Climate

 Challenges  -­‐  Market  Solutions  

     
 
July  21,  2010  
 
 
The  Honorable  John  Kerry  
218  Russell  Building  
United  States  Senate                      
Washington,  DC  20515  
 
 
Dear  Senator  Kerry,    
 
I   write   to   you   on   behalf   of   the   International   Emissions   Trading   Association   (IETA)   in   order   to   provide  
input  on  provisions  related  to  reducing  emissions  from  tropical  deforestation  and  degradation  (REDD)  in  
draft  legislation  you  have  put  forth.    
 
IETA   has   been   the   leading   voice   of   the   business   community   on   the   subject   of   emissions   trading   since  
2000.   Our   170   member   companies   include   many   of   the   world’s   largest   industrial   and   financial  
corporations   and   most   active   forestry   carbon   investors   and   project   developers.   From   project  
implementation,   to   finance,   to   offset   purchase   for   compliance,   IETA   member   companies   are   and   will  
continue  to  be  involved  in  all  aspects  of  REDD  activities  and  are  uniquely  positioned  to  provide  insight  
on  this  issue.  
 
First,   IETA   would   like   to   endorse   the   original   amendment   package   that   was   put   forward   by   the  
Tropical   Forest   and   Climate   Coalition   (TFCC),   dated   June   17,   2010.1   While   IETA   believes   that   further  
amendments  are  needed  in  addition  to  that  package,  we  commend  the  TFCC  member  organizations  for  
the   work   they   have   done   to   craft   compromise   language   on   the   issues   around   which   their   views  
converge.      
 
In  addition  to  this  endorsement,  IETA  would  like  to  highlight  our  views  on  four  critical  issues:    
 
1. The   requirement   that   subnational   and   national   crediting   baselines   must   establish   a  
trajectory   that   would   result   in   zero-­‐net-­‐deforestation   within   20   years   must   be   modified.  
IETA  agrees  that  zero-­‐net  deforestation  in  20  years  is  a  useful  policy  goal  but  believes  that  
the   current   text   fundamentally   confuses   the   concepts   of   a   crediting   baseline   and   a   policy  
objective.  It  must  be  understood  that  the  potential  to  generate  offsets,  which  is  set  by  the  
crediting   baseline,   provides   the   incentive   to   reach   an   ambitious   REDD   objective.   As   the  
graph   in   Annex   1   demonstrates,   given   the   current   requirement,   there   would   be   little  
potential  to  generate  offsets  from  even  very  significant  improvements  over  historic  levels  of  
deforestation,   since   reductions   would   be   credited   only   if   they   were   in   excess   of   the  
ambitious   net-­‐zero   deforestation   baseline.   Limiting   offset   potential   in   this   way,   without  
regard   for   historical   emissions,   projected   future   emissions,   the   drivers   of   deforestation,  
and  national  deforestation  trends,  seriously  threatens  the  success  of  the  entire  program.  

                                                                                                               
1  This  letter  does  not  reflect  support  for  any  subsequent,  a  la  carte  additions  or  changes  to  that  package.    

1730  Rhode  Island  Ave.  NW,  Suite  802  

Washington,  DC  20036  
+  1  (202)  629-­‐5980  
 
 IETA  Input  on  Provisions  to  Reduce  Tropical  Deforestation  in  Energy  and  Climate  
Legislation  
July  21,  2010  
 
 
 
While  there  are  a  number  of  different  approaches  to  setting  baselines  that  would  be  aligned  
with  the  factors  just  noted,  none  of  them  aim  to  equate  crediting  baselines  and  policy  goals.  
Indeed,  REDD  technical  experts  and  specialist  policy-­‐makers  have  been  considering  possible  
methods   for   determining   REDD   crediting   baselines   for   the   past   several   years,   yet   nothing  
similar  to  this  idea  has  ever  been  seriously  considered.  Annex  2  contains  a  sample  of  design  
options   that   have   been   considered   recently,   including   short   descriptions   of   each;   IETA   will  
gladly   pass   on   longer   descriptions   at   your   request.     Peer   reviewed   studies   have   also  
demonstrated   the   importance   of   setting   crediting   baselines   based   on   national  
circumstances,  showing  that  they  are  critical  to  determining  whether  or  not  countries  “opt-­‐
in”  to  REDD  offsets  programs.2    
 
IETA   understands   the   inclination   to   link   baselines,   and   therefore   compensation,   with   the  
achievement   of   REDD   policy   goals,   and   we   believe   that   it   is   possible   to   come   up   with   a  
workable   approach   for   doing   so.   As   such,   we   are   open   to   considering   a   wide   variety   of  
possible  methodologies  for  the  determination  of  crediting  baselines.  
 
