This chapter deals with promoting and regulating forest-related GHG emission reductions and removals. In particular, it discusses mitigation based on use of land.
A lawmaker dealing with the full range of forest-related climate change issues will have concerns beyond forest land-based mitigation. A party to the UNFCCC or the Protocol may consider laws to meet procedural and institutional requirements, e.g. procedures for carbon inventory and reporting. Persons interested in these aspects may find guidance in Articles 5 and 7 of the Protocol and the Decisions of COP-7 cited in the first part of this paper regarding the IPCC Good Practice Guidance.
Any nation undertaking long-term planning for its forests will have concerns about adaptation of forests to altered climates. Adaptation is a particular concern in forestry, because the long life span of trees means that trees planted today must face climatic conditions over many decades and perhaps centuries. Foresters know that trees planted away from their typical geographic and ecological range often show different growth characteristics and increased vulnerability to insects, disease and fire. Climate change may shift the optimal geographic areas for tree growth, stressing existing vegetation. Governments may wish to support adaptation through sponsoring research, educating landowners and foresters on management for stability and resilience, increasing efforts to control insects, diseases and fire, and anticipating and providing for unmanageable risks, such as major blowdowns from hurricanes. There may be a role for government-backed disaster insurance for forest owners. Assigning liability for forest damage from climate change and collecting damages is problematic under a court-based system, because of the large number of causal agents scattered far beyond the jurisdictional boundaries of any court. However, governments might consider a GHG-based tax supporting a fund for adaptation projects or damages to reduce the individual forest owner’s climate change-related risks.
Besides land-based mitigation, forests can also play a role through the use of forest products as materials or as fuels. When a person builds a house out of wood instead of cement or brick, that wood represents carbon removed from the atmosphere and emissions avoided in the energy-intensive manufacture of other materials. The Protocol does not yet regulate credit for carbon storage in forest products, although the SBSTA is continuing to consider the issue.
Nevertheless, governments may wish to encourage the use of wood and wood fibre in ways that keep carbon sequestered for as long as possible. In manufacture, laws could require waste reduction planning in larger, more sophisticated sawmills and pulp and paper mills, including steps to discourage decay of stored chips or timber. Laws could bar burning of sawdust and wood waste, unless the heat was captured and used in processes that would otherwise use fossil fuels. Building codes could encourage the use of wood and require fire- and decay-resistant or retardant designs. Laws could promote recycling of waste paper through a variety of means, from increasing supply by encouraging consumers to segregate recyclables, to increasing demand by having government preferentially purchase products with recycled content.
The discussion below begins by considering issues that might arise if the law recognizes claiming credit for carbon sequestration to be a kind of property right. “Ownership” of forests and forest products, whether private, community, social or state-based, is the oldest and still most prevalent legal mechanism for allocating forest resources and encouraging their sustained use. However, owning an intangible resource such as carbon sequestration, actual or potential, poses new challenges to old systems of property law.
The discussion then considers regulatory approaches. These might include regulation of forest use or conversion and regulation of the manufacture, use or disposal of forest products.
The third area of discussion is subsidy-based approaches. These issues may be the most familiar to forest managers today. The legal issues that arise out of government spending to promote GHG mitigation will be similar to the issues arising out of other government spending to promote good forest stewardship, frequently as an indirect compensation for those forest services for which no market exists.
The final area of discussion is information-related approaches. These involve attempts to promote education, product labelling or certification, and government evaluation of management systems.
Different Parties will have different interests in the possible reforms. For example, an Annex I nation trying to meet a specific reduction goal may be interested in a tax or regulatory system to reduce emissions coupled with market measures to reduce costs of compliance. The market measures may demand new laws concerning ownership of carbon sink potential. In contrast, a non-Annex I Party, with no goal to meet, may be more interested in making changes that might attract CDM investments and direct them towards sustainable development goals. Nevertheless, the non-Annex I nation may also be interested in new laws concerning ownership of carbon sinks to make investment in forest projects more attractive.
Some of the ideas in this chapter have application beyond forest projects. For example, the market issues of ownership, liability and risk apply to any project that results in emission reductions or removals. For the sake of simplicity and consistency, nations should address these kinds of issues through general laws that apply to all mitigation projects.
This section considers legal issues that will arise if a Party seeks to use property rights and market transfers to encourage carbon sequestration in forests. Markets can create incentives and encourage voluntary participation in mitigation activities domestically or abroad. Through social or community ownership, markets can empower local groups in their dealings with outsiders while allowing them to continue to follow traditional use rules among themselves. Working at their best, markets can serve environmental and sustainable development goals while fighting poverty.
Market approaches can also lead to undesirable outcomes. They must be carefully tuned to promote mitigation, or they will promote accumulation of wealth regardless of its consequences. They can attract corruption. They can catalyse unexpected social change. Moreover, although they may look good on paper, if the necessary fiscal, governmental and cultural structures are absent, markets will stumble or fail entirely. Markets can be powerful tools, but they are not panaceas.
The discussion below considers issues that will arise from ownership and trading of credit for carbon sequestration. The Parties themselves will set the rules for transfers between Parties to the Protocol. But what if an Annex I nation decides to purchase carbon sequestration credits directly from forest owners? What if a nation regulates major new sources of emissions, requiring them to acquire offsetting reductions or removal units? With the proper legal structure, these transfers involving individual buyers and sellers would be subject to national laws.
The initial inquiry about ownership must be: What will Parties or individuals wish to own? The UNFCCC and Protocol predominantly frame mitigation in terms of what a Party has achieved. Compliance depends on GHG emissions avoided or GHGs removed from the atmosphere. The agreements look to present conditions shaped by past actions. Parties will wish to claim actual carbon sequestered, as verified and certified removal credits.
To encourage GHG removal through property rights and markets, national laws must be concerned with a more abstract concept than the present amount of carbon sequestered in a forest. The law must make clear who has the right to claim ownership when the forest sequesters carbon.
