TRENDS IN FOREST-BASED CARBON

SEQUESTRATION IN ASIA:

Dovetail Staff Page 2 7/21/08

As Americans consider the role of forests in climate mitigation and possible mechanisms for rewarding

forest-related carbon sequestration, it makes sense to look at how other nations and regions are

proceeding with forest carbon sequestration programs. This article focuses on such programs in Asia, a

region that may someday serve as a major source of forest-based carbon credits for American buyers.

While only a few Land Use, Land Use Change and Forestry (LULUCF) projects have been initiated in

Asia to date, a number of recent developments may contribute to a much greater role for the region in the

near future. These developments include increasing government support for forest-based projects in many

Asian countries, improvements in standards and carbon accounting for forest projects, and building

momentum to include forest conservation projects under the Clean Development Mechanism (CDM).

Several initiatives in emissions trading may also offer increased markets for forest-based credits.

The United States could play an important role in driving demand for forest-based credits, both in the

short and long term. If the US joins the regulated carbon market, it is expected to quickly surpass Europe

in carbon trades as its key industries become regulated. With the US seemingly more open to forestbased

credits than Europe, U.S. involvement could offer a huge boost in demand for such credits.

However, many issues need to be resolved to clearly define the role of forest-based carbon credits in

global emissions trading.

Forests play a critical role in the global carbon cycle. Forests moderate the net flux of some significant

greenhouse gases (GHGs) between land and atmosphere, and forests store (sequester) carbon in biomass

and soils. Forests act as carbon sinks when their area or productivity is increased, resulting in greater

when they are burned or cut down, or when biomass or soil humus decays.

Due largely to tropical deforestation, forests are currently a net emitter of GHGs in the world. Between

to the Earth’s atmosphere each year (Swallow et al. 2007). In 2004, the Intergovernmental Panel on

Climate Change (IPCC) estimated that the forest sector was responsible for 17.4% of global greenhouse

gas emissions, more than all the cars, trucks, planes, trains, and ships in the world combined (Figure 1).

In developing Asia, deforestation likely accounts for an even greater share of emissions. In the last few

decades, there have been massive deforestation and land-use changes in tropical Asia due in large part to

clearing of land for agriculture. The FAO put annual forest loss in South and Southeast Asia at 2.85

million hectares (7 million acres) or nearly 1% per year, between 2000 and 2005. Since tropical forest

ecosystems contain substantial amounts of carbon, such losses significantly reduce carbon stocks in the

region.

Dovetail Staff Page 3 7/21/08

The extent of deforestation and

resulting GHG emissions differ

greatly between countries (Figure

2). Some countries are experiencing

a balance of carbon-emitting and

carbon sequestering land use

changes. For instance, among all

countries in the world, China

witnessed the largest annual net gain

in forest area at four million hectares

(9.9 million acres) per year between

increase is due to recent, large-scale

afforestation programs, implemented

to meet domestic fiber requirements.

However, in most countries, carbonemissions

due to forest conversion

vastly exceed carbon gains. In Asia,

this is particularly evident in

Indonesia. In this heavily-forested

country, deforestation is occurring at

the rate of about two million hectares (5 million acres) per year, as old-growth rainforest is logged,

burned, or converted to agricultural uses and palm oil plantations (World Bank 2007a). Largely due to

deforestation and peat land degradation, Indonesia is the third largest source of greenhouse gas emissions

in the world (Swallow et al. 2007).

There are increasing concerns about countries that still have abundant forest reserves, such as Lao PDR,

Papua New Guinea, and Cambodia. In Cambodia, illegal logging of hardwood timbers for export was

responsible for much of the 30 percent

reduction in primary rainforest cover

since 2000, one of the most rapid

losses recorded by the FAO.

Another concern in the region is the

rapid spread of large-scale

commercial plantations, many of

which are preceded by clearing of

natural forests. While there is a

heated debate about whether the

potential benefits of commercial

plantations outweigh the considerable

environmental and social problems

often associated with their

development, there is little doubt that

clearing primary or secondary forests

to establish plantations reduces carbon

stocks.

Source: IPCC. Climate Change 2007: Synthesis Report.

Transport

13%

Residential and

commercial

buildings

8%

Industry

19%

Agriculture

14%

Forestry

17%

Waste and

wastewater

3%

Energy Supply

26%

-40

-30

-20

-10

0

10

20

30

40

Philippines

Indonesia

Cambodia

Myanmar

Thailand

Lao PDR.

Malaysia

India

China

Viet Nam

Note: Only includes countries with over 7,000 hectares of total forest area.

