Creating value

from carbon
by John Van D. Lewis, Ph.D., CINCS & Mark L. Chapman, Carbon Credit Capital

Dr. John Van D. Lewis, former member of the US delegation to the Kyoto
Protocol, gives an insider’s perspective on policy mechanisms and approaches
to creating and reaping carbon-removal benefits from land use, land-use
change and forestry. Mark Chapman provides the perspective of an emerging
project development and carbon credit brokerage company on carbon
reduction through renewable energy installations.

The monetisation of carbon in the wake of the
Kyoto Protocol marks the transition in carbon
dioxide from simply a chemical compound to a
valuable, tradable commodity. Humans have
manipulated the carbon cycle through industrial
development for over 150 years. As a result of
which, the cycle’s continued equilibrium can no
longer be taken for granted. Most geo and bio-
physicists agree that the carbon cycle, the source of
life on earth, is being thrown increasingly off balance
and the global warming cycle is being exacerbated
by human activities.The United Nations Framework
Convention on Climate Change (UNFCCC)
attempts to respond to global warming by mitigating
the concentration of greenhouse gases in the
atmosphere. Its approach is to make the most-
industrialised countries responsible for taking the
initial steps towards a better carbon balance.Within
the UNFCCC’s Clean Development Mechanism
(CDM) framework, mitigation of greenhouse gas
concentrations is addressed through sequestration
of carbon currently in the atmosphere, as well as
further reduction of carbon emissions from current
sources.
The concentration of carbon dioxide in the
atmosphere can be mitigated in two ways. First, it
can be captured for underground storage or
removed through the increased photosynthetic
action of additional biomass on the ground, known
as bio-sequestration. In this case, plants constitute
“carbon sinks”. Second, industrial, engine or forest-
related carbon dioxide emissions from any kind of
fire can be reduced through measurable remedial
actions: induced combustion efficiencies, conversion
to kinetic (in some cases, nuclear) and solar energy
sources.
In evaluating the stability of the carbon cycle and
the extent of future global warming, we arrive at a
crucial consideration. Even if the current industrial
economies neutralise their carbon dioxide
footprints, large quantities of carbon dioxide will
enter the atmosphere from emerging industrial
nations and tropical deforestation. In fact, relative to
industry, population growth and rural poverty are
making an increasing contribution towards global
warming.The masses of the planet’s rural poor with
no choice but to clear forest land for subsistence
farming, and limited or no access to electricity, has
surpassed 2 billion in number. In order to maximise
the Kyoto Protocol’s impact on the mitigation of
greenhouse gas emissions, it is essential for policy
makers, multi-lateral NGOs and financial investment
bodies to understand the current state and lifestyles
of the developing rural poor. Equally important
knowledge for the latter group are the investments
and forecasted returns associated with financially
supporting sustainable renewable energy and
agricultural projects.
Carbon at the community level
Most of the planet’s 2 billion rural poor inhabitants
know that slash and burn agriculture will leave their
children more vulnerable to poverty than they
already are, and that fossil fuel usage for lighting
needs consumes far too much of their budget, if
they even have a budget at all. If people are clearing
the land to farm annual staple food crops, it is
because they have not found a practical and
sustainable alternative to these livelihoods.What
should they eat while they wait for soil fertility to
improve and water-conserving fruit or oilseed trees
to grow? What guarantee do they have that the local
powers-that-be will let them keep such newly fertile
land once those trees ripen? Where are there stable
markets for those tree products that can guarantee
them adequate income with which to buy food for
their families, and where are their cost-effective
alternatives to kerosene usage and diesel generators
at home?
Unless these problems for rural poverty
reduction can be solved, cleaner industry practices
will have limited restorative affects on the planet’s

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carbon balance. Fortunately, a carbon dioxide offset
contract on such land can, in and of itself, solve
some of the socio-economic impediments to
sustainable landscape management. If the rural poor
can eat and keep their land-holding in the meantime,
the poorest farmers will be the first to try and
intensify the carbon stored in the soil and farm
vegetation.They know that the longer-term
sustainability of their farm-based livelihood depends
upon the soil fertility and water conservation made
possible by the increased vegetation. A Kyoto-
catalysed clean energy source nearby or solar panels
installed on the roof will also change the rural
community standard of living.
For the average developing-community individuals
who know existence only near the poverty line, the
recent valuation of carbon promotes sequestration
or clean energy projects at the local level, and thus
translates into sustainable revenue.These projects
bring opportunities for local community individuals
to be hired as planters, cultivators or foresters who
bring seedlings to maturity during the years of
plantation growth. During that growth process the
tended forestry specimens will enter a fruit and by-
product bearing phase which signals the second
sustainable revenue stream for local individuals.While
maintaining the integrity of the tree itself, and thus
the carbon sequestration credit potential, the locals
may non-destructively reap fruit and fallen leaves and
branches for use as conversion into private
consumption, or sale to the bio oil or biomass fuel
pellet market. It is with this on-farm carbon that an
international public good, carbon dioxide removal,
becomes a very private good.This fundamental fact of
sustainable agriculture should be built upon as we
seek permanent solutions to the global warming
problem.