To make a rough analogy, when a farmer sells fruit, the buyer is only interested in what fruit the farmer has to offer. When the farmer plans for producing fruit, the farmer must think about what lands he may legally harvest – perhaps the lands he owns, or those he has leased, or those for which he has bought a right to harvest, or perhaps even public lands from which anyone may come and gather fruit. When a Party presents evidence of compliance to the UNFCCC Secretariat, the secretariat will be interested in how the Party’s sources and sinks have actually performed. However, when a Party plans for compliance, or when an individual plans to exploit sinks to offset emissions to comply with a national law, the Party and individual will be concerned about what sinks they may legally claim. They will want the law to clarify who may claim to own the potential for forests to sequester carbon.
Who owns the carbon sequestering potential of a forest? The obvious answer is: the owner of the forest. However, the obvious answer is far from the only possible answer. Below are some possible ownership systems:
I. The owner of the property owns the potential and:
A. The potential does not exist as a separate property right. The property owner cannot sell or give it away independently of selling or giving away the property. However, if the owner can affect the potential through management of vegetation and soils, the owner can contractually promise to manage the property in ways to increase the potential.
B. The potential does not exist as a separate property right as such; however, the owner of a property can grant a covenant affecting the potential. Unlike a contractual obligation, the covenant would “run with the land”, binding the present owner and anyone who happened to become an owner of the property in the future.
1. The covenant attaches to another property related to the first property. The owner of the dominant property then would have the right to protect or perhaps enhance the potential of the subservient property. The covenant can only be transferred with the dominant property.
2. The covenant attaches to a person (an individual, corporation or government entity). It cannot be transferred.
C. Instead of a covenant, the right is in the form of an easement or servitude. This may attach to a dominant estate or it may attach to a person, in which case it can be transferred to another person independently of any transfer of underlying land.
D. The potential is a separate, alienable property right, such as a usufructuary right or profit à prendre, governed under the laws concerning ownership of land (real property, immovable property, etc.). The owner can convey that right to others without conveying the whole property ownership. When that potential is transferred to a new owner:
1. The new owner of the potential inherently has the right to affect how the property is used, if that is necessary to:
a. protect the existing potential of the property;
b. protect or enhance the existing potential of the property.
2. The new owner of the potential has no inherent right to affect how the property is used; however, the property owner can separately grant the potential owner that right:
a. through a contract or other legal mechanism that binds the current owner;
b. through a covenant or other legal mechanism that “runs with the land” and binds the present and any future property owner.
E. As in (D) above, but the right is governed under the laws concerning personal, movable or some other class of property that does not include land.
II. The potential is a public good:
A. Owned and ownable by no one. It is like sunshine or air. Many people may take advantage of it, particularly as it improves their own land and condition of life, but no one can claim to own it, buy or sell it, or take credit for the good it does for others.
B. Owned by the national government:
1. As a passive entity that can take credit for carbon sequestration but that has no particular power to require landowners to protect or enhance sequestration, and:
a. that holds the potential in trust for the nation and cannot sell or give it away;
b. that can sell or give the potential away.
2. As in (1) above, but the national government has inherent power to regulate the use of land to protect or enhance carbon sequestration. This regulatory power is inalienable.
3. As in (1) above, but the national government holds power, as the owner of a property right, to affect property use to protect or enhance sequestration. If, as in (1)(b), the government may transfer the property right, the new owner would also acquire the right to affect property use.
4. As in (1)(b) above, but the national government holds the potential as trustee for the benefit of the forest owner or the public. Any profits from the sale or use of the potential must go to the beneficiaries of the trust.
C. Owned by a subnational or local government with powers as in (B) above. Note that it might be possible to have ownership vested in one level of government with some or all regulatory powers vested in another level of government.
D. Owned by no one until someone takes steps to capture the carbon. For example, if Corporation A funds a project to plant trees along roadsides, Corporation A would own the resulting carbon sequestration, regardless of who owns the roadside lands. Further:
1. Anyone can acquire carbon sequestration potential in this way.
2. Only a limited number of entities are eligible to own carbon potential in this way and these are:
a. entities emitting carbon and desiring offsets;
b. (a) plus the government;
c. (a) or (b) plus “banks” chartered to deal in mitigation credits;
d. (a) or (b) or (c) plus NGOs interested in environmental protection;
e. (a) or (b) or (c) or (d) or any landowner.
Some of these options may seem odd, but some of the oddest have analogues in other laws. From the United States come these examples:
• Under the Pacific Northwest Electric Power Planning and Conservation Act, electric power utilities in the northwestern United States can acquire ownership of conservation capacity, informally called “negawatts” (negative watts), by financing projects that reduce electric demand. For example, a utility could pay to install thicker insulation on the tanks of electric water heaters of consumers. The consumers would own the new insulation and enjoy lower electric bills, however the utility would own the reduced electric demand. The utility can sell this reduced demand to the government agency responsible for assuring that the region has sufficient energy to meet demand.
• Under the United States Clean Air Act, in regions that have not attained national goals for air quality, new sources of air pollution must arrange offsets. If the pollution problem in the region is severe enough, the new source must arrange an offset greater than the new source’s expected emissions. The exact size of the offset is determined by the new source’s expected output multiplied by a factor reflecting the severity of the local pollution problem. In areas with moderate problems, the offset may be close to one for one. In areas with severe problems, the offset may be more like two for one. The offset is not a separate property interest, but more a contractual arrangement between the new polluter and an existing polluter. As an added guarantee of performance, the government alters the air pollution permits of the two sources to reflect the agreed-upon offset.
• Also under the United States Clean Air Act, the largest sources of sulphur dioxide in the nation have been assigned emission allowances. A source may only emit as much sulphur dioxide as it has allowances. A source with too few allowances must either reduce its emissions or acquire more allowances. These allowances are alienable, and there is an open market in them. Some environmental groups have bought them and “retired” them.