Dovetail Staff Page 4 7/21/08

Ironically, the growing eagerness to slow climate change by using biofuels has provided a new impetus

for deforestation in Asia and throughout the world. For instance, the use of palm oil in production of

biodiesel has markedly increased the rate of forest conversion. While biodiesel offers many

environmental benefits, including reductions in air pollutants, increased demand for clean fuels is

significantly impacting natural forests in Indonesia, Malaysia, and Thailand (Leahy 2007). Energy

companies are investing billions to acquire or develop oil-palm plantations in developing countries, often

on lands cleared for the sole purpose of plantation development. A high proportion of existing plantations

have been established by governments, under aid programs, or under financial incentives to the private

sector (Brown 2000).

Despite the lure of forest conversion for biofuels production, various forestry practices can make retention

Tropical forests have a large potential to mitigate climate change through conservation of existing carbon

pools (e.g. forest protection, conservation and sustainable harvesting), expansion of carbon sinks (e.g.

reforestation, agroforestry), storage management (e.g. longer rotations, reduced impact logging) and

substitution of fossil fuels with biomass energy from sustainably managed forests.

that come from clearing trees are generally so paltry that, if farmers and other land users were rewarded

for the carbon stored in their trees and forests, it is highly likely that a large amount of deforestation and

carbon emissions would be prevented. In most of the areas studied, the various ventures that prompted

deforestation conversion rarely generated more than $5 for every ton of carbon released and frequently

returned far less than US $1 per ton (Swallow et al. 2007).

Despite the important role of forests in mitigating climate change, establishing mechanisms to integrate

forests into emissions trading or offset schemes has been fraught with difficulty, and the market for

temporary credits from forest-based projects has been limited. Outside of Australia, the Clean

Development Mechanism (CDM) under the Kyoto Protocol and voluntary (or carbon offset) markets are

yet figure prominently in these markets. In the following paragraphs, current forest-based carbon

sequestration projects are summarized for these two main market outlets.

For the first commitment period (2008-2012), the Kyoto Protocol primarily targets measures to mitigate

to reduce costs of emissions reductions. Public or private entities may fulfill their obligations under the

Protocol through investing in "Clean Development" projects in developing countries. While reducing

emissions, CDM projects also aim to promote sustainable development in the host country.

The issue of sinks and the inclusion of Land Use, Land Use Change and Forestry (LULUCF) activities in

the CDM has been one of the most contentious issues in negotiations aimed at making the Kyoto Protocol

operational. Inclusion of forest-based carbon sequestration projects is seen by some as a potential

International Center for Tropical Agriculture (CIAT), and the International Institute for Tropical Agriculture (IITA).

Gas Abatement Scheme, these credits must come from local projects.

Dovetail Staff Page 5 7/21/08

loophole that can be used by developed countries to postpone the implementation of domestic measures to

reduce green house gas emissions. Developing countries and environmental NGOs are also concerned

carbon sinks and restrict their use for development purposes, while deriving low-cost carbon credits for

their sole benefit. Other concerns center around the lack of permanence of carbon sequestered in forests,

the difficulties associated with quantifying the carbon stored, and the risk that including forestry activities

could provide a subsidy to clear forested land for large commercial plantations. In contrast, LULUCF

advocates maintain that investment in the forest sector is important to halt deforestation and to diversify

the income-opportunities of local communities through reforestation activities. They also argue that forest

carbon credits offer the only meaningful incentive for many developing countries to participate in

international efforts to deal with climate change.

first commitment period, or just 1% per year.

Development of the final rules for a carbon credit scheme for AR projects was concluded in December

2003 through negotiations at COP 9. An overriding focus of negotiators was establishment of procedures

for accounting for changes in carbon stocks in LULUCF projects. This is critical since inclusion of such

projects under the CDM has created a market mechanism whereby emissions are allowed in one area in

exchange for establishing sinks in another area. Some of the important rules governing LULUCF

activities under the CDM are provided in Box 1.

Forestry projects have been struggling to access carbon finance under the CDM in the four years since the

rules for AR projects were adopted. While there are currently 1,000 registered CDM projects worldwide

been registered. That project was initiated to establish 2,000 hectares (5,000 acres) of multiple-use forests

in watershed areas along the Pearl River Basin in China. An additional 16 AR projects are in the

to energy projects estimate reductions higher than that amount.

seeding and/or human induced promotion of natural seed sources. Forests are defined as having a tree crown cover

(or equivalent stocking level) greater than 10%. The activity is classified as afforestation if the land has not been

forested for at least 50 years, whereas reforestation refers to land that did not contain forest before 1990.

Established forests may be managed, harvested and used for a variety of purposes, including agro-forestry, bioenergy,

or timber production. However, the forest land may not be temporarily unstocked as a result of human

intervention such as harvesting, nor have the potential to revert to forest without human intervention.

replacement of high embodied energy (high quantities of total energy needed in production) products with low

embodied energy products.

carbon dioxide equivalent.

the requirements of the CDM on the basis of the project design document.

