivalent to 2.9% of the Japan's baseline emissions, could be achieved under current forest management activities. Therefore, new policy schemes for the forest sector in Japan need to be implemented in order to obtain additional carbon storage achieved thorough forest management (Ministry of Agriculture Forestry and Fisheries of Japan, 2002). Based on the estimation, there are several different possible options for Japan to take for achieving the Kyoto target of Japan. The first option is to expand areas under forest management so that the total amount of net carbon storage in managed forests accounts for 13 M [t-C02]. This option is supposed by the Forest Agency of Japan, and it is considered to be the most likely option at this moment (as of July 2005). The second option would be to increase the carbon intensity in forests by conducting additional forest management activities such as fertilization or planting rapid-growing tree species. To realize this option, additional funding wil l be needed for forest land owners to conduct forest management activities. 39 Figure 4-7 Estimated carbon storage achieved from forest management in Japan for 2010 f Total forest area in Japan 25.1 M Forest area (ha) Amount of carbon storage achieved through FM (t-C) Planted , Forest 11.6 M Non-Managed 3.4 M Managed 8.2 M Total carbon 9.7M [2.9%] Net carbon sink sink 19.8 M [5.9%] Natural Managed 5.9 M 10.1M [3.0%] Timber production (deducted) Forest 13.5 M Non-Managed 7.6 M [ %] shows ratios to the baseline emissions in Japan If the non-managed planted forests (3.4 M ha) are covered wi th forest management, the net carbon sink w i l l be about 13.0 M [t-C02], which is the maximum allowed l imi t of carbon storage achieved through F M activities to meet the Kyoto target of Japan. Source'- Ministry of Agriculture Forestry and Fisheries ofJapan. (2002). Shinrinkyusyugen lOkanen taisaku 4 0 Policy analysis on a carbon offset system This chapter presents a policy analysis on a carbon offset system. Currently, the introduction of a carbon offset system is being considered as one of the domestic policy options for abatement of climate change in several countries such as Canada, the United States, Japan, E U and Australia. A carbon offset system is defined as the system that awards offset credits for verified emissions reduction or removals by eligible projects (Government of Canada, 2003). Since estabhshing a carbon offset system requires the involvement of many stakeholders, different values and interests associated with introducing a carbon offset system should be considered carefully. Consequently, the "value-focused thinking approach," a framework for a policy analysis described closely in section 3.2, acts as a framework for the analysis here. The "value-focused thinking approach" suggests employing the following five steps for a policy analysis-' (l) Recognize a decision problem, (2) Specify values, (3) Create alternatives, (4) Evaluate alternatives, and (5) Select an alternative (Keeney, 1992). Adhering to these five steps, the introduction of a carbon offset system on the basis of the analysis is considered in this chapter. Since the research focuses on a policy analysis of introducing a carbon offset system for Japan, a policy design on a carbon offset system that fits the Japanese forest sector wi l l be discussed in the following sections. Also, some of the information used for the analysis in the following sections has been collected and analyzed mainly in Chapter 4- Forest sector and forest carbon sink issues in Japan and Appendix-' Case studies of other carbon offset systems. 41 5.1 Recognize a decision problem (Clarify the decision to be addressed) In general, policies are considered, established and implemented when existing social problems are expected to be solved by the public rather than left to the market to solve. Recognizing and clarifying a decision problem wi l l give us a concrete starting point for a policy analysis. In this section, decision problems associated with creating a carbon offset system wi l l be discussed. 5.1.1 Consideration of problems in the forest sector (1) Short-term problems Recently, carbon credits (C02 emissions rights) have become an economic commodity in the context of abating global warming. In particular, after the Kyoto Protocol came into effect in February, 2005, interest in estabhshing institutions for trading carbon credits has intensified. For example, the E U emission trading scheme started in January 2005 QSuropean Commission Environment DG, 2005), and several projects have been registered by the Clean Development Mechanism (CDM) Executive Board (UNFCCC, 2005c). In the meantime, forest carbon sink issues have also drawn much attention from various stakeholders, including governments, forest land owners, companies, NGOs, and the general public because sinks have the potential to uptake C02 from the atmosphere and store it in forests in economically efficient ways. If carbon credits obtained through forest management activities were tradable and could be sold, project participants, such as forest land owners, private companies, and local governments, would make profits through forest management projects. Creating a carbon offset system could affect decision-making for various stakeholders associated both directly and indirectly with the forest sector. Creating a carbon offset system may lead forest land owners to find value in a new activity, instead of merely in the economic benefits gained by harvesting. In short, they might consider trying to receive carbon credits through forest management projects via conservation rather than by clearing forests. That might also provide additional investment opportunities for private companies in the non-forest sector. Creating carbon offset systems could provide a new funding mechanism for the forest sector. Such funding schemes should be workable and could contribute to the realization of sustainable forest management. (2) Long-term problems Forests in Japan have faced a problem of forest degradation, mainly because of the 42 depressed domestic forest industry and current policy schemes with relatively low economic incentives. As discussed in Chapter 4, after the Japanese government decided on trade hberalization in 1960s, planting began to decrease. This is mainly because a massive amount of imported timber entered the domestic market. Gradually, forestry in Japan lost its competitiveness in the domestic market. Economic incentives for the forestry sector in Japan have remained relatively low for several decades (Iwai, 2002). In addition, recently, there have been growing concerns associated with the environmental values of forest resources, not only carbon sequestration but also their function as water storage, flood control, water purification, and sediment discharge control. These environmental values for forest resources are now receiving more interest than before (Science Council of Japan, 2001). .1.2 Problem definition in the research In this research, both short-term and long-term problems mentioned above wi l l be considered. The short-term problems regarding forest sector issues in Japan can be summarized in the following points: • Shortfalls of carbon storage achieved through forest management to meet the Kyoto target of Japan (Enhancement of forest carbon sequestration) The long-term problems regarding forest sector issues in Japan can be summarized in the following points: • Forest degradation which results decreased forest environmental services in forest lands (mainly in private forests) • Increased need for further implementation and prevalence of sustainable forest management in practice Creating and introducing a carbon offset system for the forest sector has a significant potential of contributing to the alleviation of both short-term and long-term problems, because estabhshing a carbon offset system can provide stakeholders with economic incentives through market mechanisms and therefore contribute to addressing both the carbon and sustainable forest management problems. In the following sections, a policy analysis on a carbon offset system wil l be conducted, and this policy analysis specifically addresses the long- and short-term problems defined above. 43 5.2 Specify values (Structure objectives) Before considering the policy implementation of a carbon offset system for a specific sector, such as the forest sector, several policy objectives should be identified to guide the related discussion and consideration in an appropriate direction. This section discusses values and objectives regarding the introduction of a carbon offset system. 5.2.1 Different stakeholders involved in a carbon offset system To put a forest carbon offset system into practice, various stakeholders need to get involved and take different roles in the system. Operating a carbon offset system would require administrative authorities, project participants, financial investors, project validators and verifiers, carbon-credit purchasers and so forth. Table 5-1 shows possible key stakeholders and their objectives to participate in a forest carbon offset system. As the table shows, each stakeholder has their respective objectives and interests. For example, governments are interested in meeting Kyoto targets, avoiding forest degradation, and achieving public acceptance etc. Private companies would have an interest in conducting forest management for themselves, investing in forest management projects, and purchasing carbon credits in a carbon offset system. Forest land owners would expect to make a profit on their forest resources by harvesting or by getting carbon credits in a carbon offset system. Accordingly, when considering policy schemes on a carbon offset system for the forest sector, the different perspectives of such stakeholders should be taken into account. 44 Table 5-1 Key stakeholders and their interests in a carbon offset system for the forest sector Key stakeholders Description Objectives and interests Government All levels of governments (Federal, Provincial, and Local) are included. To respond to policy demands - for meeting Kyoto targets - for avoiding forest degradation - for achieving public acceptance Private companies Large-scale and small-scale private companies are included. They would need a certain amount of carbon credits, if emission caps were introduced for their companies. To get carbon credits - by conducting forest mgmt. projects - by investing in forest mgmt. projects - by purchasing in a carbon offset system Forest land owners Individuals and companies who hold forest lands are included. They make decisions on how to manage their forest lands. To make a profit on their forest resources by harvesting etc. To make a profit by getting carbon credits Auditing organizations, consultants Auditing firms and consultants are included. They verify how much carbon sink is added in forest management projects. To verify the amount of additional carbon storage obtained in forest management projects General Public General public, including citizen's or environmental groups To preserve the environment in forests from: - deforestation - forest degradation Source^ Author 45 Stakeholders associated with a carbon offset system would take different roles in the system. Table 5-2 shows a sample map of possible key stakeholders' roles in a carbon offset system. Governments are supposed to take a lead role in creating and operating a carbon offset system, in terms of system administration. They also need to design the whole system and develop the legislation for estabhshing the system. As for project operation, private companies, governments, and forest land owners would take important respective roles. Government could initiate new forest management projects to achieve increased carbon storage in forests. Private companies and forest land owners could also conduct forest sequestration projects on their forest lands. Validation and verification processes would be conducted by auditing organizations and governments. Investments in forest carbon sequestration projects would be made by governments, private companies, and the public, such as NGOs. Carbon credits would be purchased mainly by governments and private companies. Table 5-2 A sample mapping of possible key stakeholders' roles in a carbon offset system Functions (Key roles) Key stakeholders Government Private companies Forest land owners Auditing organizations General Public Administration XXX policy -making Project operation XXX public forests XXX private forests XXX private forests Validation and Verification (V&V) XX XXX Investment for projects XX as investors XX as investors X as investors Carbon credits purchase XX subsidies, funds XX market demand [Legend] XXX: most important players, XX: second most important players, X: possible players Source' Author 46 5.2.2 Fundamental objectives hierarchy (Means-ends network) A s discussed in the section 5.1, problems related to forest management are separated into two aspects^ short-term and long-term. Similarly, policy objectives to introducing a forest carbon offset system can be separated into these two aspects along with their shorf and long-term problems. In addition, from the viewpoint of feasibility of the policy, policy costs and policy process aspects should be taken into account. Figure 5-1 summarizes a means-objectives (ends) network on designing a carbon offset system, which describes short- and long-term policy outcomes, policy costs, and policy process objectives regarding the creation of a forest carbon offset system. Also, the means-ends network shows how the policy objectives can contribute to achieving the fundamental objectives (ends): environmental, economic, and social objectives, which are summarized in Table 5-3. The following three fundamental objectives become a basis for evaluating alternatives, which wil l be discussed later i n this chapter. Table 5-3 Fundamental objectives (ends) in the introduction of a carbon offset system Fundamental objectives Description Environment - To reduce GHG emissions for achieving the target under the Kyoto Protocol. - To avoid forest degradation in forests Economic - To maximize social benefits regarding fostering forest environmental services, including enhancing carbon sequestration, through market based mechanisms - To increase revenues obtained by project participants through carbon credits Social - To achieve public acceptance for utilizing carbon credits through forest management activities - To encourage private companies to understand forest carbon sinks and to utilize them as one of the tools for achieving Corporate Social Responsibility (CSR) Source-' Author In the short-term, the objective related to policy outcomes i n introducing a forest carbon offset system is to store additional carbon-storage achieved through forest management--for meeting the Kyoto targets. Setting up a carbon offset system provides stakeholders with new funding schemes for forest management projects. Project proponents or financial investors can, with economic efficiency, achieve carbon credits through the forest carbon offset system while contributing to the enhancement of 47 additional carbon storage in forests. The short-term policy objectives can also contribute to achieving the environmental objectives in the final ends. In the long-term, by contrast, the objectives related to policy outcomes could be to avoid forest degradation, to utilize forest resources in sustainable ways, and to conserve forests as part of a cultural heritage, al l through sustainable forest management activities. The objectives are crucial to forest management issues. However, the establishment of a forest carbon offset system would not work directly to achieve such environmental, economic, and social objectives. It could rather influence stakeholders' decision makings for forest management activities through market mechanisms. Therefore, to some extent, the long-term policy objectives can contribute to achieving the environmental, economic, and social objectives in the final ends. In addition to the above two aspects, policy process objectives should be taken into account in the means-ends network. The policy process objectives are related to the size and credibility of the system, which significantly contribute to ensuring high political feasibility. Also, it is related to the public acceptance, which can be a driving force to install the system in practice. The policy process objectives can mainly contribute to achieving the social objectives in the final ends. Finally, policy cost objectives should be considered as one of the most crucial and cross-cutting factors in terms of feasibility of a carbon offset system. A carbon offset system is operated based on a market-based mechanism. Hence, i f a carbon offset system works under the free competition market, with a supply-and-demand balance maintained, its design wi l l need to consider the need for: (l) creating new funding opportunities from both the public and private sector, (2) finding the least cost projects by project proponents and investors. These effects based on a market mechanism could contribute to reducing total social costs associated with reducing emissions and enhancing removals, and achieving Japan's Kyoto target. 48 Figure 5-1 Means-objectives (ends) network on designing a carbon offset system Means objectives Policy objectives <Short-term policy outcome perspective> Storing additional carton storage in forests Meeting the Kyoto target <Long-term policy outcome perspective> Enhancing sustainable forest resource use (economic) Avoiding forest degradation (environment) Fostering sustainable forest management Conserving forest as heritage (social) Designing funding mechanisms for the forest sector Mar|ket influence <Policy cost perspective / Introducing Market-Based Cost Mechanisms Maximizing cost effectiveness Market influence <Dosigning system operation attributes> Increasing/ decreasing the amount of credits traded Increasing/ decreasing the number of projects Keeping reliability of the system and offset credits <Policy process perspective> Maintaining strong influences on stakeholders Ensuring credibility of the crediting system Creating effective policy schemes for GHG mgmt Achieving public acceptance to the system Fundamental objectives (ends) Environmental objectives Economic objectives Social objectives [Note] "Market influence" enables to reduce costs for achieving both short- and long-term policy objectives. It contributes tx>: finding the cost-least projects, encouraging funding from both the private and public sector. Source-' Author 49 .2.3 Influence diagram Drawing an influence diagram helps us understand what the impact would be from taking a certain action. Here, an influence diagram is depicted in Figure 5-2 in order to illustrate possible influences that creating a carbon offset system would effect. As the figure shows, the forest carbon offset system would initially be designed and implemented based on policy demand. In the context of forestry and climate change issues, several policy measures could be considered, such as creating a carbon offset system, developing new forest policies (ex. government subsidies), and new climate change policies (ex. G H G emissions cap allocations for large emitter companies). These new policies could create new opportunities of issuing and trading carbon credits, of increasing government subsidies for the forest sector, and of raising market demands for carbon credits, respectively. With a carbon offset system introduced and the balance of supply and demand for carbon credits well-maintained, fundamental objectives shown in Figure 5-1 could be achieved through the system based on a market based mechanism. Once the carbon offset system is implemented, the system could influence decision-making processes by forest land owners and investors through forest carbon sequestration projects. The carbon offset system could lead their activities toward achieving short- and long- term objectives. Most private forest land owners make decisions as to how to manage their forest lands on their own. Accordingly, the carbon offset system has the potential to affect forest land owners' decision-makings toward both enhancing additional forest carbon sequestration and achieving sustainable forest management. 