• Under the United States Clean Water Act, persons dredging or filling wetlands need a permit. As a condition of the permit, the government often requires the applicant to arrange mitigation of any damage done to the wetlands. A typical mitigation requirement might be to restore an area of degraded wetlands. In some areas, the government operates mitigation banks (United States Army Corps of Engineers et al., 1995). People who restore wetlands create a credit that they can place in the bank. Later, a person in need of a mitigation project can buy the banked mitigation.
• Most states of the United States allow private landowners to grant or sell conservation easements. The holder of a conservation easement can prevent development of the subservient land. Sometimes the holder can require the land to be kept in a natural state. Sometimes the terms of the easement require the land to be actively managed for conservation purposes. The holder of the easement ordinarily cannot sell it or reap any monetary gain from it, but holds it strictly to benefit the public. Usually, the law only allows the state or NGOs dedicated to conservation to acquire conservation easements.
• A few United States local governments recognize a fully tradable right to develop land. Property owners in areas marked for conservation cannot use their rights to develop their own property, but they can sell the rights to property owners in areas marked for development. Owners that buy the rights can “overdevelop” or build more extensively than neighbours who have not bought the tradable rights. The intent of the system is to compensate fairly property owners in the conservation zone for the restrictions on their property use.
The point of these examples is that the universe of possible models for carbon sequestration ownership and trading goes well beyond traditional notions of property and markets. Legislative drafters looking for models may find them in traditional systems of property law or in innovative systems of mitigation, trading and offsets of environmental harm.
The choice of how to shape the nature of the property right in carbon sequestration will depend on several factors. Existing laws and legal traditions will play a major role and may constrain the choice. Legislators and jurists usually prefer to apply existing patterns of law to new situations rather than to adopt radical innovations.
For example, in a country that only recognizes easements or servitudes that directly benefit other properties, legislators may hesitate to recognize a servitude that can be traded independently of a dominant estate. Costa Rica offers a concrete example of this. The country has wanted to create a property interest in the nature of a conservation easement that would create a legal right to prevent the subservient land from being developed or cleared. However, Costa Rican law only recognizes easements that benefit a specific dominant estate. The country has adopted the minor fiction that a conservation easement is for the benefit of (and so attaches to) nearby reserved natural areas.
Another factor is the nature of the local economy. In a country with an unstable currency or poorly developed markets, it will be impractical to set up a national system based on tradable rights. However, a limited system granting credits to large polluters that finance mitigation projects may be feasible.
A third factor is the governmental capacity to deal with abstract forms of landownership. In a country where the government finds it difficult even to determine who owns surface rights to a particular piece of land, it would be unrealistic to put in place a complex system of intangible, divisible interests.
A fourth factor is the nature of the demand for carbon sequestration. If the major goal of a country is to encourage foreign governments to invest in forest-based mitigation projects, and government-to-government dealings are the desired outcome, a system vesting ownership of sequestration in the national government may be appropriate. If developed countries adopt laws that encourage individual emitters of GHG to seek offsets, developing countries seeking private investment may wish to vest ownership of sequestration potential in private hands.
The ultimate interpretation of the Kyoto Protocol may affect the choice and desirability of market mechanisms as well. If the Parties develop a system that promotes transfer of mitigation credits, it will make market systems more attractive.
Carbon ownership is not an abstract question for forest owners. Even without a large market, carbon values may be substantial (see Box).
Valuating carbon sequestration in Irish forests Ireland’s industrial emissions will probably exceed Kyoto commitments consisting of annual emission reductions of approximately 15.4 Mt CO2 or 4.2 Mt of carbon (C). Forests established since 1990 will fix 0.3 Mt C per annum, offsetting about 6.5 percent of Ireland’s projected excess emissions, and reducing carbon credits to be acquired in international markets by this amount. At a market value of €30 per tonne of carbon in international emission trading, these young Irish forests alone would save the country an outlay of about €9 million annually, or €45 million over the commitment period 2008 to 2012. The average rate of carbon gain in these young forests is estimated at 3.4 tonnes of carbon per hectare per year. They would thus accumulate a gross value of approximately €100 per hectare annually. Credits for the activity “forest management” in Ireland are capped at 50 000 tonnes of carbon per year. If the country chose forest management as an eligible activity under the Kyoto Protocol, an additional gross value of annually €1.5 million could accrue. |
How big is the carbon sequestration potential of a forest stand? This question is at heart a technical matter and can be measured on-site. However, in a legal context, even technical matters have legal aspects.
As a starting point, nations will want to consider international regulations – the guidelines that the Parties adopt for international use. For example, COP-9 formally defined the CDM terms “baseline”, “additionality” and “leakage” as they apply to forests. The “baseline net greenhouse gas removals” are defined as “the sum of the changes in carbon stocks that would have occurred in the absence of the afforestation or reforestation project activity under the CDM” (UNFCCC SBSTA, 2003, p. 5, ¶ 1[c]).
The issue of additionality is closely related to the one of baselines. The text on additionality of energy projects in the CDM (UNFCCC SBSTA, 2003, p. 7, ¶ 12[d]) has been adjusted to account for the circumstances of forestry projects and reads:
The proposed afforestation or reforestation project activity under the CDM is additional if the actual net greenhouse gas removals by sinks are increased above the sum of the changes in carbon stocks in the carbon pools within the project boundary that would have occurred in the absence of the registered CDM afforestation or reforestation project activity.
The wording of the additionality definition has been subject to different interpretations. In assessing CDM projects, it is up to the CDM Executive Board to decide how to interpret the definition.12
Leakage refers to the net change in GHG emissions outside the project boundary. The COP-9 decision defines it as: “the increase in greenhouse gas emissions by sources which occurs outside the boundary of an afforestation or reforestation project activity under the CDM which is measurable and attributable to the afforestation or reforestation project activity” (UNFCCC SBSTA, 2003,
p. 5, ¶ 1[e]).
For more on these terms and their possible definitions, see UNFCCC Secretariat (2002a).