Dovetail Staff Page 6 7/21/08

The main reason for the relative lack of

activity is that, the market for temporary

credits from forestry is limited. One

major obstacle for AR CDM is the

European Union’s decision to exclude

forestry credits from the EU Emissions

Trading Scheme (EU ETS), which

currently comprises the majority of the

scheme covers much of the European

private sector, the EU policy will likely

continue to keep forestry credits out of

reach of one of the major demand groups.

In 2006, European buyers dominated the

primary CDM and Joint Initiative (JI)

market, with an 86% market share

(World Bank 2007b).

Even without the negative influence of

EU policy, demand for temporary carbon

credits has not been strong among

potential buyers in the regulated markets.

There are a number of reasons for this

low interest (Boer 2006):

permanent and must be replaced

after a certain period.

rules for AR projects imply high

Protocol is likely to alienate

some investors and credit buyers,

although it is not currently acting

unique risks, such as fire, pest

and disease, and legal problems

(e.g. land title, title to carbon,

transfer of rights, implementation

and management contracts).

EU climate policy towards its Kyoto commitment. It has spawned a thriving market in the trade of allowances and

for the import of project-based reductions. In its first phase from 2005 to 2007, the EU ETS regulated CO2

emissions from energy-intensive installations representing some 40% of EU emissions.

registration, monitoring, verification and certification, and the issuance of carbon credits. It also poses challenges in

the development and use of methodologies to define baselines, monitoring and additionality.

must meet additionality requirements, meaning that a project must

lead to carbon benefits that are additional to a business-as-usual

scenario. This requirement should restrict inclusion of large-scale

commercial plantations, since most of them should be economically

viable without carbon finance.

increasing deforestation outside the project area. If this occurs, the

carbon released when deforestation activities are relocated to areas

outside project boundaries can equal or even surpass the amount of

carbon captured through the project. The final rules state that all

projects must account for potential leakage and include measures to

minimize it.

would allow countries to offset permanent carbon releases from

burning fossil fuels with temporary carbon sequestration offered by

forests, negotiators stipulated that forestry projects could only result in

so-called temporary Certified Emissions Reductions (tCERs), which

expire after at most 10 years, or long-term CERs (ICERs), which are

valid for the crediting period of the project or the project lifetime.

These must be replaced by other credits in the future or if reversal of

sequestration has occurred during the crediting period. Thus, sellers

of carbon credits from reforestation projects have an incentive to

ensure that the carbon stocks are retained. The crediting period was

established at either 20 years - which may be renewed at most two

times (up to 60 years) - or a maximum of 30 years. This means that

the sale of a carbon credit incurs an ongoing obligation.

include a general list of social and environmental areas that must be

assessed as part of developing a CDM project. These areas include

expected impacts on hydrology, soils, local communities, land tenure,

local employment, and food production, among others. In addition, a

project’s preparation phase is subject to a 45 day comment period.

The responsibility for undertaking these assessments will fall on

project developers and other involved entities, under the watchful eye

of interested non-governmental organizations.

small-scale AR projects, which enable the participation of low income

communities. To make these activities viable, simplified modalities

and procedures were agreed on in COP 10 to reduce the high

transaction costs associated with AR projects. Due to the potential

transaction costs involved, only small-scale projects expected to result

in net removals of less than 8 Kt CO2eq/year are allowed.

Dovetail Staff Page 7 7/21/08

Despite these competitive disadvantages for AR CDM, there will likely be increasing demand for these

carbon credits due in part to their perceived community benefits. As 2012 approaches and companies in

the West realize it's cheaper to buy credits than to clean up at home, purchases of credits from developing

countries may increase. This may provide a boost to temporary credits from forestry projects.

A number of groups have offered greater access to information and capacity-building programs for

activities that address the high transaction costs associated with AR. For instance, the International

Tropical Timber Organization (ITTO) initiated a project to formulate and implement AR-CDM projects

and to facilitate public-private partnerships that link host developing countries with potential investors.

To date, several million forestry credits have been put forward and purchased by the BioCarbon Fund,

administered by the World Bank. Launched in November 2003, the Fund purchases carbon credits from

CDM projects and finances demonstration projects for carbon sequestration and conservation in forest

and agro-ecosystems outside the Kyoto market. The main contributors to this public/private partnership

are governments, including Canada and Italy, and companies (e.g., Japanese power companies).

Emissions Reduction Purchase Agreements (ERPAs) for more than a dozen projects are already signed

and more await approval (Haupt and von Lüpke 2007). The price paid by the BioCarbon Fund may be

In addition to compliance markets like the Kyoto Protocol, there is a growing voluntary carbon segment

that sells emission reductions to individuals and companies seeking to offset their own carbon emission

footprints. Started well before the Protocol by conservation organizations looking to find new ways of

financing their projects, voluntary carbon markets include all carbon offset trades that are not required by

regulation. At the broadest level, the voluntary carbon markets can be divided into two main segments –

the voluntary, but legally binding, cap-and-trade system that includes the Chicago Climate Exchange

(CCX), and the broader, non-binding, over the counter (OTC) offset market (Hamilton 2007).