50 Figure 5-2 Influence diagram on a forest carbon offset system Policy Demands Policy demands Decision-making by policymakers Policy makin and climate c g on forestry langeissues Legend • : has influence on | | : decisions ^ : uncertainties : assumptions Policy implementation & market response A carbon offset system Increased credits issued for forest carbon sink New forest policies (ex. increased subsidies for FM activities) New climate change policies (ex. GHG emissions caps allocation) ' U in '- ~ Market-based Cc (through a carbc >st Mechan isms n offset system) Decision-making of forest Decision-making of land owners investors Stakeholders' decision making Outcomes Delaying harvest for storing additional forest carbon sink Implementing effective forest management Sustainable forest management (long-term objectives) Source-' Author 5 1 5.3 Create alternatives (Create strategies) 5.3.1 Overview of life cycle in a carbon offset project for the forest sector Before starting to discuss policy alternatives for introducing a carbon offset system, let's take a look at the life cycle of a G H G emission reduction/removal project. Figure 5*3 shows how a G H G emission reduction/removal project works (International Organization for Standardization, 2005). In the project lifecycle, there are two main phases, which can be separated by the time for conducting a project: Planning phase and Implementation phase. In the project lifecycle, there are several important events for the practical implementation of a carbon offset project, for example, assessment of project eHgibility, validation for a project and project participants, registration of a project, verification for project outputs, and issuance of carbon credits, and so on. Figure 5-3 Lifecycle of a GHG emission reduction/removal project Planning j Assess Consult Validate • Project Stakeholders G H G ' rv, ' _before and after D r n - a M \ Concept/ establishing the ^ J * * Feasibility/ GHG Project | Program Plan • I A I j \ Implementation | Undertake Project Activities Proiect Project Period issuance Terminate \*£L 1 of credits Projects Ut—^ 1 1. ! i i! Obtain Plan the Register, Program GHG Project 1 Approval Project \ i l \ Periodical Verification, P r e i Periodical Certification and Fi | Periodical Issuance of G i Credits Re sent Verify rial GHG En •P Reductic - Rem P°rt Enhanci | time Final Certify lissions Final GHG )ns and Emissions oval Redudions and aments Removal Enhancements Source-' International Organization for Standardization. (2005). Greenhouse gases —part 2-' Specification with guidance at the project level for quantification, monitoring and reporting of greenhouse gas emission inductions or removal enhancements (ISO/DIS14064-2) <draft version> 52 5.3.2 Policy variables In general, when new policy schemes are being discussed in the policy planning stage, several policy options are considered and assessed in terms of feasibility in a real situation. Attributes which decide the characteristics of those policy options are called "policy variables." Considering policy variables wi l l provide chances to discuss any problems addressed from a broad range of views. It can also increase the capacity for policy-makers to choose a concrete and realistic policy option for a new policy scheme. Implementation of Clean Development Mechanism (CDM) has been considered under the U N F C C C . Since C D M schemes wi l l create tradable permits for G H G emission reductions or sequestration enhancements achieved through a C D M project, relatively strict rules for the operation are being prepared by the C D M Executive Board. In the discussion of C D M implementation, the following issues shown in Table 5-4 were discussed (IPCC, 2001). Detailed rules for the C D M agreed in international negotiations between 2001 and 2005, as well as decisions of the Executive Board, have addressed al l of these issues. Table 5-4 Main issues on implementation of Clean Development Mechanism Category Issues Eligibility Host and project eligibility Eligibility of sequestration actions Verification Monitoring, verification, and reporting requirements Baseline Baseline establishment Credits certification CER certification, registry, and trading conditions Organizational control Executive board composition and responsibilities Process for designation of operational entities Compliance Penalties for non-compliance Source: Author based on IPCC (2001)Mitigation, p427 Table 5-5 shows policy variables for a carbon offset system for the forest sector. Each policy variable has a certain range of possible options. For example, for setting baseline methodologies, there could be several options to take. There could be more conservative and rigid ones, or more flexible ones. Setting different policy variables leads to different policy outcomes. 53 Table 5-5 Policy variables on a carbon offset system for the forest sector Policy variables Description Main issues Baseline methodologies Issues of how to reasonably determine the activities and amount of carbon storage in forests which would occur in the absence of a project Uncertainties on estimation: Consideration on diversity of forest lands, tree species, etc.; Conservativeness of the estimation *Costs associated with estimation Quantification methodologies Issues of accuracy and costs associated with monitoring of activities and measurement of the amount of carbon storage in forests which actually occur in a project Uncertainties on measurement *Costs associated with measurement Review process (Validation and Verification) Issues of how to validate a proposed project, how to verify emission reductions/removals, and what is needed to authorize issuance of carbon credits *Costs of validation and verification *Liabilities of validator/verifier Non permanence issues Issues of how to treat issued credits, taking into account that carbon storage in forests is vulnerable to reversal events due to natural disturbances such as forest fires and pest outbreaks, or harvesting *Laability issues insurance for credits Leakage issues Issues related to an increase in emissions or reduction in removals outside a projects' boundary due to project operation. *The kind and quantity of leakage in a project Credit property and issuance Issues of the valid period of credits arising from forest carbon sequestration projects (because of its non-permanent characteristics, forest carbon credits might be discounted) *Kinds of credits issued: Temporary credits; Permanent credits Ehgibility of project/project participants Issues of what kind of projects and who are eligible (Range of projects/stakeholders involved) *Project category: Project size or category (A/R or forest management etc.) Supply and demand control of carbon credits Issues of how to control supply and demand of carbon credits in a forest carbon offset system *Quantities of credits demanded/supplied * Credit buyers/suppliers in the market (ex. G H G emissions caps introduced) Carbon price Issues of what the market price of carbon credits in a carbon offset system would be ($/ton-C02) *Quantities of credits demanded/supplied *Price assurance by the government Source-' Author 54 In the following sections, each policy variable in a carbon offset system for the forest sector, described in Table 5 " 5 , is explained in detail. (1) Baseline methodologies The baseline methodology issues bring up arguments on how to identify the amount of carbon storage in a forest area if the forest sector project would never happen. The baseline can be identified based on the scenario that reasonably represents the activities and amount of carbon storage that would occur in the absence of the project. Accordingly, the baseline methodologies issues have significant influence on the amount of carbon credits issued to the project participants. Figure 5 - 4 shows the relationship between baseline emissions and project-case emissions in a project. The dotted line shows "basehne removals" of carbon sinks, which mean the amount of carbon stocks when additional activities in a project never happen. On the other hand, the solid line shows "project-case removals" of carbon sinks, which mean the amount of carbon stocks when additional activities are implemented in a project. After completing the project, the difference between these two lines (S2-S1) would be given to project participants as carbon credits (IPCC, 2 0 0 0 ) . This is the basis of how carbon offset system works. Figure 5-4 Relationship between baseline emissions and project-case emissions in a project (baseline-case) Project period (year) [Note] dotted line: baseline removals, solid line: project-case removals Source'- IPCC. (2000). Land use, land-use change, and forestry, p. 229 5 5 Quantification methodologies The quantification methodologies issues are centered on the accuracy of, and costs associated with, measurement of the amount of carbon storage which actually occurs in a forest management project. Since quantification methodologies wil l decide the amount of carbon storage due to the project, along with the baseline methodologies, the quantification methodologies issues have significant influence on the amount of carbon credits issued to the project participants. However, the more accurate measurement of carbon stocks in a project, generally, the more data collection is required, which costs a lot to project participants. Consequently, in most cases, there occurs a tradeoff between the accuracy of measurement and costs associated with the measurement. Therefore, a system of quantification methodologies needs to be optimized. Review process (Validation and Verification methodologies) Review process issues are concerned with figuring out how to validate a proposed project, to verify emission reductions/removals, and to authorize issuance of carbon credits. As with the previous issues-baseline and quantification methodologies issues-there is a tradeoff between the accuracy and rigidness of the validation and verification, and the costs. Therefore, a solution to the question needs to be reached. Non-permanence issues In a forest carbon sequestration project, there is a big difference from an emissions reduction project, in that the carbon storage achieved in a forest sink project is not permanent. G H G emissions reductions achieved from an emissions reduction project are permanent because the reduced emissions themselves wi l l never be emitted again in the future. On the other hand, however, carbon storage achieved from a G H G removals project still exists as organic carbon and is vulnerable to reversal events due to natural disturbance such as pest outbreaks, wildfires, and disease outbreaks, or anthropogenic practices such as forest harvesting (Government of Canada, 2003). Those reversal events can occur at any time during a project. If a reversal event happens prior to the credit issuance, a l l or some portion of carbon credits anticipated for the project wi l l not be issued to the project participants. Therefore, forest carbon sink projects need to be monitored to make sure that the carbon storage achieved through forest management still remains in the project site (Government of Canada, 2003). 56 In addition, reversal events after credit issuance also need to be addressed carefully. Carbon credits arising from a forest carbon sequestration project could be used by a buyer, even if the carbon storage achieved from the project disappears due to a reversal event. In this case, while both buyer and seller of the credits benefit from the use and sale of the credits, the burden of addressing a reversal of forest carbon sinks wi l l be transferred to other sectors in the economy (Government of Canada, 2003). Therefore, hability mechanisms for non-permanence issues need to be implemented in a carbon offset system. A time range of25-100 years has been suggested as a hability period for project participants in the Carbon Offset System in Canada (Government of Canada, 2003). This means the project participants wi l l be liable for forest carbon sinks for 25-100 years after the last carbon credit issuance. After the hability period, the habilities wi l l be transferred from the project participants to another body, such as governments or the whole society. (5) Leakage issues When conducting a carbon offset project, a project boundary in the project needs to be defined in terms of geographical area and in terms of the project processes and activities. Any significant G H G emissions or removals within the project boundary should be under the control of the project and counted using the baseline and quantification methodologies. Leakage is an increase in emissions or decrease in removals outside a project boundary resulting from the project operations. Leakage is associated with changes in reduction/removals that are significant and reasonably attributable to the project, but are not under control of the project participant (Government of Canada, 2003). Leakage may be a potentially serious problem in a carbon offset system. Suppose, for example, that a forest or wetland that was to be cleared is instead protected. Protection of one such forest or wetland may simply deflect the pressure to another piece of land that is not protected and wi l l be cleared instead. Leakage can occur from such protection or planting situations (IPCC, 2001). (6) Credit property and issuance The credit property and issuance issues relate to the valid period for credits arising from forest sink projects. Due to their non-permanent characteristic, forest sink credits might have to be discounted unlike other emission reduction credits, or different kinds of 57 credits may have to be issued--like the temporary credits (tCER) and long-term credits (1CER) issued by C D M scheme under U N F C C C . According to the decision of the ninth session of the Parties to the U N F C C C (COP 9) in December 2003, the two types of credits from C D M afforestation and reforestation projects, temporary credits (tCER) and long-term credits (1CER) are denned as follows. The tCERs expire in 5 years after the issuance but can be renewed i f the seller retains the carbon sequestration. On the other hand, ICERs are very similar to tCERs on a practical level, but the agreement between the buyer and seller extends for a crediting period of either 30 years or 20 years, twice renewable to a maximum of 60 years. Both tCERs and ICERs must be verified every 5 years. As described above, the design of a crediting system in a carbon offset system wil l significantly influence incentives for stakeholders, in particular, for project participants and credit buyers. A tradeoff between economic and policy feasibility should be considered carefully in designing a crediting system. (7) Eligibility of project The ehgibihty issues include what projects and what proponents are eligible in a carbon offset system. The definition of ehgibility criteria determines the range of projects and stakeholders for involvement in a carbon offset system. For example, the following criteria shown in Table 5-6 are proposed as ehgibihty of a project in the Carbon Offset System in Canada (Government of Canada, 2003). 58 Table 5-6 Eligibility criteria for offset projects Criteria Description Inclusion in the inventory Only G H G reductions/removals that will be captured in Canada's G H G inventory for Kyoto Protocol reporting would be eligible. Project start date Only projects initiated after a specified 'start date' will be ehgible. Crediting period Only G H G reductions and removals that occur in the first commitment period would be ehgible. In addition, a 'start date' for ehgible projects, possibly tied to a policy decision, and defined as a stage in the project development (e.g., beginning of construction), could be required. Real A G H G reduction/removal is real if it reduces the concentration of GHGs in the atmosphere (all GHGs must be accounted for), and is the result of a specific and identifiable project net of leakage that is measurable and directly attributable to the project within the project boundaries. Measurable A reduction/removal is measurable if the level of G H G emissions/removals in the baseline (e.g., BAU, 'before-project' or other baseline), and the actual level of G H G emissions/removals with the project in-place, can be quantified with an acceptable level of confidence. The quantification methodology, including baseline approaches, is set out in a quantification protocol. Verifiable A G H G reduction/removal is verifiable if the quantification methodology is sound, clear and replicable, and the raw data required to verify/audit the calculation is available. The verification methodology is set out in a verification protocol. Surplus A G H G reduction/removal is surplus if it, or the activity that causes it, is not required (e.g., by existing federal/provincial regulation/operating certificate), and is in excess of the level that is required/might reasonably be expected will be achieved from receipt of another government climate change measure. Unique A G H G reduction/removal is unique if it is only used once (e.g., a G H G reduction/removal cannot be reported as an improvement in the seller's G H G inventory and traded to another entity for use in meeting a compliance obligation). Ownership The entity (investor/owner) creating offsets must have secure and transparent ownership rights to the G H G reductions/removals. Source'- Government of Canada (2003), Offset System Discussion paper [36-45] 59 Supply-Demand control of carbon credits Since a carbon offset system performs properly based on appropriate market mechanisms, keeping balance between quantities supplied and demanded carbon credits is critical to operating the system in a practical manner. If too many carbon credits are supplied, the carbon unit price wi l l decrease and become too cheap to be an effective incentive tool. If there is too much of a demand for carbon credits, the price wi l l increase and become too expensive. Therefore, optimization of credits supply and demand wi l l be needed by implementing a policy scheme such as a G H G emissions cap for large-scale private companies. Carbon price As already described in association with the supply and demand of carbon credits, carbon price wil l fluctuate in a carbon offset system. As an effective intervention by government, a price cap commitment or a price assurance system might work as a policy measure to control carbon price in a carbon offset system. This government intervention might cause a reduction of cost-effectiveness of the carbon offset system, but the credibility of the system should also be maintained properly. .3.3 Possib le alternative strategies I) Possible alternative strategies based on policy variables In order to consider the best policy option for the introduction of a carbon offset system in Japan, two widely divergent alternative policy options are considered here: "Rigid and conservative strategy" and "Loose and flexible strategy." Table 5-7 shows an overview of the possible alternative strategies proposed in this research. Selecting the "Rigid and conservative strategy" creates a situation that would result in a carbon offset system that is relatively rigid with carbon credits being issued more conservatively. Consequently, the system would work rigidly, and, because of the rigidness, less incentive would be provided to project participants because they would get a relatively small amount of carbon credits. That might result in fewer participants involved in the carbon offset system. On the other hand, choosing the "Loose and flexible strategy" creates a situation that would result in a carbon offset system that is relatively flexible, with carbon credits being 6 0 issued more flexibly. Consequently, although it might be difficult to maintain the credibility of the carbon offset system, the system would be preferable to stakeholders in the market, which would result in more participants involved in the system. As the table depicts, the "Rigid and conservative strategy" employs rigid system requirements! therefore, less participation and limited credits issuance are expected. However, the workability of the system becomes relatively high because of the small number of participants with rigid system requirements. In contrast, the "Loose and flexible strategy" installs flexible system requirements! therefore, more participation and flexible credits issuance are expected. However, the workability of the system becomes relatively low, because of the large number of participants with flexible system requirements. According to the different possible alternative strategies, policy variables discussed in section 5.3.2 and Table 5_5 could take on different variables. Table 5_8 shows policy variables according to these two possible extremes in alternative policy options. 