Background paper 2 3 BirdLife Carbon Offset pres E

Carbon Offset Strategy Workshop: 

Carbon Offset Strategy Workshop BirdLife International - EcoSecurities Cambridge, 23 April 2007 C A R B O N C R E D I T S — O R I G I N A T I O N T O C O M M E R C I A L I S A T I O N

Agenda: 

Agenda

EcoSecurities - Who we are: 

EcoSecurities - Who we are EcoSecurities is a leading originator of carbon credits in the global carbon market Carbon Credit portfolio at 15 February 2007 comprised of: 374 projects, up over 146% since December 2005 (152 at 31st December 2005) spanning 36 countries, using 18 technologies 71 projects registered or submitted to registration with the CDM Executive Board (20 at December 2005) 79 projects received Host Nation Approval (21 at December 2005) 133 projects validated or submitted for validation (56 at December 2005) 308 of the projects have secured financing (125 at December 2005) 210 projects are under construction or in operation (72 at December 2005) Projects have the potential to generate over 156 million carbon credits, up over 81% since December 2005 (90 million)

Portfolio : 

Portfolio What is 156 million tonnes ?

EcoSecurities Clients: 

EcoSecurities Clients Selected EcoSecurities clients Governments: Denmark, Austria, Japan, Switzerland International organisations: UNDP, UNFCCC, FAO, UNEP, IUCN, WWF, FAO, IPCC Financial institutions: Credit Suisse, Tokyo-Mitsubishi Securities, World Bank, International Finance Corporation, ADB, EIB Private clients: Shell, Essent, Toyota Tsusho, Harza, Vallourec & Mannessmann, EnXco Windpower, CDC, Alkane Energy, Cargill, Eskom, SGS Environmental NGOs: CI, TNC, IUCN, WWF, Greenpeace

Where we are: 

Where we are Oxford Rio de Janeiro The Hague Mexico City Kuala Lumpur Paris* Mumbai Madrid* New York Dublin Los Angeles Jakarta Santiago de Chile Headcount June 2005 27 employees Dec 2005 90 employees August 2006 178 employees Dec 2006 209 employees Bangkok * No legal presence but EcoSecurities has entered into contracts with individuals to act as EcoSecurities representatives Beijing Chengdu Johannesburg Casablanca* Manila Islamabad* Amman* Portland Singapore * Jaipur

Summary of Report (non-strategic): 

Summary of Report (non-strategic) Carbon markets Situation for forest conservation Standards and requirements for carbon offsets Commercialisation strategies Costs of engaging in carbon offsetting Offset project types (Strategic considerations in afternoon sessions)

Carbon markets: 

Carbon markets First carbon offsets focused on forest conservation (90s) Slow growth of carbon markets until 2005 (voluntary / pre-compliance) 2005: Kyoto entry into force and EU Emissions Trading Scheme (EU ETS) create regulatory carbon markets Established regulatory markets continue to grow: € 22.5 billon traded last year, of which € 3.9 billion under Clean Development Mechanism (CDM), i.e. through projects in developing countries Voluntary markets are smaller and less mature € 30 – 70 million (?) last year, rapid growth

Carbon markets: 

Carbon markets Project types: Regulatory (CDM): Most projects in renewable energies (forestry marginal), highest volumes from large non-CO2 projects, many technologies Voluntary: Forestry and renewable energy dominate, fewer technologies, smaller projects Offset buyers: Regulatory: Compliance buyers (companies, countries), intermediaries Voluntary: Any organisation or individual

Carbon markets: 

Carbon markets Prices have been volatile, covering wide range CDM (CERs): Influenced by risk (forward-contracts), EU ETS prices, € 2-14 / tCO2 Voluntary (VERs): Influenced by risk, quality.... VER ≠ VER, generally lower than CERs but wider range Outlook: Continued strong growth likely but depends on demand (regulatory targets / popularity of carbon neutrality, etc.) Both markets will co-exist, voluntary markets cover many “gaps” (products, countries, industries, individuals)

Markets for forest conservation: 

Markets for forest conservation Only voluntary markets at present (CDM restricted to reforestation) Not an established market segment (also not among NGO offsets) “Forestry” mainly refers to reforestation, i.e. carbon sequestration Reforestation most visible voluntary offset type (numbers & perception – plant a tree, easy to communicate) Concept of emission reductions through forest conservation not widely understood

Markets for forest conservation: 

Markets for forest conservation Conservation potentially very attractive offset type (co-benefits, marketing,…) Critique of forestry offsets Quality of offsets (permanence, leakage) History of forestry in climate discussion, diversion from energy,… Corporates concerned about reputational risk Importance of quality assurances (sound and transparent methods / standards) Positive general outlook, indications of increasing buyer interest Big push through post-2012 discussions on avoided deforestation (RED)