Started in 2004, CCX defines itself as “the world’s first and North America’s only active voluntary,

legally binding integrated trading system to reduce emissions of all six major greenhouse gases with

offset projects worldwide.” CCX is the first voluntary cap-and-trade system. Members voluntarily join

CCX and agree to its legally-binding reductions policy. The CCX’s unit of trade is the Carbon Financial

Exchange (ECX), which has since become the major exchange for EU ETS allowances. Offsets from

Indian, Chinese and New Zealand projects have also been listed on the exchange (World Bank 2007b).

Outside of CCX, a wide range of voluntary transactions make up a market that is not driven by an

emissions cap. The project-based credits in this market are generally referred to as Verified Emissions

Reductions (VERs) or simply as carbon offsets. Suppliers in the offset market include retailers selling

offsets online, conservation organizations, developers of potential CDM projects, and project developers

primarily interested in generating VERs. The buyer motivations vary. Some have an interest in

managing their climate change impacts for philanthropy or public relations benefits, while others buy

credits in preparation for federal regulations or to resell them for profit (Hamilton 2007).

Compared to their regulated cousins, voluntary markets can be more nimble and innovative. This is

particularly true when it comes to forestry projects. While Kyoto negotiators are spending considerable

time, energy, and money trying to determine how avoided deforestation might enter the CDM markets,

voluntary markets are able to consider less complex and costly ways to manage risk. As a result, large

classes of LULUCF assets that are still excluded from the CDM and other regulatory markets (e.g. soil

sequestration, fire management and avoided deforestation) still offer attractive opportunities to promote

sustainable development in natural resource-based economies (World Bank 2007b).

Dovetail Staff Page 8 7/21/08

While voluntary markets are still relatively small compared to the Kyoto market, trading in voluntary

carbon is increasing exponentially. For instance, the Chicago Climate Exchange (CCX) traded 22.9

eclipsed in the first quarter of 2008 (CCX 2007). The size of the voluntary OTC offset market is harder

to estimate because of the decentralized nature and lack of comprehensive data. According to a study

conducted by Ecosystem Marketplace, the volume of trades in the OTC market was 13.4 million tons of

all OTC transactions, particularly involving international projects (Asia and Latin America especially), so

it is possible that the actual volumes being traded are larger than the volumes reported by CCX.

According to the Ecosystem Marketplace study and in stark contrast to the situation in the CDM market

(in which forestry credits are negligible), forestry projects accounted for 36% of the transaction volume in

perhaps not surprising. First, they face lower financing and bureaucratic hurdles than is the case in

regulated markets. And second, while several projects have been criticized for negative social or

environmental impacts, forestry credits are highly valued by many buyers for providing potential benefits

to communities beyond carbon sequestration, including biodiversity (Hamilton 2007).

The popularity of forestry projects in the voluntary market has not translated into many projects in Asia.

As shown in Table 1, the vast majority of forestry-based credits originated in North America (about 66%

in 2006) due in large part to high value placed on forestry projects in US voluntary markets. For

example, the first protocol approved for offsets by the California Climate Action Registry was the

reluctant than countries in other regions to pursue these opportunities. This is tied to the resistance of a

number of developing countries in Asia to include forest-based projects in the CDM. One of the

arguments is that developing countries should have a right to develop their natural resources and advance

their national economies similar to how most developed countries fueled their own economic

development. Some also view such projects as a form of eco-imperialism - a ploy whereby developed

countries can control resources in developing countries. Such resistance has contributed to the limited

number of voluntary projects proposed in the region. Many of the projects that have been initiated are

supported by non-profit organizations such as Conservation International.

ktCO2*

Type of project

Asia Africa North

America

South

America

Europe

& Russia

Australia

/ Other Total

Afforestation/reforestation plantation 18 4 6 193 0 0 221

Afforestation/reforestation mixed native 1 308 2,337 157 128 26 2,957

Avoided deforestation 0+ 16+ 0 309 0 2 327

Total 19 328 2,343 659 128 28 3,505

(www.ecosystemmarketplace.com/ documents/acrobat/StateoftheVoluntaryCarbonMarket17July.pdf)

* + sign means that respondent indicated transactions of this type, but did not provide volumes.

and tools for member organizations to measure, monitor, third-party verify and reduce their GHG emissions.

Dovetail Staff Page 9 7/21/08

Since the United Nations Framework Convention on Climate Change came into force fourteen years ago,

forest-based carbon projects have been surrounded by controversy. While such projects will continue to

spark debate, recent events point to greater activity in forest-based carbon markets and a greater role for

both Asia and the United States in these markets. This section describes four recent major developments.