61 Table 5-7 Overview of possible alternative strategies Strategies Description Remarks (pros and cons) Openness (participation) Workability System requirement Economic incentives Status quo strategy (no carbon offset system) No new policy schemes are introduced. (+) Low costs (No additional costs) (-) No additional incentives for stakeholders N/A N/A N/A N/A "Rigid and conservative" strategy A forest carbon offset system is introduced with a rigid operation strategy, which employs a relatively conservative approach along with policy variables. (+) High reUability of the system^ high policy feasibility due to a small number of participants in the initial stage. (-) Fewer participants due to less economic incentives Low High Rigid Low "Loose and flexible" strategy A forest carbon offset system is introduced with a flexible operation strategy, which employs a relatively high-incentive approach along with policy variables. (+) More participants due to more economic incentives (-) High complexity of the system: Low policy feasibility due to a large number of participants in the initial stage. High Low Flexible High Source-' Author 6 2 Table 5-8 Policy variables according to possible alternative strategies Policy variables "Rigid and conservative" strategy "Loose and flexible" strategy Baseline methodologies * Only "authorized methodologies" allowed * Only "rigid and precise estimation" allowed * No "simplified baseline methodologies" provided * The following two options allowed: l) "rigid and precise estimation" and 2) 'loose and rough estimation." As for option 2), a more conservative baseline should be chosen. * "Simplified baseline methodologies" provided Quantification methodologies * Full sampling and full time momtoring required * No "Simplified quantification methods" admitted * Both reduced sampling and estimation allowed * "Simplified quantification methods" admitted Review process (V&V) * Strict V & V processes by the gov't or authorized third parties required * V & V processes by independent third parties pre-authorized by the gov't Non permanence issues * Setting 'longer" liability periods (Significant liabilities go to project participants)' * Setting "shorter" liability periods or "no" liability (Least liabilities go to project participants. Instead, the gov't would assume significant liabilities.) * Insurance for natural disturbance provided Leakage issues * Setting a relatively rigid project boundary for accounting leakage * Setting a relatively loose project boundary for accounting leakage Credit property and issuance * Offset credits with expiring date are issued by gov't authorities like tCER and 1CER along with the UNFCCC CDM scheme. * Offset credits with expiring date are issued by gov't authorities like tCER and 1CER along with the U N F C C C C D M scheme, or other flexible options for issuance. Eligibility of project * High standards for project eligibility criteria ("Additionality4" required). * Low standards for project eligibility criteria (No "additionality" required) Supply and demand control of carbon credits * With gov't intervention for supply and demand control, (ex. Gov't fund, subsidies, tax benefits etc.) * Without any gov't intervention for supply and demand control Carbon price * Gov't intervention by use of "price assurance" policy (garanteed price) * No gov't intervention Source-' Author based on Government of Canada. (2003). Offset system discussion paper, and interviews with expertise on a carbon offset system 4 Acrording to the Kyoto Protocol, Emissions Reduction Units (ERUs) or Certified Emission Reductions (CERs) will be awarded to project-based activities provided that the projects achieve reductions that are "additional to those that otherwise would occur (UNFCCC, 1997)." 63 Different options for a carbon offset system (Case study results) The Appendix: "Case studies of other carbon offset systems" of the thesis reviews the following three projects regarding designing a carbon offset system. As described and discussed there, the case study results show that there are several different models for the implementation of a carbon offset system as one of the policy measures for the abatement of climate change issues: • The Carbon Offset System in Canada • California Climate Action Registry • U N F C C C Clean Development Mechanism Overview of different carbon offset systems Reviewing these case studies, a comparison among these three systems wil l be useful for the policy analysis regarding designing a carbon offset system. Figure 5*5 shows the differences and relationships among the three case studies. The figure places a geographical scale on the horizontal axis, and rigidness of system requirements on the vertical axis. The California Climate Action Registry program is a voluntary policy scheme in a local state in the United States (California). Since it is a voluntary policy scheme and it has not provided certified carbon credits so far, the system requirements are relatively loose. For example, the system has not established penalties for breaking regulations (California Climate Action Registry, 2002b). Therefore, it is located at the bottomTeft ("Local" and "Relatively loose"). On the opposite end of the spectrum, the U N F C C C C D M program is an international flexibility mechanism under the Kyoto Protocol. The program wil l provide official Kyoto credits to project proponents for completing authorized C D M projects. It employs strict rules on the operation of C D M projects, basically, based on the authorization of the C D M Executive Board (UNFCCC, 2005d). Therefore, it is positioned at the top-right ("International" and "Strict"). Finally, the Carbon Offset System in Canada is now being developed by the government of Canada as one of the domestic policy measures to reduce G H G emissions in Canada. It wi l l be a national-level system and legislated. The carbon credits issued in the system wil l not be compatible with the Kyoto credits; those credits wi l l be officially issued by the government of Canada and can be used for meeting G H G emission reduction 64 targets allocated to individual private companies (Government of Canada, 2003). Therefore, the system is expected to employ relatively rigid system requirements, although the government has emphasized the need to find the appropriate balance between system integrity and cost effectiveness. In Figure 5-5, it is located in the middle ("National" and "Moderate"). Figure 5-5 Relationship among three case studies conducted in this thesis System requirements Strict Moderate Relatively loose Local National International Geographical scale Source-' Author b. System rigidness and credits trading markets As Figure 5-5 shows, system rigidness seems to have a strong relationship with a geographical scale, in other words, the credits market that the authority wants to create. Clearly, the UNFCCC CDM case should employ the strictest rules, because it should be a kind of international standards, and could issue real Kyoto credits to participants. The 65 rigidness of the C D M system could influence the significance and effectiveness of the Kyoto Protocol. On the other hand, any schemes at a national level, such as the Carbon Offset System in Canada, could be established in a more flexible way, because those schemes would be in effect within a country as a domestic policy instrument. Those national schemes could be somehow modified in order to fit the domestic situations in each country. Furthermore, any voluntary schemes at a local level, such as the California Climate Action Registry, could be more flexible than national schemes, because those schemes are spontaneous programs initiated by voluntary groups. Since those voluntary schemes are not under the force of law in most cases, social costs are relatively low to operate the system but the effectiveness and performance of the system wi l l vary according to the situation. It should also be recognized that any national or local schemes would be influenced by the existence of the CDM-based trading market. In the long term, the international acceptability of credits from domestic schemes, either at an equal value or perhaps a lower value, wi l l depend to some degree on the acceptability of these schemes, and their underlying rules and procedures, at the international level. Carbon markets and government's role Carbon credits markets never occur for emissions trading without G H G emission caps, and without clear property rights about what is being purchased and traded. G H G emission caps are currently introduced only at the national level, through the Kyoto protocol. Several countries, such as Canada or Japan, are interested in allocating G H G emission caps to provinces and prefectures, or to industries, and then to firms. Actually, the government of Canada announced that G H G emission caps wil l be allocated to large final emitters in Canada. However, it may be a long time before such caps are negotiated and decided (Government of Canada, 2005). Therefore, in particular, in the beginning stage, most of the market activities are expected to be conducted by governments. According to the degree and ways of government intervention, the level of flexibility or rigidness of the system wi l l be established to fit the domestic market situations. 66 5.4 Evaluate alternatives (Compare strategies in terms of consequences) For making an informed judgment on any policy issue, a concrete list of evaluation criteria needs to be established. The list of evaluation criteria should clearly explain how each criterion would contribute to objectives in a project. This section discusses evaluation criteria on introducing a carbon offset system, and clarifies how each criterion is related to overall objectives described in section 5.2. 5.4.1 Evaluation criteria A series of evaluation criteria for introducing a carbon offset system are discussed. Table 5-9 shows evaluation criteria for introducing such a system. As described in the table, each criterion fails into four different categories^ economic, social, environment, and policy outcomes, and each has a relationship with, and contributes to policy objectives as shown in Figure 5-1 (See 5.2 Specify values (Structure objectives)). First, "short-term objectives" look only at increasing carbon storage achieved through forest management in order to achieve Japan's G H G emission reduction target under the Kyoto Protocol. Therefore, the achievements can be measured mainly as the increased revenue obtained by project participants through carbon credits (Economic), and the increased carbon storage in forests certified under a carbon offset system (Environment). Moreover, the new job creation arising from offset projects (Social) and the increased areas under A/R and F M projects (Environment) wi l l be important criteria. Second, on the contrary, "long-term objectives" cover a wide range of issues through forest management activities, such as avoiding forest degradation or prevailing sustainable forest management. Therefore, the new job creation arising from offset projects (Social) and the increased areas under A/R and F M projects (Environment) wi l l be the most important criteria to measure the performance. Following those criteria, the increased revenue obtained by project participants through carbon credits (Economic), and the increased carbon storage in forests certified under a carbon offset system (Environment) wi l l also be important criteria. Finally, "policy objectives" should also be taken into account when assessing the performance of a carbon offset system. Since the policy process objectives are related to the size and rehability of the system, they significantly contribute to ensuring high political feasibility. Therefore, the achievements can be measured mainly as the following criteria: the administrative costs to operate a carbon offset system! the total amount of transaction credits, the number of project participants and industrial sectors involved in a carbon offset system; credibility of a carbon offset system and issued credits. 6 7 Table 5-9 Evaluation criteria for introducing a carbon offset system Categories Criteria Evaluation methods (Indicators) Short-term objectives Long-term objectives Policy objectives Economic Increased revenues obtained by project participants through carbon credits *Total value of carbon credits created from a carbon offset system X X X XX Social New job creation arising from offset projects *Total number of man-hours spent for projects X X X X X Environment Increased amount of carbon storage in forests certified under a carbon offset system *Additional carbon storage in forests created from a carbon offset system X X X XX Increased areas under Afforestation/Reforestation (A/R), and Forest Management (FM) projects *Total number of areas where A/R or F M projects are conducted within a carbon offset system X X X X X Policy outcome Operation cost *Administrative costs to operate a carbon offset system X X X Total amount of transaction credits *Total amount of carbon credits traded, sold and purchased by project participants and investors XXX The number of project participants and industrial sectors involved in a carbon offset system *Total number of projects, proponents, investors, and purchasers involved *The number of industrial sectors involved X X X Credibility of a carbon offset system and issued credits *Degree of credibility for stakeholders and public (ex. opinion survey results on a carbon offset system) XXX [Legend] XXX: strong achievement of objectives, XX: moderate achievement of objectives, X: possible achievement of objectives [Note] Short-term objectives: enhancing forest carbon sequestration for meeting the Kyoto target, Long-term objectives: prevailing sustainable F M , Policy objectives: cost-effectiveness etc. (See: Figure 5-1) Source'- Author 6 8 .4.2 C o n s e q u e n c e tab le According to the evaluation cri teria shown i n Table 5-9, alternative strategies for introducing a carbon offset system, described i n Table 5-7 and Table 5-8, are evaluated i n a qualitative manner. A consequences table on introducing a carbon offset system is shown i n Table 5-10. There are several pros and cons between two strategies^ the "Rigid and conservative" and the "Loose and flexible" strategies. The system performance under the "Rigid and conservative" strategy w i l l become somehow l imited, because of the smal l participation of stakeholders, but w i l l perform i n a relatively stable way due to the high pol i t ical feasibility. Therefore, achievements from environmental, economic, and social aspects may be relatively low or moderate, but i n terms of policy outcome such as achieving credibil i ty of the system would be relatively high. On the contrary, the system performance under the "Loose and flexible" strategy w i l l become relatively more significant than that of the "Rigid and conservative" strategy, because of the large part icipation of stakeholders. However, the system may perform i n a relatively unstable way, due to the l imited capacity of the government, i n terms of the system operation..Therefore, achievements from environmental, economic, and social aspects can be relatively high, but, i n terms of policy outcome, the system w i l l usually be subject to r isks of system failure. 69 Table 5-10 Consequences table on introducing a carbon offset system Categories Criteria "Rigid and conservative" strategy "Loose and flexible" strategy Economic Increased revenues obtained by project participants through carbon credits Relatively low (with high uncertainties due to price fluctuation of carbon credits) Relatively high (with high uncertainties due to price fluctuation of carbon credits) Social New job creation arising from offset projects Medium (due to a narrow range of participation) High (due to a wide range of participation) Environment Increased amount of carbon storage in forests certified under a carbon offset system Medium (due to a narrow range of projects and project participants) High (due to a wide range of projects and project participants) Increased areas under Afforestation/Reforestation (A/R), and Forest Management (FM) projects Medium (due to a narrow range of projects and project participants) High (due to a wide range of projects and project participants) Policy outcome Operation cost* High (due to maintaining "rigid" system operation) High (due to maintaining "flexible" system operation) Total amount of transaction credits Moderate (due to a narrow range of participation) High (due to a wide range of participation) The number of project participants and industrial sectors involved in a carbon offset system Narrow range of participants (fewer projects and project participants) Wide range of participants (more projects and project participants) Credibility of a carbon offset system and issued credits High (due to rigid system operation) Medium (due to flexible system operation) *System operation costs in both strategies are expected "high" because of costs associated with maintaining each system. Source-' Author 70 5.5 Select an alternative (Identify value trade-offs) This section discusses the most suitable policy option for the introduction of a carbon offset system in Japan. Based on the policy analysis described above, identifying value trade-offs and selecting an alternative is discussed. 5.5.1 Characteristics of the Japanese forest sector As discussed in Chapter 4, there are several typical characteristics in the Japanese forest sector. These characteristics are summarized as follows: • Long term downward economic trend in the Japanese forest sector, mainly because of low domestic stumpage price (See the section 4.1.1) • Private forest lands are the dominant form of ownership (See Table 4-1) • Small-scale land owners dominate in the ownership of private forest lands (See Figure 4-4) • Few economic incentives are provided to stakeholders in the current subsidy policy schemes (see Figure 4-2 and Figure 4-5) Also, the main problems associated with a policy analysis for the Japanese forest sector can be divided into long- and short-term^ • The short-term problems^ shortfalls of carbon storage achieved through forest management to meet the Kyoto target of Japan (Enhancement of forest carbon sequestration) • The long-term problems^ increased need for further prevailing sustainable forest management to avoid forest degradation and decreased forest environmental services in forest lands 5.5.2 Different FM activity options for achieving objectives In general, there are several practical forest activities that can assist in achieving the short-term and long-term objectives mentioned above. Figure 5-6 shows alternative forest management activities for enhancing forest carbon sequestration. To achieve short-term objectives, enhancing forest carbon sequestration to meet the Kyoto target, carbon stock needs to be increased and harvest needs to be decreased. Shifting top-left to bottom-right in the figure would present the best option. In short, making "reserved forests," or delaying the harvest is the best option toward achieving the short-term objectives (Kurz, 2005). 71 Figure 5-6 Alternative forest activities for enhancing forest carbon sequestration Carbon stock Decrease Increase Increase Harvest Decrease Short Rotation Deforestation Source-' Kurz, W. (2005). Monitoring, modelling and managing Canada's forest carbon cycle, BIOCAP Canada's 1st National Conference. Ottawa, ON Taking these factors into account, the next section discusses examining alternative strategies. 