For  example,  we  support  the  intent  of  the  recent  amendment  sent  to  you  by  The  Nature  
Conservancy   on   18   July   2010.     In   particular,   we   could   support   the   establishment   of   national  
baselines   for   an   initial   period   at   or   lower   than   the   average   annual   historical   deforestation  
emissions   of   the   nation   during   a   recent   period   of   at   least   5   years,   with   adjustments   made  
taking   into   account   the   drivers   of   deforestation   and   other   factors,   to   ensure   additionality.  
We   could   also   support   the   periodic   lowering   of   those   baselines,   partly   based   on   recent  
achievements.      
 
As   an   additional   safeguard,   we   also   suggest   that   the   legislation   mandate   the  
Administrator  to  review  the  baseline  trajectory  and  achievements  for  each  country  twenty  
years   after   the   date   on   which   the   national   deforestation   baseline   has   been   established.    
The   Administrator   could   be   given   the   authority   to   determine   whether   to   maintain   the  
baseline,  re-­‐adjust  the  baseline,  or  discontinue  crediting.3    
 
2. Given   the   current   limitations   on   project-­‐based   crediting   for   REDD,   it   is   essential   that  
afforestation,   reforestation   and   revegatation   (A/R/R)   either   be   included   as   a   separate  
category  of  eligible  international  offset  activities,  or  receive  a  minimum  15-­‐year  crediting  
period  for  initial,  project-­‐based  activities  in  both  large  and  small  emitters.  Treating  A/R/R  
like   REDD   will   make   investments   in   A/R/R   largely   unviable   and   will   have   a   detrimental  

                                                                                                               
2  Busch  et  al.,  “Comparing  Climate  and  Cost  Impacts  of  Reference  Levels  for  Reducing  Emissions  from  

Deforestation,”  Environmental  Research  Letters,  Vol.  4.  No.  4,  Oct.  2009.  
3   In   general,   IETA   strongly   believes   that   a   firm   20-­‐year   cut-­‐off   date   for   crediting   is   unlikely   to   be  

appropriate   for   REDD   activities   in   any   country,   regardless   of   how   the   baseline   is   set.   REDD   activities  
require   a   relatively   long   lead-­‐time   to   plan   and   implement,   and   time   is   needed   for   REDD   economic  
incentives   to   help   bring   about   the   changes   in   land   and   resource   use   that   are   needed   to   reduce   forest  
loss  and  permanently  change  land-­‐use  behaviors.  In  addition,  REDD  activities  are  very  likely  to  require  
additional,   if   diminished,   finance   to   ensure   the   permanence   of   land-­‐use   changes   in   later   years   by  
continuing  to  promote  activities  that  increase  sequestration  once  forest  ecosystems  have  stabilized.  
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 IETA  Input  on  Provisions  to  Reduce  Tropical  Deforestation  in  Energy  and  Climate  
Legislation  
July  21,  2010  
 
 
impact   on   the   effectiveness   of   the   REDD   program   overall.   Creditable   A/R/R   activities   are  
crucial   to   successful   REDD   efforts;   they   enable   the   use   of   integrated   land   management  
approaches  that  help  control  leakage  around  protected  forests  by  alleviating  the  pressures  
to  deforest.    
 
A/R/R   activities   are   fundamentally   different   from   traditional   REDD   projects,   since   they  
sequester,   rather   than   avoid   emissions.   A/R/R   projects   have   substantially   higher   upfront  
costs   –   for   preparing   land,   purchasing   and   planting   seeds,   and   maintaining   forests   during  
maturation—   and   generate   offsets   only   as   trees   grow   slowly   over-­‐time,   both   of   which  
greatly  extend  the  payback  period  on  investment,  when  compared  with  REDD.      
 
Graph   1   in   Annex   3   depicts   a   typical   project-­‐level   A/R/R   carbon   stock   curve,   showing   that  
sequestration   and,   thus,   crediting,   only   begins   to   take   off   at   year   5.   (Graphs   2-­‐4,   taken   from  
university   studies,   support   that   assertion.)   Graph   1   also   demonstrates   the   impact   on  
crediting   that   will   occur   given   an   8-­‐year   crediting   period.   This   graph   shows   that   the   vast  
majority  of  emissions  sequestered  through  the  project  occur  in  later  years  and  will  thus  go  
un-­‐credited,   or   will   be   subsumed   in   a   national   scheme.   Given   the   uncertainty   surrounding  
the  implementation  of  nested  crediting  during  the  early  years  of  the  program,  this  is  simply  
not   a   situation   in   which   private   investors   will   provide   the   upfront   finance   needed   to   get  
projects  up-­‐and-­‐running.  
 