National lawmakers will have to decide whether and how to apply similar definitions to carbon transactions under their jurisdiction. As with ownership, there are many possibilities. To give an example, say that a coal-burning utility negotiates with a private forest landowner for the purchase of the carbon sink potential of a forest, so that the utility may claim it as an offset of its emissions.
In one possible case, the contract does not discuss the size of the potential, but the size is important to the utility in its relations with government regulators. The law could declare that the size is determined by:
• a specific, objective formula, established by legislation, allowing little room for professional judgement;
• a set of general guidelines, established by legislation, allowing room for professional judgement of government officials;
• a set procedure, established by legislation, such as a hearing, allowing interested individuals to provide expert testimony to a finder of fact, who makes a decision based on the testimony;
• any of the first three options above, except that the formula, guidelines or procedure are set case-by-case by negotiated agreement of the utility and regulator rather than by general legislation;
• any of the above three, except that the formula, guidelines or procedure are set case-by-case unilaterally by the regulator;
• any of the above three, except that the formula, guidelines or procedure are set by some third party. This might be a standard-setting organization such as the International Organization for Standardization or its national affiliates, an impartial arbitrator agreed to by the buyer and seller, or a group affiliated with the UNFCCC Secretariat.
In another possible case, the contract has terms that depend on the size of the carbon sequestration potential, and the size could be set:
• by a method specified in the contract, chosen by the buyer and seller;
• by a method specified in legislation, regardless of what the buyer and seller state in the contract;
• by a method specified in legislation, unless the buyer and seller specifically agree to another method in the contract;
• by law, the customary method or the method in common use in the trade, unless the contract specifies another method.
Creating workable law in this area may require familiarity with national laws concerning interpretation of contracts, regulation of utilities and control of air pollution. It may require some familiarity with applicable international standards. It may also require thorough technical understanding of carbon sequestration and traditional forestry issues, such as site, growth and yield, and forest products markets.
Cathcart (2000) describes how the state of Oregon, United States, has decided to determine the size of carbon offsets created by its Forest Resource Trust projects. The state is limiting the total claimable offset to the expected long-term average of carbon stored on the site over multiple harvest and regeneration cycles. The state subtracts from this amount an estimate of carbon stored on the site before reforestation to get the long-term net average increase in carbon storage. This choice appears to be a policy decision that the government has made unilaterally, without formal legislation, although the legislature recently gave the State Board of Forestry authority to write regulations governing forestry carbon offsets (Oregon Revised Statutes §526.786).
A question related to “What is the size of the removal?” is “What units do we use to describe the size?” As discussed in the first chapter of this paper, the COP seems to have answered this question by creating the removal unit (RMU) and a group of similarly sized permanent as well as temporary units to measure trades and compliance with Protocol goals. To promote trades and simplify accounting, countries should adopt these international units to describe size.
Closely related to size are issues of duration and timing. Governments and other organizations may base obligations on annual or five-year cycles, but forest cycles of growth, harvest, and decay extend over much longer periods. The rules for offsets must reconcile these differences and deal with other complications of timing.
For example, can offsets be measured in units that fungibly combine time and mass? Is one tonne of carbon sequestered for five years equivalent to five tonnes fixed in biomass for only one year? Is five tonnes fixed for one year at the beginning of a compliance period equivalent to five tonnes fixed for one year at the end of a compliance period?
And what about the non-permanent nature of forests? If governments grant carbon credits and financial awards to forest owners for carbon increment in their forests, will owners have to pay back when they harvest their forest, or when the forest succumbs to the next hurricane?
Internationally, the Parties have solved the problem of non-permanence through the concept of temporary credits and carbon leasing. National governments may adapt the Parties’ solution or may seek alternatives that fit both international requirements and local needs. As examples, New Zealand now proposes carbon credits and market participation for domestic afforestation of protection forests that exclude future harvests, while the state of Oregon is allowing forestry offsets in production forests based on expected average sequestration over multiple harvest cycles.
The above discussions have begun to raise some of the legal issues that might arise regarding transfers of ownership of a forest’s carbon sequestration potential. Assuming that the potential can be owned and transferred at all:
• Can it be transferred separately from the ownership of the land?
• If landowner A transfers the ownership of the potential to buyer B:
– Can B force A to manage the forest to maintain or enhance the potential?
– Can B enter the land and assess the potential?
– Can B enter and actively manage the land?
– If A then sells the underlying land to new owner C, does C bear any obligations towards B?
– Can B transfer the ownership and all it entails to a stranger, D?
• Can the government force A to transfer the potential to the government for public use?
These kinds of question are common ones in the world of property transactions. The answers will depend on whether the government recognizes the potential as a kind of property, subject to property transaction laws, or as something that results from particular kinds of behaviour, subject to laws regarding contracts.
If the potential is transferable, some issues of fraud prevention may arise. The interest will be intangible. There may be no physical indication that someone other than the land occupier holds the interest, beyond the paper or electronic record of transfer held by the parties. What would prevent an unscrupulous owner from selling the same carbon sink potential over and over to different parties?
Governments face similar problems with other incorporeal property rights, such as security interests or usufructuary rights. The spectre of fraud even haunts transfer of the ownership of the whole property.
The response of government has been to give notice to potential buyers of who actually owns the property. In its most basic form the notice may be little more than a public ceremony of transfer or a posted sign declaring ownership. Or the government may create a registry of property interests and require buyers or sellers to enter sales in public record books.
In nations with well-developed markets and experienced regulators, the governments may wish to consider legislation in other areas to promote transfers. These areas could include insurance, brokerage, banking and formal market structures.
Insurance encourages transfers by spreading risk. Buyers of carbon sink potential will face two kinds of risk. The first is that the seller does not actually have authority to transfer the sink potential. This could be so because the seller’s underlying land title is flawed or because the seller has already transferred the potential to someone else. A “title” insurer would research the seller’s ownership rights and issue a policy that would pay out if the seller’s title later proved flawed.