5.5.3 Examining alternative strategies (1) Value tradeoffs between two alternatives As depicted in Table 5-10 of the previous section, there are several trade-off relationships between the "Rigid and conservative" and "Loose and flexible" strategies. There are three typical trade-off relationships found in the policy analysis on a carbon offset system^ • Rigid system requirements versus Economic incentives • Openness versus Workability • Carbon price in the market • Harvesting versus carbon storage 7 2 a. Rigid system requirements versus Economic incentives Rigid system requirements within a carbon offset system wi l l give high credibility to the system. However, it might reduce stakeholders' participation due to the lower flexibility and fewer economic incentives of the system. For example, it could be too costly to establish baselines or quantification methodologies for measuring actual G H G emissions or removals, or to get carbon credits certified in offset projects. In case studies found in the Appendix, projects under the C D M of U N F C C C are conducted very strictly, because the carbon credits certified in this scheme wil l be officially allowed to be used for meeting the Kyoto targets. Numerous project-related documents and records, such as project design documents, baseline and monitoring methodologies, and G H G accounting reports, must be submitted to, and authorized by, the C D M Executive Board. Therefore, the procedures to get carbon credits certified are unwieldy and complicated, and it takes a long period to complete. Such series of strict procedures can reduce stakeholders' incentives and result in a reduced size and range of participants. Reduced size of the participation in a carbon offset system wil l directly influence policy outcomes, such as (l) the number of projects, (2) the amount of carbon sinks achieved through the projects, and (3) the quantity of new job creation in the system. Therefore, the rigidness of system requirements should be optimized to keep a balance with economic incentives to meet stakeholders' interests. b. Openness versus Workability The level of openness of the system is a critical factor in considering the design of a carbon offset system because it can enhance transparency, influence, and fairness of the system. The openness of the system contributes to achieving sound public acceptance regarding the introduction of a carbon offset system, which results in more policy achievements involved in the system. However, at the same time, too much openness wi l l allow more participants and wil l constrain the workability of the system because open accessibility requires rather stricter rules to maintain the concrete system operation. Small participation under rigid system requirements is relatively easy to handle for the administrator of the system. Therefore, openness of a carbon offset system should be optimized to maintain workability in the system. In case studies found in the Appendix, schemes developed under the California 73 Climate Action Registry are relatively open, because it is a voluntary scheme and, therefore, it accepts project participants as openly as possible. Though they need to be rigid in terms of achieving public acceptance and credibility of the system, the system requirements are relatively loose because it is a voluntary scheme and has no strict penalties installed. Furthermore, operating a carbon offset system wi l l involve a great deal of uncertainty since it is a totally new policy scheme in most countries. Therefore, solid workability and strict rigidness of the system operations should be given a higher priority than openness, flexibility, and higher participation of stakeholders. c. Carbon price in the market (with or without government intervention) The carbon price in the market is one of the most critical factors in operating a carbon offset system because the price settings decide the level of incentive for stakeholders. If a carbon offset system operates under the complete free-market economy, the carbon price wi l l change by both quantities supplied and demanded in the market. In that case, basically, carbon price in a carbon offset system can not be controlled by the government. However, in general, without appropriate government market intervention, price in a trading market fluctuates widely, in particular, by the time when the market becomes mature and stable enough. In case of a new emerging market such as a carbon offset system, the tendency for fluctuation is more likely to occur. Consequently, it could be effective for the government to introduce a policy scheme to assure a minimum price for buying up carbon credits in the carbon offset system. Or the government could establish a mnding scheme to buy up domestic carbon offset credits in the system. By providing such price assurance schemes, project participants could avoid significant risks associated with carbon pricing and count on a sound plan of investment for offset projects. d. Harvesting versus carbon storage The final but not least tradeoff is between harvesting due to improved forest management and carbon storage. Project participants could receive carbon credits just by extending their schedule for harvesting while they would take some risks of losing their carbon credits due to forest management activities. This tradeoff could occur in both the "Rigid and conservative" and "Loose and flexible" strategies. One suggestion to address this tradeoff could be a specification of no credits issued for reduced harvesting. However, this option does not seem practical in a real situation, 74 because taking a long rotation policy in forest harvesting could contribute to enhancing forest environmental services, which meets the long-term objectives. Therefore, the decision on this tradeoff should be controlled by decisions made by stakeholders involved, based on market mechanisms. Although the net impacts on carbon with and without harvesting are complex as expected, the tradeoffs can occur and the government can take some responsibility for managing the tradeoffs by monitoring the market. The most suitable option for the introduction of a carbon offset system in Japan As shown in the case studies in the Appendix, the Canadian case falls in the middle between the rigid and flexible options (see Figure 5-5). Since the Carbon Offset System in Canada is a domestic policy scheme at the national level, there should be similarities to the prospective option that is desirable in Japan. Therefore, it seems reasonable that the desirable option for Japan should be developed in reference to the Canadian case. However, the government of Canada is currently trying to develop the Carbon Offset System, based on a market-based mechanism, so that it wi l l be as flexible as possible by employing economic incentive mechanisms in the system. Actually, the system is being developed as openly as possible, subject to maintaining practical workability. This strategy seems to correspond to the "Loose and flexible" strategy rather than to the "Rigid and conservative" strategy. Analysis would seem to suggest that, unlike the Canadian strategy, starting with the relatively more rigid and conservative strategy than the Canadian case at the initial stage, and adding flexible mechanisms to install economic incentives over time would be a better choice for Japan. Hereafter, this option is called a "Mid-rigid strategy," which takes a position between the Canadian case and the U N F C C C C D M case, in terms of system rigidness. The reasons why Japan should take the "Mid-rigid strategy" are as follows: First, experience on how to operate a carbon offset system is lacking in Japan. Unlike the situation in Canada, there have been few pilot projects regarding the design and implementation of a carbon offset system for the forest sector in Japan (Ministry of Environment of Japan, 2003). Therefore, knowledge and information of accounting methodologies, managing forestry inventory, and measuring the amount of carbon storage in forests, al l need to be improved. Thus, the Japanese system should be developed more rigidly than the Canadian one. Second, small scale forest land owners are dominant in the private forests in Japan (see Figure 4-4). It is difficult and costly to operate the system with only small-scale forest 75 land owners involved, in particular, at the initial stage of the operation. In particular, in the beginning stage of mstalling the system, the government leadership wil l take the most important role to make a carbon offset system effective. From the view point of economic effectiveness, taking up large-scaled projects by governments or large private companies first would be a desirable and effective option under a relatively rigid system. Finally, public opinion regarding the utilization of forest carbon sequestration projects has not fully accepted the idea in Japan yet. Some environmental groups still have strongly negative stances against utilizing forest carbon sink for the abatement of G H G emissions. They insist that private companies or the government should address substantial G H G emissions reduction first rather than utilize forest carbon sequestration projects (FoE Japan, 2005). In addition, faced with such public opinion toward forest carbon sink, the central government, such as the Forest Agency in Japan and the Ministry of Environment in Japan, has not been ready to consider new policy schemes on a carbon offset system for the forest sector. Therefore, starting with rigid system requirements and building up public acceptance would be the better option in Japan. Once enough public acceptance for developing a carbon offset system is achieved, a number of stakeholders, including private companies, who are interested in utilizing forest management projects as a tool for promoting their Corporate Social Responsibility (CSR) activities, are expected to get involved in the system. Hence, as mentioned above, a concrete set up is a must for making a carbon offset system workable in Japan. The situation in Japan is quite different from that in Canada. In Canada, the government tries to make the system as flexible as possible, since they believe that the more flexible the system is, the more policy objectives could be achieved in the system (Government of Canada, 2003). Actions to take should be based on situations in each country. Therefore, policy schemes based on different strategies should be installed in Canada and Japan. In Japan, the "Mid-rigid strategy" at the initial stage, rather than the "Loose and flexible" strategy, would be the best option for introducing a carbon offset system in Japan. Issues on the timing and sequence of a transition from a rigid system to a somewhat flexible one are also important and they wi l l depend on both the domestic carbon market conditions and the G H G emissions status for achieving the Kyoto target in Japan. Once the market conditions become credible and mature enough in terms of operating the system, the government of Japan could introduce additional incentive mechanisms to get more participants involved in the system. According to the market conditions and the G H G emission reductions status, the government of Japan should adjust the system requirements appropriately to make it more flexible by providing incentive mechanisms for stakeholders. 76 6 Conclusion This research focuses on a policy analysis on introducing a carbon offset system in Japan. Implementing a carbon offset system is being considered in several countries such as Canada, the United States, Australia, as well as Japan. The government in each country tends to customize the legal framework for a carbon offset system to complement the situations in their countries. In other words, the policy design of a carbon offset system applied to a country could be made flexible enough to fit the situation, and to address the specific problems, of that country. 6.1 Summary of the policy analysis 6.1.1 Recognize a decision problem As discussed in Chapter 4, the current forest sector in Japan faces several problems. The problems are categorized into short- and long-term problems in terms of economic, environmental, and social aspects. Table 6-1 Summary of decision problems in the introduction of a carbon offset system in Japan * Short-term problems: shortfalls of carbon storage achieved through forest management to meet the Kyoto target of Japan (Enhancement of forest carbon sequestration) * Long-term problems: increased need for further implementation and prevalence of sustainable forest management to avoid forest degradation and decreased forest environmental services in forest lands Source: Section 5.1 "Recognize a decision problem (Clarify the decision to be addressed)" 6.1.2 Specify values Objectives of introducing a carbon offset system in Japan are summarized in Table 6-2. In order to achieve these objectives, a market-based mechanism involved in a carbon offset system contributes to (l) creating new funding opportunities from both the public and private sector, (2) the discovery of low cost projects by project proponents and investors. Accordingly, creating a carbon offset system has a big potential to achieve those objectives in a cost-effective way. 77 Table 6-2 Summary of fundamental objectives in the introduction of a carbon offset system in Japan * Short-term objectives: to store additional carbon storage achieved through forest management for meeting the Kyoto targets * Long-term objectives: to avoid forest degradation, to utilize forest resources in sustainable ways, and to conserve forests as part of a cultural heritage, all through sustainable forest management activities. * Policy process objectives: to ensure high political feasibility by mamtaining the size and rehability of the system * Policy cost objectives'- to minimize social costs associated with G H G emissions reductions/removals Source^ Section 5.2 "Specify values (Structure objectives)" 6.1.3 Create alternatives In order to consider policy alternatives associated with creating a carbon offset system in Japan, the two contrasting strategies, "Rigid and conservative strategy" and "Loose and flexible strategy" (Table 6-3) were suggested in this research. Also, according to these possible alternative strategies, how policy variables vary was examined. Table 6-3 Summary of the policy alternatives in the introduction of a carbon offset system in Japan * Rigid and conservative strategy: aims to build a carbon offset system that is relatively rigid with carbon credits being issued more conservatively. * Loose and flexible strategy: aims to build a carbon offset system that is relatively flexible with carbon credits being issued more flexibly Source-' Section 5.3 "Createalternatives (Createstrategies)" 6.1.4 Evaluate alternatives There are pros and cons of the two strategies^ "Rigid and conservative strategy" and "Loose and flexible strategy." The strategies were examined in terms of consequences, using a set of evaluation criteria. Examination based on case study results given in the Appendix found three typical trade-off relationships of a carbon offset system, as shown in Table 6-4. The attributes of each element in a certain pairing prove incompatible. Therefore, optimizing the trade-off relationship between those attributes should be considered in creating a carbon offset system in a country. 78 Table 6-4 Summary of the trade-off relationships found in designing a carbon offset system * Openness vs. Workability, * Rigid system requirements vs. Economic incentives, * Carbon price in the market. Source-' Section 5.4 "Evaluate alternatives (Compare strategies in terms of consequences)" 6.1.5 Select an alternatives Finally, taking the current situation of the Japanese forest sector into account, the best option for introducing a carbon offset system in Japan was examined. According to the case study results in the Appendix, the government of Canada is trying to develop the Carbon Offset System in Canada, based on a market-based mechanism, so that it wi l l become relatively flexible by employing economic incentive mechanisms in the system. However, as a departure from the Canadian strategy, starting with the "Rigid and conservative" strategy and estabhshing a rigid system at the initial stage was suggested. Flexible mechanisms to install economic incentives in the system should be added later. The suggestion makes sense because it takes into consideration several specific aspects of the situation in Japan (Table 6-5). Table 6-5 Specific situations associated regarding creating a carbon offset system in Japan * Less experience on how to operate a carbon offset system (esp. for the forest sector) * Small scale forest land owners are dominant in the private forests * Public opinion on forest carbon sink issues has not fully accepted the use of forest sinks yet Source' Section 5.5 "Selectan alternative (Identify value trade-offs)" 6.2 Policy recommendations for introducing a carbon offset system in Japan To wrap up the discussion, based on the results of policy analysis and case studies conducted in this research, policy recommendations for the introduction of a carbon offset system in Japan are shown in the following sections. 79 6.2.1 Maximizing market-based mechanisms (1) Employing both supply and demand mechanisms for carbon credits As discussed in Section 3.1, a carbon offset system is a market-based mechanism. To achieve the most cost-effective outcomes, both supply- and demand-side mechanisms for carbon credits should be installed and the supply and demand relationship should be maintained properly (McDaniels, 2005). In Canada, the Carbon Offset System is supposed to work as a supply-side mechanism, while the government fund, called "Climate Fund," and 'Targe Final Emitter System" are supposed to work as demand-side mechanisms. Those systems wil l contribute to maintaining the supply and demand relationship in the market (Government of Canada, 2005). As in Canada, the Japanese government should consider mstalling similar supply-and demand-side mechanisms for carbon credits when they introduce a carbon offset system in Japan. Even though policy outcomes arising from emissions trading schemes are difficult to estimate because of high uncertainties, supply- and demand-side mechanisms for carbon credits should be prepared. (2) Converting current subsidy schemes into competitive funding system Basically, current subsidies for the private forest sector in Japan are provided to forest land owners based on notifications regarding forest management activities, which are submitted to the governments by the forest land owners or agencies. Therefore, there is no competition in receiving the subsidies (Mochida, 2002). In order to make the best use of a market-based mechanism associated with a carbon offset system, a competitive funding system should be installed. For example, projects with low cost and high performance should be funded in preference. 6.2.2 Emphasiz ing F M projects rather than A / R projects Forests account for a high percentage, about 70%, of the total land in Japan. However, Japan has a considerably smaller land area, compared with Canada, the United States, and Australia, and land availabuity for conducting new A/R projects is very limited. Therefore, when considering a carbon offset system for the forest sector in Japan, forest management projects should be given more emphasis than A/R projects in terms of enhancing carbon storage in forests. 80 In general, baseline and quantification methodologies for forest management projects are more complicated than those for A/R projects. This is simply because it is more difficult to estimate the amount of additional carbon storage in forests due to forest management activities under a particular project. A/R projects in the C D M scheme under U N F C C C do not include forest management or forest conservation projects because of concerns about these difficulties (UNFCCC, 2005a). In Canada, for example, the Carbon Offset System would not include F M projects i f F M was not included in Canada's national accounting for the Kyoto Protocol. If F M was included, then the Carbon Offset System would include F M projects (Lempriere, 2005). 6.2.3 Developing standard methodologies (protocols) and databases Compiling standard methodologies for the accounting of stored carbon in forests contributes to helping project proponents reduce the costs of participating in a carbon offset system. Also, it contributes to increasing transparency, rehability, and effectiveness of the system, if such methodologies and protocols are available to the public (Lempriere, 2005). The Japanese government could make use of the existing methodologies such as approved C D M methodologies under the U N F C C C , the Forest Sector Protocol or the Forest Project Protocol under the California Climate Action Registry, among others. It could also make use of methodologies, guidance documents and protocols that wi l l be developed for the Carbon Offset System in Canada. 6.2.4 Establishing support-systems for aggregating small-scale forest land owners The dominant ownership in the private forests of Japan consists of small-scale forest land owners (see Figure 4-4). Since the size of each business is relatively small, it is difficult for them to participate in the system and conduct forest carbon sequestration projects individually. Therefore, a support system for aggregating small-scale forest land owners should be implemented. 6.2.5 Starting with "Rigid and conservative strategy" As already discussed, starting with the "Rigid and conservative" strategy and estabhshing a rigid system at the initial stage would be the best option for introducing a carbon offset system in Japan. This is mainly because the public acceptance of forest carbon sink issues has not been sufficient. In particular, several environmental NGOs are strongly against using forest carbon sink as one of the domestic policy options to reduce G H G emissions (FoE Japan, 2005). 