Standards for carbon offsets: 

Standards for carbon offsets Offset projects reduce emissions elsewhere to compensate for ongoing in-house emissions Emission Target / cap Actual emissions Buyer Carbon Credits (CERs/ VERs) Carbon value ($) Company / Consumer Seller An offset project reduces GHG emissions (in a host country)

Standards for carbon offsets: 

Standards for carbon offsets Is an offset really an offset? 1 tCO2 = 1 tCO2? How does a buyer know what he/she buys?  Emission reductions from good quality offsets need to be Additional Measurable Verifiable A standard can communicate quality and quality assurance

Standards for carbon offsets: 

Standards for carbon offsets Additionality of offsets Would the project have happened anyways? What is the baseline (business-as-usual) scenario? How can additionality be “proven”?

Standards for carbon offsets: 

Standards for carbon offsets Quantifying emission reductions (offsets) How are emission reductions measured? How are they monitored? How can baseline emissions be measured? (what is the starting level, e.g. deforestation threat) Is there leakage of carbon benefits? Are carbon benefits permanent? Sequestration (reforestation ) vs. emission reductions (conservation = avoided deforestation)

Standards for carbon offsets: 

Standards for carbon offsets Quantifying emission reductions (offsets) How are emission reductions measured? How are they monitored? How can baseline emissions be measured? (what is the starting level, e.g. deforestation threat) Is there leakage of carbon benefits? Are carbon benefits permanent? Sequestration (reforestation ) vs. emission reductions (conservation = avoided deforestation)

Standards for carbon offsets: 

Standards for carbon offsets Verifying emission reductions (quality assurance) Who controls that offset has taken place? Anyone? Offset provider? External auditor? Review of documentation? On-site control? What is being verified (criteria verification ≠ high quality

Standards on regulatory markets: 

Standards on regulatory markets CDM has highly regulated quality control Projects need approved methodologies to calculate and monitor emission reductions Design and performance are controlled by external verifiers Approved projects are registered with Executive Board Project Design Document (PDD) is central, includes: ex-ante estimations of emission reductions against baseline additionality arguments of the project monitoring plan analysis of environmental and socio-economic impacts

Standards – CDM project cycle: 

Standards – CDM project cycle

Standards on voluntary markets: 

Standards on voluntary markets No widely used and accepted standards exist Quality control of providers varies widely Internal standards / criteria, partly with external verification, or Few obvious quality criteria and assurances General trend towards more stringent criteria and verification Driven by increasing criticisms Poor quality offsets threaten credibility of entire market Several efforts to develop industry standards e.g. Voluntary Carbon Standard (VCS) Pushed by offset providers and corporate buyers CDM is benchmark

Standards for forestry offsets: 

Standards for forestry offsets CDM provides high standard for reforestation Also accounts for leakage, non-permanence No carbon accounting standard for forest conservation Most initiatives for voluntary standards do not include forestry General guidelines (also for non-carbon benefits) provided by Climate, Community and Biodiversity Alliance (CCBA) Plan Vivo System Challenges Definition of baseline of deforestation (= emissions) Leakage Credible standards seen as decisive for future market acceptance

Standards for forestry offsets: 

Standards for forestry offsets CDM provides high standard for reforestation Also accounts for leakage, non-permanence No carbon accounting standard for forest conservation Most initiatives for voluntary standards do not include forestry General guidelines (also for non-carbon benefits) provided by Climate, Community and Biodiversity Alliance (CCBA) Plan Vivo System Challenges Definition of baseline of deforestation (= emissions) Leakage Credible standards seen as decisive for future market acceptance

Standards on voluntary markets: 

Standards on voluntary markets Advantages of high standards / quality criteria & assurances: Increased market access (groups of buyers, especially corporates) Offsets can sell for higher price Protect reputation of provider Disadvantages of high standards: More expensive (transaction costs – small projects may not be viable) Longer project cycle

Presentation outline: 

Presentation outline Commercial aspects Target market Commercialisation model Type of sales contract Factors influencing pricing Financial aspects Costs Revenues Carbon offset project types

Target market and customers: 

Target market and customers Retail Caters to offtakers of small amounts of offsets - individuals, smaller companies BirdLife members? Volumes from single digits to thousands of offsets A single project supplies many offtakers Strictly voluntary

Target market and customers: 

Target market and customers Wholesale Large offtakers - large organisations (public/corporate) BirdLife corporate partners? Volumes from tens of thousands to Millions of offsets Many projects supply to a single buyer Voluntary or compliance (Kyoto)

Commercialisation models: 

Commercialisation models Direct sales Requires a marketing strategy (mail, telephone, internet) Emissions calculator, custom-made footprinting Advantages: Maximises the marketing effect for BirdLife. More sales Higher prices Higher prices by avoiding intermediaries.

