Analysis: What does Waxman-Markey Mean for Trees?

Maria Bendana

On March 31, US Congressmen Henry Waxman and Ed Markey released the first official draft of the American Clean Energy and Security Act of 2009 (ACESA) covering 85% of US emissions. The emissions cap is more ambitious than expected with 2005 as a baseline: 3% below 2005 levels in 2012, 20% in 2020, 42% in 2030 and 83% below 2005 levels in 2050. Ecosystem Marketplace examines the implications of this bill for the global forestry sector and the race to halt climate change.

2 April 2009 | One week after the US Congress spawned its first climate bill of the legislative season, Congressmen Henry Waxman and Ed Markey released the first draft of a climate bill that presents three mechanisms for channeling funding aimed at reducing deforestation: offsets, a supplemental pollution reduction program, and strategic reserve auctions. The bill signals a strong recognition and commitment to address the 20% of emissions coming from the land use, land use change and forestry sector (LULUCF), more than the total emissions of the transportation sector combined.

Offsets

International forestry – and in particular reducing emissions from deforestation and degradation (REDD) credits – may be issued by the Environmental Protection Agency (EPA) and used as offsets in the US climate regime. Based on the recommendations of the Advisory Board, the EPA may include forest degradation and soil carbon losses associated with forested wetlands or peatlands within the meaning of deforestation.

The total quantity of offsets allowed each year cannot exceed 2 billion tons and may be based on sector-wide reductions or avoidance of emissions, or sector-wide increases in sequestration. It is split evenly between domestic and international offsets. Starting in 2012 offsets can be used to meet 30% of the compliance target and the share will progressively increase up to 66% in 2050 and each year thereafter. Due the 50/50 split for domestic and international offset use, a covered entity may then satisfy 15%–and progressively increase the share to 33% in 2050– of its compliance obligation using international offsets. The conversion will be 1.25 offset credits in lieu of an emission allowance. Of these international offsets, forestry and in particular REDD credits can be crucial cost containment measures in light of the economic crisis. Eligible project types will be determined by EPA two years after Act’s enactment. International offsets must be approved and reissued by EPA.

However, the bill explicitly mentions offsets from deforestation will be allowed if the EPA determines the following criteria is met:

The United States has a bilateral or multilateral agreement or arrangement with the country where the offset takes place and it is considered a developing country

The activity occurs in an eligible country which is defined as one that has the capacity to participate in international deforestation reduction activities at a national level, including—the technical capacity to monitor and measure forest carbon fluxes for all significant sources of greenhouse gas emissions from deforestation with an acceptable level of uncertainty; and the institutional capacity to reduce emissions from deforestation, including strong forest governance and mechanisms to deliver deforestation resources for local actions

The quantity of the international offset credits has been determined by comparing the national emissions from deforestation relative to a national deforestation baseline for that country established, in accordance with an agreement or arrangement. The baseline should be national; take into consideration the average annual historical deforestation rates of the country during a period of at least 5 years to ensure additionality; establish a trajectory that would result in zero gross deforestation by not later than 20 years after the national deforestation baseline has been established; be adjusted over time to take account of changing national circumstances; be designed to account for all significant sources of greenhouse gas emissions from deforestation

The reduction in emissions from deforestation has occurred before the issuance of the international offset credit and has been demonstrated using ground-based inventories, remote sensing technology, and other methodologies to ensure that all relevant carbon stocks are accounted

The activity is designed, carried out, and managed in accordance with widely accepted, environmentally sustainable forestry practices; and it promotes native species and conservation or restoration of native forests.

Protecting Local Communities

The bill also includes a provision for the protection of vulnerable groups involved in deforestation offsets.

The offset project should give due regard to the rights and interests of local communities, indigenous peoples and vulnerable social groups. It should also promote consultations with local communities and indigenous peoples in affected areas, as partners and primary stakeholders, prior to and during the design, planning, implementation, and monitoring and evaluation of activities. It should encourage profit sharing from these incentives with local communities and indigenous peoples.