81 • In order to implement a carbon offset system in Japan in a smooth way, the Japanese government needs to achieve sound public acceptance toward forest carbon sink issues as well as establish a concrete framework and organizational bodies to operate it. Therefore, getting started with the "Rigid and conservative strategy" and adding flexible mechanisms later over time would be a better option for Japan. .2.6 Functioning as a new funding mechanism effectively L a s t l y a n d this may be the most important recommendation for Japan to consider in the introduction of a carbon offset system- a carbon offset system should be installed as a new additional funding mechanism for the forest sector in Japan and should be maintained to achieve long-term objectives rather than short-term objectives. In Canada, the Carbon Offset System is being implemented basically for achieving their Kyoto target, in other words, for increasing carbon storage in their forest or agricultural lands. Thus, they tend to put higher emphasis on achieving short-term objectives rather than long-term objectives. When considering the introduction of a carbon offset system in Japan, the situation is different from that in Canada. First, because of the limited availability of land use change, it is relatively difficult to find forest lands in which to conduct A/R projects, especially compared with countries such as Canada, the United States, and Australia. Consequently, F M projects in small scale forest lands wil l be the most likely option for conducting a carbon offset system in Japan. In general, the amount of carbon credits obtained from F M projects becomes smaller than that from A/R projects. In terms of economic incentives, achieving carbon credits through F M projects might be a less attractive option for project participants. Although the economic incentives might be relatively low for project participants in a carbon offset system in Japan, there are still several significant considerations because introducing a carbon offset system wi l l create a new funding mechanism for the forest sector in Japan. The current financial support schemes are based on government subsidies, but they have not performed very well for a long time. Therefore, mstalling a carbon offset system has a great potential to provide new funds for mamtaining forest management activities in the Japanese forest sector. A t least, several large companies who are interested in obtaining carbon credits through F M projects can contribute to it. Therefore, achieving long-term objectives"in other words, maintaining sustainable 82 forest management-should be given precedence for the forest sector in Japan rather than obtaining short-term objectives such as increasing carbon storage in forests. Figure 6-1 shows current and prospective market condition of the forest sector in Japan Figure 6-1 Current and prospective market condition of the forest sector in Japan Current market diagram Government Subsidies Forest sector Domestic timber Domestic timber market -Private forest lands -Municipal forests -National forests Imported lumber SE Asian countries, Canada, US etc. Prospective market diagram Government Private companies NGOs General Public Reduced Subsidies New investments through a carbon offset system Forest sector ' New Values" based:' on environment, economic, and social aspects. Increased '•Domestic timber \ Environmental services (Carbon credits etc.) I j Domestic timber/ carbon market Reduced Imported lumber SE Asian countries, Canada, US etc. Source-' Author 83 Appendix: Case studies of other carbon offset systems This Appendix describes case study results on carbon offset systems which are now being conducted or developed in several countries. Since this thesis focuses on considering recommendations for carbon offset systems for the forest sector in Japan, the examples raised here as good practices of carbon offset systems include forest carbon sequestration projects. There are several examples of carbon offset systems being put into practice, and each have different system requirements and characteristics. These system differences come from objectives, stakeholders' interests, and/or policy frameworks in each country or region. Through the case studies, a comparative policy analysis between separate carbon offset systems wil l be performed, in terms of finding out how they are different, why they are different, and how could they be improved. Any findings through the case studies here contribute to a policy analysis on the most suitable design for a carbon offset system in Japan. The following three examples are discussed in this Appendix: • The Carbon Offset System in Canada • California Climate Action Registry • U N F C C C Clean Development Mechanism These three systems al l have different system requirements and characteristics. They can be categorized based on their system requirements and geographical scales. The first case study is 'The Carbon Offset System in Canada." This system is now being developed by the Government of Canada and is used as one of their domestic policy schemes on abatement of climate change. Therefore, it is categorized as a "national" scheme. In terms of system requirements, it is administered by the Government of Canada and it wi l l be operated under the Canadian law. Although it has flexibility in itself to some extent, the system requirements wi l l be set officially and the system wil l have binding forces (Government of Canada, 2003). The second case study is "California Climate Action Registry." This system is a voluntary G H G emissions reporting scheme and has already been put into operation. Although this system addresses G H G emissions reductions by entities and projects of inside and outside California, the system basically treats California-based entities and 84 projects. Therefore, it is categorized as a 'local" scheme. System requirements of the system are relatively loose because it is a voluntary scheme (California Climate Action Registry, 2005). The third case study is ' T J N F C C C Clean Development Mechanism (CDM)." T h i s system treats international G H G emissions reductions and removals projects and has been under consideration as to how to maintain it under the U N F C C C (United Nations Framework Convention on Climate Change). Since this is an international policy scheme and creates tradable permits called "Kyoto compliance credits," the system requirements set by the C D M board in U N F C C C are relatively strict ( U N F C C C , 2005d). 85 A.1 The Carbon Offset System in Canada A. 1.1 Overview (1) General context on climate change in Canada O n December 17, 2002, the government of Canada ratified the Kyoto Protocol ( U N F C C C 2005). O n February 16, 2005, the Kyoto Protocol came into effect, following Russia's ratification. Canada wil l have to reduce their G H G emissions below the baseline by 6% by 2010. Table A - l shows Annex B countries of the Kyoto Protocol and their emissions targets ( U N F C C C , 1997). Table A-1 Countries included in Annex B of the Kyoto Protocol and their emissions targets Country Target ETJ-15* Bulgaria, Czech Republic, Estonia, Latvia.Liechtenstein, Lithuania, Monaco, Romania,Slovakia,Slovenia, Switzerland -8% US*** -7% Canada, Hungary, Japan, Poland •6% Croatia -5% New Zealand, Russian Federation, Ukraine 0 Norway + 1% Australia + 8% Iceland + 10% * The EITs 15 member States have redistributed their targets among themselves, taking advantage of a scheme under the Kyoto Protocol known as a "bubble". ** Some EITs have a baseline other than 1990. *** The US has indicated its intention not to ratify the Kyoto Protocol. Source-' UNFCCC. (1997). Kyoto protocol to the united nations framework convention on climate change However, it is difficult to find marked improvements in the current status of G H G emissions in Canada. In the year 2002, G H G emissions in Canada were 731 [Mt"C02e], which was 20.1% higher than they were in 1990 at 609 [Mt-C02e]. Figure A - l shows trends in Greenhouse gas emissions for Canada during the years 1990-2002 (Environment Canada, 2004). 86 Between 2000 and 2001, G H G emissions decreased by 1.2%, mainly because of electricity and heat generation, some vehicle categories, agricultural soils, and fugitive emissions from oil and natural gas transmission and distribution . However, between 2001 and 2002, emissions increased by 2.1%. The increase in emissions resulted primarily from the energy sector, such as petroleum refining, mining, and production of fossil fuels, and manufacturing. Emissions from the residential and commercial/institutional sectors also increased CEnvironment Canada, 2004). Figure A-1: Trends on greenhouse gas emissions for Canada (1990 to 2002) [Mt C02eq] +20.1% 725 716 7 3 1 609 6 0 3 618 624 659 675 675 682 700 705 • • ~* las f 'SS Ol IS — l _ . i 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source'- Environment Canada. (2004). Canadas greenhouse gas inventory, 1990-2002 (2) Climate Change Plan for Canada 2005: "Project Green" The Government of Canada has established the revised climate change plan for Canada, "Moving forward on Climate Change: A Plan for Honouring our Kyoto Commitment (the 2005 Plan)." In the 2005 Plan, the Government of Canada clearly states that Canada is a strong supporter of the Kyoto Protocol and that Canada wil l meet its Kyoto target while maintaining a productive and growing economy (Government of Canada, 2005). 8 7 T h e 2005 P lan wil l become the basis for climate change pohcy-making in Canada. It provides information on several domestic and international potential policy options, including the Large F i n a l Emit ter System, carbon ofiset system, and climate fund scheme, among others. What follows is a summary of the 2005 Plan, and a discussion of the role of the carbon offset system in the 2005 Plan. Potential emission reductions in the 2005 Plan According to the estimates described in the 2005 Plan, al l the approaches together could reduce G H G emissions by about 270 M [t"C02] annually in the 2008-2012 period. The amount of 270 M [t-C02] emission reductions would fill the emissions gap to meet Canada's Kyoto target. T h e associated federal investment is in the range of $10 billion, mcluding $2 billion in funding for existing climate change programming. Table A-2 gives a summary of potential emission reductions and associated federal costs outlined in the 2005 P l a n (Government of Canada, 2005). 88 Table A-2 Potential emission reductions and associated federal costs Element Potential cost to the federal government and impact on emissions Climate Fund Funding in the order of $4-5 billion could reduce emissions by 75-115 Mt annually in the 2008-2012 period. Budget 2005 provided a minimum $1 billion over five years. Partnership Fund Funding in the order of $2-3 billion could reduce emissions by about 55-85 Mt annually. Budget 2005 provided at least $250 million over five years, and indicated that funding could grow to $2-3 billion over the next decade. Large Final Emitter (LFE) System The emission reduction target for the L F E system is set at 45 Mt off the revised baseline. Since LFEs can contribute up to 9 Mt to the G H G Technology Investment Fund, it is possible that 36 Mt would be generated in compliance against our Kyoto target. Automobile Industry The automobile industry has agreed to an emission reduction target of 5.3 Mt. Renewable Energy The initiatives for renewable energy found in Budget 2005 (WPPI, RPPI and tax incentives), combined with other initiatives such as supportive provincial actions, could yield emission reductions of about 15 Mt annually. Budget 2005 provided $297 million over five years and $1.8 billion over 15 years for WPPI and RPPI, and $295 million over five years in tax incentives. Extending the five year funding to 2012 could involve a total cost to Government of about $1 billion. Supplementary incentives through the offset system may be needed to deliver the 15 Mt. One-Tonne Challenge The One-Tonne Challenge set an emissions reduction goal for Canadians of 5 Mt. It is proposed that an additional $120 million be invested in the program to support that objective. Greening Government The emissions reduction goal for the federal government from its own operations is being set at 1 Mt, to be funded primarily through internal reallocation. Programs Extension of existing funding for climate change programs through 2012 could bring the cost to the federal government to about $2.8 billion. It is estimated that this level of funding could result in emission reductions of about 40 Mt annually in the 2008-2012 period. Budget 2005 notes that the $2 billion in program spending is subject to reallocation. Business-as-Usual Sinks The B A U agricultural sink is estimated at 10 Mt annually in the 2008-2012 period. The B A U forest sink is estimated to be in the range of 0-20 Mt. Source' Government of Canada (2005), "Moving forward on Climate Change'A Plan for Honouring our Kyoto Commitment" 89 b. Public engagement mechanisms The government of Canada, together with local governments including provinces, territories, and Aboriginal peoples, mentions the importance of public engagement mechanisms to meet Canada's Kyoto target in the 2005 Plan. Federal and local governments intend to implement major "on-the-ground" steps in all areas of the 2005 Plan, before the end of 2005. Table A-3 shows public engagement mechanisms outlined in the 2005 Plan (Government of Canada, 2005). Table A-3 Public engagement mechanisms outlined in the 2005 Plan Engagement Description L F E G H G Protocol Sets out how the L F E system could be implemented under CEPA 1999 — for consultations with provinces, territories, industry, Aboriginal peoples and stakeholders. Climate Fund mandate Sets out proposed mandate for the Climate Fund — certain aspects for consultations with provinces, territories, industry, Aboriginal peoples and stakeholders. The offset system rules Sets out the rules for the offset system, including criteria for qualifying onset credits — for consultations with provinces, territories, industry, Aboriginal peoples and stakeholders. Partnerships with provinces and territories Sets out proposed mandate and implementation of the Partnership Fund, including links to MoU process — for consultations with provinces and territories. The development of L F E regulation Launch collaborative process with provinces, territories, industry, environmental groups, Aboriginal peoples and other stakeholders on development of the L F E regulation. Source: Government of Canada (2005), "Moving forward on Climate Change: A Plan for Honouring our Kyoto Commitment' 90 (3) The Carbon Offset System in Canada a. Background and objectives In the 2005 plan, several key policy measures have been designed: Large Final Emitter System (LFE System), the carbon offset system, and the Climate Fund etc. L F E System is supposed to deliver a reduction of 45 [Mt-C02e] annually over the 2008-2012 period. In order to achieve Canada's Kyoto target, Canada needs to reduce their G H G emissions by 270 [Mt-C02e] from the projected baseline case (based on the Business-As-Usual scenario). Therefore, the G H G reduction of 45 [Mt"C02e] in the L F E s makes up a significant amount (about 17%) of the total necessary G H G emission reductions in Canada (Government of Canada, 2005). The carbon offset system is designed as a complimentary system to the L F E System (Government of Canada, 2003). The carbon offset system is supposed to be used by L F E companies when they need to purchase carbon credits from outside the company to keep compliant with their obligations. Therefore, the system design of the L F E System wi l l have significant influence on how much carbon credits L F E companies could purchase in a domestic offset carbon market, which wi l l be created by the carbon offset system. In other words, the system design of the L F E System wil l influence demand for carbon credits created in the carbon offset system (Hull, 2005). Figure A-2 shows the interactive relationship between the carbon offset system and L F E System. Also shown is the Climate Fund, which is a government fund for abatement of climate change. The fund wi l l purchase both domestic and international carbon credits. Therefore, the fund is also supposed to influence the demand for carbon credits created in the carbon offset system. b. Objectives for creating the Carbon Offset System in Canada The objective for creating the Carbon Offset System in Canada is to provide large final emitters with a low-cost means of achieving compliance with their targets by offering an alternative to domestic abatement action or the purchase of domestic carbon credits (Government of Canada, 2003). Creating a carbon offset system is supposed to provide a market incentive for the identification and development of projects that reduce G H G emissions. Consequently, the carbon offset system would help them purchase cheaper domestic carbon credits as an alternative to in-house emission reductions to achieve their compliance. 91 Figure A-2: Interactive relationship between the Carbon Offset System and the LFE System in Canada Source-' Author 92 A . 1.2 System Description (1) Principles for the Carbon Offset System in Canada To describe implementation policies for the Carbon Offset System in Canada, the government of Canada has established the following five main principles in the Offset System Discussion paper (Government of Canada, 2003): • Enhancing market liquidity (The design of the offset system wi l l enhance market liquidity.) • 'Open' offset system (The offset system wil l be as open as is practical.) • Contributing to achieving Canada's Kyoto commitment (The offset system wil l contribute to achieving Canada's Kyoto commitment.) • Creating an incentive for investment in Canada (The offset system wil l create an incentive for investment in Canada.) • Providing the appropriate economic signals (The offset system wi l l providethe appropriate economic signals.) Source-' Government of Canada. (2003). Offset system discussion paper Table A-4 gives a detailed description of the five main principles of the Carbon Offset System in Canada (Government of Canada, 2003). 93 Table A-4 Main principles of the Carbon Offset System in Canada Principles Description Enhancing market Uquidity - A n offset system is a market-based system that w i l l encourage the identification of low-cost G H G reduction and removal projects. - The offset system w i l l increase the number of participants and the supply of compliance units i n the domestic emission trading market. 