Conservation Finance Guide Carbon Offset Projects Table of Contents 1 UNDERSTANDING CARBON OFFSET PROJECTS by ujz44824

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									Conservation Finance Guide




                             Carbon Offset Projects
                                      Table of Contents

1    UNDERSTANDING CARBON OFFSET PROJECTS                                                                 3

     1.1 Overview                                                                                         3
          1.1.1 The science of climate change                                                             4
          1.1.2 Policy context                                                                            5
          1.1.3 The carbon market                                                                         7
                1.1.3.1 Market development                                                                8
          1.1.4 Snapshot of carbon projects                                                               9

     1.2 Key Actors and Motivations                                                                     10

     1.3 Types of Carbon Offset Projects                                                                13
          1.3.1 Carbon sequestration                                                                    13
          1.3.2 Emissions avoidance                                                                     13
          1.3.3 Forest management                                                                       14

     1.4 Advantages and Disadvantages                                                                   14

     1.5 Success Factors                                                                                15

     1.6 Steps to Implement a Carbon Offset Project                                                     16
          1.6.1 CDM project cycle                                                                       16
          1.6.2 Step-By-Step Methodology                                                                17

2    FEASIBILITY PHASE                                                                                  20

     2.1 Pre-feasibility Stage                                                                          20

     2.2 Information Gathering                                                                          24

     2.3 Sustainable Development                                                                        29

     2.4 Terms of Reference for Carbon Offset Project Feasibility Study                                 33

     2.5 Carbon Project Calculator                                                                      36

     2.6 Leakage Tools                                                                                  37

     2.7 Project Marketing and Proposal Development                                                     40

3    IMPLEMENTATION                                                                                     40

     3.1 Legal Agreements                                                                               40
          3.1.1 Letter of Agreement                                                                     40
          3.1.2 Memorandum of Agreement                                                                 41
          3.1.3 Comprehensive Agreement                                                                 41



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     3.2 Monitoring and Verification protocols                                               41
          3.2.1 Protocol                                                                     41

4    REFERENCES                                                                              42

     4.1 References                                                                          42

     4.2 Web Sites                                                                           42

5    APPENDIX                                    ERROR! BOOKMARK NOT DEFINED.43




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1      UNDERSTANDING CARBON OFFSET PROJECTS


1.1       Overview
A scientific consensus has emerged over the last decade that climate change – caused primarily by
human activities such as carbon dioxide (CO2) emissions resulting from the burning of fossil fuels and
deforestation – is underway and will have significant impacts on society. Governments, corporations,
environmental organizations, and consumers are now responding. Most reductions in greenhouse gases
(GHGs) such as CO2 will need to be realized through energy-related measures such as energy efficiency
improvements and investments in renewable energy technologies. However, an alternative and cost
effective means of achieving GHG reductions looks to forests as carbon “sinks” that absorb atmospheric
CO2 through photosynthesis.


As forests sequester (i.e. store) carbon, forestry projects can mitigate or "offset" a portion of CO2
emissions from the burning of fossil fuels or other CO2-emitting activities. Moreover, an estimated 20-
25% of total GHG emissions result from deforestation, when carbon stored in plants and soils is released
into the atmosphere as a result of burning or decomposition. Therefore, an important strategy for
addressing climate change involves restoration of forests and the protection of forests that are under
threat.
Many conservation projects around the world have already raised funds to promote project activities that
will have a positive impact on climate change via forests’ ability to offset carbon emissions. The purpose
of this chapter is to help readers understand how some conservation projects might generate
extra funds by offering climate change benefits, and how to begin the process of measuring,
marketing, and selling those benefits.


As a response to climate change, governments have been developing an international regulatory
framework to mitigate global warming. In 1997 they signed the Kyoto Protocol. The Protocol sets
mandatory caps (limits) on the GHG emissions of industrialized countries and “transitional” (mainly ex-
communist) economies. While each country has its own specific targets, the total aggregated reductions
equal a 5.2 percent reduction from 1990 levels by the so-called first “commitment period” (2008-2012), -
the period by which countries must be in compliance. To achieve this target, industrialized signatory
country governments will set emissions limits for GHG emitting companies.


In addition to setting emission limits, the Kyoto Protocol provides several market-based mechanisms to
enable GHG emitters to achieve their assigned reductions. The basic idea, trading emission rights, has
been successfully implemented for other pollutants in many countries. Under this system, because some
countries will be able to reduce emissions more easily and cheaply than other countries (for example
                                               1
through forest-based "carbon offset projects "), they can sell their surplus reductions (or "carbon credits")
to countries that emit more than their limit. This will enable achieving the overall global emissions target
at the least cost.


Carbon projects can therefore generate financing for conservation by selling certified carbon
credits to GHG emitters. The outcome of international agreements such as the Kyoto Protocol and
various national regimes will determine the range and magnitude of opportunities for funding for carbon
offset projects.



1
    The terms "carbon offset projects" and "carbon projects" are used interchangeably in this chapter.

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Carbon projects can be developed in both the energy and the "land-use, land-use change and forestry"
(LULUCF) sectors. However, this Guide, with its focus on conservation finance, will consider only
projects in the LULUCF sector, and in particular, forestry-based projects. Such projects often have
multiple other benefits such as biodiversity protection, soil conservation, watershed maintenance, and
sustainable forest management. However, it is important to keep in mind that, given the current level of
policy and carbon market development, not all conservation projects will make good carbon projects (this
will be discussed in section 1.1.2). Nor are all carbon projects good for biodiversity. For example,
restoring native vegetation can actually result in a loss of carbon storage because exotic vegetation that
may store more carbon has to be removed. In many cases conservation projects will result in little to no
net impact on CO2 emissions. Therefore, only a small subset of conservation projects are likely to be
attractive as carbon offset fund-raisers. Conservationists will need to balance maximizing carbon benefits
with fulfilling their commitment to biodiversity conservation.


Some companies and countries are already investing in carbon offset projects with a view to gaining
experience while generating offsets, achieving collateral benefits such as conservation of biodiversity and
community development, and gaining greater access to ongoing policy discussions.


                             Box 1 The Guaraqueçaba Climate Action Project


An example of one such conservation project generating funding through its carbon offset potential can
be seen in the Atlantic Forest of Brazil. The Guaraqueçaba Climate Action Project seeks to restore,
protect and manage approximately 20,000 acres (8100 hectares) of partially degraded and-or deforested
tropical forest within the Guaraqueçaba Environmental Protection Area in southern Brazil. With financial
support from Central and South West Corporation, a US based electric utility (recently acquired by AEP),
the Project – a collaborative effort between AEP, The Nature Conservancy (TNC), and Sociedade de
Pesquisa em Vida Selvagem e Educação Ambiental (SPVS), a Brazilian conservation organization – will
promote assisted natural forest regeneration and re-growth on pastures and degraded forests on
acquired lands. It will also protect standing forest that still exists within the Project area but is under
threat of deforestation. With a total investment of US$5.4 million, the Project is expected to reduce or
avoid emissions equivalent to approximately 1 million metric tons of carbon over the next 40 years. The
Project aims to produce significant net carbon benefits that are scientifically quantifiable and long-lasting
for its investors; protect biodiversity and ecosystems and improve local environmental quality; and
promote sustainable development by creating economic opportunities for local people. Brief overviews of
other carbon offset projects can be found in section 1.1.4.




1.1.1    The science of climate change
The natural phenomenon behind climate change is known as the "greenhouse effect." Energy from the
sun reaches the Earth’s surface mainly in the form of visible light. Approximately 30% of the energy from
these rays is emitted back into space almost immediately, but the remaining 70% stays in the Earth's
atmosphere and is absorbed by greenhouse gases such as carbon dioxide, nitrous oxide and methane.
The absorption of this energy by the greenhouse gases results in a rise in temperature, which enables life
to exist on Earth. This is known as the greenhouse effect.


Since the industrial revolution the concentration of greenhouse gases in the Earth's atmosphere has
increased to a level unknown for 10,000 years. This increase, attributed to human activities, has
accompanied a rise in Earth’s surface temperatures, often referred to as "climate change." Scientists
have concluded that this change in temperature will have significant environmental, economic and social
impacts, including a rise in sea level leading to loss of low-lying islands and coastal lands, an increase in



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hurricanes, droughts, and floods. Equally disturbing, global warming could turn rich agricultural areas into
drylands, drylands into deserts, and – paradoxically – even switch off the Gulf Stream’s protective shield
for temperate Europe, making vast alterations to current habitats and ecosystems. This represents a
major threat to slow-adapting plants and trees as well as to vulnerable animals, insects and marine
species even at the phytoplankton level. According to the international scientific consensus:
“Anthropogenic climate change will persist for many centuries.”


Since as much as one-fifth to one-quarter of CO2 emissions come from fossil fuel use, slowing
deforestation could make an important contribution to the effort to reverse global warming. In addition to
lowering emissions that result from deforestation, it is also possible to restore degraded areas and
expand forests or other ecosystems, increasing the carbon they sequester. Scientists estimate that there
is the potential to offset 10-20 percent of fossil fuel emissions between now and 2050 by sequestering
carbon in growing trees and by protecting existing carbon stocks. If GHG emitters can compensate
forestry and other land use projects that sequester carbon for this valuable environmental service, it could
potentially become a significant source of revenue for conservation.


Such options often compare favorably in cost with many options designed to reduce energy-related
emissions. If policy on carbon sequestration is developed and structured properly, it will provide an
effective tool for putting a value on the environmental service that forests and other ecosystems provide
to the atmosphere and, thereby, change the economic equation Surrounding decisions on land-use.


1.1.2      Policy context
As a result of the scientific evidence of a correlation between elevated greenhouse gases from human
activities and a measurable warming of the Earth’s lower atmosphere, political concern with regard to the
effects of climate change began to grow until in 1992 150 countries finalized the United Nations
Framework for Climate Change (UNFCCC). This was presented it for signature at the Earth Summit in
Rio de Janeiro. The ultimate objective of the Convention is to stabilize the concentration of atmospheric
greenhouse gas emissions (GHGs) so as not to produce negative impacts on climate systems. However,
this is to be done within a timeframe that allows ecosystems to adapt to climate change and does not
                                                                     3
threaten sustainable food production and economic development. Countries adopted shared but
differentiated responsibilities. Thus, industrialized countries agreed to voluntarily adopt GHG-reduction
policies, contributing to climate change mitigation.


In 1995, the Conference of Parties (COP) became the Convention’s ultimate authority. The first COP was
held in Berlin. It was concluded that the voluntary commitments included in the UNFCCC were not being
fulfilled, and that even if they were, it would not be enough to stabilize GHG emissions. The so-called
Berlin Mandate was therefore established. In this declaration, countries agreed to address climate change
on behalf of present and future generations, and pledged that developed countries would take the lead in
action to address climate change and reverse its effects.

In 1997, the third conference of the parties (COP-3) was held in Kyoto, Japan, where countries adopted
by consensus what is known as the Kyoto Protocol (KP). When the KP goes into force, it will legally bind
participating industrialized countries to reduce their collective greenhouse gas emissions by a collective
5.2% below 1990 levels by the first commitment period (2008-2012). The Protocol will enter into force
when it is signed and ratified by 55 countries, including developed countries whose total emissions
represent at least 55% of the emissions of this group in 1990. The Protocol will reach its second
ratification “trigger” when ratified by the Russian Federation, and can then come into force. The latest list
of signatories and ratifications is found at: http://unfccc.int/resource/conv/ratlist.pdf.