The second kind of risk is that the forest does not serve as a sink owing to circumstances beyond the control of the buyer or seller. For example, flood, wind, fire, insects or disease could strike the forest. Squatters could steal the trees or clear the land. War or rebellion could destroy the forest. Or the government could acquire the land legally for public purposes such as construction of a road. Insurers might be willing to write policies covering some of these kinds of risk.
Governments may choose to provide insurance directly or to regulate private insurance providers. Providing insurance would be a form of subsidy to promote these kinds of transaction.
Governments may regulate insurers to provide stability to the insurance market and to prevent fraud, thereby making insurance a more attractive option for consumers. Governments interested in promoting sink insurance through regulation can probably draw on their own experience in regulating insurance companies. If the government does not have a domestic insurance industry already, it is unlikely to generate one solely to cover GHG mitigation transactions.
An open market in GHG mitigation potential may allow people to earn money as mitigation brokers. The broker’s role would be to link interested buyer with interested seller and otherwise to facilitate sales. To cite a well-known example to demonstrate the feasibility of GHG mitigation brokerage, the World Bank has created several funds, among them specifically the BioCarbon Fund for sink projects. Again, the government may wish to take the brokerage task on itself or it may wish to regulate the profession of broker. Regulation may take the form of licensing, training or bonding requirements. Governments will probably find models for brokerage programmes and laws in their laws concerning sales of agricultural crops.
Related to brokerage is banking. Here, willing sellers could transfer the rights to their potential to a mitigation bank. The bank would be a central place for those in need of mitigation to come to buy credits. Depending on the system, the bank could pay the sellers for the mitigation up front or could act more like a broker, making some of the payment contingent on sale. Banks could be government or private entities. If the government allows private banks, it may want to regulate them to reduce fraud or mismanagement that could hurt buyers and sellers.
Mitigation banks can function even if the law does not recognize greenhouse gas mitigation potential as a severable, transferable property right. The wetlands mitigation banks found under the United States Clean Water Act are an example. Regulators under that law can require persons seeking to dredge or fill wetlands to arrange for restoration of other wetlands in mitigation. In some states and regions, the government agencies run mitigation banks to link owners of restored or restorable wetlands with people seeking mitigation credits.
Another area that may invite government involvement is in the general regulation of markets, if mitigation is openly traded. Nations may wish to control trading through centralized markets, similar to stock, bond or commodity futures markets.
The above discussion of insurance touched on the issue of risk. Transactions involving forests will involve existing removal or promises of future removal. In the case of growing forests, several things could change the forest and so affect that removal. Those things include changes in law or policy that preclude the storage of carbon (sovereign risk); intentional or unintentional failure of the project promoter to carry out promised actions (implementation risk); and acts of nature or third parties changing the forest (human and natural hazards).
Moreover, improvements in our knowledge of forest science could change our understanding of how much carbon a particular forest sequesters. If that happens, whether the estimate of carbon sequestered goes up or down, who gains or loses?
Who bears the risk may depend on the nature of the property right and the transaction. In a country where all carbon sequestration potential is owned by the nation, and there are no transactions, the nation will naturally bear all risks. In a situation where a private forest owner contracts with a private factory to provide an offset, the terms of the contract may spell out who bears the risks.
Even in a contractual situation, there may be room for the law to establish basic assumptions on risk. For example, the law may establish who bears the risk when the contract is silent on the issue. This may be a matter of existing contract law; however, some nations may eventually establish specific standards covering GHG mitigation transactions.
In countries that adopt regulatory provisions concerning offsets, the situation may be more complex. Those laws may recognize obligations between source and government, source and sink, and sink and government. A failure by the sink could affect all three obligations, and the law may treat the outcome differently in each case. For example, a nation’s law might require sources to contract with sinks for offsets before a source may operate, and it might require contracting sinks to take reasonable precautions to protect the forest to qualify as sinks. If a lightning strike causes sink owner A’s forest to burn, does A have to return offset payments to factory owner B? Does factory owner B lose permission to operate? Does A owe the government any penalty for the loss of the sink or the increased emissions of carbon from the fire?
The UNFCCC Secretariat (2002b) has produced an options paper for the SBSTA discussing how the Parties might deal with non-permanence in LULUCF activities. The paper raises several options for reducing risks among Parties that national governments could borrow and apply internally. These options include the following:
• Viability. Through regulations, the government can require the operator of a forest activity to demonstrate financial, legal and technical viability before the claiming or transferring carbon sequestration credits.
• Liability. Clear liability rules, regarding contracts as discussed above and torts and offences as discussed in the next section of this paper, will tend to deter some risky activities.
• Risk management. Regulations could require operators to design projects to minimize risks. Grouping activities into portfolios could reduce the risk of total failure.
• Insurance. Insurance systems could be set up either privately or through the government. The insurer would collect premiums from those investing in forest offsets. The insurer would use some or all of the premiums to pay for a reserve of unused offsets. If an insured investor experiences a failure, the reserve would cover the loss.
• Credit reserves. The law could require the government, a broker, or one of the other participants in credit or offset trading to hold credits in reserve to cover possible losses.
• Buffers. The law could require each forest claiming removal credits to retain a percentage of the credits as a buffer. The owner could tap the buffer to cover future losses.
Using similar reasoning, the law could initially require a source to obtain more than a 100 percent offset for its emissions. If the offset partially failed, the law would not penalize the source unless the offset dropped below 100 percent.
The law may want to draw distinctions based on intent or culpability. One rule may state who bears the risk of acts of nature, while another states who bears the risk of loss from negligence or intentional acts. The law may recognize degrees of negligence or may apportion responsibility where multiple causes contribute to the loss.
These kinds of issue should be familiar to contract and regulatory lawyers. The issues are analogous to the ones raised in other contractual and regulatory situations.
If the owner of a forest suffers damage to the value of the forest owing to the actions of another, the law will often offer some way for the forest owner to recover the loss. This may involve bringing a suit before the courts seeking damages.