Forest-based projects are increasingly viewed by government officials in Asia as a way to meet national

development and environmental priorities while contributing to economic, social, and institutional

development. This is apparent by the inclusion of forest-based initiatives in the Sydney APEC Leaders’

Declaration on Climate Change, Energy Security and Clean Development, signed on September 9, 2007

(Box 2). While the overall pact was criticized for its failure to call for binding targets, the agreements

made relating to forests represented an about-face from reluctance shown in the past.

Although regional commitments are a step in the right direction, real progress must come at the countrylevel.

Important factors at the country-level include the state of forest resources, attention to relevant

legal and legislative issues (e.g. land tenure), and advancement of forest management policies, including

the promotion of AR CDM projects. Based on these criteria, China and India will likely offer the most

promising sites in Asia for forest-based sequestration projects in the near future.

In both China and India, there are many regions where once-rich forests have been depleted of their

timber wealth and where large areas of land are under the control of governments. In India, for instance,

the National Remote Sensing Agency estimated the extent of wastelands to be 63.85 million ha, which is

almost 20% of the total geographical area (UNFCCC). These lands could potentially provide forest-based

industries with opportunities to establish CDM-supported industrial plantations to meet raw material

needs as long as additionality and other project requirements are met. Such plantations could leverage the

proactive efforts of governments and local communities. The Joint Forest Management (JFM) program in

India, for example, has increased stability of tenure and participation of communities in land management

decisions. In some areas of China, improved land tenure policies have stimulated farmers to develop

collaborative institutions to capitalize on economies of scale in marketing timber (Smith 2002).

Forests can play a critical role in the carbon cycle. Ongoing action is required to encourage afforestation and

reforestation and to reduce deforestation, forest degradation and forest fires, including by promoting sustainable

forest management, combating illegal logging and addressing the underlying economic and social drivers. We

therefore:

• agree to work to achieve a regional aspirational goal of increasing forest cover in the APEC region by at least

20 million hectares of all types of forests by 2020.

• welcome the Global Initiative on Forests and Climate launched in Sydney in July 2007.

• welcome the development of other instruments which may include continued work on a Legally Binding

Instrument on Sustainable Forest Management for those economies interested in pursuing this option.

• agree to establish the Asia-Pacific Network for Sustainable Forest Management and Rehabilitation to enhance

capacity building and strengthen information sharing in the forestry sector. Collaboration between all regional

initiatives on forests, including the Asia Forest Partnership, will be important.

• coordinate with relevant international institutions to develop forest program partnerships, including the

proposed World Bank forest carbon partnership facility.

Dovetail Staff Page 10 7/21/08

On the other hand, the potential for AR CDM projects may be limited in countries that are rich in forests,

such as Indonesia and Malaysia. In these countries, land rights are often unclear and overlapping and

there is a higher degree of conflict among stakeholders, such as the logging and plantation industries,

local communities, and large scale farmers and ranchers (Smith 2002). If these problems can be

overcome, many opportunities exist. Of Indonesia’s 108 million ha of forestland, 12% is presently idle

and unproductive and offers potential areas for carbon sequestration through forestation under the CDM.

These lands could absorb 45–300 tons of carbon dioxide per hectare per year (ADB 2003).

As explained above, offsetting carbon emissions by conserving forests is not yet one of the UN’s carbon

trading mechanisms, so any projects starting now can only earn credits in the voluntary market.

However, momentum has been building behind Reduced Emissions from Deforestation and Degradation

(REDD) initiatives to extend regulated carbon markets to include “avoided deforestation” - activities that

produce payments for preserving existing forests.

The Coalition for Rainforest Nations, a global lobbying group consisting of fifteen developing nations,

put avoided deforestation on the post-Kyoto agenda at the 2005 Climate Change Conference in Montreal.

Participating nations sought full credit for avoided deforestation and reforestation. Their cause received a

identified avoided deforestation as one of the most cost-efficient strategies to mitigate climate change.

Bolstered by this growing momentum, the UN climate conference in Bali last December (COP 13) agreed

to move forward on inclusion of REDD in global carbon market mechanisms in the second phase (from

2012) of the Kyoto Protocol. The four-page Bali Action Plan, while containing no binding commitments,

called on Parties to step up international efforts to combat climate change and get to an agreed outcome in

Copenhagen in 2009 (a process tentatively started in the most recent talks in Bangkok on March/April

It is unlikely that negotiations will lead to immediate approval of REDD projects, as there are still a

number of contentious issues to be worked out. One problem is that if avoided deforestation is allowed

into the CDM and reduction targets stay the same, the price of compliance allowances could fall

significantly. The big losers of this crash would be local communities hoping to cash in on forestry. In

addition, there is the ever-contentious issue of additionality. With avoided deforestation, some kind of

system will need to be devised to prove that a saved forest is in danger of being cleared without a project

intervention; this will require putting firm numbers on hypothetical future developments (Zwick 2007).