2
    IPCC summary p17.
3
    UNFCCC, Convention on Climate Change, 1992


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The high cost of global emission reductions led to the negotiation and approval of various "flexibility
mechanisms" that offer industrialized countries more cost-effective means to achieve their GHG
emission reduction targets (and creates the framework for a global carbon market). The Kyoto Protocol
authorizes these mechanisms with the understanding that GHGs are globally distributed and that the
effect of emissions or sequestration is the same no matter where they take place. The Kyoto Protocol
                                              4
includes the following flexibility mechanisms each of which is associated with a specific type of carbon
credit:

 Emissions Trading (ET) (Article 17 in the KP): This mechanism allows developed countries and
    countries with economies in transition to purchase assigned amount units (AAUs) from other
    developed countries and economies in transition, in order to fulfil their emissions reduction
    commitments. Emissions trading must not replace domestic action to reduce emissions.
 Joint Implementation (JI) (Article 6 in the KP): In order to attain their reduction commitments, JI allows
    developed countries to purchase emission reduction units (ERUs) resulting from project activities
    implemented in any other developed country or country with an economy in transition.
 Clean Development Mechanism (CDM) (Article 12 in the KP): The CDM allows industrialized
    countries to accrue credits (“certified emission reduction units”) in return for financing carbon
    reduction projects in developing countries that help further their sustainable development. The first
    baseline and monitoring methodologies were approved for CDM in July 2003. For details see:
    http://unfccc.int/press/prel2003/pressrel280703.pdf
 Removal Units (RMUs): This new carbon credit unit represents forestry credits generated within
    industrialized countries and can be traded through ET or JI mechanisms. The limitation of this unit is
    that it can only be generated during the commitment period (2008-2012) and not transferred to a
    future commitment period, unlike other carbon credit units.


Note: All carbon credits, which include CERs, ERUs, AAUs and RMUs are equal to one metric ton of
carbon dioxide equivalent.

At the seventh Conference of the Parties (COP-7), held in Marrakech, Morocco, in 2001, delegations from
over 170 countries came to a final agreement on a package of decisions for the implementation of the
Kyoto Protocol. At this meeting, countries agreed to limit carbon sequestration projects under JI
and CDM during the first commitment period (2008-2012). In the case of CDM, allowable activities
were limited to reforestation and afforestation. Limits were also placed on land-use based CDM
projects. Only 1% of a developed country's base year emissions, for each year of the-5 year commitment
period, can be achieved using such sinks. In the case of JI, allowable activities include reforestation, and
afforestation, as well as forest management.


This means that project activities focused solely on the protection of existing forests, (referred to
as "avoided deforestation" activities) which by definition are central components of many conservation
projects are excluded under the Kyoto Protocol until the year 2012.


Since the climate negotiations began in 1992, the development of a "carbon market" has evolved almost
in parallel responding to corporate demands for carbon credits. These were spurred by government
regulations on GHG emissions such as the Kyoto Protocol as well as national climate change policy
frameworks, and bilateral and/or regional agreements. As more countries ratify the Kyoto Protocol, the
future market for carbon is expected to grow significantly, even without US participation. As policy
continues to evolve and develop within national climate change frameworks, and perhaps at the



4
    UNFCCC, The Kyoto Protocol , 1997



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international level as well, a market for forest protection (or "avoided deforestation") credits may yet
emerge. The carbon market and its evolution are further discussed in section 1.1.3.


The Kyoto Protocol has established various standards that projects must achieve in order for their carbon
credits to be considered valid. To have carbon credits certified or accredited under the international
regime, carbon projects will need to meet the following standards:

   Additionality: Projects must demonstrate that their carbon benefits are "additional to any that would
    otherwise occur” without project investments, and “additional to any that would occur in the absence
    of the certified project activity”. In other words, if a project area is already being re-forested without
    carbon-related investments, it is not eligible to receive carbon credits for that reforestation.
   Quantification: Carbon credits must be real and measurable. In order to measure the carbon credits
    produced by the project, the project must develop a baseline (that projects what would have
    happened without project activities). The baseline is the standard by which to measure verifiable
    changes in carbon stocks.
   Permanence: Projects must assure the long-term provision of carbon benefits to the buyer of the
    carbon credits..
   Leakage: Project activities must demonstrate that their carbon benefits are not being displaced to
    other locations through what is called “leakage.” For example, if the project is designed to retire a
    logging concession, project design should help account for the possibility of the concessionaire
    shifting operations to another location. In the international negotiations this matter is still under
    discussion and the scientific community was requested to provide scientific solutions to address this
    issue.
   Monitoring and verification: projects will need to develop monitoring plans to ensure that the carbon
    credits claimed remain the same throughout the lifetime of the project or that changes be claimed.
    Furthermore, projects will need a third party to verify that the carbon credits claimed are measurable,
    real and additional.


1.1.3    The carbon market


Besides the development of an international climate change policy framework, two main factors have
contributed to the growth of the carbon market:

   Corporate action in response to governmental progress:                Many of the world’s largest
    corporations (e.g. BP Amoco, AEP, Texaco, Shell, Ford, Tokyo Electric Power, GM) have already
    invested in projects that reduce the build-up of GHGs in the atmosphere, in advance of the final
    ratification of the Kyoto Protocol. A second tier of smaller companies is also pursuing this strategy.
    With the mounting awareness that climate change is a serious problem, few companies with high
    levels of GHG emissions can hold a public position that they do not need to take any action. Many
    are moving forward with proactive strategies.

   Unilateral governmental action: A handful of national governments have moved forward on
    developing national and regional trading systems. Denmark, the UK, and Canada are developing
    trading schemes, and the European Union is planning a regional trading scheme for 2005. Even the
    USA, though currently opting out of the Kyoto Protocol, is proposing legislation for national GHG
    emission caps.

In 1995 a pilot phase program known as Activities Implemented Jointly (AIJ) was launched in the climate
negotiations, which allowed countries to experiment with projects that would provide GHG emission
reductions or avoidance. AIJ enabled the private sector, the public sector and other stakeholders to learn


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about the complexities of developing and implementing carbon projects including: designing baselines,
measuring costs and opportunities of such activities, and quantifying GHG emission reductions, etc. (for
more information on these issues see the feasibility and implementation sections of this chapter).


In 1997 the Kyoto Protocol introduced three flexibility mechanisms (ET, JI, and CDM). These
mechanisms allow countries to meet their emission reduction targets through cost-effective measures. As
the KP negotiations evolved, governments established national programs, while private companies
developed private market schemes, which contributed to the progress of the carbon market. Individual
countries have also developed climate change policies and schemes independent from the international
process. Although avoided deforestation (i.e. forest protection) is not included in the Kyoto Protocol it
may eventually be part of the carbon market under national and/or bilateral schemes.


Programs following the international climate change regime include:

   Prototype Carbon Fund (PCF): developed by the World Bank, this program’s objective is to mitigate
    climate change. Governments and private companies contribute to the PCF which in turn uses fund
    resources to support energy and forestry projects designed to produce carbon offset credits fully
    consistent with the Kyoto Protocol’s CDM and JI.
    Private investors: some GHG emitting companies already invest directly in the development and
    implementation of CDM and/or JI projects for the purposes of meeting their emission reduction
    commitments.
   The Biocarbon Fund: It is a fund developed by the World Bank to finance carbon projects that
    sequester or remove greenhouse gases in forest and agro-ecosystems. The fund will support
    projects that fall under mandatory measures (the Kyoto Protocol or other domestic policies) or
    voluntary efforts to manage GHGs. It will aim to deliver cost-effective emission reductions, while
    promoting biodiversity conservation and sustainable development. In addition, the Fund seeks to
    gain practical experience in order to guide governments and other market players with a wider range
    for cost-effective tools for reducing GHGs.
   Carboncredits.nl: Through this Web site the Dutch government buys carbon credits from projects to
    meet that country's commitments under the Kyoto Protocol.


There are various estimates of the potential size of the carbon market. Many analysts anticipate that the
global trade in carbon emission reductions, driven by national and global emission policy shifts such as
the Kyoto Protocol, will amount to tens of billions of US dollars by 2010. Estimates based on the size of
the potential carbon trade in North America and Europe indicate that it could be worth US$30 to US$100
billion when fully operational. However, even if these estimates are realized, and the Kyoto Protocol goes
into effect, it is likely that only a small portion of the carbon traded will come from conservation projects
because there is significant competition from offsets produced through improvements in technology,
renewable energy, and other forms of sequestration.


1.1.3.1    Market development

The carbon market continues to evolve rapidly. In many of the examples cited in this chapter, forest-
based carbon offset projects have been complex "one-off" deals aimed at gaining experience for project
developers and generating favorable publicity for investors. In these cases, companies have made large
up-front investments to pilot-phase carbon projects, with the expectation that viable and valuable carbon
credits may one day result. These early investors were willing to pay for project start-up costs and to
assume many of the risks associated with production of the offsets. Once the Kyoto Protocol is ratified
and becomes legally enforceable, or other policy regimes are put into place, a more systematic trading
scheme will be required to keep up with demand for carbon credits. The implication is that investors will
want to purchase offsets rather than pay for projects. Project developers will need to identify



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significant sources of funds to start projects and produce the offsets to sell in the market.
Investors will ask project developers to assume offset production risks, and provide guarantees on the
timing and magnitude of offset production.


The shift to carbon credit exchanges that enable regular and high-volume trading has already begun. By
bringing multiple buyers and sellers together in a central trading platform, exchanges offer a transparent
                                                                              5
and efficient system for determining a fair price for both buyers and sellers. One example is the Chicago
Climate Exchange (CCX), a voluntary cap-and-trade program for reducing and trading greenhouse gas
emissions in North America. Under the CCX, companies in multiple industries will make a voluntary
binding commitment to use a rules-based market for reducing their greenhouse gas emissions. CCX will
enable them to receive credit for such reductions and to buy and sell credits in order to find the most cost-
effective way of achieving reductions.


As the market develops carbon credit buyers increasingly want to diversify their risk by investing in a
portfolio of projects, rather than depend completely on a single project. Investment funds such as the
World Bank's Prototype Carbon Fund and Biocarbon Fund (described above) help address this concern
by acting as a pooling mechanism that will enable a range of investors to hold a stake in a number of
carbon offset deals. This will reduce risk and allow individual investors to move their equity in and out of
projects as they wish.


Confidence in the market continues to expand. As policy progress is made, the number of market service
providers such as investment funds and exchanges is growing, increasing the trade in credits. Ahead of
the regulatory curve, some companies are already developing in-house carbon reductions plans, and
purchasing carbon offsets.




1.1.4        Snapshot of carbon projects
The following section provides brief overviews of some forest-based carbon offset projects.


The Coastal Rainforest Carbon Offsets Project in Ecuador was begun in March 2002 to restore native
hardwoods to 275 ha (680-acre) of land degraded by poor agricultural practices. The Project is located
within the Bilsa Biological Station, a 3000 ha (11.5 sq. mile) private reserve managed by the Jatun Sacha
Foundation, a non-profit organization in Ecuador that works to protect this critical remnant of Ecuador's
coastal premontane wet forest, of which less than one percent remains. Located in northwestern
Ecuador in the State of Esmeraldas, restoration of this remnant forest, administered by Jatun Sacha and
Conservation International, will sequester an estimated 65,000 tons of CO2 over the life of the project
(100 years). In addition to mitigation of carbon, the project will restore connectivity of Bilsa with the larger
110,000 ha Mache Chindul Ecological Reserve and preserve habitat for rare animals such as the Jaguar,
the Long Wattled Umbrella Bird, the Giant Anteater and abundant populations of the threatened Mantled
Howler Monkey. The project will also continue the work of the Jatun Sacha Foundation to integrate local
farmers in reforestation efforts.