The courts may base the amount of the damages on the monetary loss to the owner. If carbon sequestration becomes a commodity, the law may automatically include loss of carbon sequestration in damage calculations. In some countries, the legislature may wish to eliminate any possible doubts by declaring that owners may seek damages related to carbon sequestration losses.
Calculating damages can be complicated in a forest injury case because the lost value of commodities does not reflect the total injury. There is also an injury to the productive capacity of the forest.
For example, let us say that a nation follows the example of the Protocol and measures carbon sequestration in five-year periods. A landowner afforests his or her land at the start of the first period. Because of the rate at which trees grow, the new forest will sequester relatively little carbon during the first five years. It will perform better during the next five years, because the trees are older and larger. Depending on the trees and the site, this improving trend could continue for several more cycles.
Now assume that someone sets fire to the forest at the end of the first cycle. The amount of sequestered carbon lost is relatively small. However, the fire has reset the clock of ecological succession to zero. In the next five years, the forest will again sequester relatively little carbon. Besides destroying the small gain of the forest, the fire has delayed future gains.
Valuing the injury to productive capacity can be difficult. It requires a good understanding of the rate at which trees will grow on the site throughout their lives. If the forest is of a type commonly managed for wood production, foresters may have this information. For many forests, however, the information may be unavailable. And, even with this information, calculating the loss will be complicated where fire or other injury has killed only some of the trees. On the whole, the current state of the art in forestry may not always be capable of assigning accurate values to these kinds of injury.
The law can help by setting out some guidance. If the land is in private ownership and the marketplace accurately captures the value of the land for carbon sequestration, loss of market value to the land may be an adequate measure. If the land is only recently forested, then the damages should include the cost of restoration of forest cover. Restoration changes may also be appropriate where the injured land is part of a protected area.
In situations where actual damages are difficult to determine, the law can set standard measures of damages. These could be detailed formulas based on area, forest type, age, and other factors, or they could be arbitrary, relatively high figures set to deter forest injury as well as compensate injured owners.
Because there is a social interest in deterrence of forest injury, some jurisdictions allow forest owners to claim damages of two or three times the value of lost wood. The law could apply similar multipliers to the value of lost carbon sequestration.
Another means of increasing deterrence is to make destruction of carbon sequestration an offence. Particularly in countries where the average person lacks the capital to pursue a lawsuit or pay damages, a criminal approach may be the most effective way to deter injuries. Of course, existing laws concerning criminal trespass or damage to government or private property may be sufficient to create deterrence. However, it may be appropriate to direct the courts to consider loss of carbon sequestration value when weighing the severity of the offence.
If the nation expects carbon sequestration to remain a public good, the law might empower the government to sue to seek damages. Such damages might be based on the cost of restoration. Alternatively, the law could specify some simple formula for calculating damages based on the area of forest injured or the volume of wood injured or lost. Such a formula could simplify proof of losses, particularly if there is no local market setting a value on sequestered carbon.
One model for such a damage scheme is the natural resource damage provision in the United States law governing liability for releases of hazardous substances. Where such a release kills fish or wildlife or injures other public natural resources, the law recognizes the right of the national and subnational governments to seek compensation from those responsible (Comprehensive Environmental Response, Compensation and Liability Act [CERCLA] §107[f][1], codified as 42 US Code §9607[f]). The law allows the president and state governors to designate government officials to serve as trustees of the resources for the purposes of seeking compensation. The law also empowers the president to write regulations establishing the proper level of compensation for lost resources [CERCLA] §301[c], codified as 42 US Code §9651[c]).
Command-and-control regulation can play many roles in a national system to reduce net GHG emissions and the regime for climate change mitigation through forests. The above discussion of property and transfer issues identified several points where regulation could be useful. Indeed, a regulatory offset requirement could drive a country’s whole market in carbon credits. Besides regulating markets, a country could reduce its net GHG emissions by directly regulating forest use.
Examples of possible forest regulatory approaches include:
• Laws placing trees off-limits to harvest. These could include laws creating protected natural areas on private lands, laws requiring uncut buffers of forests around waterways or roads, or laws prohibiting harvest on steep slopes or unstable soils.
• Laws controlling harvest methods or rotation age. Biologists, foresters and policy-makers currently do not all agree on which management systems and harvest or rotation ages would maximize carbon sequestration on particular forests over the long term and how to integrate mitigation and adaptation techniques. The issue is made more complex because how long carbon in harvested wood remains out of the atmosphere depends on how the wood is produced and used. If science is able to give clearer guidance in this area, laws regulating harvests may be useful in promoting carbon sequestration.
• Laws requiring property owners to ensure regeneration of harvested forests, to restore degraded forests, or to maintain minimum crown covers after thinnings.
• Laws limiting the use of fire to destroy logging waste or to clear land, and laws requiring people who work in or use forests to report fires or carry simple fire fighting tools.
Governments may also want to adopt regulations for projects under the Clean Development Mechanism or Joint Implementation that foster environmental and social goals in the UNFCCC and the Kyoto Protocol that go beyond climate change issues:
• Laws could require mitigation projects to respect environmental standards and conform to COP-7’s principle that implementation should contribute to conservation of biological diversity and sustainable use of natural resources.
• Laws could require projects to respect traditional or indigenous forest use.
• Laws could require projects to offset disruption and costs to local communities by providing local benefits, such as employment, public access to the forest or public use of project infrastructure.
In some instances, existing laws might need to be streamlined to facilitate mitigation projects. Carbon sequestration projects in California, for example, were subject to at least 16 federal and state regulations (Vine, 2004). The Kyoto Protocol and many countries (Bekhechi and Mercier, 2002) require environmental and social impact assessments for afforestation and reforestation. The carbon sequestration services that forests provide should probably be given a weight in these assessments as well as in laws on land-use planning, zoning and landscape conservation (Kennet, 2002). Current environmental legislation sometimes requires material offsets for interventions in the landscape that affect soil, water, local climate, forest area, biological diversity or amenity values. In the future, diminished carbon stores and reduced sequestration potential might also be considered in landscape restoration.