The first step to accomplishing this is to open up
all global emissions markets to well-measured, on-
farm carbon sink credits.The carbon flux in all land
use, land-use change and forestry (LULUCF) has to
be accurately modelled and measured before a bio-
sequestration offset timetable can be established and
contracted with an industrial offset buyer.Advance
funding for these activities can feed the participating
farm family while the tree crops grow. That contract
can be used to protect the land tenure claims of the
tree-planting farmers. Finally, the industrial offset
purchaser can use its global economic influence to
ensure that markets for the chosen tree products
remain transparent and equitable.
When examining sustainable energy projects
from the community perspective, the value that
carbon brings to the local individual is embodied in a
source of electricity that is reliably generated from
local, as well as clean eco-friendly fuel sources such
as landfill gas capture, hydropower, bagasse, biomass
and solar power. Essential to the viability of such
projects is the need to capitalise on a local resource
that can be supplied reliably and at minimal
transport cost beyond that which currently exists.
Bio oil and electricity generating facilities in Brazil
tend to be located adjacent to saw mills that can
supply a large tonnage of biomass residues as fuel
supply. Rice husk and mustard seed residues are
widely available in India and thus prime-candidate
biomass supplies for clean energy in a country
where more than 60% of the rural poor has no
electricity. Enhancing the reliability and transparency
of renewable projects are steps toward bringing the
rural masses and project financiers into the global
warming mitigation arena at a functioning level.
Carbon accounting and project
finance barriers
Using carbon measuring, monitoring and verification
systems to automate a carbon accounting system for
land use, land-use change and forestry will reduce
the costs and uncertainties of measuring carbon
dioxide removal “sinks” and offsets.This should
allow more tropical agricultural credits to move
through the CDM process. It will also allow
subsequent rounds of protocol negotiations to
consider avoided deforestation as a measurable, and
thus viable, emissions reduction methodology.
Monitoring technologies are able to verify tree
growth and species propagation, but how can the
end to roaming slash-and-burn practices be ensured
at a level that inspires institutional investment and
opens more trading floors to another valuable
carbon venue?
The monitoring of actual carbon movement and
control within a renewable energy system is
captured largely in the project’s design.The biomass
fuel sources are analysed for their carbon content
prior to entry into the facility, hydro and wind
power projects are monitored for the carbon
leakage that occurs in their construction, and in
each case the project activity is compared to a
status quo carbon baseline that it aims to abate. In
each of these energy projects, design and verification
engineers perform due diligence assessments to
ensure that carbon measurements and offsets are
evaluated and valued legitimately.
The marketplace for carbon offsets
Greenhouse gas (GHG) emissions trading markets
are developing out of, and alongside, the Kyoto
Protocol. Carbon dioxide (CO2), the principal GHG
culprit in global warming, is the most heavily traded
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 GHG in these markets. By emphasising more-easily
measured CO2 reductions, including clean energy
substitution for fossil fuels, to the virtual exclusion
of CO2 removals, including land use, land-use change
and forestry practices, in “non-industrialised” (mostly
tropical) countries, the Kyoto Protocol misses an
important global warming mitigation opportunity.
Part of Kyoto’s hesitation in crediting avoided
deforestation carbon removals as eligible offsets
comes from a legitimate concern over the
complexity of measuring carbon fluxes out over a
diverse landscape. Unfortunately, these measurement
uncertainties make it even more difficult for Kyoto
to recognise a deforestation baseline scenario
against which emissions reductions from forest
protection actions might be calculated for credit.
Thus, yet another large scale global warming
mitigation opportunity is being neglected as tropical
deforestation increases exponentially.
So up to this point, the preservation of forest
lands, although deemed highly important by
members of environmental communities, has not
been regarded as an eligible project practice by the
CDM Executive Board.The reason for this omission
of avoided deforestation as an approved
methodology has to do with contention over
measuring such projects and their carbon credits, as
well as a weaker mechanism for generating social
enterprise in developing regions where
a/reforestation and energy projects do.The
European Union Emissions Trading Scheme (EU-ETS)
has blocked crediting of an umbrella of forestry
projects, including those that are CDM-approved.