Financing for the Project has come from The Climate Trust, a nonprofit trust established in the state of
Oregon (in the US) that manages a CO2 fund. The Oregon state legislature has required that new power
plants reduce their CO2 emissions. One of the ways power plants can do so is by purchasing CO 2 offsets
through the Climate Trust, which in turn can invest the money into various offset projects.



5
    IIED, Silver Bullet or Fool's Gold


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One of the earliest carbon offset projects was undertaken in Belize by The Nature Conservancy and
local partner Programme for Belize. This project involves conservation and sustainable forest
management of more than 58,400 ha (225 sq. miles) of lowland tropical rainforests that were slated for
conversion to agriculture. At a cost of US$5.6 million, the project will sequester an estimated 2.4 million
tons of carbon over 40 years. Financing has come from a consortium of energy companies: Wisconsin
Electric, PacifiCorp, Cinergy, Detroit Edison, Suncor and Utilitree.


One of the largest carbon offset projects to date is in Bolivia, where the borders of the Noel Kempff
Mercado National Park were extended after logging rights on neighboring forest concessions were
retired. This US$9.6 million project, which protects 600,000 ha (2300 sq. miles) of tropical rainforest, will
sequester an estimated 6-8 million tons of carbon emissions over 30 years. Industry investors include
AEP, PacifiCorp, and British Petroleum. The land is owned by the Government of Bolivia and managed
by Bolivian NGO, Fundación Amigos de la Naturaleza (FAN). Fifty percent of carbon offsets will be
credited to the Government of Bolivia and fifty percent to investors. For an in-depth look at the Noel
Kempff project see the case study in the Annex to this chapter.


For the latter two projects it should be noted that any carbon sequestration due to protection of standing
forest, "avoided deforestation", are non-Kyoto compliant at this time.



1.2      Key Actors and Motivations
Whether the key actors in carbon projects are the private sector, the public sector or NGOs, each group
can play multiple roles under varying conditions as credit buyers, sellers, or investors. The role that each
group assumes and their potential motivations are summarized in Table 1. Other specific actors such as
GHG emitters, consultant firms, carbon market brokers, and local communities are discussed later.



Table 1 – Carbon Market Actors and Motivations
                        Private Sector                     Public Sector                   NGOs
Investor – Invests      Motivations:                       Motivation:                     Motivation:
capital in the start-       GHG-emitting                     Governments of                  Early investments
up and                       companies seek to                 developed countries              to demonstrate
implementation of            identify projects that            will want to invest in           viability of forest-
a carbon project in          give a good return (in            projects to produce              based carbon offset
order to eventually          terms of carbon                   carbon credits and               projects; and
use credits                  credits), with                    meet their                       demonstrate best
produced to fulfil           manageable risks.                 commitments under                practices for public
GHG emissions                                                  the Kyoto Protocol.              relations.
limits, or profit           Demonstrate corporate
                             responsibility.                   This accruing of
from the trade of                                              credits can allow
carbon credits.             Build good will with              those governments to
                             stakeholders and                  bank some credits for
                             customers as well as              future commitment
                             enhance public                    periods or to trade
                             reputation.                       them in the carbon
                                                               market.
Buyer –                 Motivation:                        Motivation:                     Motivation:
Purchases carbon            Comply with their             Governments of                      NGOs can
credits.                     emission reduction            developed countries will             purchase carbon
                             targets.                      want to purchase credits             credits and "retire"



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                            Some companies will         to meet their commitment           them, or take them
                             purchase carbon             with the international             off the market, in
                             credits to resell in        regime.                            order to reduce the
                             secondary markets.                                             overall limits to
                                                                                            GHG emissions.
Sellers – Sells         Motivation:                      Motivations:                  Motivations:
carbon credits to           Opportunity for a               Serve as brokers and         Raise funding for
gain profits while           financial return in a new        gain income or profit         compatible project
helping other                commodity market.                form services                 goals (e.g.
actors to comply                                              rendered.                     conservation,
with the emission                                                                           development, etc.)
reduction targets.                                           To be involved and
                                                              influence the                Facilitate entry of
                                                              development of a              developing
                                                              new commodity                 countries or small
                                                              market.                       projects to the
                                                                                            market.


GHG Emitters


These are companies that are either voluntary participants in emissions reduction efforts or have to
comply with national or international regimes that set limits on GHG emissions. These companies, as
mentioned in Table 1, can be carbon credit investors, buyers or sellers depending on their needs. While
most project investors might be concerned with the green image of the project (i.e. biodiversity or socio-
economic values) they are more concerned with meeting their carbon emission limits at the lowest cost.
Public relations for the company can be an important aspect of the project and should not be overlooked
for marketing purposes. Investors may seek out projects if they are interested in further business
investment in a particular country or are interested in gaining market access. The advantage for these
companies to invest in forestry projects is that LULUCF activities may provide the most cost-effective
carbon credits and other co-benefits. While these may be the most cost-effective carbon credits, they
usually entail higher risks than energy projects, because of uncertainties associated with permanence
and leakage aspects specific to LULUCF projects (please refer to the carbon market section 1.1.3). For
this reason, carbon credit buyers currently favor projects in the energy and industrial sector. The
perception is that credits from the energy sector are more secure. They are therefore more sought after
than carbon credits from LULUCF projects. Under market circumstances, this could also mean that
credits from energy projects would trade at higher prices than those from LULUCF projects.


Consulting Firms


Consulting firms offer various kinds of service and expertise to stakeholders in the public and private
sectors. Some consulting firms guide stakeholders on the development and implementation of a project,
including technical services such as: developing baselines, quantifying carbon benefits, developing
monitoring plans, verifying carbon credits, legal advice, and policy expertise. These consulting firms play
a valuable role in the development of carbon market schemes. As private entities these firms receive
payment for their services.


Brokers


These groups "broker" (facilitate) transactions of carbon credits between buyers and sellers, and as such
provide a fundamental market service by lowering transaction costs through economies of scale. They
provide this service for a profit to private companies, governments, and NGOs. They help stakeholders


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with the technical and legal procedures of selling and buying in a new market. They are active players in
the design and development of the carbon market.


Governments


The CDM offers developing (host) country governments the opportunity to attract investment in land-use
(and renewable energy) projects as suppliers of carbon credits. Developed countries can demand and
supply credits depending on their needs. Governments also represent their country’s interests at
international climate change negotiations, which in turn shapes the international process and the
agreements achieved. Certain countries such as Canada, the US and many Latin American countries are
keen on including more LULUCF activities in the process. Other countries such as those in the European
Union are against the inclusion of further LULUCF activities. Therefore, governments will invest in
forestry projects according to where they stand at the negotiating table.


Once the Kyoto Protocol is ratified, governments that are a Party to it will be responsible for shaping the
national policies that allow countries to implement it. For example, countries that want to participate in
the CDM process will need to develop sustainable development criteria (especially in the case of
developing countries) and implement policies that will allow for those practices to take place.
Furthermore, the government will be a key player is designing the National Authority, which will be the
body that approves the initial stage of CDM projects.
Under the Kyoto Protocol each country has an assigned National Authority responsible for endorsing
carbon offset projects. Unless projects are approved by such agencies, they are not accepted as part of
the Clean Development Mechanism (CDM).


Environmental NGOs


Environmental NGOs play several roles in the process. Often they help companies and/or governments
to design project activities and provide guidance through the different steps. Environmental NGOs are
also a key player at the international negotiations and policy design at the domestic level. Due to the
potential catastrophic consequences of global climate change on natural ecosystems, environmental
NGOs are concerned that the development of policy ensures effective long-term climate change
solutions. It would be short sighted to view carbon offset projects merely as a conservation finance
mechanism if they were not truly effective in reducing atmospheric GHG concentrations.


Local Communities


The CDM mandates that projects contribute to sustainable development. Well-designed projects should
therefore benefit local communities, for example, by supplementing and diversifying income, increasing
forest access to goods and services and transferring skills and knowledge. Conversely, if local
livelihoods are not taken into consideration, forest-based carbon projects could have negative impacts on
local livelihoods by restricting access to resources that local communities depend upon. In some cases,
there will be a trade-off between the amount of carbon benefits sought and providing benefits to local
livelihoods.


Given the complexity and high transaction costs of designing and implementing a carbon offset project, it
will be very difficult for small-holders or community groups to establish projects and derive direct benefits
themselves. In some instances governments and NGOs are working with local communities to
encourage "project bundling," in which the coordinating organization assists small holders with the various
complexities of developing a carbon project. The carbon benefits from multiple participants are then
combined and jointly marketed in order to lower transaction costs. Without such collaborative projects,



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however, the impact of carbon projects on local livelihoods is most likely to be determined by the
sustainable development component of projects implemented by governments, large companies, or large
organizations. For a further discussion of the sustainable development requirement of projects see
section 2.3.



1.3      Types of Carbon Offset Projects
There are two general categories of land-use activities that can contribute to conservation goals while
helping to reduce or stabilize atmospheric greenhouse gas concentrations:

 Carbon sequestration – projects that increase carbon storage in ecosystems, and
 Emissions avoidance – projects that prevent the emissions of carbon through protection of carbon
   stocks

Many well-designed carbon projects combine both carbon sequestration and emissions avoidance
components.



1.3.1    Carbon sequestration
Carbon sequestration is accomplished by increasing the carbon stored (or "fixed") by a certain area of
forest and is most applicable in areas that have been degraded or will not recover without the
management activities implemented through the carbon project. This category includes reforestation
and afforestation projects.


Within this category natural forest restoration is probably the most directly relevant to conservation.
Depending on the previous treatment of the land and the likelihood of its natural recovery, reforestation
projects clearly result in carbon sequestration, and are easily understood. Grassland restoration on
degraded agricultural lands with low biomass, and improvements to agricultural practices to increase soil
carbon (e.g. no-till agriculture), are other carbon sequestration options. Areas that were converted prior
to 1990 are the most compelling project sites, since it is easy to refute any claim that the sites were
converted only to make possible carbon credits. Some agriculture-related project types, such as
agroforestry, or changing from full sun-grown to shade-grown coffee, also fall within this category.


Since the policy regimes developing support carbon sequestration more than emissions avoidance,
successful carbon project proposals should generally include 50% or more of restoration. Areas that are
particularly attractive for conservation purposes are those where habitat fragmentation is a problem and
funds could be used to restore habitats in order to decrease fragmentation, build corridors, or create
buffers around core conservation areas.



1.3.2    Emissions avoidance
Emissions avoidance projects preserve carbon stocks (in soils, vegetation, etc.) in areas that are
demonstrably threatened with imminent land conversion or degradation (e.g. clear-cutting, removal of the
most economically valuable species, or "high-grading"). Forest protection projects are usually very
attractive for their conservation benefits. Unfortunately their climate benefits are generally less easily
understood than reforestation or other restoration approaches, as people don’t always see a visible
change between before (baseline) and after (with project) implementation of the project.
As noted, forest protection projects are not credited under the Kyoto Protocol but may be included in
other climate change policy regimes. With this in mind, where there are clear historical trends of


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deforestation or degradation, and where imminent threats are obvious, these areas are more attractive
sites for emissions avoidance projects. In these projects the highest rates of emissions avoidance are
possible in high biomass sites that would have been completely and lastingly converted to low biomass
systems without the project.



1.3.3     Forest management


Forest Management projects may involve both carbon sequestration and emissions avoidance. For
example, emissions avoidance would result from reduced-impact logging where timber is still being
harvested but the residual impact is reduced through directional felling, well-planned skid trails, etc. Net
carbon sequestration results where forests are managed to increase storage rates and volumes through
longer rotations, thinning regimes, enrichment planting, or other silvicultural treatments. Management
improvements in agriculture, for example reduced-till agriculture, can also serve to sequester carbon.