Steps will also have to be taken to ensure that the benefits of such a global forest trading scheme will

reach peoples living within the affected forests.

Despite these ongoing issues, significant steps are already being taken to develop this market. The

Chicago Climate Exchange is currently working on protocols for "pure preservation" credits. It has

allowed avoided deforestation protocols in its credits, albeit only when paired with reforestation and

afforestation. In addition, the World Bank has stepped in to guide a market in REDD credits through its

Forest Carbon Partnership Facility, launched at the UN climate change talks in Bali. The FCPF is

designed to test the feasibility of different market-based approaches to avoided deforestation, with the

ultimate goal of jump-starting a forest carbon market. Nine industrialized countries have already pledged

US$155 million to kick-start the 10-year initiative. A US$100 million Readiness Fund will provide grants

to help countries set up systems and processes to monitor and credibly govern their forests. Several

Dovetail Staff Page 11 7/21/08

countries will also be able to sell emission reductions to a special US$200 million Carbon Fund (World

Bank 2007a). It will differ from the CDM by setting national-level reduction targets for a country's entire

forest sector, instead of on a project-by-project basis. Pilot projects have already been proposed for Papua

New Guinea, Costa Rica, Indonesia, Brazil, and the Democratic Republic of Congo.

Asian countries may become active partners in REDD initiatives. The government of Australia has

already pledged 200 million Australian dollars toward preventing deforestation in the Asia Pacific region,

a figure nearly twice the size of the entire voluntary carbon market in 2006 (Zwick 2007). As part of this

pledge, the Australia-PNG Forest Carbon Partnership would see Australia pay to preserve Papuan

rainforest and earn carbon credits for use in its own emissions trading scheme currently under

development, or in other regional and global emissions trading schemes.

Asia is also home to a groundbreaking forest conservation project that may serve as a model for how

carbon markets can be used to halt rapid rates of tropical deforestation and resulting carbon emissions.

The project, located in the Ulu Masen forest in Aceh Province, Indonesia, is the first REDD project in the

developing world to be accredited by the Climate, Community and Biodiversity Alliance (CCBA), which

offers an offset accreditation standard in the voluntary market for forestry carbon. The project – backed

by the Government of Aceh, Fauna & Flora International (FFI) and Carbon Conservation – will protect

750,000 ha of forest in the Ulu Masen Ecosystem and peripheral forest blocks located in Aceh Province.

Proposed activities (e.g. land use planning and reclassification, increased monitoring and law

enforcement, reforestation, restoration, and sustainable community logging) will reduce deforestation in

the area by 85% and will help avoid 3,369,848 tons of CO2 emissions each year (Aceh, 2007).

As the voluntary carbon market is getting more diverse and competitive with the addition of many more

retailers, brokers, and project developers, the quality of forest-based carbon offsets is increasingly

important for both buyers and sellers in the market. Quality issues will ultimately determine how (and

how fast) the market for such offsets will grow. In response, various groups, from non-profits and

industry associations to offset providers and government agencies, have been working to create more

rigorous standards and certification programs top ensure confidence and quality in the global market.

One such program that has been developed to address this need is the Climate, Community, and

Biodiversity (CCB) standard. The development of the CCB Standard was spearheaded by the Climate,

Community and Biodiversity Alliance (CCBA), which is a partnership between a range of corporations

(e.g. Intel Corp. and Weyerhaeuser) and research and non-governmental organizations (e.g. The Nature

Conservancy, Rainforest Alliance, Sustainable Forestry Management). This standard promotes the

development of climate change mitigation projects that incorporate biodiversity conservation and

contribute to sustainable development.

The CCB Standard allows private-sector companies, multi-lateral funding organizations, and government

agencies to screen land-based carbon projects. In 2007, the first two forestry projects, in Panama and in

China, were independently certified to the CCB Standard. Since then, several dozen projects, both under

the CDM and for the voluntary carbon market, are using the CCB Standard. Leading market players,

including the World Bank and EcoSecurities, are now applying the CCB Standard to their project

portfolios, and the Chinese Government has endorsed the Standard as a valuable tool for helping their

country develop sustainable forestry initiatives (Sustainable Forestry Management 2007). The CCBA

recently accredited the first REDD project in the developing world. The project, located in the Ulu

Masen forest in Aceh Province, Indonesia, may serve as a model for how carbon markets can be used to

halt rapid rates of tropical deforestation and resulting carbon emissions.

Dovetail Staff Page 12 7/21/08

Meanwhile, advancements in carbon accounting are refining the measurement of tree growth and

carbon storage in forests. In the Asian region, Australia is taking a lead in assisting developing

countries in this effort. As part of a program with the Clinton Climate Initiative, Australian scientists

will train foresters in neighboring APEC countries to use the Australian Greenhouse Office’s National

Carbon Accounting System (NCAS) to assess carbon sequestration in native and plantation forests.