Supplemental Pollution Reductions Program

In addition to the cap, there are supplemental pollution reductions with the aim of preserving tropical forests, building capacity to generate offset credits and facilitating international action on global warming. From 2012 through 2025 the EPA will set aside up to five percent of emission allowances to be used to provide incentives to reduce deforestation in developing countries. For vintage years 2026 through 2030, it goes down to three percent and for 2031 through 2050, only two percent will be set aside.

In 2020, the activities to reduce deforestation must provide emission reductions in an amount equal to an additional 10 percentage points of reductions from U.S. emissions in 2005. The EPA can transfer these allowances to countries that enter into and implement agreements or arrangements relating to reduced deforestation. By 2020 the program should achieve 720 mtCO2e in additional emission reductions and cumulatively six billion tCO2e by end of year 2025.

Another objective of the program is to build capacity to reduce deforestation in countries experiencing deforestation, including preparing developing countries to participate in international markets for international REDD credits and preserve existing forest carbon stocks in countries where such forest carbon may be vulnerable to international leakage, particularly in developing countries with largely intact native forests. The EPA deems those countries eligible to receive this support are those that:

are experiencing deforestation, degradation or have standing forest carbon stocks that may be at risk of deforestation or degradation, and

have entered into a bilateral or multilateral agreement with the US and agree on certain standards.

The EPA will support the following activities:

National deforestation reduction activities
Subnational deforestation reduction activities, including pilot activities that reduce emissions but are subject to significant uncertainty

Leakage prevention activities

Development of measurement, monitoring and verification capacities to enable a country to quantify supplemental emissions reductions and to participate in international markets for offset credits from reduced or avoided deforestation

Development of governance structures to reduce deforestation and illegal logging

Enforcement of requirements for reduced deforestation or forest conservation

Efforts to combat illegal logging and increase enforcement cooperation and

Providing incentives for policy reforms to achieve the aforementioned objectives.

Beginning five years after the date that a country entered into the agreement, the EPA will cease compensation through emission allowances to that country for any subnational deforestation reduction activities, except that the EPA may extend this period by an additional 5 years if it determines that:

the country is making substantial progress towards adopting and implementing a program to achieve reductions in deforestation measured against a national baseline

the emissions reductions achieved are not resulting in significant leakage and

the emissions reductions achieved are being appropriately discounted to account for any leakage that is occurring

Strategic Reserve Auctions

The EPA will auction strategic reserve allowances quarterly each year from the strategic reserve fund, which is comprised of a percentage of allowances that are banked by the system. The covered entity purchasing limit is 10 percent of the allowance compliance obligation. The EPA will use the proceeds from each strategic reserve auction to purchase international offset credits issued for reduced deforestation activities. The EPA will retire those international offset credits and establish a number of emission allowances equal to 80 percent of the number of international offset credits retired.

Strategic reserve allowances established will be additional to regular emission allowances.

EPA will fill reserve with 1% of annual allocation from 2012-2019; 2% from 2020-2030 and 3% from 2030-2050. The minimum strategic reserve auction price is two times the EPA-modeled 2012 price.

For 2013-14, it will be the 2012 price increased by 5% plus the inflation rate (Consumer Price Index, CPI). Post-2014 it will be 100% above a rolling 36-month average daily closing price for that year’s vintage recorded on carbon trading exchanges.

Fear of Flooding?

In light of the new bill evidencing a strong US demand for credits, the likelihood of international forestry credits causing global carbon prices to crash decreases significantly. Additionally, the volume of forestry credits that could potentially reach the market will not flood it because it can be dealt with by constraining the forestry credit supply as is the case in this bill where international offsets and thus international forestry credits are not allowed unfettered access. Moreover, revenue from the strategic reserve auctions and allowance set asides in the supplemental pollution reduction program to retire forestry credits should mitigate the deflationary price pressure as well.

Maria Bendana manages the Forest Carbon Portal, a project of Ecosystem Marketplace. She can be reached at [email protected].