1.4       Advantages and Disadvantages

                      Advantages                                             Disadvantages
Environmental:                                            Environmental:
     The potential for forest carbon offsets as a           Not all biodiversity conservation projects will
      mechanism to finance conservation is                    work as carbon offset projects. Carbon content
      enormous. This market is projected to be                is not necessarily correlated with biodiversity
      worth billions of US dollars.                           value.
     Environmental co-benefits are conservation of          Monoculture plantation forestry projects will
      biological diversity, increased forest                  result in reduced biodiversity, and can have
      productivity, reduced erosion, improved soil            other negative environmental impacts such as
      and hydrological benefits (water quality, regular       increased erosion, siltation, and reduced water
      flows, etc.), and ecotourism potential. These           supplies.
      co-benefits are the basis for other conservation
      finance mechanisms.
                                                          Development:
     Carbon offset projects assign economic value
      to one of the key environmental services               Local communities can experience a loss of
      provided by standing forests, thereby                   access to forest resources if projects involve
      recognizing the value of natural ecosystems             complete protection.
      beyond timber.                                         Land tenure security for the poor can be
                                                              adversely affected with increased competition
                                                              for control over forest land.
Development:
                                                             It can result in reduced food security and have
     The CDM mandates that projects must                     adverse health impacts if a project reduces
      contribute to sustainable development. Ideally,         forest dependent communities’ access to
      carbon offset projects can increase local               forests.
      communities access to forest goods and
      services, and diversify income.                        Project investments may cluster in a relatively
                                                              small number of large developing countries that
     Technology transfer includes developing local           that have the infrastructure and institutions to
      institutions and the local knowledge base,              develop carbon offset projects.
      training in sustainable forestry, project
      management, etc.                                       Project financing may reduce other aid or
                                                              foreign direct investment flows.
     Associated policy work can result in increased



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      land/resource tenure security.
     Improved forest management can have                Investors and buyers:
      positive impacts on human health through
      improved water and air quality and diversified          Compared to carbon credits derived from the
      diet, if there is improved access to NTFPs               energy and industrial sector, land-use based
      (non-timber forest products).                            projects tend to be riskier investments due to
                                                               concerns of leakage and permanence.
     Stable income streams can reduce vulnerability
      to seasonal shifts in land-based activities for
      local communities.                                 Project developers:
                                                              Transaction costs are high: project preparation
Investors and buyers:                                          and implementation (information gathering,
                                                               design, monitoring, risk management, etc.).
     It offers a cost-effective means of reducing
      GHG emissions. Indications from pilot projects          Forest sequestration projects under the CDM
      indicate that forest-based carbon offset                 are limited to 1% of emissions.
      projects in developing countries offer the              Uncertainties still exist for project developers
      cheapest carbon credits.                                 and investors in development of policy regimes
     Public relations benefits come from investing in         such as the Kyoto Protocol.
      projects that have positive social and economic         To achieve full carbon benefits requires a
      impacts.                                                 minimum project development time of at least
     Forest carbon offset projects offer a wide range         30 years.
      of investment opportunities.


Project developers:
     Can create a long-term stable stream of
      income.




1.5       Success Factors
The following list of carbon offset project success factors should be considered in tandem with the
general project site selection criteria given in Box 2 and the project screening criteria in Table 2 (section
2.1)

     Careful site selection and working with a third-party certifier, especially in the absence of clear rules
      and guidelines, to ensure that the project will meet the criteria for project acceptance.
     Compatibility with the host-country’s conservation and development goals (particularly in the forest
      sector) is essential to securing host-country approval.
     Project addresses most significant conservation threats.
     Good relations between the local partner and the host government to sustain support of the project
      during changes in administrations.
     Balancing maximization of carbon benefits with fulfilling the organizations' commitment to biodiversity
      conservation.
     Equal understanding among all participants of the unique nature of carbon projects and the related
      policy and market complexities. These are not traditional conservation projects, but climate mitigation
      projects with considerable conservation benefit.
     Managing participants' expectations.
     Investors who understand and are passionate about the project and can champion it internally.





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     Understanding that investors are not donors, but business partners expecting a return on their
      investment; therefore, such projects must meet a more rigorous standard of performance than
      traditional conservation projects funded through philanthropy.
     A project capable of generating a reasonably predictable cash flow.
     Working with local communities and including a social development component: this can reduce the
      risk of project failure and protect against leakage by providing alternative livelihoods. Equitable
      sharing of benefits among investors, the host country, and local partners.
     Recognizing at the outset that the key to the project’s credibility is a defensible baseline of what
      would occur without the project.
     Sufficient funds and expertise to ensure capacity to address technical challenges throughout the life
      of a project, particularly during periodic staff changes.
     Develop and keep reliable outside expertise with high credibility.
     Land tenure conditions that are clear in law and enable landowners to derive benefits from carbon
      project activities.
     A diverse range of expertise necessary to assess, plan and implement a carbon project including
      forestry, business, and legal knowledge
     A capacity-building process put in place early to enable project partners to assume responsibility for
      large projects/budgets.
     Protection against unexpected loss of carbon stocks and offsets due to natural disasters, illegal
      logging or other unanticipated events. Projects can be bundled in a portfolio to spread risk and share
      cost of insurance. A percentage of verified offsets can be placed in a buffer in case of changes in the
      baseline or other loss of offsets.
     Significant sources of funding, outside of the sale of carbon offsets are identified. IN many cases only
      a portion (e.g. 20% to 30% of project costs) can be recovered through the sale of carbon offsets. In
      most cases other sources of up-front funding will be needed to start projects.



1.6       Steps to Implement a Carbon Offset Project
The general steps taken to develop carbon sequestration project depend in large part upon the type of
project and/or policy regime that the project developer will follow. As noted, multiple national and regional
climate change initiatives and policy regimes are under development that would allow a project developer
to benefit from the carbon market.

1.6.1     CDM project cycle
If a project developer seeks to comply with the Kyoto Protocol, they can establish carbon offset projects
through afforestation and reforestation activities. This is true whether the project developer chooses to
use JI or CDM as their mechanism. As previously noted, JI projects are implemented between developed
countries while CDM projects are carried out in developing countries with investors from developed
countries. Unlike JI, the CDM sets out a very detailed process for project developers to follow, known as
the "project cycle." JI does not have to go through such a rigorous process. However, there are many
similarities in the course of action. In both scenarios, project documents should be developed.
Click here to see a template for a CDM project document (section 1 of the Appendix).


As national regimes depend on country-specific policies there is no one definitive project cycle, however
project developers may want to use the project document guidelines provided for the CDM as a
preliminary standard. Since the CDM has the most rigorous process, a project developer following those
steps will have a high likelihood of abiding by other regimes, which will tend to be more lenient in
approving carbon offsets.




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The project cycle established by the Marrakech Accords for the CDM has five fundamental stages: design
and formulation, national approval, validation/registration, monitoring, and verification/certification. The
first three are performed before the implementation of the project. The last two are performed during the
lifetime of the project.

The step-by-step methodology we recommend provides also for a pre-feasibility phase, which serves as
an initial screening tool to evaluate if it is worth investing more money into a full feasibility study.

   Project Design and Formulation: Project formulation must follow the format established by the
    CDM Executive Board and the COP. however, for the meantime the Marrakech accords provide a
    clear guideline of information that should be included in the Project Design Document (PDD). An
    overview of those guidelines includes: a description of the project, a presentation of the baseline
    calculation, an explanation of how the project meets the additionality requirements, an environmental
    impact assessment, stakeholder comments, and a monitoring plan
   National Approval: Potential CDM projects must be approved by the national authority of the host
    country through the issuance of a Letter of Approval.
   Validation and registration: Validation is the process of independent evaluation of a project activity
    by a designated "operational entity" (a certified third-party agency). The CDM Executive Board
    assigns the operational entity. Registration is the formal acceptance by the Executive Board of the
    CDM of a validated project as a CDM project activity.
   Monitoring: Monitoring is the systematic surveillance of the project's performance by measuring and
    recording performance-related indicators. A monitoring protocol should provide confidence that the
    emission reductions and other project objectives are being achieved and should be able to monitor
    the risks inherent to baseline and project emissions.
   Verification and certification: Verification is the independent, periodic review and ex-post
    determination by the operational entity of the monitored reductions in emissions. Certification is the
    written assurance by the operational entity that, during a specified time period, a project activity
    achieved the reductions as verified.

1.6.2    Step-By-Step Methodology
The following methodology outlines general steps for implementing a forestry-based carbon offset project.
In this illustrative methodology, land management activities (such as afforestation and reforestation) and
forest protection activities (avoided deforestation) are considered viable options given the emerging
opportunities of national and regional carbon policy regimes. It is important to note that precise
sequencing and implementation of these steps will vary considerably, depending on many circumstances
specific to the project. It is also important to note that the steps outlined below (e.g. conducting an in-
depth feasibility study) should be integrated into a broader conservation or land management plan. This
methodology assumes that the carbon "project developer" is a conservation practitioner such as a
protected area manager or environmental NGO.


Step 1: The project developer, with the help of consultants if necessary, conducts a pre-feasibility study
        to determine the potential of a carbon offset project proposal.


     Approximate time: One month. Approximate Cost: less than US$10,000
     Develop a general project concept by evaluating conservation management goals for overlap with
      climate change mitigation opportunities.
     Conduct a preliminary project site evaluation and apply first order screening criteria (see Table 2)
      to the project concept to determine if a full feasibility study is warranted.
     Carry out an approximate desk-study quantification of the project costs and potential carbon
      credits the project could sell.




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        Verify that the host government supports carbon sequestration policy regimes. Identify the
         authorizing agency /Ministry for host government approval. Identify the requisite legislative
         process or applicable national policy regimes.
        Begin to gather necessary information for consultant(s) (see Section 2.1) to conduct a full
         feasibility study including: biological description of project area; land-use and demographic
         trends; land tenure information; budget estimates
        Carry out an approximate desk-study quantification of the potential carbon credits the project
         could sell.


IF THE PRE-FEASIBILITY STUDY INDICATES THAT A CARBON OFFSET PROJECT IS
POTENTIALLY VIABLE AND RESOUCES AND INTEREST STILL EXIST:


Step 2: Project Developer develops the Terms of Reference for feasibility study (see section 2.4 for
        detailed Terms of Reference).

          Identify the project development team.

Step 3: Carbon project development team and/or consultant(s) conduct a feasibility study.


     Approximate time: 3-6 months. Approximate Cost: US$15,000-US$50,000
     Project Developer provides consultants (or project development team) with descriptions of the
      project area and proposed project activities.
     Consultant conducts a literature search, expert interviews, and data collection needed to gather
      additional information necessary for study.
     The feasibility study will assess and document the following factors:
        “Without project” baseline (a first-order baseline to estimate carbon benefits to be generated
           by the proposed project)
        Estimate growth rates and prepare initial carbon offset estimates
        Estimate project costs
        Estimate cost/ton of carbon sequestered
        Permanence
        Identify strategies for leakage prevention and quantification
        Co-benefits – environmental services
        Opportunities to contribute to sustainable development
        Reliability
        Research land tenure situation
        A proposed monitoring protocol
        Investment potential


IF CARBON OFFSET PROJECT DETERMINED FEASIBLE:

Step 4: Project Developer or broker markets project to potential investors.
    Identify key GHG emitters and other potential investors with ties to the project area.
    Prioritize potential investors (Do they work in your region? Do they have an immediate or future
        need for carbon credits? Does your organization have an existing relationship with them?)




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        Develop "project term sheet" (see sample in the Appendix, section 2) and/or business plan as a
         marketing tool for investors.
        Meet with potential investors to "sell the project."
        Obtain commitment for investor to fund project development phase.