The NCAS uses a sophisticated system involving remote sensing, information from thousands of satellite

images, greenhouse gas accounting methods, and modeling of environmental changes to monitor and

account for emissions from land-based sectors (Australian Government 2008).

Although a full-fledged carbon trading system based in Asia is unlikely in the near term, emissions

trading has recently gained the attention of Asian governments. With China and India currently

dominating the market for CDM project development, it is possible that Asia will emerge as a major

carbon trading center.

The first entity to enter the Asian market was Asia Carbon, a private sector enterprise founded in 2003.

After months of extensive research and development, Asia Carbon announced that they had finalized their

trading platform for the Asian Carbon Trade Exchange (ACT) in September 2006. Volumes are low so

far, at just 3.5 million credits from over 20 online transactions, but the group wants to align with an

established exchange to achieve growth (Carbon Research Group 2008).

Also in 2006, the Chicago Climate Exchange signed a deal with an Asian environmental group – the Tata

Energy and Resources Institute of India (TERI) – to make it possible for US companies to fund CDM

projects (including AR projects) in South Asia. TERI will ensure that greenhouse gas-cutting projects in

India, Sri Lanka, Pakistan, Nepal, Bhutan and the Maldives meet the standards of the CCX, while

corporate members of the CSX will buy "the right" to pollute by buying credits that fund those projects.

By linking with an environmental group on the ground, the CCX can help ensure that such projects are

“cleaner” (Pasternack 2006).

The first half of 2008 has seen an explosion of carbon-related activity in Asia. In January, India’s largest

commodity exchange, Multi Commodity Exchange (MCX), entered into a strategic alliance with the

Chicago Climate Exchange to initiate carbon trading in India and announced that it will offer European

Climate Exchange (ECX)-based futures contracts, which will allow developers of local emissions

reduction projects that generate credits under the CDM, to hedge against price risk, i.e. they can ensure

there is no loss in credit revenues by purchasing European allowance futures contracts (Good 2008). This

is just one of the recent developments that suggest that Asian may soon play a vital role in carbon trade.

Other developments include:

move that could establish the Chinese capital as an important center for the multibillion-dollar

global trade in carbon credits (Dickie and Harvey 2007).

in emissions trading.

start trading in 2011.

the possibility of creating a domestic carbon trading market (Good 2008).

The United States could play an important role in driving demand for forest-based credits, both in the

short and long term. Perhaps the biggest change on the horizon is that the United States could soon join

the regulated carbon market, as the likely presidential nominees in each party are backers of cap-and-trade

Dovetail Staff Page 13 7/21/08

legislation. As key industries become regulated, the US could quickly surpass Europe in carbon trades.

With the US seemingly more open to forest-based credits than Europe, this development could offer a

huge boost in demand.

Exchange operators and banks are quickly seizing new opportunities amidst increasing pressure for

negotiators to agree on a post-2012 successor agreement to the Kyoto Protocol. In March 2008, NYMEX

Holdings, in partnership with several investment banks and brokers, launched a new “Green Exchange” in

New York, representing the first real challenge to the Chicago Climate Exchange. Initial contracts will

focus on United Nations-approved and voluntary carbon credits, while future offerings could include biofuel

and reforestation credits. Such liquidity will allow even more investors to take a position in climate

change-based markets. Also in March, California and Chinese provincial governments reached an

agreement through the United Nations to share research, policy initiatives and technological innovations

aimed at reducing greenhouse gas emissions with Chinese provincial governments.

In the voluntary markets, some recent developments in the US may spark increased demand for carbon

offsets. Ten states in the Northeast and Mid-Atlantic region have agreed to a cap-and-trade program to

control power generation emissions starting in 2009 under the Regional Greenhouse Gas Initiative

(RGGI). The Chicago Climate Exchange also announced plans to launch the California Climate

Exchange, which will support that state’s mandatory reductions under the California Global Warming

Solutions Act, which calls for the establishment of a statewide cap on emissions. All of these

developments could translate into demand for carbon offset credits in Asian markets.

There is growing interest in forest-based carbon sequestration projects as a strategy to mitigate climate

change, and Asia and the United States are right in the middle of recent developments. Ongoing

negotiations will determine the rules and modalities for LULUCF projects in the second phase of the

Kyoto Protocol, including the possible inclusion of reduced emissions from deforestation and degradation

(REDD) projects. While it is likely that REDD initiatives will undergo a pilot stage before probable fullscale

introduction after 2012, there is already speculative project activity with the expectation that there

will be some sort of compliance value in the future. Several U.S. banks are preparing for the future by

buying up carbon credits to sell to industry and national governments later on.

It is important to keep in mind that many issues still need to be resolved to clearly define the role of

forest-based carbon credits in global emissions trading. The state of carbon markets overall adds to the

uncertainty – it is not certain that new and expanding markets will translate into a new source of

significant near-term demand for CDM credits, much less forestry credits. For instance, the European

Commission is looking to cut back on developing world credits used for Kyoto compliance so that more

utilities and industrial firms will shift their practices at home. In addition, it is uncertain whether demand

for credits in Asia will grow if countries in the region are not faced with emissions caps.