Because GHG mitigation is a public good, governments may find it appropriate for the public to share the cost of producing it. Subsidies for forest-based GHG mitigation may not be very different from subsidies for forest management generally. GHG mitigation may be harder to evaluate than, say, area of forest cover or volume of wood brought to mills. But the basic mechanisms for promoting GHG mitigation through subsidies are probably analogous to general use of subsidies to promote good forest management. For example:
• As in Costa Rica, the government may wish to pay forest landowners directly for management that promotes carbon sequestration. These could be lump sum cash payments, tax deductions or tax credits.
• Governments could make payments to forest landowners in the form of goods. For example, the government could provide nursery stock, fertilizer or tools.
• Payments could be in the form of services. These could include fire fighting assistance, forest inventory, planning, timber sales preparation or extension services.
• In some countries, payments could go to local communities willing to help improve public forests.
• Revised management of public forests could also be effective. This could include placing restrictions on the forest practices that concession holders may employ in their harvests. Any resulting reduction in government income from concessions would be equivalent to public spending for better management.
Some countries may wish to consider government purchase of lands or land interests:
• In some countries, creation or increased protection of natural areas may be effective. For example, Bolivia has attracted donor, NGO and corporate funding for the Noel Kempff Mercado Climate Action Project, involving hundreds of thousands of hectares in northeastern Bolivia (www.noelkempff.com ). Projects such as these can provide non-consumptive uses besides GHG mitigation, for instance protection of biodiversity or ecotourism.
• In some countries, the government may not need to acquire a complete interest in land to achieve its ends. For example, if the law recognizes conservation easements or GHG usufructuary rights, the government could acquire those on suitable lands. It may be attractive to do so on a multiyear lease basis, with annual payments. This would give the landowner an incentive to keep the land in good condition during the whole term of the lease. In countries with annual property taxes based on the value of the land, the government could create an additional incentive by lowering the appraised value of the land during the term of the lease. Leasing would also give the landowner and government periodic opportunity to review the appropriate price to be paid for GHG mitigation. The price is likely to change as the market for GHG mitigation matures.
Governments may also decide to undertake general forest management service programmes without regard to the management decisions of individual landowners. For example, the government may decide to spend money on new programmes for forest fire prevention and response, for control of destructive forest insects or for control of forest diseases. These may ultimately result in quantifiable, verifiable increases in GHG sequestration, which the government may be able to claim for itself or offer as an offset. (Note, however, that the reporting requirements adopted by COP-7 require Parties to state which lands are subject to LULUCF activities, and to report on emissions and removals from those lands now and in future years. Claiming credit for a countrywide programme might complicate reporting.)
More intense enforcement of existing forest protection laws may also yield gains. Most countries find it difficult to enforce basic property laws in remote forested areas. Investment in increased surveillance to stop unauthorized land uses might reduce forest degradation enough to have a measurable effect on carbon sequestration.
Particularly in countries that consume large amounts of wood or paper, governments may wish to undertake programmes to promote more efficient use of forest products. These could include programmes to collect and recycle wood and paper.
It should also be noted that the UNFCCC directs Parties to end destructive subsidies. These might include programmes encouraging the clearing of land or the early harvest of trees.
For the country implementing these kinds of subsidy, the major questions may be judging the costs or likely returns. Until countries gain more experience in these areas, new programmes will necessarily entail some uncertainties.
One of the barriers to GHG mitigation projects is a lack of information. Providing information to landowners, consumers of forest products and the general public may encourage GHG mitigation projects.
Landowners may not be aware that GHG mitigation is an issue that involves them. The government can affect landowner management decisions by taking steps such as:
• informing landowners about economic opportunities that may arise under offset and mitigation programmes;
• informing landowners about the public service that they can perform through management for carbon sequestration;
• informing landowners about how to manage forests to improve carbon sequestration;
• informing landowners about how to measure and verify the results of their management efforts.
In many instances, information and training may be provided through established extension services. These could also be done through tax agents, through land registry agents or other non-traditional means.
Consumers and users of forest products may not be aware of their role in the carbon cycle. The government might consider programmes such as:
• clearinghouses collecting information on efficient manufacture and use of forest products;
• labelling programmes or educational campaigns to inform consumers about efficient use and recycling of forest products and about the advantages of wood as a carbon-neutral source of green energy;
• evaluation of the GHG impacts of individual large landowners or forest concession holders and public disclosure of those evaluations.
Governments may have a role to play in certifying or verifying GHG mitigation efforts. Certification and verification may be directly connected to compliance with the Kyoto Protocol for Annex I nations; they may be an adjunct to national market-based, regulatory or subsidy laws; or they may some day be important in the marketing of wood products.
Three articles in the Kyoto Protocol mention verification or certification. Article 12 requires CDM emission reductions to be certified. The Protocol directs the COP to designate “operational entities” to make these certifications, under the oversight of the Executive Board. The COP-9 decision on definitions and modalities for including LULUCF under the CDM includes aspects concerning verification and certification as well as the accreditation of operational entities in relation to afforestation and reforestation projects under the CDM (UNFCCC SBSTA, 2003, pp. 12–13 and 18).
Article 6 allows Annex I Parties to implement emission reduction and sequestration projects in other Annex I countries. There are two “tracks” to Joint Implementation, with different institutional implications at the national level. The first track – the “fast track” – is available for host Parties meeting the eligibility requirements.13 These Parties may use their own processes to verify emissions reductions or removals as being additional and issue the appropriate quantity of ERUs or RMUs. Consequently, it will be important for these Parties to have the necessary institutional basis in place well before the beginning of the commitment period in 2008. Under the second “track”, a Joint Implementation supervisory committee sets international procedures for baselines, verification and other procedures (Mullins, 2002, pp. 5 and 18). The guidelines on the implementation on Article 6 are included in the decision 16/CP.7 of the Marrakesh Accords.