IF FUNDING IS AVAILABLE INTIATE PROJECT DEVELOPMENT:

Step 5: Project Development


Approximate time: 10-14 months. Approximate Cost: US$50,000-US$500,000

Funding
      Identify funds for project start-up and secure commitments of purchase for carbon offsets
      Secure funding for project implementation.

Technical challenges
      Conduct first full-scale carbon inventory.
      Develop a detailed project plan, including initial fieldwork activities and a monitoring plan.

Social component
       Consultations with community representatives to introduce project, solicit input for project
         design
       Negotiate with landowners/sellers where land acquisition is a project activity (conduct a
         thorough title check on lands suitable for acquisition).

Legal component
    Evaluate the legal system to identify the appropriate legal framework for proposed project
       activities (land acquisition, easements, etc.).
    Draft and sign an initial Memorandum of Agreement between project partners
    Draft project contract/agreement among parties.
    Draft sub-agreements for various project components.
    Finalize all negotiations and contracts and sign a comprehensive legal agreement among all
       parties
    Obtain government clearances/approvals.

Operational
    Prepare operating protocols.
    Set up financial systems.
    Train staff for long term project implementation.

Step 6: Project Implementation


Approximate time: 30-70 years. Approximate Cost: US$1 -15 million
    Transfer initial funds from project investor / buyer to project developer.




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         Begin project implementation as per detailed project plan (e.g. take actions to reduce or prevent
          emissions – begin reforestation activities, acquire appropriate properties, etc.).
         Carbon offsets begin to accrue once proven emissions reductions occur and leakage prevention
          is assured (potentially 1-5+ years after beginning of implementation).
         Stay abreast of relevant approval and/or registration processes and submit a Project Plan to the
          appropriate agency or agencies as required.



2     FEASIBILITY PHASE


2.1       Pre-feasibility Stage
Prior to beginning a full feasibility study, there are several benchmarks that can be used to determine,
within broad parameters, if the area under consideration is suitable for a carbon sequestration project. A
project may pass through this first filter yet later be deemed unfeasible due to the outcome of the study.
However, if a project does not meet the basic criteria below, it is highly unlikely to be feasible.


Preliminary Project Site Evaluation
     Habitat Type – What type of forest will be protected and/or planted? Generally, moist forest types
      and mangroves have higher carbon density per hectare, while scrub and arid systems have the
      lowest density. If per hectare carbon values are too low, the project may not be feasible, unless
      a large area of “inexpensive” land is involved.


     Project Size – How much suitable land is available for the project? Whether it is standing forest that
      will be protected or land that will be reforested, projects over 5000 hectares are preferable
      because economies of scale make them less expensive.


     Threat or regeneration barriers – Is the proposed project site under threat? If threat or barriers to
      regeneration cannot be demonstrated, the area is not suitable for a carbon offset project. It
      must be shown that the area would otherwise be deforested. In a reforestation project, current
      land degradation and/or land use must be such that it prevents natural forest regeneration. In
      other words, the proposed project must be shown to provide additional benefits to the remedial
      action.




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                                              Box 2 Site Selection Criteria
Given the current investment and policy environment, and taking into consideration the conservation
goals of project developers, carbon projects that are most likely to be successful have the following
characteristics:

1) The project site should be an area of high conservation priority as determined within a conservation
   or land management plan. Since conservation interests often want to preserve intact functioning
   ecosystems, restoration activities in fragmented areas often make attractive carbon projects.
   Reforestation of non-forested riparian or floodplain areas also make good candidates.
2) Carbon offsets must be at least 50% from sequestration: e.g. if at least half of the project area has
   been completely deforested and will be reforested. From the perspective of many investors, the
   greater the proportion of the offsets from sequestration the better. For projects to be valid under the
   CDM, only areas that were not forest on 31 December 1989 are likely to meet the definitions of
   afforestation and reforestation.
3) It must be easy to demonstrate that the additional carbon storage was made possible by the project,
   not by some other event or opportunity, or by changes in policy or management that have already
   taken place (additionality). The baseline has to be credible and defensible.
4) Biomass and carbon storage will be high relative to the baseline. Moist temperate and tropical
   forests are therefore generally the most attractive.
5) Costs per ton of (CO2) offset are less than US$10. Since most forests will store no more than about
   500 to 740 tons of CO2 per hectare (200-300 tons per acre) at maturity, costs to be covered by offset
   sales should generally be less than US$5000 to US$7400 per ha/US$2000-US$3000 per acre.).
   Many investors would be reluctant to invest in projects at this time unless they cost only about one-
   quarter of this amount ( US$1,00- US$1900 per ha/US$500-US$750 per acre total). In non-forested
   systems that store less carbon, such as grass or scrubands, the value of offsets per area unit would
   be lower still.
6) The project has positive economic impacts on local stakeholders and encourages them to not
   simply move their carbon emitting activities to other locations (leakage).
7) The project area is relatively safe from significant carbon stock loss due to either human or natural
   risks (permanence). In developing countries, having clear land tenure helps.
8) Project co-benefits, such as protection of biodiversity, water quality, and poverty alleviation are
   emphasized and quantified when possible. Projects located in regions that are a priority to
   prospective investors are often looked upon favorably.
9) The project is not of the “one-off” variety but is scaleable to allow for expansion and contraction to
   meet investor needs. This also helps to reduce transaction costs and ensure that the project idea
   provides a replicable model that can be applied at a meaningful scale.

Source: Bill Stanley, The Nature Conservancy’s Climate Change Initiative




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Table 2 provides first order project screening criteria. It is a tool for project developers to begin to ask and answer basic questions about the
viability of a proposed carbon offset project, and to organize the information gathered.


Table 2 – PROJECT SCREENING CRITERIA


   PROJECT NAME __________________________________________

CATEGORIES              Key questions                                                                  Issues to be addressed
1) Additionality        1) What will happen to forest cover on the site if the project is not
                        carried out?
                        2) Is the area officially designated as protected from deforestation?
                        Is forest protection and/or restoration legally required to occur (legal
                        reserve areas)?
                        3) If so, how effective are protection measures?
                        4) Is forest restoration likely to occur in the absence of the project?
                        5) Is there a documentable threat to the area (evidence and/or maps
                        of recent deforestation, public plans to develop area, build a new
                        road, etc.)?
2) Leakage              1) Will the land-use threats to forest cover that are addressed by the
                        project simply find other forested areas to impact?
                        2) Where are these areas likely to be? How far are these from the
                        project?
                        3) What are the current and future land-uses that are being changed
                        by the project?
                        4) Are they being displaced by the project?
3) Reliability          1) What experience does the project executor have with protected
                        areas management?
                        2) Is the land purchasable or otherwise able to be secured?
                        3) What experience does the project executor have with large-scale,
                        long-term, multi-million-dollar projects?
                        4) How stable is the executing group for carrying out a multi-decade
                        project?
                        5) How likely are the project actions to produce the results expected
                        for the project?
                        6) How might local, state or national politics affect the success of the
                        project?
                        7) How might local community issues affect project implementation?



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4) CO2                  1) Do forest inventories of the area (region) exist?
quantification          2) Does the area (region?) have an updated forest cover or
                        vegetation map? (This can be done AFTER the project is approved
                        and financed.)
                        3) Has there been any forestry research carried out on the project
                        area recently?
                        4) Is it possible to estimate accurately the forest-cover and
                        topography (to evaluate risk of deforestation without project) of the
                        proposed project site?
5) Co-benefits          1) What threatened or endangered species or ecosystems will be
                        protected by the project?
                        2) Is this a generally agreed-upon priority area for biodiversity
                        conservation?
                        3) What is the state of conservation in the area’s ecosystems
                        (excellent, good, fair, poor)?
                        5) Are there benefits to downstream human communities from
                        protecting or restoring forest cover on the project site?
                        6) What public relations opportunities exist in the region for a
                        potential investor?

6) Cost-                1) What would it cost to carry out the actions described in the
effectiveness           project?
                        2) What is the average purchase cost per hectare/acre of land in the
                        project area?
                        3) Are only those activities necessary for project success included in
                        the budget?
                        4) Have other funding sources been identified to cover those beyond
                        the value of the carbon offsets, and to deal with potential cash flow
                        problems?
7) Overall/             1) Why is your organization interested in climate action projects?
General?                2) What is special about this area?
                        3) Why is this area appropriate for a climate action project?
                        4) Would your organization be prepared to accept a major
                        investment from a large multinational “polluter?”
                        5) Is your organization able and prepared to take on a project that
                        binds it contractually for 40+ years?




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2.2      Information Gathering

There are several basic information “building blocks” that are essential for completing a feasibility study,
and they are outlined below. Project developers can begin to gather much of this information. After
considering the basic criteria above, project developers may feel that they have a strong project,
however, without the appropriate scientific documentation, a full feasibility analysis cannot be carried out.


                             Box 3 Information Needed for a Feasibility Study

   Biological Description of Project Area – this should include a summary of flora, fauna and habitat
    types in the area that establish its conservation value. Additionally, forestry data is critical for
    establishing baselines for conducting carbon benefit analysis. Further, an assessment of natural risks
    is needed such as if the area if prone to fires, wind damage from hurricanes and the like; project
    areas that are subject to natural damage may be too risky to undertake because of potential loss of
    carbon benefits.

   Land-Use Change Data – satellite imagery and maps are necessary for establishing the deforestation
    trend for the area. This will be used to calculate the “with-project” and without-project” scenarios that
    form the basis of carbon benefit calculations.

   Land Tenure Information – Project developers must be able to determine who owns or controls the
    land proposed for project activities. Whether through fee-simple purchase or an agreement with
    current landowners, the host country’s land ownership system must ensure control of the land
    throughout the life of the project. Without a means to ensure land control, the project is too risky to
    undertake.

   Demographic Trends – A demographic sketch of the region where the project is located is very
    helpful in establishing threat and is also useful in creating “with-project” and “without-project”
    scenarios. Information on growth rates and descriptions of recent immigration or emigration in the
    project area is useful.

   Socio-economic Context – This information should include current economic activities in the area and
    a description of these activities’ impact on natural resources. Also, include trends that describe
    whether the region is prospering or in recession.

   Budgetary Context – In-country project designers will be relied upon to provide input on the basic cost
    of doing business in the project region. Some critical budget line items include land prices, project
    staff salaries, and reforestation costs, which are calculated on a per hectare basis.