Despite this uncertainty, many Asian countries are seeking a greater role in addressing climate change and

look at forestry projects as part of the solution. To more fully take advantage of the CDM and other

markets, they must now follow the lead of countries like India in developing the institutional and legal

arrangements. Along with improved standards and carbon accounting systems that are currently being

tested and refined in the region (such as in the Ulu Masen Ecosystem), improved policies and

mechanisms to identify, develop and approve forest-based projects can help improve market access, as

Dovetail Staff Page 14 7/21/08

Asian Development Bank (ADB). 2003. Technical Assistance to the Republic of Indonesia for Carbon

Sequestration through the Clean Development Mechanism. (July).

(http://www.adb.org/Documents/TARs/INO/tar_ino_36675.pdf)

(http://www.environment.gov.au/minister/wong/2008/pubs/mr20080218.pdf)

(http://www.worldagroforestry.org/sea/Networks/RUPES/download/Annual_Reports/2006/Appendix_9.p

df)

(http://www.dovetailinc.org/DovetailPlant1005.html)

Division, Rome. (February). (http://www.fao.org/docrep/003/X8423E/X8423E00.HTM)

(http://www.carbon.sg/carbontrade_bt.htm)

Chicago Climate Exchange (CCX). 2007. CCX Market Report. Vol 4,No. 12 (December).

(http://www.chicagoclimatex.com/docs/publications/CCX_carbonmkt_V4_i12_dec2007.pdf)

Dickie, Mure and Fiona Harvey. 2007. China and UN plan carbon trading exchange. Financial Times

Limited. (February 5). (http://www.ft.com/cms/s/0/0fbd7396-b54b-11db-a5a5-

0000779e2340.html?nclick_check=1)

(http://www.fao.org/DOCREP/008/a0400e/a0400e00.htm)

Good, Megan. 2008. Carbon Trading Exchanges – New Players in the U.S. and International Markets.

RiskMetrics Group. (March 17). (http://blog.riskmetrics.com/2008/03/001139print.html)

Carbon Finance. (July 18). (www.ecosystemmarketplace.com/

documents/acrobat/StateoftheVoluntaryCarbonMarket17July.pdf)

Committee on Paper and Wood Products. Shanghai, China (June 6).

(www.fao.org/forestry/webview/media?mediaId=12713&langId=1)

Dovetail Staff Page 15 7/21/08

(http://www.commondreams.org/headlines07/0322-01.htm)

(www.proyectoforma.com/Documentos/GuidebooktoMarketsandCommercializationofCDMforestryProje

cts.pdf)

Pasternack, Alex. 2006. Chicago Climate Exchange to Help Green South Asia. (August 24).

(http://www.treehugger.com/files/2006/08/chicago_climate_1.php)

The Provincial Government of Nanggroe Aceh Darussalam (Aceh), Fauna & Flora International, and

Carbon Conservation Pty. Ltd. 2007. Reducing Carbon Emissions from Deforestation in the Ulu Masen

Ecosystem, Aceh, Indonesia: A Triple-Benefit Project Design Note for CCBA Audit. (December 29).

(http://www.climatestandards.

Swallow, B, M. van Noordwijk, S. Dewi, D. Murdiyarso, D. White, J. Gockowski, G. Hyman, S.

Budidarsono, V. Robiglio, V. Meadu, A. Ekadinata, F. Agus, K. Hairiah, P.N. Mbile, D.J. Sonwa, S.

Nairobi, Kenya (November). (www.asb.cgiar.org/.../Report-on-Opportunities-for-Avoided-Deforestation-

Sustainable-Benefits-web-low.pdf)

Smith, Joyotee. Afforestation and reforestation in the clean development mechanism of the Kyoto

(www.cifor.cgiar.org/publications/pdf_files/articles/afforestation.pdf)

UNFCCC. Bagepalli CDM Reforestation Programme.

(http://cdm.unfccc.int/Projects/Validation/DB/QV6NUE84TBZ0ZFBM2JNLZNPQ7LJ3X4/view.html)

(http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/ORGANIZATION/

EXTSDNETWORK/0,,contentMDK:21581819~menuPK:3981802~pagePK:64159605~piPK:64157667~

theSitePK:3167628,00.html)

(carbonfinance.org/docs/Carbon_Trends_2007-_FINAL_-_May_2.pdf)

Zwick, Steve. 2007. Carbon and Avoided Deforestation: The Road to Bali. The Katoomba Group’s

Ecosystem Marketplace (November 30). (http://ecosystemmarketplace.com/pages/

article.news.php?component_id=5436&component_version_id=7868&language_id=12)

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