3. The   re-­‐inclusion   of   project-­‐based   crediting   for   "small   emitters"   is   an   important   step   in   the  
right   direction,   but   IETA   believes   that   the   legislation   should   extend   a   limited   period   of  
project-­‐based   crediting   to   large   emitters   as   well.     Allowing   project-­‐based   crediting   in   all  
countries  for  a  limited  amount  of  time  would  kick-­‐start  REDD  activities  and  protect  forests  in  
the   near-­‐term,   until   national   governments   can   build   the   necessary   capacity   to   do   so   and  
gain  the  trust  of  much-­‐needed  private  investors.    
 
Projects   serve   two   essential   purposes.   First,   they   permit   local   communities   to   gain   direct  
finance  for  REDD  activities,  giving  them  the  freedom  to  protect  their  homes  and  livelihoods  
in  a  timely  manner  when  governments  are  unable  to  do  so  quickly  or  reliably,  which  is  the  
current  situation  in  the  majority  of  forest  nations.    
 
Second,   project-­‐based   crediting   serves   as   a   hook   that   draws   much-­‐needed   private  
investment   to   REDD   initially,   hopefully   convincing   investors   to   maintain   and   deepen  
investments   as   countries   move   to   national   baselines.   The   initial   period   of   project-­‐based  
crediting   should   serve   as   an   ‘incubation   period’   that   acclimates   private   investors   to   the  
REDD   space,   giving   them   time   to   become   comfortable   financing   activities   that   require  
harmonized  public/private  approaches  in  unconventional  investment  situations,  where  their  
investments  face  significant  sovereign  risk.      
 
Existing  REDD  protocols  developed  in  conjunction  with  highly  respected  non-­‐governmental  
conservation   organizations   establish   additionality,   set   crediting   baselines   and   address  
concerns   about   leakage,   permanence,   and   non-­‐carbon   social   and   environmental   benefits.    
Given  the  additional,  extensive  safeguards  for  project-­‐based  activities  already  included  in  
the   draft   legislation,   IETA   believes   that   restricting   an   initial   period   of   project-­‐based  
crediting  to  small  emitting  countries  is  arbitrary  and  unnecessarily  slows  REDD  efforts  by  
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 IETA  Input  on  Provisions  to  Reduce  Tropical  Deforestation  in  Energy  and  Climate  
Legislation  
July  21,  2010  
 
 
severely   limiting   the   flow   of   private   financing   in   large   emitters,   where   the   pressures   to  
deforest  are  highest.  
 
4. IETA  believes  that  reductions  in  illegal  deforestation  must  remain  eligible  to  receive  offset  
credits,   at   the   project-­‐based,   subnational,   and   national   levels.   While   precise   data   on   the  
scope   of   illegal   forest   activities   is   not   available,   organizations   such   as   the   World   Bank   and  
Chatham   House   estimate   that   between   50-­‐80%   of   deforestation   is   illegal,   which   makes   it  
clear   that   denying   funding   from   activities   to   halt   illegal   deforestation   would   completely  
undermine   REDD   efforts.   Moreover,   concerns   about   the   possibility   of   crediting   illegal  
actors  for  not  undertaking  illegal  activities,  which  would  clearly  create  a  situation  of  moral  
hazard,   are   unfounded   and   reflect   misunderstandings   about   the   differences   between  
planned   and   unplanned   deforestation   and   the   actors   that   would   be   eligible   to   act   as  
project   participants   and   gain   direct   access   to   credits.     IETA   would   gladly   explain   these  
differences  in  great  detail,  if  needed.  
 
On  behalf  of  IETA’s  member  companies,  I  would  like  to  thank  you  for  your  attention  to  this  letter.  Please  
do  not  hesitate  to  contact  me,  or  Kim  Carnahan    <carnahan@ieta.org>  in  our  Washington  D.C.  Office,  
with  any  questions  that  you  may  have.    
 
 
 
Sincerely,  
 

   
 
Henry  Derwent  
President  and  CEO,  IETA

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 IETA  Input  on  Provisions  to  Reduce  Tropical  Deforestation  in  Energy  and  Climate  
Legislation  
July  21,  2010  
 
 
Annex  1:  

 
   

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 IETA  Input  on  Provisions  to  Reduce  Tropical  Deforestation  in  Energy  and  Climate  
Legislation  
July  21,  2010  
 
 
Annex  2:  
 
Reference  Level/Crediting  Baseline  Design  Options  
A  Sample  of  Proposals  from  Existing  Studies  
 