INFORMATION NEEDED TO DEVELOP CARBON OFFSET ESTIMATES


As noted, an effective feasibility study will require the assistance of consultant(s) or a project team with a
diverse skill set, including technical expertise in estimating carbon offsets. If consultants conduct the
feasibility study, their work must be supported by information provided by the project developer. This is
particularly true in estimating preliminary carbon offsets. In all international projects, in order to estimate
the carbon offsets, carbon stocks that would have been on the landscape without the project (without-
project measures) are compared to carbon stocks that will be on the landscape with the project (with-



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project measures). Prior to project implementation these estimates are usually accomplished through
desk studies that are based upon information found in published and unpublished literature and
descriptions of project plans and activities. The project developer will need to provide consultants with
descriptions of the project area as well as project plans and activities.
Essentially the project developer will need to define what the project does. Specifically, how would
project interventions affect land cover relative to what would have happened without the project? For a
typical project you need to provide clear descriptions of:


   Current land-use cover
   "With-project" changes in land cover
   "Without-project" changes in land cover


It is critical to provide a clear description of all land-cover types for sites targeted for specific interventions
as well as descriptions of land-cover changes anticipated in both the with-project and without-project
scenarios over the life of the project. The descriptions should be as detailed as possible but may, at a
minimum, consist of simple land-cover classifications such as those available through vegetation maps.
For generating offset estimates, rates of land conversion, degradation, and restoration that would occur
both with and without the project are as important as land-cover descriptions for ecosystem carbon
estimates. In estimating land degradation trends, types and intensity of management that would affect
land cover in the project area (e.g. fuel wood gathering, logging, swidden/slash-and-burn agriculture) are
needed. Rates of 1) deforestation and 2) strategies and rates of reforestation are two of the most
common parameters that must be known to estimate offsets. If the land cover with-project and the land
cover without-project for a particular area is anticipated to be the same over the life of the project, the
project has no effect on carbon and no offsets would be anticipated. Areas like these are not of particular
concern to the carbon expert.
One of the best ways to organize the information is by using a spreadsheet with column headings that
include current land cover, anticipated with-project land cover or reforestation trends, and anticipated
without-project land cover or conversion trends. This should be accompanied by notes on the sources
used to develop assumptions, and if practical, copies of articles or other information used in the
assessment. Maps of the project area, with areas of specific project interventions outlined, are also
extremely helpful.
Table 3, below provides a summary of the categories of information needed to develop offset estimates.
Hypothetical data is included that might emerge from carbon offset estimates for a 30-year project,
consisting of forest conservation and reforestation. In this hypothetical project area, agricultural
conversion is the primary threat to forests. The area being protected includes various forest types and
ages as well as natural shrub lands. If implemented, the reforestation component of the Project would
take place on degraded areas that are no longer under agricultural production. Specifically, the offsets for
this Project would come from:


Component A – Protection: Averting the conversion of forests and natural shrub lands to agricultural
uses. In this component, the without-project land cover at the end of the project period would have been
agricultural land. In contrast, the with-project land cover would be natural forests and shrubland.
Component B – Reforestation of degraded lands. In this component the without-project land cover at the
end of the project period would have been agricultural crops, bare degraded lands, and some natural
regeneration consisting of grass and small shrubs, while the with-project land cover would be restored
forest.




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                                     Table 3 - Information to Develop Offset Estimates – Sample Data Inserted
Project Name:                      [INSERT NAME]
Location:                          [INSERT LOCATION]
Project Length:                    [INSERT PROJECT
                                   DURATION]

   Name of             Project   Land Area Current Land            Without-Project                 With-Project                     Notes
  Project Site      Intervention    (ha)      Cover                   Scenario                      Scenario

Site 1             Protection           5,400 mature tropical 1.2 % deforestation       same as current land Deforestation rates from [INSERT
                                              wet forest      per year. Conversion      cover, no deforestation SOURCE]. Crop conversion percentages
                                                              to crops according to                             provided by [INSERT SOURCE].
                                                              details provided in                               Deforested areas are converted to particular
                                                              notes.                                            crops according to the following proportions:
                                                                                                                rice = X%; potato = X%; yucca = X%;
                                                                                                                banana = X%; coffee = X%, etc.
Site 2             Protection          13,660   secondary       1.2 % deforestation/yr. no deforestation,       See notes for site 1.
                                                tropical wet    Same conversion         natural regeneration
                                                forest          assumptions as above.
                                                                Areas not converted
                                                                undergo natural
                                                                regeneration.
Site 3             Protection          10,300   natural shrub 1.2 % deforestation/yr. same as current land See notes for site 1.
                                                lands           Same conversion         cover, no deforestation
                                                                assumptions.
Site 4             Reforestation        1,300   grassy          same as current land reforestation with         Planting will begin in the 3rd year of project
                                                degraded land cover                     native species - 162.5 implementation.
                                                                                        ha/yr.
Site 5             Protection          66,080   mature tropical 1.2 % deforestation/yr. same as current land See notes for site 1.
                                                moist forest    Same conversion         cover, no deforestation
                                                                assumptions.
Site 6             Protection           8,160   secondary       1.2 % deforestation/yr. natural regeneration, See notes for site 1.
                                                tropical moist Same conversion          no deforestation
                                                forest          assumptions. Areas
                                                                not converted undergo
                                                                natural regeneration.




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Site 7             Reforestation   1,300 shrubby        same as current land     reforestation with     Planting will begin in the 3rd year of project
                                         regeneration   cover                    native species - 162.5 implementation.
                                         averaging 15                            ha/yr.
                                         years old




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The following provides a closer look at the categories of information needed.


Descriptions of Current Land Cover
The carbon expert uses descriptions of all current land-cover types in offset-generating areas to help
determine potential carbon sequestration. A common mistake for carbon project managers is to try to
provide the expert with specific forest inventory data and fail to provide other, more important,
information. It is usually not a good use of a project manager's time or finances to take field
measurements or make separate estimates of biomass or carbon during the feasibility or proposal stage.
If there is no specific inventory information for the project area, the carbon expert will estimate ecosystem
carbon using information in the literature – this is one of the expert’s primary skills. However, if forest
inventory information is already available it will help the carbon expert to increase the accuracy of the
offset measurements and should be provided. The carbon-offset estimates are sensitive to the data
derived from the descriptions of areas targeted for protection, so care must be taken to provide the best
information available.


Descriptions of With-Project Changes in Land Cover
Land-cover changes that result from project interventions will obviously factor into the carbon offset
estimates. During the early stages of a project, the with-project scenario estimates over the life of the
project are based upon project strategies and plans. As the project is implemented, these changes will
be monitored on the ground, and projections into the future will be verified and updated.


Protection Component
When mature forests are protected there should be little change between present and with-project land
cover over time: perhaps a relatively small increase. However, when secondary forests are protected,
some natural regeneration should be anticipated.


Reforestation Component
To determine the amount of sequestration that would occur through forest restoration, a description of the
areas targeted for reforestation, rates of planting, species planted and/or growth rates are needed. Often,
species to be planted have not been determined in the feasibility study stage of a project. If this is the
case, the carbon expert should use growth rates typical of the region.


Descriptions of Without-Project Changes in Land Cover
An assessment of what would have occurred without the project is most often called the baseline and is
often the most challenging aspect of generating an offset estimate, particularly for projects that seek
offsets through reductions in emissions (e.g. avoided deforestation projects). The without-project
scenario has to be described both for areas targeted for protection, and those targeted for reforestation.


In finding deforestation or logging data for the project, try to find data that is very specific to the project
area. Regional and national information may also be helpful (including forestry laws that dictate
maximum harvest rates or minimum legal diameters that may be cut). An analysis of a time series of
remotely sensed data (e.g. data from 1970, 1980, 1990, and 2000) may be used in conjunction with
Geographical Information Systems (GIS) to evaluate deforestation rates
Potential sources of information for baseline projections include:
 Agricultural growth patterns
 Dept of forestry data
 Remote sensing data of land cover trends
 Population growth statistics


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Population growth data may be used in conjunction with deforestation rates to determine whether there is
a correlation. Declining populations might suggest that the deforestation rates would decline in the future,
with or without the project, while population growth suggests that deforestation rates would increase. For
a feasibility study, conservative estimates should always be used. A projected increase in deforestation
rates, relative to historical trends, would be warranted only in extreme cases, or if available information
showing the potential increase is extremely compelling.
It may be helpful, but is not absolutely necessary, to provide this type of population information to the
carbon expert. It is of use to in verifying that population growth, and associated deforestation rates, are
not decreasing in the project area. This deforestation rate, along with the total areas and land cover
types targeted for conservation, are what the carbon expert needs. If you have information that indicates
that particular land cover types are preferred for conversion, that information should also be provided.
Descriptions of land-cover types that would replace the areas being protected if the project were not to
take place (the without-project land cover) are also required.


This information can then be presented to the carbon expert in a variety of ways: oral communication
through face-to-face meetings or telephone conferencing, piecemeal information through writing, one
consolidated written document, or a combination of these. Check with the carbon expert to determine the
expert’s availability and time constraints, and this will help you to determine the best strategy. Ideally you
will be able to provide the information in a comprehensive and consolidated written format and follow up
submittal of the written information with a face-to-face oral description and discussion of the project and
assumptions that went into your assessment of changes in land cover caused by the project. If you are
working under a tight deadline, you should not necessarily wait until you get all of the information before
you start submitting it to the carbon expert.


2.3       Sustainable Development
A key aspect of the Clean Development Mechanism is its requirement to assist developing countries in
“achieving sustainable development.” In a project site, this often means working with local communities
to promote local social and economic benefits. Working with local communities is also a necessary step
in counteracting leakage. A project is not successful unless it has the support of the local community and
adequately addresses local land-use demands. The objectives of the community development
component is to foster good working relationships with the local community and other primary
stakeholders, reduce leakage, improve sustainable forest management and build local ownership of the
project.


Key questions that project staff should ask at each stage of project development include:


     What is the strategy for community participation within the project?
     How can we build trust with the community?
     How do we design projects to prevent leakage and ensure local economic development?
     Can renewable energy technologies help counteract leakage and provide low carbon energy needs to
      the local community?


In order to address these issues, a stakeholder analysis should be undertaken in the project design
phase. All stakeholder groups should be defined as either primary or secondary stakeholders. Primary
stakeholders are those that are affected by the project and have a physical relation with the project area.
Local communities and other groups that use forest resources in the project area are primary
stakeholders. The next stage of the analysis should be to identify stakeholders’ interests relevant to
the project goals, and assess the likely impact of the project on these interests. Expected impacts can be
classified simply into positive, negative, and uncertain.


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In the hypothetical example set out in table 4, a forest-based carbon offset project seeks to replace
destructive logging and agricultural practices with sustainable forest management and regeneration to
sequester carbon. The project area contains indigenous and non-indigenous populations, while the
surrounding buffer zone contains small-holder farmers. Logging companies have concessions within the
project area, and are influential in municipal and state politics.



             Table 4 Stakeholder Interests for a Typical Climate Action Project

      Primary Stakeholders                          Interests                   Project Impact
Residents in project area             Maintenance of forest                   (+)
                                      Security of land tenure                 (?)
                                      Unlimited and exclusive use of          (-)
                                      forest resources
                                      Improved incomes, health care and       (?)
                                      education
Villages around project area          Security of tenure                      (?)
                                      Access to forested land for swidden     (-)
                                      agriculture
                                      Improved incomes, health care and       (?)
                                      education
Local indigenous community            Maintenance of forest                   (+)
                                      Security of land tenure                 (?)
                                      Unlimited and exclusive use of          (-)
                                      forest resources
                                      Improved incomes, health care and       (?)
                                      education

Timber concessionaires                Income generation                       (?)
                                      Continued logging.                      (-)
Downstream urban community            Watershed protection                    (+)
                                      Recreational access to forest           (+)
Local political elites                Maintenance of power in rural areas     (-)


Secondary Stakeholders                Interests                               Project Impact
Forestry Department                   To maintain forests                     (+)
Municipal government                  Increased municipal income              (?)
Local conservation NGO                Increased biodiversity conservation     (+)
National Indigenous Agency            Improved welfare and rights for         (+)
                                      indigenous peoples
State University                      Involvement in research                 (+)
                                      Opportunities for students
Table 4 identifies stakeholder interests and evaluates the impact of project objectives upon them.


Interests with which project objectives will definitely conflict, are indicated by a negative sign (-), and
interests that benefit project objectives are indicated by a positive sign (+). Stakeholder interests which


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may conflict with project objectives, but which the project maybe able to benefit through the design and
implementation of specific activities are denoted by a question mark (?).
In the case shown above, the project will have a negative impact on all primary stakeholders who
currently practice unsustainable forest management (e.g. continued logging by timber concessionaires)
and it will challenge the power of local political élites. But it will have a beneficial impact on the interests
of the downstream urban community, who currently use the forest sustainably for watershed protection
and recreational value.


