The term “carbon markets” refers to the market in which carbon credits, in other words, carbon certificates, are obtained from and sold within defined standards (also known as carbon crediting mechanisms; World Bank 2020)[1] for the prevention or reduction of GHGs. GHGs are man-made pollutants that lead to climate change. The following are the carbon market segments which provide the potential for mobilising resources for implementation of forest management activities
International crediting mechanisms are governed by international climate treaties and are usually administered by international institutions. For example the Clean Development Mechanism under the Kyoto Protocol has been the biggest issuer of carbon credits, responsible for over 50 percent of all credits ever issued globally[2]. However, international interest in CDM has been shifting towards the provisions of the Paris Climate Agreement, but it is not yet clear how the “mechanism” established under Article 6.4 of the Climate Agreement (Box 7) will operate in relation to the Kyoto Protocol.
Box 7: Article 6.4 of the Paris Climate Agreement
A mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development is hereby established under the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to this Agreement for use by Parties on a voluntary basis. It shall be supervised by a body designated by the Conference of the Parties serving as the Meeting of the Parties to this Agreement, and shall aim to:
(a) promote the mitigation of greenhouse gas emissions while fostering sustainable development;
(b) incentivize and facilitate participation in the mitigation of greenhouse gas emissions by public and private entities authorized by a Party;
(c) contribute to the reduction of emission levels in the host Party, which will benefit from mitigation activities resulting in emission reductions that can also be used by another Party to fulfil its nationally determined contribution; and
(d) deliver an overall mitigation in global emissions.
Independent crediting mechanisms are mechanisms not governed by any national regulation or international treaties. They are administered by private and independent third-party organizations, which are often nongovernmental organizations. Examples are the Gold Standard and the Verified Carbon Standard Program.
Regional, national and subnational crediting mechanisms are governed by their respective jurisdictional legislature and are usually administered by regional, national or subnational governments. Examples are the Australia Emissions Reduction Fund, and the US State of California’s Compliance Offset Program.
When FMIs decide to manage forests for independently verifiable carbon credits, the standard practices and steps to follow (Olander, Jacob, and Johannes Ebeling, 2011)[3] involve a series of documentation as follows:
(a) Draft Project Idea Note
The project idea note contains the Project Idea, Preliminary Assessment, and Project Conceptualization. These include planning how the FMUs will be managed (which should already be part of the FMP). The project idea note shall include clearly stated objectives, preliminary definition or description of project activities (such as Afforestation and Reforestation Projects, Reduced Emissions from Deforestation and Degradation (REDD) Projects, Improved Forest Management Projects, or as the carbon credit market mechanism above describes them. The project idea note also includes the preliminary determination of project scale, area, and boundaries and project participants. Once the project idea has been concretised, then a project idea note is drafted.
A Project Idea Note is a summary description of a proposed project. It is commonly used as an initial summing up of the project and is useful for engaging governments, investors, and technical support. It should be noted that developing a project idea note is not a formal requirement under the Verified Carbon Standard or Clean Development Mechanism, and project idea notes do not have to follow any particular format. In some countries, however, a project idea note is required by the Designated National Authority for issuing the formal Letter of Approval required for Clean Development Mechanism projects[4]. When a project idea note for the Clean Development Mechanism is complete, the FMI undertakes a thorough project feasibility assessment to decide whether carbon finance as a method of mobilising resources for implementation of forest programmes and activities is truly a viable option.
(b) Project Design and Planning
Includes the technical and procedural elements required to prepare a Project Design Document (PDD) or Project Description for external validation. In addition, the elements encompass a broader range of issues relating to project activities, legal matters, finance, and stakeholder engagement. This phase, leading up to securing project finance and validation – and achieving both of these is required for success – will demand significant resources and time, as well as patience and perseverance. Securing adequate finance for the planning and design phase is a challenge that must be addressed early on. The following are the additional standard practices:
(i) Define a target market or carbon crediting mechanism or standard (the choice as shown above involves choosing between: international crediting mechanisms, independent crediting mechanisms or regional, national and subnational crediting mechanisms
(ii) Ensure effective community engagement
(iii) Plan for project design: i.e. define roles and responsibilities for project design and implementation, agree on management and allocation of carbon revenues (benefit-sharing), prepare a roadmap: budget and work plan,
(iv) Secure project development finance and structure agreements,
(v) Draft design of project activities
(vi) Legal due diligence and carbon rights such as: carbon and tenure rights, review national and district regulatory requirements
(vii) Social and Biodiversity Impact Assessment
(viii) Assess non-permanence risks and develop mitigation strategies
(ix) Maintain ongoing liaison with regulators
(c) Developing a PDD
A PDD is the key source of information and analysis that summarizes project characteristics, quantified carbon benefits, and lays out a monitoring plan, thereby providing the basis for independent project validation and verification of its emission reductions or removals. The same document is called Project Document under the Verified Carbon Stabdard, and may have other names under different crediting mechanisms mentioned above.
(i) Structure PDD Team: The development of a PDD can be a daunting challenge for first-time project developers. Methodologies available are complex, and, as described in the REDD and Afforestation and Reforestation guidance documents, also draw on supplementary tools for specific needs (land eligibility, additionality, leakage, etc.) which are not directly integrated into the methodologies themselves
(ii) Choose a methodology
(iii) Conduct PDD Analyses on: Spatial Boundaries, Land Eligibility, Additionality, Starting Conditions, Baseline, and With-project scenario (baselines), quantification of emission reductions or removals, leakage, non-permanence risk assessment and others
(iv) Prepare the PDD
(d) Review project activities and develop project implementation strategy
(i) Re-assess feasibility and adjust project activities
(ii) Budgeting and financial projections
(iii) Defining management structure for implementation
(e) Finalizing Financing and Investment Arrangements
(i) Commercializing forest carbon
(ii) Establishing agreements for finance
(f) Approvals, validation, and registration
Project proponents must ensure that all required documentation, permits, approvals, and agreements are firmly in place as the project moves beyond the preceding design and development steps
(i) Host country approval
(ii) Stakeholder consultation
(iii) Validation
(iv) Registration
(g) Implementation and monitoring
(h) Verification and Issurance
Verification is the key step preceding actual issuance of carbon credits. During verification, an external auditor reviews and certifies the volume of GHG benefits that the project has actually achieved – and monitored. This audit is based on monitoring results which have been collected by the project developer, based on the monitoring plan validated as part of the PDD.
Instruction 367: As has been mentioned above, preparing PDDs to the point of their implementation and getting carbon payments is a daunting process. It requires expertise and resources to accomplish. Therefore, a decision to manage a forest/ forests for emissions reductions payments shall be taken by the top management of the FMI
Instruction 368: During the process of preparing PDDs, most likely spearheaded from Headquarters, field staff of the relevant FMUs shall be closely engaged.
World Bank. “State and Trends of Carbon Pricing 2020” (May), World Bank, Washington, DC ↩︎
Ibid ↩︎
Olander, Jacob, and Johannes Ebeling. Building Forest Carbon Projects: Step-by-Step Overview and Guide in Building Forest Carbon Projects, Johannes Ebeling and Jacob Olander (eds.). Washington, DC: Forest Trends, 2011 ↩︎
CDM projects ended with 2020 and will be replaced by what shall have been agreed on article 6 of the Paris Agreement which is still under negotiation ↩︎