'Open' offset system - In general, the system w i l l not restrict ehgibility on the basis of project type or project size unless the approach is determined to be impractical for policy, operational or legal reasons. - A n 'open' offset system w i l l be complex to design and operate given the large number of projects and wide variety of project types. The costs associated wi th assessing projects must be kept as low as possible. - Thus, implementation of the principle of 'openness' must take into account of the requirement to ensure the workability of the system. Contributing to aclueving Canada's Kyoto commitment - Domestic onsets used by L F E s replace actions that they would otherwise have taken (i.e., to reduce or remove G H G s in-house or to purchase other compliance units). Therefore, the domestic offsets do not contribute directly to achieving Canada's Kyoto target. - The offset system can be designed to make a contribution to aclueving Canada's Kyoto target. Creating an incentive for investment i n Canada - The onset system w i l l be designed to encourage the identification and development of low cost G H G reduction/removal projects i n Canada. There are two ways i n which this benefits Canada^ 1) provide the framework to create value from actions taken domestically, thereby encouraging investment i n Canada 2) encourage the long-term structural changes that w i l l assist i n moving the Canadian economy to a less carbon-incentive trajectory Providing the appropriate economic signals - Providing the right signals for enhancing emission reductions and removals w i l l be important for Canada to achieve its target i n the first commitments to further reduce G H G s . Source- Author based on Government of Canada (2003), Offset System Discussion paper [27-34] 94 (2) Eligibility Criteria The Offset System Discussion paper describes the following nine ehgibihty criteria for projects to get approved by the system: Inclusion in the inventory, Project start date, Crediting period, Real, Measurable, Verifiable, Surplus, Unique, and Ownership. Table A-5 gives a detailed description on the ehgibihty criteria for offset projects (Government of Canada, 2003). Table A-5 Eligibility criteria for offset projects Criteria Description Inclusion in the inventory Only G H G reductions/removals that will be captured in Canada's G H G inventory for Kyoto Protocol reporting would be ehgible. Project start date Only projects initiated after a specified 'start date' will be ehgible. Crediting period Only G H G reductions and removals that occur in the first commitment period would be ehgible. In addition, a 'start date' for ehgible projects, possibly tied to a policy decision, and defined as a stage in the project development (e.g., beginning of construction), could be required. Real A G H G reduction/removal is real if it reduces the concentration of GHGs in the atmosphere (all GHGs must be accounted for), and is the result of a specific and identifiable project net of leakage that is measurable and directly attributable to the project within the project boundaries. Measurable A reduction/removal is measurable if the level of G H G emissions/removals in the baseline (e.g., BAU, 'before-project' or other baseline), and the actual level of G H G emissions/removals with the project in place, can be quantified with an acceptable level of confidence. The quantification methodology, including baseline approaches, is set out in a quantification protocol. Verifiable A G H G reduction/removal is verifiable if the quantification methodology is sound, clear and replicable, and the raw data required to verify/audit the calculation is available. The verification methodology is set out in a verification protocol. Surplus A G H G reduction/removal is surplus if it, or the activity that causes it, is not required (e.g., by existing federal/provincial regulation/operating certificate), and is in excess of the level that is required/might reasonably be expected will be achieved from receipt of another government climate change measure. Unique A G H G reduction/removal is unique if it is only used once (e.g., a G H G reduction/removal cannot be reported as an improvement in the seller's G H G inventory and traded to another entity for use in meeting a compliance obligation). Ownership The entity (investor/owner) creating offsets must have secure and transparent ownership rights to the G H G reductions/removals. Source-' Government of Canada (2003), Offset System Discussion paper [36-45] 95 A.2 California Climate Action Registry (US) A.2.1 Overview (1) Background and objectives The California Climate Action Registry was established by California statute as a non-profit voluntary registry for greenhouse gas emissions. The program aims at helping entities to establish G H G emission baselines and to encourage their voluntary actions to increase energy efficiency and decrease G H G emissions. The program foresees that possible future G H G emission reduction requirements may be applied at any of the state, federal, and/or international levels. The premises seem to make incentive for participating entities to get involved in this program. As policy tools to enhance voluntary actions and the registry for G H G emission reductions and removals, one general and several industry-specific G H G accounting protocols have been developed in the program. The G H G accounting protocols give program participants guidance on how to account for G H G emission reductions and removals. The program participants are required to register their G H G emissions for al l operations in California state and are also encouraged to report other operations nationwide. The program participants are required to register al l direct G H G emissions, along with indirect G H G emissions from electricity use. Also, for the first three years, program participants are required to report C02 emissions, and they are also encouraged to report the remaining five GHGs regulated in the Kyoto Protocol (CH4, N20 , HFCs, PFCs, and SF6). After the first three years, they are required to report al l six GHGs covered in the Kyoto Protocol (California Climate Action Registry, 2005). (2) Grants, sponsorship, and donations for the program The costs associated with the administration of the program are covered by grants, sponsorship, and donations from several energy-sector foundations and private sector entities. Table A-6 shows the contributors for the California Climate Action Registry program. As the table says, the program is maintained primarily by energy-related entities in the private sector (California Climate Action Registry, 2005). 96 Table A-6 Contributors for the California Climate Action Registry program Categories Contributors Grants The Energy Foundation, The Wi l l i am and Flora Hewlett Foundation, The David and Lucile Packard Foundation, State of California (California Energy Commission) Sponsorships/Donations BP, Pacific Gas & Electric, Southern California Edison, Sacramento Munic ipa l Ut i l i t y District, Southern California Gas Company, S D G & E , Det Norske Veritas, Bentley Prince Street, T U V America, C H 2 M H i l l , Weyerhaeuser Company In-kind donations B P : office space and furnishings, Edison International: office furnishings, P a u l Hastings: legal services, Rose and Kinde l : pubhc affairs, The Bohle Company: public relations Source-' California Climate Action Registry. (2005). California climate action registry website, http://www.climateregistry.org/ (3) Technical Advisory Committee (TAC) In the California Climate Action Registry program, the Technical Advisory Committee (TAC) is organized to provide technical expertise and policy recommendations to the program. The members of TAC have different expertise on G H G accounting and managing issues. The main responsibilities for the TAC members are to make contributions to the program in terms of technical aspects, such as reviewing the G H G accounting protocols of the program. As of June 30 in 2005, the current TAC members are as follows: Alan Ba l l (Qualcomm, Inc.); Gretchen Hardison (City of Los Angeles); Nancy Ryan (Environmental Defense); Greg San Mart in (Pacific Gas & Electric); Laurie Wayburn (Pacific Forest Trust). Also, certain guest members are invited to the TAC: California A i r Resources Board and California Energy Commission (California Climate Action Registry, 2005). (4) Benefits to participating entities Since the California Climate Action Registry is a voluntary program, entities are not required to register themselves in the program. However, there are several incentives provided for participating entities. Those incentives are categorized into two types, direct benefits and indirect benefits, which can be gained from the program. The direct benefits include demonstrating their environmental leadership to the pubic and receiving the latest 97 information on G H G management by participating in discussion working groups as part of the program. A t the same time, the indirect benefits include gaining competitive advantage by increasing operational environmental efficiency, managing carbon-related risks, and protecting early actions. As of June 2005, no tradable carbon credits have been issued for participating entities in the program. Therefore, the incentives achieved from the program have no relevance to real economic gains. However, a great number of entities participate in the program. According to the website for California Climate Action Registry, in addition to these incentives, member benefits are summarized in Table A-7 (California Climate Action Registry, 2005). Table A-7 Member's benefits in California Climate Action Registry (1) The Registry's acclaimed Climate Action Registry Reporting Online Tool (CARROT) to calculate your G H G emissions footprint. For organizations that have not developed systems for measuring and recording emissions, C A R R O T is the ideal "off the shelf' way to implement G H G emissions tracking. (2) The "General Reporting Protocol" and "Certification Protocol" for in-depth guidance on G H G reporting and certification, wi th reporting guidelines specifically tailored to your organization's needs. (3) Personalized C A R R O T Training sessions i n your area (4) A listing of approved certifiers and technical assistance providers. (5) Use of the Climate Action Leade r™ logo on your products, publications and website to signal your organization's leadership to your customers, shareholders, and the public. (6) A Members Only website wi th handpicked news and updates just for Members. A one-stop shop for tips, giudelines and resources on G H G reporting, emissions reductions and climate-related news. (7) Workshops that showcase successful G H G emission reduction strategies. (8) Participation i n developing industry-specific protocols and metrics - make sure your organization has a seat at the policy table. (9) Dialogues on emerging G H G accounting issues and related policies. (10) Complementary Access to the Registry's "Climate Change and California" seminar series, wi th topics including emerging science and policy. (11) Reduced fees to the Registry's A n n u a l Conference: a forum for expert discussion on emerging climate change and G H G accounting issues relevant to your organization. (12) The Climate Action Leader Logo is available for use by Registry members once one year of emissions data has been certified and approved by the Registry. Source^ California Climate Action Registry. (2005). California climate action registry website, http://www.climateregistry.org/ 98 (5) Rational for registering G H G emissions The California Climate Action Registry program clearly delineates the rational for registering G H G emissions. First, the monitoring of G H G emissions leads participating entities to deeper insights on energy efficiency. Should participating entities find waste and inefficiency in their energy usage, they could make profits through improving that usage. Second, by taking early action on G H G emissions reductions and removals, participating entities could acquire deliberate strategies on GHG-related risk management. The program mentions that once new policy schemes for G H G emissions reductions and removals are put into practice, early movers could benefit, because they would be in the best position to help influence any future policies addressing G H G management issues, and to understand the most cost-effective means for G H G emissions reductions and removals (California Climate Action Registry, 2005). (6) Membership fees for the program The California Climate Action Registry program collects annual membership fees from participating entities. The fees include the use of the CARROT, a web-based emissions calculation and reporting tool, training sessions and other member benefits. Table A-8 shows the Annual Fee Schedule in the California Climate Action Registry in July, 2004. Different rates are available, according to categories that organizations belong to. Non-profit, government, and academic organizations are provided with discounted rates (California Climate Action Registry, 2005). 99 Table A-8 Annual Fee Schedule* in the California Climate Action Registry Categories Revenue ranges Membership fees Commercial and Industrial Organizations wi th Revenues Over $2 bil l ion $7,500 F rom $ 500 mill ion to $ 2 bill ion $5,000 F rom $ 100 mil l ion to $ 500 mil l ion $3,000 F rom $ 20 mil l ion to $ 100 mil l ion $1,500 Under $ 20 mil l ion $500 Non-profit, Government and Academic Organizations wi th Budgets Over $2 bil l ion $4,000 F r o m $ 500 mil l ion to $ 2 bill ion $3,000 F rom $ 100 mil l ion to $ 500 mil l ion $2,000 F rom $ 20 mil l ion to $ 100 mil l ion $750 Under $ 20 mil l ion $400 Affiliates** _ _ _ _ _ _ _ _ " $500 (Effective Ju ly 1, 2004) * A new member reporting data for the calendar year i n which i t joins w i l l be assessed the full fee for that year. Members who do not report for the year they join w i l l be assessed a pro-rated annual fee based upon the month i n which they join. I f a member wishes to register historic data, they w i l l be charged 50% of the current annual fee for each year of historic data registered. **Aff_iate status is available for membership organizations only. It is intended for business associations, coalitions, and industry groups that represent member organizations who are interested i n the Registry's work and programs. To qualify for affiliate status an organization must: (l) have members that are primari ly organizations, not individuals; (2) support the goals of the California Climate Action Registry. Source-' California Climate Action Registry. (2005). California climate action registry website, http://www.climateregistry.org/ As Table A-8 states, affiliate status in the California Climate Action Registry is available for membership organizations only. They must have members that are primarily organizations, not individuals, and support the goals of the California Climate Action Registry. The annual fees for affiliates are $500, and affiliates are eligible for al l of the benefits of membership shown in Table A-9. The benefits exclude the registering and certifying of emissions, and the use of the Registry "Climate Action Leader" icon (California Climate Action Registry, 2005). 100 Table A-9 Affiliates' benefits in the California Climate Action Registry (1) Reduced fees to the Registry's seminar series, wi th topics inducting emerging science and policy (2) Access to the Registry's Climate Action Registry Reporting Online Tool (CARROT) to calculate their G H G emissions footprint, although this data cannot be registered or certified, (3) A n orientation session on the Registry and use of the C A R R O T (4) A Members Only website wi th handpicked news and updates just for Members. This is a one-stop shop for tips, guidelines and resources on G H G reporting, emissions reductions and climate-related news. (5) Opportunities to lead the development of industry-specific protocols and guidance (6) Workshops that showcase successful G H G emission reduction strategies (7) Reduced fees for seminars (8) Reduced annual conference fees (9) Speakers from the Registry who can present to your members on climate change topics Source: California Climate Action Registry. (2005). California climate action registry website, http://www.climateregistry.org/ A.2.2 System Description (1) General procedures and Protocols The California Climate Action Registry provides a series of protocols to assist participating entities in the program. A l l the participating entities, including both project participants and certifiers, are supposed to use General Reporting and General Certification Protocols. Also, the California Climate Action Registry offers industry-specific protocols. As of July in 2005, there are two industry-specific protocols developed for the forest sector and power/utility sector. Figure A-3 shows general system procedures and protocols for the California Climate Action Registry. General system procedures include four main steps: (l) Participating in the program! (2) Calculating G H G emissions; (3) Reporting G H G emissions; and (4) Certifying G H G emissions. Corresponding to these steps, several protocols have been developed in the program. The steps in calculating G H G emissions and reporting G H G emissions, are divided into General Reporting Protocol for al l users, Forest Sector Protocol and Forest Sector Protocol for users in the forest sector, and Power/Utility Reporting Protocol for users in the power/utility sector. Similarly, for the step in certifying G H G emissions, General Certification Protocol, Forest Certification Protocol, and Power/Utility Certification Protocol have been developed (California Climate Action Registry, 2005). 101 Figure A-3 General system procedures and protocols in the California Climate Action Registry System procedures (1) Participating the program (2) Calculating GHG emissions (3) Reporting GHG emissions (4) Certifying GHG emissions Protocols (General/Sector-specific) General Reporting Protocol Forest Sector ^ Protocol_ Power/Utility Reporting ^Protocol_ I Forest Project Protocol^ General Certification Protocol Forest Certification Protocol Power/Utility Certification Protocol [ Source-' Author based on California climate action registry website, http://www.climateregistry.org/ The following sections explain a series of system procedures in the program. a. Calculating G H G Emissions After completing registration in the California Climate Action Registry, participating entities need to identify sources of greenhouse gas emissions for all operations. These sources include emissions from electricity use, motor vehicles (cars, trucks, fleets, etc.), and stationary combustion (generators, boilers, power plants, refineries, manufacturing facilities). Also, participating entities need to collect background information on their projects1 utility bills for electricity, fuel purchases or mileage for vehicles, fuel purchases for stationary combustion, and so forth. To support participating entities and reduce their workload on accounting for G H G emissions, the California Climate Action Registry provides the Climate Action Registry Reporting On-Line Tool (CARROT). According to the website for the program, use of CARROT enables participating entities to save work and time. Participating entities are also allowed to use their own calculation tools alternatively (California Climate Action Registry, 2002a). 102 b. Reporting G H G Emissions After calculating G H G emissions, participating entities must create and submit an emissions report to the program through the use of CARROT. The finalized emissions report includes their GHG-related information shown in Table A-10. Participating entities can retrieve and utilize their own data from the CARROT database after their reporting. Also, irmited GHG-related information is made in the program, based on the information on the emissions report prepared by participating entities. The hmited information, only emissions totals for the five emissions sources (mdirect electricity and cogeneration, direct mobile, direct stationary combustion, direct process and direct fugitive emissions), wi l l become publicly available after certification and registry approval (California Climate Action Registry, 2002a). Table A-10 Information included in an emissions report in CARROT Total reported emissions - entity Entity-level emissions by year Total reported emissions - by facility (if applicable) Facility administrative summary (if applicable) Total reported emissions — by source (if applicable) Source-' California Climate Action Registry. (2002). General reporting protocol (version l), p. 12.2 Table A-11 Information included a limited GHG related information in CARROT Entity-level emission report California and US total reported emissions California and US total reported emissions by industry List of participants Source: California Climate Action Registry. (2002). General reporting protocol (version l), p. 12.2 c. Certifying G H G Emissions The final step in the system procedures for the California Climate Action Registry is certifying G H G emissions. The program asserts that certification confirms the high accuracy of the information and can help improve the quality of future data collection, and that certification also allows for comparability across participants and helps protect the long term value and viability of the data. The certification requirements for the program are shown in Table A-12 (California Climate Action Registry, 2005). 