Once this understanding of stakeholders, their interests relevant to the project, and the impact of these
interests are clear, strategies can be developed to compensate primary stakeholders adversely affected
by the project. For example, specific project activities may be designed to improve the security of land
tenure, incomes and health care of residents in and around the project area. This will compensate them
for the negative impact of restricting the management of forest resources.
Participative research techniques can be used to gather further relevant information and strengthen
working relations with the primary stakeholder groups with whom the project wishes to engage. Well
structure research will seek to answer the key questions that the project team has about stakeholder
livelihoods, interests and management of forest resources.


                     Box 4 Social and resource mapping for climate action projects.
Participants are divided into groups of men, women and children. Each group is given a large blank piece
of paper and some colored pens. They are asked to draw a map of the locality including all the dwellings
in the area. The maps will highlight features in the community and surrounding environment which are
importance to each group. Each group is then given six sticky labels (three blue and three red) and
asked to identify the three best places on the map, together with the three worst places.
The maps provide an understanding of how the different groups perceive their environment and what they
consider to be its positive and negative features. The men’s map may have a completely different
dimension and features to the women’s map. That of the children may be different still. A skilled facilitator
can then stimulate a group analysis of the differences, which will explore different roles in resource
management, relations with other villages, the needs and aspirations of the community. The exercise will
also provide a detailed understanding of the local socio-economic context.
This exercise may be used as an introduction to a more sophisticated analysis of community resource
management using transparencies overlaid on aerial photographs or printed maps.




Sustainable development is a requirement of the Kyoto Protocol and entails integrating three objectives –
environmental, social and economic. It is important not to make the mistake of treating sustainable
development as an "environmental" concern only – this can cause social or economic problems. The
following list contains questions to consider when determining if project activities promote sustainable
development at multiple levels.




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                      Box 5 Balancing sustainability issues at different levels:
Project:

 What are the impacts on local livelihoods and assets?
    Will land tied up in forestry affect an area's food security?
    How will forestry schemes affect the demand for labor at certain times?
    Which types of investment could improve local skills and capacities?
    Will management for increased carbon storage reduce income from timber?

 How well are soil and water managed?
    What scale and type of afforestation will best fit with the pattern of local farming?
    Where might afforestation reduce water availability?

 How are employees being treated?

Key question: Is the scheme using best locally appropriate practices?


National
 What is the program's contribution to poverty reduction and employment?
 Does it empower marginalized groups?
 What are the effects on tax revenues and export earnings?
 Does the program improve or transfer technology?


Key question: Is the program contributing to national visions and plans for sustainable development


Global
 Does it improve equity in development between countries and issues concerning global public
   services?
Key question: Does the program reflect international norms and obligations on human rights,
environmental and economic development?



Adapted from IIED: Laying the Foundations for Clean Development: Preparing the Land Use Sector


The Forest Stewardship Council (www.fscoax.org) maintains a set of principles and associated criteria
for sustainable forest management covering social, environmental and economic factors.




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2.4       Terms of Reference for Carbon Offset Project Feasibility Study
This document describes the terms of reference for proposed activities to be carried out by
[CONSULTANT] on behalf of [CONTRACTOR], with the objective of identifying and assessing the
feasibility of a forest-based carbon offset project at [FILL IN SITE NAME] that would:


     generate permanent and verifiable greenhouse-gas reduction benefits, and
     provide funding for protection and/or ecosystem restoration in the study area


The product to be delivered by [CONSULTANT] would describe possible project options such as forest
conservation and restoration with native species, quantify the likely carbon benefits that would result from
each option, and make recommendations for the implementation of a carbon offset project that would
provide multiple biodiversity conservation, sustainable development, and greenhouse-gas (GHG)
mitigation benefits. It is expected that this study will define and identify the investment criteria needed by
potential investment decision-makers to justify a multi-million-dollar investment in GHG mitigation actions
that improve the global environment.


TASKS

1. Literature search, expert interview, data collection

      The contractor will conduct a literature survey, interview experts, and collect data on the following for
      the study area:
   Protection and/or ecosystem restoration strategies and
   Protection and/or ecosystem restoration costs for various strategies and methods
   Land use and Land tenure
   Existing biomass and growth yield curves for ecosystem types
   Biomass to carbon ratios for ecosystem types
   Carbon measurement, monitoring, and verification techniques and costs for ecosystem types
   Spatial data layers for the study area including:
       Land cover (preferably Landsat images) images, pre-1990 (but close to 1990) and as close as
        possible to the current year
       Digital elevation models
       Soil types
       Roads
       Demographics: population centers, migration patterns

2. Baseline development


The contractor will build a land management trend model using available spatial data. If not previously
done by others, the contractor will delineate the vegetation types and land uses of the study area by
working with local experts to interpret the land cover images. The contractor will then build a land
management trend model using the available spatial data. This model will be used to project the rate of
land use and vegetation change, to establish a baseline scenario for carbon storage and uptake in the
study area.

3. Estimate of growth rates/carbon stored and sequestered




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On the basis of the data gathered, the contractor will provide estimates of carbon stored in the study area
1) currently, 2) in the baseline scenario (projected out 70 years), and 3) with the implementation of the
carbon sequestration project (protection and/or restoration – projected across 70 years). The contractor
will then estimate the net carbon benefits of carbon sequestration project activities, or "additionality" (with
project scenario minus baseline scenario) in the study area. These initial estimates of carbon benefits
may require additional in-depth analysis during a subsequent project development phase to revise these
first-order estimates. The consultant will indicate in the final report what additional work if any will be
needed. The parameters and data for this estimate will be entered into MS Excel software, which will be
able to be used to evaluate new, similar project ideas after the development of this feasibility study.


4. Estimate of project costs


Using the data gathered, the contractor will create a budget for the estimated carbon sequestration
project costs, showing startup costs, long-term costs, expected annual cash outflows, and total project
costs. The budget assessments will be developed using MS Excel software, which will be able to be
used to evaluate new, similar project ideas after the development of this feasibility study.



5. Estimate of cost/ton of carbon


The contractor will provide an estimate of the cost per ton of carbon sequestered for the carbon
sequestration project for the study area. The parameters and data for this estimate will be entered into
MS Excel software, which will be able to be used to evaluate new, similar project ideas after the
development of this feasibility study.


6. Permanence assessment


The contractor will assess the permanence risks for the project implementation strategies, including an
assessment of the risks from natural events.


7. Leakage assessment


For project activities to be considered creditable, they must be shown to have not simply transferred
carbon emissions to another area. The contractor will identify and quantify the leakage risk for proposed
project activities (positive and negative) and propose options for management of leakage.


8. Co-benefits assessment


The contractor will recommend project activities that in addition to providing GHG mitigation, maximize
multiple benefits in terms of biodiversity conservation, sustainable development and environmental
services as much as feasible without severely reducing the cost-effectiveness of the project in terms of
carbon capture. In the final report, the consultant will list and describe the multiple economic benefits
(positive and negative) that will result from project activities, and the biodiversity benefits of the carbon
sequestration project in the study area.


9. Reliability




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This component covers the likelihood that project activities will provide the expected carbon benefits, as
well as the institutional arrangements that are most advantageous to guaranteeing the production of
these benefits. The consultant will propose the best assignment of responsibilities for project execution to
assure the generation of the expected benefits.


10. Monitoring protocol


The final report will propose and cost out a monitoring protocol adequate to confirming the carbon
benefits of the project.


11. Investment potential assessment


The consultant will gather the information necessary for potential project investors to evaluate project
options and costs and make investment decisions. The financial assessment will include a thorough
evaluation and breakdown of the costs and benefits for each identified project option. This assessment
will take into account the other assessments in this feasibility study (cost/ton of carbon, permanence and
leakage risks, co-benefits, etc) and current and future carbon market and policy conditions. The
contractor will provide an assessment of the likelihood of investments in the project.


12. Next steps


The contractor will recommend specific next steps to establish a carbon sequestration project in the study
area.


DELIVERABLES

1. Feasibility study. The contractor will submit a preliminary report capturing all of the task points
   outlined above to a review team for comments and discussion prior to the finalization of the report.
   The contractor will submit a final report in written and electronic form. The final report will contain an
   executive summary and the fully body of the report.
2. Baseline report. The contractor will write a report explaining in detail each step in the creation of the
   baseline model. This report will contain the parameters used in the baseline projection, and copies of
   all baseline components (including spatial layers) will be submitted electronically.
3. Maps. The contractor will submit electronic and hard copies of maps delineating the study area, the
   land use and vegetation types, and land use and vegetation types in baseline and with-project
   scenarios.
4. MS Excel spreadsheets. The contractor will provide in electronic form the MS Excel spreadsheets
   that were used to calculate the project cost, carbon sequestered, and cost/ton of carbon sequestered
   estimates. These spreadsheets will be used to evaluate new, similar project ideas after the
   development of this feasibility study.

The feasibility study will be implemented during the period [FILL IN]. A preliminary report will be due on
[FILL IN DATE] and a final report will be due on [FILL IN DATE]. The level of effort will require a total of
[FILL IN #] contractor days. The budget for carrying out these activities is [FILL IN].




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                                             Box 6 Capacity Needs
In-country project staff will require a diverse skill set in order to complete a feasibility study including:

     Project activity design – Project designers must determine what combination of project activities will
      ensure a carbon benefit while at the same time be technically feasible in the project area. Skill areas
      include conservation planning and management, business planning and specialized forestry technical
      assistance such as conducting carbon sequestration estimates, developing monitoring protocols, and
      projecting baseline scenarios.

     Institutional capacity assessment – Once technically feasible project activities are identified, project
      designers must assess whether organizational capacity in the project region is sufficient for
      implementing the project activities.

     Stakeholder liaison – In-country staff or a trusted partner organization must be able to interact with
      local people in the proposed project area and effectively gauge their level of interest in the project.
      This is a delicate undertaking because one must sufficiently describe the project yet not unduly raise
      expectation levels.

     Scientific assistance – It is helpful if a local technician familiar with the region’s plant and tree species
      can interact directly with the consultant who will determine the project’s carbon benefit.

     Government relations – Host country support is necessary prior to implementing a carbon
      sequestration project. In-country project designers should engage appropriate government officials
      during feasibility analysis to ensure their support of the project.

     Other technical skills needed to complete a feasibility study in initiate project development can
      include: business administration and proposal writing, policy and legal expertise, climate change
      technical advisor, financial management, and GIS.




2.5       Carbon Project Calculator
The carbon project calculator is a powerful spreadsheet tool that enables users to estimate the potential
carbon tonnage sequestered from a specific project area – the Atlantic Rainforest of Brazil – and the
associated costs of developing and implementing the project. The calculator is intended to produce first
cut estimates for a forty year project feasibility study.


** THIS TOOL IS SPECIFICALLY CALIBRATED FOR THE BRAZILIAN ATLANTIC RAINFORESTS. IT
WILL NOT GIVE ACCURATE CARBON ESTIMATES FOR DIFFERENT FOREST TYPES. HOWEVER
IT CAN HELP YOU THINK THROUGH THE KINDS OF CALCULATIONS NECESSARY FOR CARBON
ESTIMATES, AND BE USED TO GIVE A VERY ROUGH PRELIMINARY INDICATION OF THE
FEASIBILITY OF YOUR PROJECT.**


Click here to access the worksheets and instructions or open it from the worksheets in the Annex.



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Important: note that you can not change the name of this file because some macros (embedded
programs) are related to the file name.