Article 3 of the Protocol allows Annex I Parties to claim net changes in GHG emissions due to land-use change and forestry activities, but requires such changes to be verifiable. Annex I Parties have to report annually their anthropogenic greenhouse gas emissions and removals, which will be reviewed in accordance with relevant decisions relating to Articles 5, 7 and 8 of the Protocol.
Governments that set up market-based, regulatory or subsidy programmes may find it necessary to create internal standards or mechanisms to verify GHG reductions due to forest activities. Some of the sections above in this paper have touched on verification issues, e.g. the discussion of size under market-related issues. Similar verification issues may arise in determining compliance with GHG regulations or eligibility for GHG reduction subsidies.
Government involvement in internal certification and verification could take several forms. The government could itself measure and certify GHG offsets, perhaps through government forestry agencies. It could provide official guidelines for measuring them. It could license private parties, such as publicly accredited certification organizations, to measure them.
Government certification may occur in varying contexts. It may be strongly tied to government enforcement efforts, as a means to determine whether property owners are following laws designed to reduce GHG emissions. In a non-enforcement context, the purpose of certification may be to assure parties involved in GHG mitigation transactions that the mitigation is real.
If the public grows more aware of the importance of forests as GHG sinks, it may be interested to know whether wood came from forests managed to promote carbon sequestration. Certification of wood products could provide that information. This could be a government function, or it could fall to non-governmental organizations that maintain certification standards, such as the Forest Stewardship Council.
By mandating planning, the government can make decision-makers more aware of the impacts that forest-related decisions have on net GHG emissions. It is hoped that this awareness will lead to better decisions. This applies both to government and private decision-makers.
Many countries have impact assessment or planning laws that require government decision-makers to review the environmental impacts of proposed actions and consider alternatives and mitigation. GHG effects from forest projects may escape review under these laws for several reasons. Climate change may not be one of the kinds of impact that analysts usually consider. Or, the analyst may decide the effect of a single project on net GHG emissions is so minor that it is not worth consideration. Or the analyst may conclude that the ultimate impacts of climate change are so distant in time and space and so speculative that a present analysis cannot assign them a reasonable weight for the decision-maker to consider. New laws or guidance on impact assessment can overcome these hurdles and ensure that analysts weigh climate impacts when reviewing forest projects.
Many countries have planning requirements that apply to public or private forests. Managers cannot manage forests without short-term operational plans or long-term management plans. Typically, the law requires that these plans protect the productivity of the forest resource. At a minimum, planning makes the owner aware of the costs and benefits of proposed activities. It may also have a regulatory function, allowing the government to verify that the owner can carry out the proposed activity in accord with existing laws. Adding requirements for carbon inventories and projection of management impacts on net carbon sequestration could make forest owners and regulators more aware of the likely net GHG effects of proposed actions.
Some countries require industrial operations to prepare pollution prevention plans. These typically focus on hazardous or toxic pollutants. Governments could require the forest industry to prepare GHG emission reduction plans for forest management.
Legally mandated research generally takes one of two forms. One is a kind of subsidy, where the government commits itself to conducting research and making the results freely available. The other is a form of regulation, where the government orders others to gather information or conduct tests and pass the information on to the public or the government.
To understand and improve the effectiveness of LULUCF projects, each forested country will benefit from research on the behaviour of its own forests. Just as foresters require a fair amount of locally specific information to determine the optimal management for producing timber, foresters will need locally specific information for optimal management for carbon sequestration. Research may also improve the accuracy of local inventory methods and aid in measurement and certification of the amount of carbon sequestered. A large, industrial landowner might have the ability to conduct this sort of research, but the government itself may want to conduct the research for the benefit of small private landowners and for the better management of public forests,
Rather than conducting the research on small plots in dedicated experimental forests, some of the research on public lands could be in the form of adaptive management. In the course of management of public lands for carbon sequestration, the government would carefully vary its actions from stand to stand. By monitoring the resulting forest growth, the government would learn about how the lands react to management. The results would lead to better management decisions in the long term.
If a country does host large, private, industrial-scale carbon sequestration projects, it may want to require project operators to conduct research. For example, it might require that large operators present the results of surveys of soil carbon content or non-tree biomass before they could get their projects certified. The government could analyse data from several projects to glean a better understanding of the carbon sequestration capacity of local lands.
Implementation of the Kyoto Protocol hinges on institutional capacities. In particular, countries must designate a “national authority” if they are contemplating using the Clean Development Mechanism. Some nations may make the designations through legislation, while others may be able to make it through exercise of executive discretion.
At the last count, only the European Union, eight industrialized countries, 39 developing, and six countries in transition had established such authorities. For some of these countries, the authority exists only on paper.
It is probable that few countries will designate their forestry institution as the lead national authority. More often the choice will be an institution whose focus is air pollution or energy. Nevertheless, the lead institution will have to deal with LULUCF issues. Climate change presents a challenge that naturally cuts across institutional lines and requires cooperation among people with diverse expertise. Legislation can promote an interdisciplinary approach by creating interagency or public-private coordinating and advisory committees and requiring the lead institution to consult with other affected institutions before taking major actions.
12 Even the attempt to clarify how to interpret the meaning of “would have occurred in the absence of the registered CDM project” by the CDM Executive Board (see the reports of the Executive Board at its ninth and tenth session, cdm.unfccc.int/EB) did not lead to the expected clarity on the issue. The decisions of the Executive Board on baseline methodologies, however, suggest that the Executive Board is interpreting additionality in a relatively strict manner.
13 These are: (i) being a Party of the Kyoto Protocol; (ii) having established its assigned amount and a national system for estimating emissions and sinks; (iii) putting in place a national registry; and (iv) having submitted the required national inventory and supplementary information annually. Furthermore, the country has to inform the UNFCCC Secretariat of its designated focal point and its national guidelines and procedures for approving Article 6 projects.