“This exclusion includes agroforestry,
silvopastoral, and community forestry projects that
have the potential to transform low-carbon
degraded landscapes into diverse, high-carbon
productive systems. As a result of this exclusion
LULUCF projects are relegated to markets in which
prices are substantially lower.” This poses a circular
problem of “who concedes first”: Is it that trading
schemes must be opened to unproven projects and
thus show a promise of return for credits generated
from forestry projects before financing and support
of the projects occur, or, must project financiers take
the risk initiative and prove to the carbon
community that such projects are reliable and
profitable? Regardless of a project being
sequestration or avoidance based, options do exist
for up-front contracts to be signed for the sale of a
certain number of credits at roughly €6 per carbon
credit, or sold at a much higher price in a spot-
market approach as the credits become validated
each year.
This discussion of “creating value from carbon” has
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focused on the functionality and benefit of a carbon
sequestration or carbon avoidance project and the
marketplace for the credits generated from such
endeavors. It is the project financing lynch pin that
definitively makes it possible for these projects to be
tied to reliable investments and better economic
opportunity in developing regions of our world.
Value in, value out
Any supermarket, amusement park or biomass
energy project that is erected is made possible by an
investment body that not only has the financial
resources to support such an endeavor, but that also
foresees some form of return for their risk in
choosing to become involved. It is this return that
embodies the second looking glass through which
carbon’s value is examined. Not all project financiers
are seeking to meet emissions quotas for
compliance with Kyoto requirements, but they
choose to become involved by taking equity stakes
in projects because both the compliance and
voluntary credit markets are showing greater
promise as worthwhile trading frameworks.
Well-established technology corporations are
seeing the potential in proactively engaging in the
emerging carbon markets and taking a branding
opportunity.When accounting for research and
development, capital startup and incidentals, the
financial cost of implementing a fossil fuel alternative
power facility is higher than simply maintaining the
status quo energy supply. Alternatively, the upfront
investment has a potential for significant return
when considering the marketability of being an early
mover in the CDM process, the Corporate Social
Responsibility bolstering that follows association
with a developing world or eco-friendly activity, and
of course the option to own or purchase carbon
credits generated from such projects.
The stability of the CDM process and trading
schemes relies upon investors, government bodies
and project developers taking risks in the near term.
The uncertainties of Kyoto’s longevity unveiled in
the first commitment period must be met with
willingness to take financial risks, semi-transparent
operating procedures and information sharing
between knowledge networks and project
developers. Healthy competition and profit can still
be amassed in this market structure so long as
experts on technology procurement and its transfer
to developing regions can be tied to on-the-ground
professionals who have invested their own
resources in following and understanding the CDM
process. As Paul Desanker, UNFCCC delegate from
Malawi, points out with regard to a global CDM
project track record, “capacity building needs to be
tied to specific project ideas, project funding and • Haskett, Jonathan. “Landscape Carbon and
national institutional frameworks”. Technology Development Initiative.” 2006
transfer from developed-world entities, acting as www.carbondevinit.org
project finance, need also continue as an opportunity • Desanker, Paul V “The Kyoto Protool and the
for project efficiency to rise and for key global CDM in Africa: A good idea but …” May 2006,
investment bodies to take a dedicated stance on FAO Document Archive,
participation in project sponsorship. www.fao.org/docrep/009/a0413e/a0413E05.htm.
There is no shortage of financing that can be Paul V. Desanker is a Chair of the Miombo
allocated to sustainable agricultural and renewable Network, Malawi, and participant in the
energy projects.The gap in technology and resource UNFCCC as a Malawi delegate and member of
transfer thwarting the forward movement of the the Least Developed Countries Expert Group
CDM process occurs when investment bodies (LEG).
cannot locate the proper on-the-ground expertise
network in a certain region or find the lowest-risk
project developer with a strong track record of Authors:
previous CDM process experience.There are limited John Van D. Lewis, Ph.D. Chief Operating Officer
guarantees when venturing into new markets; CINCS (the Climate Investment Network
however a large amount of value is available to those for Carbon Sequestration)
project developers, communities and investment Email: jlewis@cincs.com
bodies that make even the most basic risk-hedging Tel: +1 (212) 925 8106
maneuvers and connections with experts in the Website: www.CINCS.com
clean development and carbon trading mechanisms
that are opening wider to the world by the day. Mark L. Chapman, Director of
Marketing & Communications
References: Carbon Credit Capital
• Practical Action “Energy and Poverty”, Email: mchapman@carboncreditcapital.com
www.itdg.org Tel: +1 (212) 925 5697
• Chapra, Anuj “Low-Cost Lamps Brighten the Website: www.carboncreditcapital.com
Future of Rural India.” The Christian Science
Monitor, Jan 2006,World Resource Institute. 561 Broadway Suite 6A
www.nextbillion.net/newsroom/2006/01/03/low- New York
cost-lamps-brighten-the-future-of-rural-india 10012