2.6       Leakage Tools
A forest-based carbon offset project could potentially influence land-use patterns not only within the
project site but also in surrounding areas. Land that is placed under conservation protection limits the
amount of land that can be used for agricultural production, logging, and industrial uses. As a result,
stakeholders affected by land-use changes may begin clearing other land outside project boundaries to
meet their need for timber and other forest products, as well as for food production or other economic
needs. For example, a logging concession displaced by a carbon-offset project may merely move its
operations to another area, not reduce logging activities or improve sustainable logging practices.
Without careful planning, design, and implementation, the project may have difficulty demonstrating a
“net” reduction in carbon.
This phenomenon of shifting land development and resultant greenhouse gas production is known as
“leakage” or “activity-shifting". Leakage is the unintended loss or displacement of estimated
greenhouse gas benefits.
Successful carbon offset projects must identify, measure, and address potential secondary impacts,
including those that might occur off-site. Project implementers are required to make estimates of
“leakage.” Since projects can only take credit for incremental carbon emissions reductions, emissions
reduction estimates must be decreased by the amount of leakage detected or anticipated.


To avoid leakage or minimize its risk at the project level, we recommend:

     Project sponsors should ensure that local people and small landowners are involved in project design
      and implementation, and are given incentives to help guarantee project success (e.g. sustainable
      agricultural training and resources, a renewable energy component, alternative livelihood
      opportunities, etc.).
     Integrate project design with national and priorities and legislation.
     Develop and implement a fire protection plan.
     Project design should identify and effectively deal with the root causes of land-use change (e.g.
      logging, agriculture, etc). For a more comprehensive summary of primary drivers of land-use change,
      potential leakage effects, and strategies to address those threats.
     Ideally, project boundaries should be large enough to encompass potential activity-shifting caused by
      the project, so that overall net carbon benefits are measured by the project.
     Projects should use transferable technologies, so as not to restrict benefits to a limited area. In this
      way project benefits can be duplicated elsewhere ("positive leakage").
     Baseline assumptions (the "without project" scenario) must be carefully investigated and
      documented.
     Projects should determine if the leakage is small or large. If leakage is significant and measurable,
      then the project should undertake cost effective and practicable mitigation and should debit offsets for
      any remaining impacts.


Table 5 provides an index of the various leakage risks associated with different land use project types,
and the potential strategies for mitigating those risks.




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     Table 5: Leakage Index


Primary Drivers                                               Conditions
                        Market             Project                                 Potential Net
  of Land-use                                                  Signaling                                      Strategies
                      Boundaries         Components                                   Effect
    Change                                                   Leakage Risk


Agricultural Land   Subsistence for    Increased            Increase output     Moderate                  Protect adjacent
                    local use          agricultural         but free            Leakage                   forests;
                                       productivity         resources for                                 Implement
                                       through green        development on                                sustainable
                                       cover crop           adjacent lands                                forestry;
                                       cultivation,                                                       Introduce
                                       agroforestry, soil                                                 ecotourism
                                       conservation
                                       practices, or
                                       other measures
                                       Forest               Decrease            High leakage              Create
                                       preservation         agricultural                                  alternative
                                                            output                                        income source
                                                                                                          (i.e. non-timber
                                                                                                          forest products);
                                                                                                          Add agricultural
                                                                                                          productivity
                                                                                                          component

                                                                                Moderate                  Protect adjacent
                                       Increased            Free resources      leakage
                                                            for development                               forests;
                                       agricultural                                                       Implement
                                       productivity         on adjacent lands
                                                                                                          sustainable
                                                                                                          forestry;
                                                                                                          Introduce
                                                                                                          ecotourism
                    Local, regional,
                    or global export



                                                                                High leakage
                                                                                depending on              Create
                                       Forest               Decrease            where activity            alternative
                                       preservation         agricultural        shifts                    income source
                                                            output
                                                                                                          such as
                                                                                                          sustainable
                                                                                                          forestry




Fuel wood           Local use or       Agroforestry,        Common              Moderate                  Employ
                    regional market    Re/afforestation,    property            leakage potential         transferable
                                       Windbreaks           resource; Offsite                             technology (i.e.,
                                                            market demand                                 solar power, fuel
                                                                                                          stoves)


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Primary Drivers                                                          Conditions
                           Market                 Project                                   Potential Net
  of Land-use                                                             Signaling                                    Strategies
                         Boundaries             Components                                     Effect
    Change                                                              Leakage Risk
                                              Fuel stoves             N/A                N/A                       N/A


Timber                Local use               Sustainable             Decrease short-    Short-term                Re-estimate
                                              forestry                term timber        leakage                   project impacts
                                              (Reduced impact         output                                       over short-term;
                                              logging, Natural                                                     Develop
                                              forest                                                               alternative timber
                                              management                                                           sources such as
                                                                                                                   plantations on
                                                                                                                   marginal land


                                                                      Decrease long-     Leakage                   Re-estimate
                                                                      term timber        throughout                project impacts
                                                                      output             project life. (High)      over short-term;
                                                                                                                   Develop
                                                                                                                   alternative timber
                                                                                                                   sources such as
                                                                                                                   plantations on
                                                                                                                   marginal land
                                              Forest                  Decrease or halt   High degree of            Develop
                                              preservation            timber output      leakage                   alternative timber
                                                                                                                   sources such as
                                                                                                                   plantations on
                                                                                                                   marginal land;
                                                                                                                   Introduce
                                                                                                                   sustainable
                                                                                                                   harvest in buffer
                                                                                                                   areas


                      Export                  Sustainable             Decrease short-    Short-term                Re-estimate
                                              forestry                term timber        leakage                   project impacts
                                              (Reduced impact         output                                       over short-term
                                              logging, Natural
                                                                      Decrease long-     Long-term                 Re-estimate
                                              forest
                                                                      term timber        leakage                   long-term project
                                              management)
                                                                      output                                       impacts

                                              Forest                  Decrease or halt   Leakage                   Develop
                                              preservation            timber output                                alternative timber
                                                                                                                   sources such as
                                                                                                                   plantations on
                                                                                                                   marginal land
     Source: Paige Brown, Bruce Cabarle, and Robert Livernash, “Carbon Counts: Estimating climate change
     mitigation in forestry projects.”




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2.7       Project Marketing and Proposal Development


Once the feasibility study data has been gathered and analyzed and if it appears that a carbon offset
project is viable, the data should be developed into a brief outreach piece that can be used to market the
project to potential investors. An example of a "project term sheet" providing the basic information about
a carbon offset project in clear and simple format is provided in the Appendix section 2 – click here.


A project proposal summarizes information gathered in the feasibility study and can expand on project
design concepts by:


     outlining specific project activities
     defining a yearly timeline
     refining carbon estimates
     developing a detailed budget


Tasks involved in developing a project proposal include:


     Assign responsibilities between project developer and consultants early on
     Contract consultants to calculate carbon estimates
     Seek advice and clarity on legal aspects from outset
     Compile supporting documents and appendices
     Specify timeline and deliverables



3     IMPLEMENTATION


3.1        Legal Agreements

3.1.1     Letter of Agreement
The Letter of Agreement (for feasibility study funding) is an informal letter acknowledging and thanking
the prospective investor. At this stage, the project developer has discussed the potential carbon offset
project with a prospective investor. The investor has agreed to fund a feasibility study in order to assess
the probability of success of such a project. The Letter of Agreement (“LOA”) typically mentions the
amount from the investor for the feasibility study, as well as the key components of the feasibility study. It
should include request for signature, as well as information on where to send payment, etc. Because this
Letter confirms the financial participant’s commitment to funding a feasibility study, it requires a returned
signature of the financial participant. A template for a Letter of Agreement can be found in Appendix
section 3.1




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3.1.2     Memorandum of Agreement
The Memorandum of Agreement (“MOA”) outlines relationship between the project developer, the
financial participants, and partners between the period of the feasibility study and the official start of the
project. The MOA is an agreement among parties to develop a Project Proposal, and to establish the
terms of such a proposal, and to confirm the financial participant’s commitment to fund the Project
Proposal. The MOA stipulates that the Project must obtain approval from the appropriate government
agency. A description of the main sections of a Memorandum of Agreement can be found in Appendix
section 3.2


3.1.3     Comprehensive Agreement


The Comprehensive Agreement is the working document for the actual carbon offset project. The
Comprehensive Agreement identifies all parties to the project, their specific roles and commitments. It is
a contract and sets forth the project objectives, project governance and project finance terms. The
Comprehensive Agreement should be specific and detailed so as to prevent any future
misunderstandings. A description of the main sections of a Comprehensive Agreement can be found in
Appendix section 3.3. The comprehensive agreement is an example and should be modified as
appropriate for each project.




3.2       Monitoring and Verification protocols

3.2.1     Protocol


Monitoring and verification is essential to ensure the credibility of projects. Experts will be required to
estimate accurately the amount of carbon sequestered by the project. Monitoring and verification
activities involve the creation of a “baseline scenario” that illustrates what would have happened at the
project site without the intervention.
As the carbon market develops there needs to be a reliable method for measuring the GHG benefits of
carbon storage projects. Monitoring and verification activities will need to measure the amount of carbon
emissions reduced, avoided or sequestered over the course of the project. Winrock International Institute
for Agricultural Development has developed and implemented a rigorous protocol for carbon monitoring
and verification based on a peer-reviewed, field-tested methodology.
Monitoring refers to assessment of the net difference in organic carbon stored in soil and forest biomass
for project and non-project (or pre-project) sites over a specified period of time. The difference in carbon
available, reduced, or mitigated is the amount of carbon sequestered (GHG benefit) by the project.
Verification refers to an independent review of carbon monitoring methodologies, records and
inspection, and calibration of measurement and analytical tools, similar to an accounting audit performed
by an objective party.

Under the protocol developed by Winrock, in order to calculate the carbon benefits of a forestry or
agroforestry project, the following steps should be taken:

      1. Establish a carbon baseline. Through the use of permanent forest measurement plots, satellite
         imagery, etc., quantitatively determine how much carbon exists in the project area.
      2. Establish a reference case. Quantitatively determine what would have happened to the land
         without the project, and establish data collection on plots of land representing this “without-the-
         project” reference case.


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                                                                                              Carbon Offset Projects



      3. Estimate the difference between the baseline and reference case. Using sound assumptions,
         determine, for example, how many tons of carbon offsets will be generated from the project by
         calculating how much more carbon will be sequestered, or how much carbon will not be released
         due to prevention of deforestation. Field based sampling includes measurement of above ground
         biomass, leaf litter, soil carbon and estimates of below ground biomass.
      4. Re-measure the carbon in the project area. Every 2-5 years over the project life, “true up” the
         original assumptions about how many offsets will result from the project.




4     REFERENCES


4.1      References

Brown P., B. Cabarle, and R. Livernash. 1997. “Carbon Counts: Estimating climate change mitigation in
            forestry projects.” World Resources Institute.


CIFOR. Capturing the value of forest carbon for local livelihoods.


IIED. 2002. "Laying the Foundations for Clean Development: Preparing the Land Use Sector – A quick
            guide to the Clean Development Mechanism". IIED natural resource issues paper


Landell-Mills, N., and I. T. Porras. 2002. "Silver bullet or fools' gold? A global review of markets for forest
             environmental services and their impacts on the poor". IIED.


MacDicken K. G. 1997. "A Guide to Monitoring Carbon Storage in Forestry and Agroforestry Projects".
           Winrock International Institute for Agricultural Development.


Smith J., and S. J. Scherr. 2002. "Forest Carbon and Local Livelihoods: Assessment of Opportunities
            and Policy Recommendations". CIFOR Occasional Paper No. 37.



4.2      Web Sites


www.prototypecarbonfund.org


www.biocarbonfund.org


www.chicagoclimatex.com


www.carboncredits.nl


www.unfccc.org




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5    APPENDIX

Click here to see the Appendix to the Carbon Offsets Projects Chapter


Includes:
 CDM Project document
 Sample Project Term Sheet
 Legal Documents
 Glossary of terms




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