Commercialisation models: 

Commercialisation models Direct sales Disadvantages: Additional overhead costs. Establishing a customer network may be time consuming. Credit rating issues in financial transactions Depending on overall volume of credits, access to large-volume buyers may be more difficult

Commercialisation models: 

Commercialisation models Sales to intermediaries Outsourcing of marketing effort Access to wholesale buyers Advantages: Much lower overheads Better market access Wider contract possibilities due to intermediary’s understanding of market Assistance with project development and implementa- tion, often as part of credit purchase deal Less reputational risk

Commercialisation models: 

Commercialisation models Sales to intermediaries Disadvantages: Lower price than in direct sale (must be balanced against overhead costs of direct sale). Lose branding advantage Some intermediaries (e.g. most carbon funds) are only interested in large volume transactions.

Commercialisation models: 

Commercialisation models Sales facilitated by intermediaries Brokers/exchanges bring parties together, charge commission Wholesale only Advantages: Lower overhead costs than direct sales. Better market access Better price than sales to intermediaries

Commercialisation models: 

Commercialisation models Sales facilitated by intermediaries Disadvantages: Brokers and exchanges will engage at a later stage of project development Lower prices than direct sales Less direct contact with the end user, reducing the marketing benefits for BirdLife.

Commercialisation models: 

Commercialisation models How do other conservation NGOs do it? Most do direct sales (though indirect perhaps not visible?) Retail sales all involved internet-based emissions calculator Also mixed approach of retail and wholesale (CI, WLT) Larger volumes sold through wholesale than retail

Sales contracts: 

Sales contracts Forward – agreement to deliver in future. % may be paid up-front, but usually bulk on delivery of credits Prices may be fixed or floating Spot – Immediate delivery, immediate payment Some retailers have sold future offsets as if delivered immediately, attracting negative publicity Derivatives – push or call options, etc. Not yet used much

Price implications: 

Price implications Sales contracts Forward – lower price, because of risks Price even lower if up-front payment vs. Spot – market price ‘Quality’ of credits Marketing value to buyer

Financial aspects – Transaction costs: 

Financial aspects – Transaction costs

Financial aspects – Overhead costs: 

Financial aspects – Overhead costs Overhead cost items (mainly staff costs) Commercialisation – much lower if intermediary is used. Web-based sales structure Administration and finance support Legal support Project development - accompany project design and monitoring and verification activities. Office running costs

Financial aspects - Revenues: 

Financial aspects - Revenues Projects often have front-loaded costs Revenues from verified offsets only when project operational Mismatch can be dealt with through forward contracts 0-100% upfront payment Cost-revenue balance impacts viable minimum project size Several small projects could be bundled, provided quality criteria apply overall

Carbon Offset Project Types: 

Carbon Offset Project Types Forest and Soil Conservation Avoided deforestation, peatland conservation Afforestation and reforestation Non-renewable biomass avoidance Cooking stove projects Energy (Renewable and Non-renewable sources) Hydropower, solar, wind, biomass, biofuels, fossil fuel switch Agriculture Methane capture, no-tillage agriculture

BirdLife’s current and potential project portfolio: 

BirdLife’s current and potential project portfolio BirdLife International Carbon Strategy Workshop Cambridge, 23 April 2007

BirdLife’s project portfolio: 

BirdLife’s project portfolio Project types Forest conservation Reforestation Renewable energy (incl. bio-energy) Improved cooking stoves General relevance in project activities of BL and Partners Project sizes Distribution of project types and sizes among Partners Assumption: Current portfolio corresponds to mandate and capacity of organisation(s)

BirdLife’s project portfolio: 

BirdLife’s project portfolio Forest conservation How important is it as project type overall? Project size – to which category do most conservation projects belong? < 1,000 ha 1,000 - 10,000 ha 10,000 - 50,000 ha > 50,000 ha Are some Partners much more involved in this project type than others? Do some partners have particularly large projects?

BirdLife’s project portfolio: 

BirdLife’s project portfolio Reforestation How important is it as project type overall? Project size – how large are most reforestation projects? Are some Partners much more involved in this project type than others? Do some partners have particularly large projects?

BirdLife’s project portfolio: 

BirdLife’s project portfolio Renewable energy Water, wind, solar, biomass (animal waste, woodchips,…), biodigestion How important is it as project type overall? Project size – how large are most energy projects (KW)? Are some Partners much more involved in this project type than others? Do some partners have particularly large projects?

BirdLife’s project portfolio: 

BirdLife’s project portfolio Improved cooking stoves “Non-renewable biomass” (wood, charcoal) How important is it as project type overall? Project size – how many stoves / families do projects involve? Are some Partners much more involved in this project type than others? Do some partners have particularly large projects?