103 Table A-12 Certification requirements in the California Climate Action Registry (1) Review members' greenhouse gas management systems and methodologies (2) Confirm emissions sources (3) Sample and confirm emissions calculations (4) Compile a report for the organization (5) Provide the Registry wi th a certification opinion (which indicates whether the reported data is certifiable - achieving the required accuracy level of at least 95% necessary to be accepted by the Registry.) Source^ California Climate Action Registry. (2005). California climate action registry website, http://www.climateregistry.org/ The process of certifying G H G emissions has a three-year life cycle shown in Figure A"4. The certification process needs to be conducted annually, but the full certification process, including al l five steps shown in Table A-12, needs to be undertaken only in Year 1 during the three-year life cycle. In the interim years (Year 2 and Year 3), for simplicity, certifiers are not required to review participant's management systems i f a participant's operations do not change significantly from year to year. The certifier wi l l provide the member with a certification report and a certification opinion. Only the certification opinion wi l l be reported to the program (California Climate Action Registry, 2005). Figure A-4 Three year life cycle of certification in the California Climate Action Registry 1 f Year 1: Full certification (Identify sources, Review management systems, and Verify emissions estimates) Year 2: Verify emissions estimates Year 3: Verify emissions estimates Source-' Author based on California climate action registry website, http://www.climateregistry.org/ 104 The cost of certification in the California Climate Action Registry is decided based on the contract between project participants and certifiers. Since the contracts are made on a case-by-case basis, the rates vary from organization to organization, depending upon the complexity of operations and the contract negotiated with an approved certifier. According to the website for the California Climate Action Registry, the typical rates range from $100 to $250 per hour, depending on the individual certifier's level of expertise. The estimates are based on the following "best-case" assumptions shown in Table A-13. In addition, Table A-14 shows estimated costs associated with certification processes in the California Climate Action Registry (California Climate Action Registry, 2005). Table A-13 "Best-case" assumptions regarding operation status of project participants *Participants have good management and record-keeping processes in place. *Operations remain the same from year to year. (There are no significant organizational boundary, process, or source changes that increase or decrease total G H G emissions by more than 10%.) *Emissions are reported for California only. *A single individual is responsible for Registry reporting (i.e., responsibility is centralized). *CertifLers are located near the Participants, so travel expenses are not significant. Source: California Climate Action Registry. (2005). California climate action registry website, http://www.climateregistry.org/ 105 Table A-14 Estimated costs associated with certification processes in the California Climate Action Registry Scenario 1 Scenario 2 Scenario 3 Scenario 4 Background information Annual revenue $200 Million $9 Billion $200 Million $1.6 Million Organization category Government "agency Commercial corporation Industrial corporation Non-profit organization Number of builcbiigs/facilities 34 2 2 Manufacturing plants 1 Office Direct emission sources * 1 co-generation plant * 70 vehicles * natural gas heating * 10 generators * 30 vehicles on natural gas * natural gas heating * 3 boilers * 1 generator * 30 vehicles * natural gas heating * 1 hybrid vehicle Indirect emission sources Purchased electricity Purchased electricity (utilities) Purchased electricity Purchased electricity Gases reported C02 only C02 only All Kyoto gasses C02 CARROT used to calculate Yes Yes No Yes Annual registry fee $2,000 $6,000 $3,000 $500 Estimated certification costs (Year 1 of 3 year cycle) 60-110 hours 40-80 hours 50-80 hours 6-12 hours (Year 2 of 3 year cycle) 20-60 hours 25-50 hours 25-50 hours 4-6 hours (Year 3 of 3 year cycle) 20-60 hours 25-50 hours 25-50 hours 4-6 hours [Note] Certifiers typically charge an hourly or daily rate that can range from $100-250 an hour, depending on the individual certifier's level of expertise. Source: California Climate Action Registry, "What Willit Cost to Certifyan AnnualGHG Emission Report?/' http://www.chmateregistry.org/ 106 (2) Protocols overview The California Climate Action Registry has created a series of protocols to support participating entities in the process of calculating, reporting and certifying G H G emissions inventory. General protocols are supposed to be used by al l the participating entities. Industry-specific protocols are expected to be used by participating entities in certain sectors. As of July in 2005, industry-specific protocols are available for the Power/Utility sector and the Forest sector (California Climate Action Registry, 2005). Table A-15 Prepared protocols in the California Climate Action Registry Categories General protocols Industry-specific protocols Forestry Power/Utility Reporting General Protocol Reporting Forest Sector Protocol Forest Project Protocol Power/Utility Reporting Protocol Certification General Protocol Certification Forest Certification Protocol Power/Utility Certification Protocol Source-' California Climate Action Registry. (2005). California climate action registry website, http://www.climateregistry.org/ a. General Reporting and Certification Protocols The General Reporting Protocol is prepared primarily for participating entities to calculate and report G H G emissions through use of the CARROT, while the General Certification Protocol is prepared for approved certifiers to certify an emissions report. The General Reporting Protocol outlines the principles, concepts, calculation methodologies and procedures for reporting GHG-related information to the California Climate Action Registry. It is designed to minimize the reporting workloads and maximize the benefits of creating G H G inventories. The General Certification Protocol describes a standardized approach to independent verification of G H G emission baselines and annual G H G emissions reported by project participants. Conducting processes based on the General Certification Protocol ensures the credibility, accuracy, transparency and usefulness of emissions data reported by project participants. b. Forest Protocols As of July 2005, the Forest Sector Protocol, Forest Project Protocol, and Forest Certification Protocol have been developed in the California Climate Action Registry. These Forest Protocols are designed for participating entities in the forest sector. 107 T h e Forest Sector Protocol and Forest Project Protocol are designed for project participants in the forest sector. Forest Sector Protocol aims at providing guidance to forest entities to account for and report entity-wide forest carbon stocks and emissions over time, while Forest Project Protocol aims at providing guidance to landowners to quantify and monitor G H G reductions resulting from specific forest activities. O n the other hand, the Forest Certification Protocol is designed for certifiers to use. Forest Certification Protocol aims at providing guidance to "approved third party certifiers" to conduct a standardized and accurate assessment of reported G H G data at forest entity and project levels. A l l the forest protocols are important in the program because they are the first "industry-specific" protocols i n the program and they address both G H G emissions and sinks. Table A-16 through Table A-18 show key components described in the Forest Sector Protocol, Forest Project Protocol, and Forest Certification Protocol (California Climate Action Registry, 2004). 108 Table A-16 Key components of Forestry Sector Protocol Component Description Protocol Purpose Provide guidance to forest entities to account for and report entity-wide biological forest carbon stocks and biological emissions over time. Forest entity Legal entity or individual who owns > 100 acres of commercial or non-commercial trees. Geographic Boundaries Landowner can report CA only or nationwide, though G H G data is only certifiable in CA at this time. Consolidation Methodology Equity share or management control. Equity share strongly recommended. Required Emissions C 0 2 only. As with the General Reporting Protocol, all Kyoto gases are required in the fourth year of participation. Entity Baseline (optional, though strongly encouraged) Includes a characterization of forest practices over 100 years and corresponding quantification of carbon pools Accounting approach stock change accounting Required U.e. certified) carbon pools Live tree biomass (tree bole (trunk), roots, branches, leaves/needles) and dead tree biomass (standing and lying dead wood); all other pools are optional. Optional G.e. not certified) carbon pools Soil, wood products, and herbaceous understory. Carbon Quantification Requires a complete inventory and direct sampling with use of models G H G Emissions calculated as decreases in carbon stocks over time G H G Reductions: not calculated at entity level! entity must follow Project Protocol guidance to qualify for and calculate G H G reductions Source^ California Climate Action Registry. (2004). California climate action registry forest protocols overview, http://www.climateregistry.org/ 109 Table A-17 Key components of Forestry Project Protocol Component Description Forest project A planned set of activities to remove, reduce or prevent C02 emissions in the atmosphere through the conservation and/or increase in on-site forest carbon stocks. Protocol Purpose To provide guidance to landowners to quantify and monitor G H G reductions resulting from specific forest activities Project Types Reforestation, Conservation-based forest management and Conservation Geographic boundaries Projects can be reported and certified for California only Environmental Integrity Projects must promote and maintain native species.' forest management must be "natural forest management," and project area must be secured with permanent conservation easement Project Baselines (required) Forecasted characterization of forest practices (or lack thereof) in the project area over time, which varies by project type, and corresponding quantification of carbon stocks. Project Additionality Project activity must additional to baseline, mduding any mandatory laws (e.g. CA Forest Practice Rules). Project Permanence Project must be secured with a perpetual easement. Annual registry reporting determines duration of any calculated G H G reductions,' if entity stops reporting to Registry, reductions are no longer valid. Leakage Activity-shifting leakage (within entity boundaries) assessment and quantification is required; Entity-level reporting required if reporting forest projects! market leakage reporting is strongly encouraged; Registry will continue to pursue approaches for tracking and quantifying market leakage and activity shifting leakage outside of entity boundaries Accounting approach/Carbon quantification Same approach as Entity Protocol, but differences include higher minimum confidence standard and application of deductions (shding scale) based on confidence of estimates. G H G Emissions GHGs calculated as decreases in carbon stocks over time. G H G Reductions GHGs calculated as increases in project carbon stocks over time. Source: California Climate Action Registry (2004). California climate action registry forest protocols overview, http://www.climateregistry.org/ 110 Table A-18 Key components of Forestry Certification Protocol Component Description Purpose Provide guidance to "approved third party certifiers" to conduct a standardized and accurate assessment of reported G H G data at forest entity and project levels; third party certification is essential for credibility of reported G H G emissions (biological and non-biological)/reductions. Process Certifier assesses entity's methodologies, estimations, models and calculations Specialized expertise Approved certifiers must include a Registered Professional Forester. Direct Sampling Certification process includes direct sampling of required carbon pools at the beginning and end of 5-year certification intervals. Annual Monitoring Reports Certifier assesses annual monitoring reports submitted by entity, checks reports against public information. Material misstatements Reported data must be free of material misstatements (e.g. entity's direct sampling results must be within 15% of certifier's results) Source-' California Climate Action Registry. (2004). California climate action registry forest protocols overview, http://www.climateregistry.org/ Table A-19 shows forest workgroup members in the California Climate Action Registry. The workgroup is in charge of developing reporting and certification protocol recommendations for the forest sector. The workgroup comprises members from government organizations, private companies, and non-profit organizations (California Climate Action Registry, 2005). TableA-19 Forest workgroup members in the California Climate Action Registry California Climate Action Registry California Department of Forestry & Fire Protection California Energy Commission Hancock Natural Resources Group Mendocino Redwood Company The Nature Conservancy The Pacific Forest Trust Winrock International Source-' California Climate Action Registry. (2005). California cMmate action registry website, http://www.climateregistry.org/ 111 c. Power/Utility Protocols As of July 2005, the Power/Utility Reporting Protocol and Power/Utility Certification Protocol have been developed in the California Climate Action Registry. These Power/Utility Protocols are designed for participating entities in the electric power sector. The Power/Utility Workgroup has been working since January 2004 to develop reporting and certification protocols for entity-wide reporting within the electric power generation, transmission and delivery sectors. Table A-20 shows the Power/Utility workgroup members in the California Climate Action Registry (California Climate Action Registry, 2005). Table A-20 Power/Utility workgroup members in the California Climate Action Registry Business Council for Sustainable Energy California Climate Action Registry California Energy Commission Calpine Corporation Environmental Defense Electric Power Research Institute F P L Group New York Department of Environmental Conservation Pacific Gas & Electric PacifiCorp Sacramento Municipal Utility District San Diego Gas & Electric Southern California Gas Company World Resources Institute OFacilitation: M.J. Bradley & Associates) Source-' California Climate Action Registry (2005). California climate action registry website, http://www.climateregistry.org/ d. Protocols in Progress According to the website for the California Climate Action Registry, supplemental greenhouse gas (GHG) reporting and certification protocols have been under development. Those protocols in progress are designed to complement the existing Protocols in the program. During the developing processes, the following components shown in Table A-21 are being conducted. 112 Table A-21 Action items for developing protocols in progress *Voluntary multi-stakeholder workgroup: Group tasked with developing the draft protocols. *Internal Review: Workgroup members' respective organizations review the drafts and provide feedback. *Expert Review: Revised drafts are sent to industry, policy and academic experts, along with targeted questions and solicitation of general comments. Registry hosts an expert reviewer meeting. *Technical Advisory Committee: The Registry's TAC is briefed on the protocols. *Agency and Public Review: Revised drafts are posted on the C E C and Registry websites, listserv messages are sent to the Registry's database to solicit comments, and a public workshop is held. *Board Review and Consideration: The protocols are presented for consideration and approval to the Registry's Board of Directors. *Ongoing opportunity for public feedback and comment. Source-' California Climate Action Registry. (2005). California climate action registry website (3) Service Providers The California Climate Action Registry has prepared the following two types of service providers for supporting participating entities: Certifiers and Technical Assistance Providers. Table A-22 and Table A-23 show the roles assigned to Approved Certifiers and a list of Approved Certifiers in the program. The certifiers listed here have been verified as experienced firms in providing G H G emissions certification services. Similarly, Table A-24 and Table A-25 show the roles assigned to Approved Technical Assistance Providers and a fist of Approved Technical Assistance Providers in the program. Participating entities in the program can select any certifiers and/or technical assistance providers. However, participating entities are not allowed to choose the same firms as both certifier and technical assistance provider in order to avoid a conflict of interest, even though a number of firms are approved as both certifiers and technical assistance providers. As Table A-23 and Table A-25 show, all certifiers work as Approved Technical Assistance Providers for the program (California Climate Action Registry, 2005). Table A-22 Roles assigned to Approved Certifiers *Approved certifiers provide independent, third-party verification of Registry member's G H G emissions inventories. *Approved certifiers have been accepted by the Registry and the C E C to provide these services following an application process and training session. *Registry members are required to use an approved certifier for their emissions inventory to be accepted by the Registry. Source- California Climate Action Registry. (2005). California climate action registry website 113 Table A-23 List of Approved Certifiers in the California Climate Action Registry Certifier Mailing Address Det Norske Veritas Certification, Inc. www.dnv.com 3780 Kilroy Airport Way Suite 510, Long Beach, CA 90806 First Environment of California, Inc. www.firstenvironment.com 21550 Oxnard Street, Woodland Hills, CA 91367 Ecology and Environment, Inc. www.ene.com 350 Sansome Street, No. 300, San Francisco, CA 94104 E . H. Pechan & Associates www.pechan.com P.O. Box 1345, 6245 Pleasant Valley Road, E l Dorado, CA 95623 ENSR Corporation www.ensr.com 1220Avenida Acaso, Camarillo, CA 93012-8738 1420 Harbor Bay Parkway, Suite 120, Alameda, CA 94502 ICF Consulting www.icfconsulting.com 14724 Ventura Blvd., Suite 1001, Sherman Oaks, CA 91403 Ryerson Masters and Associates www.rmaq.com 735 State Street, Suite 209, Santa Barbara, CA 93101-5503 SGS North America Inc. Trade Assurance Services Division www.climatechange.sgs.com 2058 FeU Street, San Francisco, CA 94117 822 San Nicolas Drive, Walnut, CA 91789 T U V America, Inc. www.tuvam.com 10040 Mesa Rim Road, San Diego, CA92121 [Note] all approved certifiers also work as an Approved Technical Assistance Provider. Source-' California Climate Action Registry, http://www.climateregistry.org/ Table A-24 Roles assigned to Approved Technical Assistance Providers *Approved technical assistance providers (TAs) have been verified as experienced firms in providing G H G emissions services, and many of them have attended Registry-sponsored training sessions. All certifiers are also qualified to provide technical assistance. However, the Registry is not responsible for any consulting services or recommendations they may provide. *Registry members are not required to use technical assistance providers when completing their emissions inventory for the Registry. Source-' California CHmate Action Registry, http://www.cHmateregistzy.org/ 114 Table A-25 List of Approved Technical Assistance Providers in the California Climate Action Registry Technical Assistance Provider Mailing Address CH2MHil l 2485 Natomas Park Drive, Suite 600, Sacramento, CA 95833-2937 Det Norske Veritas Certification, Inc. (+) 3780 Kilroy Airport Way, Suite 510, Long Beach, CA 90806 Ecology and Environment, Inc. (+) 350 Sansome Street, No 300, San Francisco, CA 94101 Econergy International Corporation 3825 Iris Avenue, Suite 350, Boulder, CO 80301 EcoSecurities Ltd. 206 W. Bonita Ave. Claremont, CA 91711 E.H. Pechan & Associates (+) P.O. Box 1345, 6245 Pleasant Valley Road, E l Dorado, CA 95623 Energy Advantage Inc. 690 Dorval Drive, Suite 400, Oakville, O N L6K 3W7 Environmental Science Associates 225 Bush Street, Suite 1700, San Francisco, CA 94104 ENSR Corporation (+) 1220AvenidaAcaso, Camarillo, CA 93012-8738 Environmental Software Providers (ESP) 444 Castro Street, Suite 800, Mountain View, CA 94041 First Environment of California, Inc. (+) 21550 Oxnard Street, Woodland Hills, CA 91367 Futurepast, Inc. 2111 Wilson Boulevard, Suite 700, Arlington, VA 22201 Heck Associates 118 Garner Avenue, Bloomfield, N J 07003 ICF Consulting (+) 14724 Ventura Blvd, Suite 1001, Sherman Oaks, CA 91403 International Council for Local Environmental Initiatives (JCLEI) 15 Shattuck Square, Suite 215, Berkeley, CA 94704 Rocky Mountain Institute / K E M A - X E N E R G Y Team 492 Ninth Street, Suite 220, Oakland, CA 94607 Ryerson, Master and Associates, Inc. (+) 735 State Street, Suite 209, Santa Barbara, CA 93101-5503 SBW Consulting, Inc. 2820 Northup Way, Suite 230, BeUevue, WA 98004 Science Applications International Corporation (SAIC) 301 Greensboro Drive, MS E-5-7, McLean, VA 22102 SGS North America Inc. Trade Assurance Services Division (+) 2058 Fell Street, San Francisco, CA 94117 Shaw Environmental, Inc. 3347 Michelson Drive, Suite 200, Irvine, California 92612-1692 Trexler Climate + Energy Services, Inc. 529 SE Grand Ave, Suite 300, Portland, OR 97214 Trinity Consultants 1100 Johnson Ferry Road, Suite 685, Atlanta, GA 30342 T U V America (+) 10040 Mesa Rim Road, San Diego, CA 92121 URS Corporation 500 12th Street, Suite 200, Oakland, CA 94607-4014 [Note] (+) indicates that the firm also works as an Approved Certifier. Source^ California Climate Action Registry, http://www.climateregistry.org/ 115 (4) Climate Action Registry Reporting Online Tool (CARROT) The California Climate Action Registry has developed an online G H G accounting tool, called "Climate Action Registry Reporting Online Tool (CARROT)." CARROT is designed for G H G emissions calculation, reporting, and certification by participating entities in the program. A l l G H G emissions data is to be entered and managed through CARROT. CARROT wi l l be used by project participants, certifiers, and the public. Figure A-5 shows the main procedures for al l types of CARROT users (California Climate Action Registry, 2002a). Also, the CARROT has the following four main functions^ • It helps Registry participants calculate their annual G H G emissions and/or report these emissions to the Registry; • It allows approved certifiers to review participants' Annual G H G Emission Reports and to submit their certification information to the Registry; • It permits the general public to view aggregated reports of participants' annual G H G emissions and their progress in managing these emissions. • It enables the Registry staff to efficiently manage and track participants' data. Source-' California Climate Action Registry, http-'//wwwxlimateregistryorg/ 116 Figure A-5 Main procedures for all types of CARROT users CARROT Log In Main Page PAdmin User Main Page Participant User Main Page Certifier Enter Entity Info Add Users Participant User - Certifiers Input Emissions Data - Entity - Facility Submit Data for Certification Enter Info for only the facilities to which they are assigned Input Emissions Date - Facility Submit Facility Data to PAdmin for Certification View Emissions Data Certify Data Provide Certifier Access to Submitted Data Source: California Climate Action Registry. (2002). Climate action registry reporting online tool (carrot): Getting started guide, PartII-2 117 A.3 Afforestation/Reforestation CDM projects under UNFCCC A.3.1 Overview (1) Clean Development Mechanism The Clean Development Mechanism (CDM) is well-known for being one of the flexibility mechanisms proposed in the Kyoto Protocol. The definition of C D M is described in Article 12 in the Kyoto Protocol, and it allows Annex I countries (i.e. developed countries) to receive Certified Emission Reductions (CERs) by implementing project activities that reduce G H G emissions in non-Annex I countries (i.e. developing countries) (UNFCCC, 1997). The CERs achieved through C D M projects can be used by developed countries to meet their emission reductions targets under the Kyoto Protocol. Therefore, rules governing procedures for approving C D M projects are strictly enforced by the C D M Executive Board under the United Nations Framework Convention on Climate Change (UNFCCC). On November 18, 2004, the C D M Executive Board officially authorized a C D M project for the first time. G H G emission reductions achieved through the project operation wi l l be officially authorized as the CERs. Since then, several C D M projects were registered, and as of July 18, 2005, 12 projects are officially registered (UNFCCC, 2005c). Table A-26 shows C D M project activities that have been registered by the C D M Executive Board. 