This column provides informative commentary on business and financial matters and is written by Patrick van Beek, Managing Proprietor of Caribbean Actuarial & Financial Services.

Introduction

On first inspection the idea of giving credit to those who pollute less and penalise those who pollute more seems to be a strong incentive to reduce the overall levels of pollution. The Kyoto Protocol has as its aim to reduce the emissions of greenhouse gases by industrialised countries by an average of 5.2% compared to 1990 between 2008 and 2012. One of the mechanisms envisioned is the Clean Development Mechanism (CDM), which allow those who produce more greenhouses than their target to offset the excess against investments in emissions reductions projects. The CDM Executive Board has a procedure to register such projects, leading to Certified Emission Reductions (CERs). Thus a market is born, project participants will seek to sell their CERs to excess polluters looking for credit.

CDM projects can broadly be broken down into two categories: those which avoid or reduce emissions, for example though the replacement of fossil fuel power generation with renewable sources and so called "carbon sinks" formally referred to using the somewhat tongue-twisting acronym LULUCF "Land use, land use-change and forestry" which seeks to lock up carbon in the atmosphere typically through the planting of trees.

The market

It may be tempting to think that while in theory this is a great idea putting it into practice is something else. Yet there has been trading in carbon emissions in Europe on several exchanges for nearly two years now; though as the following graph shows, the price has been extremely volatile and the bottom fell out of the market earlier this year with a 60% fall in little more than a week. Although the market rebounded somewhat, since then there has been a steady decline and current price is close to an all time low.

Spot price 1 tonne carbon (European Union Emissions Trading Scheme)

Source: www.pointcarbon.com

Opportunities for CDM Projects

While renewable resources are looking attractive anyway given the high price of oil it is somewhat surprising that investments in hydropower here in Guyana are not being planned in tandem with CDM certification. If a hydropower project is planned anyway, why not sell the credits and garner an additional return on the investment?

I believe that the potential for CDM energy projects in Guyana is limited, given the small amount of fossil fuels used here, though the electricity generation at Skeldon using renewable sources would also warrant certification.

Where Guyana has a great potential is in the area of LULUCF, such as Afforestation and Reforestation'. 'Afforestation' is the direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural seed sources. 'Reforestation' is the direct human-induced conversion of non-forested land to forested land through planting, seeding and/or the human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land. In the first commitment period (2008-2012) reforestation activities will be limited to reforestation occurring on those lands that did not contain forest on 31 December 1989.

One area where I strongly disagree with the framework outlined by the CDM is that afforestation and reforestation are the only LULUCF activities eligible to produce CERs in the first commitment. Thus no credit is given to maintaining existing forests, surely a large oversight, particularly when faced with an economic decision of whether or not to fell trees. If credit is given for not felling them then there is some incentive to keep as much of our rain forest as possible intact.

Types of Afforestation and Reforestation activities

Agroforestry is essentially the integration of trees on existing farmland, thus providing a mix of agriculture and livestock and CDM activity. Along with the CERs generated comes the opportunity to utilise the trees to further enhance income - for example planting of coconut palms. I think this area has great potential in Guyana where we have large existing areas of farmland and trees could be planted on the periphery.

Plantations have come under negative press from organisations such as FERN and SinksWatch who argue that large-scale monoculture tree plantations do far more damage to the local environment than any offset to carbon emission in developed countries (they argue that by allowing offset this actually encourages the countries buying the credits to continue to pollute rather than cut their own emissions).

Forest landscape restoration describes the process of rebuilding previously forested areas. In contrast to the plantation approach, this approach seeks to build a much closer environment to that which was originally forested. This may be difficult in Guyana given the long time it takes for hardwoods to grow.

Combining elements of all three of the above Community forestry contributes to the sustainable livelihoods of rural people.

Finally Biomass energy projects serve the production of energy in the form of electricity, solid, liquid or gaseous fuels and heat, which is based on biomass. The Skeldon project would also qualify here.

Certification

I can imagine that obtaining certification for Guyanese projects will involve considerable challenges, not least due to the potential for fraud and corruption. There are considerable legal issues which need to be addressed, particularly with regard to the legal status of the land; who owns and who currently occupies and uses it; and the definition of forest!

The CDM Executive Board retains final say though, and there are several steps which make the process somewhat rigorous. There must be an initial approval of the project by the Executive Board, validation by the Designated National Authority (DNA), which is a domestic institution required to implement the CDM in the host country. Once endorsed by the DNA the correct application of the methodology and the consistency of the project will then be validated by a Designated Operational Entity (DOE), typically an audit firm. Once the Executive Board accepts the validation by a DOE the project is registered. There then follows a process of monitoring and finally certification, by a different DOE, which verifies that the reduction in greenhouse gases has been achieved. The Executive Board then issues the CERs that correspond to the certification provided.

Note that Afforestation and Reforestation activities are temporary - since the carbon is released when the tree is felled or dies, hence the credits granted will depend on the term of the project and will either be temporary (requiring the holder to find a replacement credit at the end of the period) or long-term, in which case regular certification is required.

Conclusion