BirdLife’s potential offset project portfolio: 

BirdLife’s potential offset project portfolio How much could current portfolio change for a carbon offset scheme? How much room is there for above project types? How much room is there for large projects?

Strategic considerations: 

Strategic considerations BirdLife International Carbon Strategy Workshop Cambridge, 23 April 2007

Standards: 

Standards Quality of offsets is determined by the criteria applied. Third-party quality control increases offset credibility - impact on commercialisation success. Credibility is linked to the reputation of the offset provider. Reputation can compensate for lower quality Perceived lower quality can damage reputation More standardisation of voluntary markets may occur in future. WHAT IS ADDITIONAL FOR NGOs?

Target market: 

Target market

Target market: 

Target market

Commercialisation model: 

Commercialisation model

Commercialisation model: 

Commercialisation model Project-specific offsets vs. portfolio-based sales Project-specific Pro: higher marketing value for buyer Cons: More delivery risk (which portfolio can mitigate) Less volume flexibility

Pricing strategy: 

Pricing strategy Sell at cost price vs. sell at market price (direct sales only) Cost price reduces need for other financing sources Market price likely to result in more sales (if lower than cost price) Closely linked to additionality discussion Assumptions: wholesale buyers will want market price cost price easier to market to retail

Project size: 

Project size Project size should be large enough to justify Transaction costs Overhead costs Contingency Many small projects could be bundled into programme Credibility risk Probably only suitable for retail market

Centralised vs. decentralised: 

Centralised vs. decentralised Branding aspects BirdLife brand or Partner brand or both? Different brand, same programme Different brand, different programme (role of secretariat?) Project size and type Differentiate smaller, larger, CDM Separately choose for each: target market, rigour of standards, commercialisation strategy and brand

Geographic considerations: 

Geographic considerations For projects in developed (Annex I) countries there is risk of double counting Project development must be coordinated with governments

Key considerations for discussion: 

Key considerations for discussion Project size, number of projects What is potential? Credibility/reputation What is additional for BirdLife? What weighs heavier: credibility or workability? Target market (retail vs wholesale) Marketing to individual members/corporate partners? Bundling of smaller projects? Commercialisation model (direct sales vs. intermediary) Project-specific vs. portfolio Pricing strategy (cost price vs market price – direct sales only) Branding? (centralised vs decentralised)

Conclusions and next steps: 

Conclusions and next steps

Tentative Conclusions: 

Tentative Conclusions Standards Nothing but the best, should be as close as possible to compliance markets Reputation of BirdLife and aims of organisation Should aim at consistent approach with other NGOs (methodologies) Additionality: only those activities entirely financed through carbon qualify Must not encourage individuals and business to offset instead of reducing emissions Target market Ways to engage with buyer is key Wholesale (corporate) offsetting is acceptable to BL as long as highest standards are used, probably large projects Needs to include communicating need to reduce first, potentially assessment / screening of buyer Retailing to individuals not acceptable to entire network but is acceptable to some national Partners No possibility to evaluate buyer, limited communication Non-offset funding may be alternative (see below)

Tentative conclusions: 

Tentative conclusions Post-2012 avoided deforestation discussion Link approach as much as possible to forthcoming (pilot) schemes, but don’t stand still until then – including accessing pilot funds Link voluntary scheme to political lobbying efforts Small projects Probably unlikely to be viable under acceptable high standards Could potentially be bundled and funded through new “carbon rescue fund” – climate donations rather than offsets Internal monitoring but not strict offset standards Commercialisation model Different ways (direct vs. intermediary) should be considered Wholesale probably best through BL International, i.e. centralised Project types Only potential large projects are probably in forest conservation (and peatland) Bundling of smaller projects needs to be assessed – acceptable under high standards? E.g. Cooking stove (national schemes)

Outstanding issues(list not conclusive): 

Outstanding issues (list not conclusive) Commercialisation model Is BL willing to take on overhead costs of direct sales? Is an intermediary acceptable given reduced influence over end customer? (unless intermediary carries out similar screening) Could BL branding be maintained in intermediary sales? Retail sales How to resolve (co) branding if some Partners engage in retail sales? How would “carbon rescue fund” be defined and operated? Who will cover planning costs until revenues are created? Centralised vs. decentralised approach to marketing and project development Also fundraising for “carbon rescue fund” Define approach for standard development

Next steps: 

Next steps Identify promising pilots and assess potential Assess costs of conservation (can they be recovered through carbon?) Collect project ideas, inventorise (also regarding project sizes), what is potential in long run? Is there a base for a broad strategy? Discuss collaboration with other NGOs regarding standards, lobbying, pilot funding for REDD Assess willingness to pay / acceptability of individuals to give money for “rescue fund” without receiving offsets (also: may give less than when buying offsets) Keep Offset strategy as agenda item (regional council meetings etc.)