118 Table A-26 CDM project activities that have been registered by the CDM Executive Board Registered Project title Host Parties Other Parties Methodology * Reductions ** 18 Jul 05 5 MW Dehar Grid-connected SHP in Himachal Pradesh, India India AMST.D. 16,374 18 Jul 05 Graneros Plant Fuel Switching Project Chile Japan AM0008 19,438 26 Jun 05 Huitengxile Windfarm Project China Netherlands AM0005 51,429 03 Jun 05 Santa Cruz landfill gas combustion project Bolivia AM0003 82,680 03 Jun 05 Cortecito and San Carlos Hydroelectric Project Honduras AMST.D. 37,466 23 May 05 Biomass in Rajasthan -Electricity generation from mustard crop residues India Netherlands AMS-I.D. 31,374 23 May 05 e7 Bhutan Micro Hydro Power C D M Project Bhutan Japan AMS-IA. 524 23 Apr 05 Cuyamapa Hydroelectric Project Honduras AMS-I.D. 35,660 24 Mar 05 H F C Decomposition Project in Ulsan Republic of Korea Japan AM0001 1,400,000 08 Mar 05 Project for G H G emission reduction by thermal oxidation of H F C 23 in Gujarat, India. India Japan, Netherlands, United Kingdom of Great Britain, and Northern Ireland AM0001 3,000,000 11 Jan 05 RIO BLANCO Small Hydroelectric Project Honduras Finland AMST.D. 17,800 18 Nov 04 Brazil NovaGerar Landfill Gas to Energy Project Brazil Netherlands AM0003 670,133 * A M - Large scale, A C M - Consolidated Methodologies, AMS - Small scale (AMS-IA.: Electricity generation by the user, AMS-I.D.: Renewable electricity generation for a grid) ** Estimated emission reductions in metric tonnes of C02 equivalent per annum (as stated by the project participants) Source: UNFCCC. (2005). CDM project activities that have been registered by the CDM Executive Board. http'-//cdm. unfc(x.int/Projects/registered.html 119 Before getting C D M projects authorized, project participants need to get baseline and monitoring methodologies authorized by the C D M Executive Board. Once the methodologies receive authorization, project participants can submit a project design document, using the authorized baseline and monitoring methodologies. Table A-27 shows the sectoral scopes of C D M projects and the authorized methodologies by sectoral scope. There are 15 categories of sectoral scopes. As of July 2005, 27 approved methodologies, 16 approved small scale methodologies, and three approved consolidated methodologies have been authorized by the C D M Executive Board. As of July 2005, no methodologies have been authorized for afforestation or reforestation projects. Table A-27 Authorized methodologies by sectoral scope Sectoral Scope Approved Approved Small Scale Approved consolidated Methodology Methodologies methodologies Energy industries (renewable - / non-renewable sources) 7 6 1 Energy distribution 0 1 0 Energy demand 3 2 0 Manufacturing industries 3 1 1 Chemical industries 1 0 0 Construction 0 0 0 Transport 0 1 0 Mxnmg/mineral production 0 0 0 Metal production 0 0 0 Fugitive emissions from fuels 1 1 0 (sohd, oil and gas) Fugitive emissions from production and consumption of halocarbons and 1 0 0 sulphur hexafluoride Solvent use 0 0 0 Waste handling and disposal 9 2 1 HMffl*1* Agriculture 2 2 0 Total 27 16 3 (As of July 15, 2005) Source-' UNFCCC, Methodologies linked to sectoral scopes, http-'//cdm. unfccc.int/DOE/scopes.html#ll 120 (2) Afforestation and Reforestation projects In July 2004, a new working group was launched to discuss how to conduct CDM projects in the Afforestation and Reforestation sector. As of July 15, 2005, no approved methodologies have been established. Currently, baseline and monitoring methodology proposals on Afforestation and Reforestation projects are being discussed, and the following 11 methodologies shown in Table A-28 have been listed (UNFCCC, 2005a). Among those 11 methodologies, 5 methodologies (ARNM000T0005) have been rejected by the CDM Executive Board, because of the incompleteness of the methodologies. For example, as for ARNM0005: The Mountain Pine Ridge Reforestation Project (MPR Project), A/R Working Group pointed out that the following points should be corrected (CDM A/R WG, 2005): • the term usage of "project boundary" should be corrected • further improvements on baseline and quantification methodologies, • a conflict of interest in managing baseline control areas should be reconsidered A series of discussions about estabhshing and authorizing methodologies by the CDM Executive Board is now being conducted. They are building up technical knowledge on how to develop standard methodologies applicable to A/R projects in the CDM schemes. As of July 15, 2005, all five proposed methodologies (ARNMOOOl through ARNM0005), which were taken under advisement, were rejected by the CDM Executive Board. 121 Table A-28 Proposed methodologies for Afforestation and Reforestation projects, as of July 18,2005 Method number Methodology Title C D M E B final decision ARNM0001 The Mountain Pine Ridge Reforestation Project C (not approved) ARNM0002 Reforestation Project Using Native Species Around AES-Tiete Reservoirs C (not approved) ARNM0003 The International Small Group & Tree Planting Program (TIST) C (not approved) ARNM0004 "Treinta y Tres' afforestation combined with livestock intensification C (not approved) ARNM0005 The Mountain Pine Ridge Reforestation Project (MPR Project) C (not approved) ARNM0006 Bagepalli C D M Afforestation Programme N/A ARNM0007 Moldova Soil Conservation Project N/A ARNM0008 Kikonda Forest Reserve Reforestation Project N/A ARNM0009 Rio Aquidaban Reforestation Project (RA) N/A ARNM0010 Facilitating Reforestation for Guangxi Watershed Management in Pearl River Basin, China N/A ARNM0011 Choco-Manabi Corridor Reforestation and Conservation Carbon Project N/A [Note] Five methodologies (ARNM0001-0005) have not been approved by the C D M Executive Board. Source^ UNFCCC, Methodologies for afforestation and reforestation CDM project activities, http://cdm.unfccc.mt/methodologies/ARmethodologies 122 A.3.2 System Description By completing C D M projects, project participants are able to receive Certified Emission Reductions (CERs), which are counted as official emissions reductions for meeting Kyoto targets in their countries. Therefore, they need to follow the rules to regulate the operation of C D M projects, which are relatively strictly imposed by the C D M Executive Board. In the following sub-sections, system description regarding normal C D M projects and specific A/R projects are discussed separately. (1) Normal C D M projects As discussed in the previous section, project participants need to get baseline and monitoring methodologies authorized by the C D M Executive Board, before they get their projects registered officially. In the C D M schemes, a number of processes shown in Figure A-6 are involved prior to registration of a C D M project. In order to identify a baseline scenario on a C D M project, project participants need both to get methodologies authorized by the C D M Executive Board and to get validated by an Operational Entity (Matsuo, 2004). 123 Figure A-6 General procedures involved prior to registration of a CDM project Drafting the PDD (with new methodology) Submit to the CDM EB through the OE Expert desk review and public comments If existing methodology applicable Methodology Panel recommendation Judgement by the CDM EB A-rated: Approved Reformat to AM OOxx Validation by the OE Technical clarification Pre-recommendation B: Resubmit to panel Host country approval, local stakeholder/NGO/public comments Request for registration by the OE (with validation report) Assessment by the CDM EB (with host countries) Registration as a CDM project by the CDM EB C: Not approved [Note] "AM OOxx" is a serious number attached to the approved methodologies by the CDM Executive Board. Source-' Matsuo, N. (2004). The clean development mechanism'- Issues and opportunities. International Review for Environmental Strategies, 5(l), 233-240 1 2 4 (2) Small-scale C D M project A project which is eligible to be considered as a small scale C D M project activity can benefit from the simplified modalities and procedures, which were adopted by the Conference of the Parties at its eighth session (UNFCCC, 2005e). For example, project participants shall provide an explanation to show that the project activity would not have occurred anyway due to at least one of the following barriers (UNFCCC, 2004): • Investment barrier: a financially more viable alternative to the project activity would have led to higher emissions; • Technological barrier: a less technologically advanced alternative to the project activity involves lower risks due to the performance uncertainty or low market share of the new technology adopted for the project activity and so would have led to higher emissions! • Barrier due to prevailing practice: prevailing practice or existing regulatory or policy requirements would have led to implementation of a technology with higher emissions; • Other barriers: without the project activity, for another specific reason identified by the project participant, such as institutional barriers or limited information, managerial resources, organizational capacity, financial resources, or capacity to absorb new technologies, emissions would have been higher. Source-' UNFCCC. (2004). Appendix B of the simplified modalities and procedures for small-scale CDMproject activities Project participants willing to validate/register a small scale C D M project activity shall conduct the following items (UNFCCC, 2005e): • Use a simplified baseline and monitoring methodologies specified in appendix B for their project category; or • Propose changes to the simplified baseline and monitoring methodologies specified in appendix B for consideration of the C D M Executive Board,' or • Propose additional project categories to those contained in appendix B for consideration of the Board. Source-' UNFCCC. (2005). Small scale cdm project activities, http'-//c(mi.imfccc.mt/Projects/pac/pac_ssc.html 125 As of July 18, 2005, 15 methodologies for small-scale C D M project activities had been approved by the C D M Executive Board. Table A-29 shows approved methodologies for small-scale C D M project activities (UNFCCC, 2005b). Table A-29 Approved methodologies for small-scale CDM project activities Reference Methodologies Title (including baseline and monitoring methodologies) Sectoral Scope AMST.A. Electricity generation by the user 1 AMS-I.B. Mechanical energy for the user 1 AMS-I.C. Thermal energy for the user 1 AMS-I.D. Renewable electricity generation for a grid 1 AMS-IIA. Supply side energy efficiency improvements - transmission and distribution 2 AMS-II.B. Supply side energy efficiency improvements - generation 1 AMS-II.C. Demand-side energy efficiency programmes for specific technologies 3 AMS-H.D. Energy efficiency and fuel switching measures for industrial facilities 4 AMS-II.E. Energy efficiency and fuel switching measures for buildings 3 AMS-II.E Energy efficiency and fuel switching measures for agricultural facilities and activities 3 AMSTIIA. Agriculture AMS-III.B. Switching fossil fuels 1 AMS-III.C. Emission reductions by low-greenhouse gas emitting vehicles 7 AMS-III.D. Methane recovery 10, 13 AMS-III.E. Avoidance of methane production from biomass decay through controlled combustion 13, 15 [Notel As of July 18, 2005 Source: UNFCCC. (2005). Approved small scales methodologies. http-Y/cdm. unfccc.int/methodologies/SSCmethodologies/approved (3) Afforestation and Reforestation Projects Figure A-7 shows Clean Development Mechanism Afforestation and Reforestation (CDM A/R) project activities in a lifecycle of a C D M A/R project. According to the U N F C C C website, the C D M A/R project cycle is described as followed (UNFCCC, 2005a). a. A/R Project Activity Design Project participants need to submit information on their proposed C D M A/R project 126 activities, using the project design document for afforestation and reforestation project activities. The format of the project design document is prepared by the C D M Executive Board and is available on the website for the C D M website under U N F C C C . b. Proposal for a New A/R Baseline and/or Monitoring A/R Methodology Before the validation process and submission for registration of C D M A/R project activities, the A/R baseline and monitoring methodologies need to be submitted by the designated operational entity to the Executive Board for review, with the draft project design document. c. Use of an Approved A/R Methodology The approved A/R methodology is a methodology previously approved by the C D M Executive Board and made publicly available along with any relevant guidance. In the case of approved methodologies the designated operational entities may proceed with the validation of the C D M project activity and submit project design documents for afforestation and reforestation project activities for registration. d. Validation of the C D M A/R project activity Validation is the process of independent evaluation of an A/R project activity by a designated operational entity against the requirements of the C D M as set out in decision 19/CP.9, its annex and relevant decisions of the COP/MOP, on the basis of the project design document for afforestation and reforestation project activities. e. Registration of the A/R C D M project activity Registration is the formal acceptance by the Executive Board of a validated project as an A/R C D M project activity. Registration is the prerequisite for the verification, certification and issuance of CERs related to that A/R project activity. f. Certification/Verification of the A/R C D M project activity Verification is the periodic independent review and ex-post determination by a designated operational entity of the monitored reductions in anthropogenic emissions by sources of greenhouse gases that have occurred as a result of a registered A/R C D M project activity during the verification period. Certification is the written assurance by the 127 designated operational entity that, during a specified time period, a project activity achieved the reductions in anthropogenic emissions by sources of greenhouse gases as verified. Figure A-7 Afforestation and Reforestation CDM project activities A/R Project Activity Design | • Validation of the CDM A/R project activity r i r Proposal of a New A/R Baseline and/or Monitoring A/R Methodology Registration of the A/R CDM project activity Use of an Approved A/R Methodology CertificationA/erification of the A/R CDM project activity Source-' Author based on UNFCCC website, http-'//cdm. unfccc.int/ 128 References California Climate Action Registry. (2002a). Climate action registry reporting online tool (CARROT): Getting started guide. California Climate Action Registry. (2002b). General reporting protocol (version l): California Climate Action Registry. California Climate Action Registry. (2004). California climate action registry forest protocols overview: California Climate Action Registry. California Climate Action Registry. (2005). California climate action registry website. Retrieved July 18, 2005, from http://www.clirnateregistry.org/ C D M A / R W G . (2005). C D M : Proposed new A/R methodology A / R working group recommendation to the Executive Board: C D M A / R W G . Environment Canada. (2004). Canada's greenhouse gas inventory, 1990-2002. In G . G . Division (Ed.).Ontario, Canada: Envrionment Canada. European Commission Environment D G . (2005). The European Union greenhouse gas emission trading scheme (ETJETS). Retrieved July 15, 2005, from httpV/europa.eu.mtycomrn/enviromnentyclimat/emission.htm F o E Japan. (2005). C 0 2 kyusyugen toshite no sliinrin (in Japanese). Retrieved July 18, 2005, from http://www.foejapan.org/forest/sink/ Forest Agency of Japan. (2003). Mokuzai jikyuhyo (in Japanese): Forest Agency of Japan. Government of Canada. (2003). Offset System Discussion Paper. Ottawa: Government of Canada. Government of Canada. (2005). Large Final Emitter system. Retrieved July 18, 2005, from http://www.cMmatechange.gc.ca/engHsh/ofTsets/lfe.asp Government of Canada. (2005). Moving forward on climate change: A p i a n for honouring our Kyoto commitment. Greenhouse Gas Inventory Office of Japan. (2005). The G H G s emissions data of Japan (1990-2003). Retrieved July 15, 2005, from http://www-gio.nies.go.jp/database/db-e.html 129 Hull , J . (2005). Personal communication on the current status of the Carbon Offset System in Canada. In Author (Ed.).Ottawa, O N . International Organization for Standardization. (2005). Greenhouse gases — part 2' Specification with guidance at the project level for quantification, monitoring and reporting of greenhouse gas emission reductions or removal enhancements (Vol. ISO/DIS 14064-2) (draft version): International Organization for Standardization. IPCC. (2000). Land use, land-use change, and forestry. Cambridge, U K : Cambridge University Press. I P C C . (2001). Climate change 2001:Mitigation. Cambridge, U K : Cambridge University Press. I U C N Forest Conservation Programme. (2005). Forest environmental services. Retrieved July 15, 2005, from http://www.iucn.org/themes/fcp/forestissues/fenvironmental.htm Iwai, Y. (Ed.). (2002). Forestry and the forest industry in Japan. London, U K : U B C Press. Keeney, L . R. (1992). Value-focused thinking: A path to creative decisionmaking. London, England: Harvard University Press. Keeney, L . R., & McDaniels, L . T. (1992). Value-focused thinking about strategic decisions at B C Hydro. Interfaces, 22\<o), 94-109. Keeney, L . R., McDaniels, L . T., & Ridge-Cooney, L . V. (1996). Using values in planning wastewater facilities for metropolitan Seattle. Water resources bulletin, 52(2), 293-303. Kurz, W. (2005). Monitoring, modelling and managing Canada's forest carbon cycle, BIOCAP Canada's 1st National Conference. Ottawa, O N . Lempriere, T. (2005). Personal communication on the Carbon Offset System in Canada. In Author (Ed.).UBC, Vancouver, B C . Matsuo, N . (2004). The Clean Development Mechanism: Issues and opportunities. 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