Design  option   Reference   Description  
“National  historical”   Santilli  et  al.(  2005)   Reference  rate  is  historical  for  all  
countries.    Reference  period  set  to  
the  average  deforestation  rate  of  
the  last  10  years,  updated  every  3  
years.  
“Higher  than  historical  for   Mollicone  et  al.  (2007);  da   Reference  deforestation  rate  is  
countries  with  low   Fonseca  et  al.  (2007)   0.3%  for  low-­‐deforesation  
deforestation  rates”   countries;  Baseline  is  historical  for  
high  deforestation  countries.  
“Weighted  average  of   Strassburg  et  al.  (2008)   Reference  rate  is  0.6*global  
national  and  global”   average  rate+0.4*historical  rate  
for  all  countries.  Different  
scenarios  can  be  generated  by  
differing  the  weights  put  on  
historical  global  deforestation  and  
national  deforestation.  
“Flow  withholding  and   Cattaneo  et  al.  (2008)   Reference  rate  is  historical  for  all  
stock  payment”   countries;  30%  “withholding”  on  
flow  payments  to  pay  for  stock  
payments.  
“Uniform  fraction  of  at-­‐risk   Ashton  et  al.  (2008)   Reference  level  is  1%  of  at-­‐risk  
stock”   forest  for  all  countries;  80%  of  
total  forest  is  assumed  to  be  at-­‐
risk  in  all  countries.  
“Half  the  global  average”   Joint  Research  Center   Uses  historical  global  
proposal  of  Archard  et  al.   deforestation  rates  to  set  
(2005)   individual  country  baselines.    
Countries  with  a  rate  of  
deforestation  lower  than  half  the  
global  average  use  that  as  a  
national  baseline,  while  countries  
with  higher  deforestation  rates  
use  a  national  historical  baseline.  
“Development  Adjustment   Coalition  for  Rainforest   In  order  to  take  into  account  
Factor”   Nations   national  circumstances,  countries  
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 IETA  Input  on  Provisions  to  Reduce  Tropical  Deforestation  in  Energy  and  Climate  
Legislation  
July  21,  2010  
 
 
with  low  levels  of  GDP  per  capita  
will  get  more  generous  baselines.  
This  is  justified  because:  (i)  the  
poorest  countries  are  presumably  
at  an  earlier  stage  in  forest  
transition,  and  therefore  
deforestation  is  likely  to  accelerate  
rather  than  slow  down  in  a  BAU  
scenario  and  (ii)  the  capacity  to  
implement  REDD  may  be  inversely  
related  to  GDP  per  capita,  and  
larger  transfers  are  needed.  
“Economic  Models  of   Angelsen  and  Kaimowitz   Factors  including  population  
National  Deforestation”   (1999)   density  and  growth,  forest  area,  
economic  growth,  commodity  
prices,  governance  variables,  and  
location  (tropical  and  regional)  
could  all  be  included  in  a  formula  
for  setting  baselines.  
“Corridor  Approach”   Schlamadinger  et  al.  (2005)   Increases  percentage  of  reductions  
being  credited.    For  example,  a  
reduction  in  deforestation  and  
degredation  from  0.8%  to  0.7%  per  
year  (or  the  equivalent  in  GHG  
emissions)  gives  carbon  credits  
worth  only  20%  of  the  estimated  
emissions  reductions,  while  
reductions  from  0.7%  to  0.6%  give  
credits  equivalent  to  40%  of  the  
estimated  reductions,  and  so  on.  
 
 
 
 
 
 
 
 
 
 

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 IETA  Input  on  Provisions  to  Reduce  Tropical  Deforestation  in  Energy  and  Climate  
Legislation  
July  21,  2010  
 
 
Annex  3  :    
 
Graph  1  :  IETA  Depiction  of  Typical  Project-­‐Level  A/R/R  Carbon  Stock  Curve  
 
 

 
 
 
 
 
 
 
 
 

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 IETA  Input  on  Provisions  to  Reduce  Tropical  Deforestation  in  Energy  and  Climate  
Legislation  
July  21,  2010  
 
 
Graph  2:  Study  from  University  of  Idaho,  Moscow  (March  2008)4  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

                                                                                                               
4  O’Laughlin,  J.  "Carbon  Sequestration  in  the  Forest  Sector."  Policy  Analysis  Group  Issue  Brief  No.  

11.  University  of  Idaho,  College  of  Natural  Resources.  March  2008.    Sources  for  the  scientific  claims  
and  data  for  the  figures  can  be  found  in  the  PAG  Issue  Brief  document  at  
www.cnrhome.uidaho.edu/default.aspx?pid=106665.  
 
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 IETA  Input  on  Provisions  to  Reduce  Tropical  Deforestation  in  Energy  and  Climate  
Legislation  
July  21,  2010  
 
 
Graphs  3  and  4:  Study  from  University  of  Washington  (June  2003)5  
 
 
 
 
 
 
 
 

                                                                                                               
5  Lippke,  B.,  J.P.  Garcia  and  C.  Manriquez.  "Executive  Summary:  The  impact  of  Forests  and  Forest  

Management  on  Carbon  Storage."  Rural  Technology  Initiative,  College  of  Forest  Resources,  
University  of  Washington.  June  2003.  
 
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