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THE ROLE OF TRANSACTION COSTS IN LUCF PROJECTS. Oscar Cacho School of Business, Economics and Public Policy University of New England AUSTRALIA. Research funded by ACIAR. Outline. Background The CDM project cycle Carbon accounting-issues Implications for REDD

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slide1

THE ROLE OF TRANSACTION COSTS IN LUCF PROJECTS

Oscar Cacho

School of Business, Economics and Public Policy

University of New England

AUSTRALIA

Research funded by ACIAR

Cacho (2008)

slide2

Outline

  • Background
  • The CDM project cycle
  • Carbon accounting-issues
  • Implications for REDD
  • Overview of transaction costs
  • Strategies to reduce transaction costs

Cacho (2008)

slide3

Background

Clean Development Mechanism (CDM) allows Kyoto signatories to reduce greenhouse gas emissions in developing countries (Article 12).

The medium of exchange is the Certified Emission Reduction (CER)

CDM projects can operate in the energy sector (reduced emissions) or in the land-use change and forestry (LUCF) sector (sinks).

Afforestation and reforestation projects are eligible within the LUCF sector.

Cacho (2008)

slide4

Transaction Costs

cost of participating in the CER market (CT).

SA

P($)

CT

SP

PA

PP

D

QA

QP

Q(CERs)

Abatement Costs

opportunity cost of land-use change (SP).

Cacho (2008)

slide5

CDM project cycle

project developer

PDD Development

host government (DNA)

approval by host country

ex ante

(pre-implementation)

validation

operational entity (DOE)

registration

CDM executive board

project developer

monitoring

ex post

(implementation)

t

operational entity

verification + certification

CDM executive board

CER issuance

Cacho (2008)

slide6

Carbon-Accounting Issues

  • Additionality
  • Permanence
  • Leakage

Cacho (2008)

slide7

Carbon-Accounting Issues

  • Additionality
  • Permanence
  • Leakage

Carbon sequestered by the project must be additional to “business as usual”

Cacho (2008)

slide8

Carbon-Accounting Issues

  • Additionality
  • Permanence
  • Leakage

Carbon sequestration can be reversed through fire and deforestation

Cacho (2008)

slide9

Carbon-Accounting Issues

  • Additionality
  • Permanence
  • Leakage

Emission reductions achieved within a project cause increased emissions outside the project boundary

Cacho (2008)

slide10

Full Carbon Accounting (FCA)

An FCA system measures all changes, positive and negative, in all carbon stocks from all lands continuously…

lands are monitored permanently over contiguous commitment periods…

“ultimately the atmosphere does not differentiate (and neither should climate policy) between carbon dioxide molecules produced by fossil fuel combustion and such molecules produced through forest destruction”

Bonnie et al (2002), p. 1871

Cacho (2008)

slide11

Implications for REDD

  • REDD will only ever work under a Full Carbon Accounting (FCA) scheme
  • FCA avoids the problems of permanence and leakage
  • The link between FCA and forest dwellers still needs to be established and rewards must be distributed
  • This link will carry transaction costs

Cacho (2008)

slide12

Transaction costs

  • Search and negotiation
  • Approval
  • Project management
  • Monitoring
  • Enforcement and insurance

Cacho (2008)

slide13

Transaction costs

  • Search and negotiation
  • Approval
  • Project management
  • Monitoring
  • Enforcement and insurance
  • find site, establish contact, organize information sessions, draft contracts, provide training
  • establish baseline for region
  • estimate potential C stocks and flows of project
  • produce PDD

Cacho (2008)

slide14

Transaction costs

  • Search and negotiation
  • Approval
  • Project management
  • Monitoring
  • Enforcement and insurance
  • approval by host country (DNA)
  • validate the project proposal (DOE)
  • Submit to CER Board

Cacho (2008)

slide15

Transaction costs

  • Search and negotiation
  • Approval
  • Project management
  • Monitoring
  • Enforcement and insurance
  • purchase hardware and software, establish office
  • establish permanent sampling plots
  • maintain database and administer payments
  • coordinate field crews, pay salaries
  • distribute payments to landholders
  • interest costs

Cacho (2008)

slide16

Transaction costs

  • Search and negotiation
  • Approval
  • Project management
  • Monitoring
  • Enforcement and insurance
  • sample C stocks
  • verification and certification by DOE
  • check for leakage

Cacho (2008)

slide17

Transaction costs

  • Search and negotiation
  • Approval
  • Project management
  • Monitoring
  • Enforcement and insurance
  • maintain buffer of C
  • purchase liability insurance,
  • settle disputes
  • protect plot from poachers and fire

Cacho (2008)

slide18

Reducing transaction costs

  • Generate and disseminate information on carbon stocks, baselines and potential carbon sequestration.
  • Train landholders to measure carbon.
  • Select cohesive communities and encourage community self-regulation to meet project commitments.
  • Bundle projects and payment schemes.
  • Grant land tenure to landhoders who restore degraded land.

Cacho (2008)

slide19

Reducing transaction costs

enforcement and insurance

project management

search and negotiation

monitoring

approval

Generate & disseminate information

Bundle projects

Teach landholders to measure C

Encourage community self-regulation

Promote secure land tenure

Cacho (2008)

slide20

“It is unlikely that developing countries will be willing to take emission budgets that require FCA unless they gain experience in successfully curbing tropical deforestation while also providing for the needs of their citizens”

Bonnie et al (2002), p. 1872

Cacho (2008)