Climate Change Update - Release of Voluntary Carbon Standard 2007

There has been increasing media attention on the quality and reliability of voluntary carbon offset products. One of the problems with choosing offset providers has been the lack of a rigorous universal standard by which to judge offset products.

The much-anticipated release of the Voluntary Carbon Standard 2007 (VCS) on 19 November has helped however to boost confidence in the booming offset industry.

The VCS is a global standard for voluntary greenhouse gas (GHG) emission reduction or removal projects and their validation and verification.  It is likely to become the voluntary carbon market’s most popular standard for the regulation of offsets.

The VCS was developed over the last two years by the Climate Group, the International Emissions Trading Association, and the World Business Council for Sustainable Development, in consultation with industry, NGOs and market specialists.

The standard, if properly applied and administrated, should provide much-needed comfort and certainty for buyers and developers of voluntary carbon offset products. Rules for certification under the VCS will be as robust as those of the Kyoto Protocol’s Clean Development Mechanism (CDM), but should be less expensive to implement due to lower transaction costs and more flexible methodologies.

Accredited validators and verifiers will provide an independent assessment of projects seeking approval under the VCS.  Approved projects will be eligible to create Voluntary Carbon Units (VCUs), each of which will represent 1 tonne of CO2 equivalent GHG emission reduction or removal.  VCUs will be issued, held and if necessary, cancelled, in VCS registries.  The public will be able to access information on every offset project approved under the VCS.

VCUs will only be granted for emission reductions or removals that have already occurred and been verified.  This means that forestry projects will not be able to generate VCUs for emissions captured in trees until the emissions have actually been sequestered.

Forestry-based offset projects have recently been attracting controversy.  This is largely due to the difficulties associated with quantifying the carbon stored and assuring longevity of the carbon storage, as well as a lack of consistent, credible standards by which to judge the projects.  However, given that forestry projects account for between 35-50% of all voluntary offsets being sold, the VCS drafters did not want to exclude forestry projects from the approved methodologies.  The VCS therefore includes a range of Agriculture, Forestry and Other Land Uses (AFOLU) in its eligible project activities.  AFOLU projects are divided into four categories:

• Afforestation, Reforestation and Revegetation (ARR) – establishing, increasing or restoring tree species in forests.
• Agricultural Land Management (ALM) – increasing carbon stocks in soils and trees; decreasing CO2, N2O and/or CH4 emissions from soils through improved cropland and grassland management or land-use change.
• Improved Forest Management (IFM) – such as conversion from conventional logging to reduced impact logging (RIL), conversion of logged forests to protected forests, and improving the capacity of poorly stocked forests.
• Reducing Emissions from Deforestation (RED) – activities that reduce the conversion of forests to cropland, grassland, wetland, peat land, settled areas and/or other land uses.

More categories (such as avoided devegetation) may be introduced when appropriate methodologies become available. AFOLU projects must have a project length of at least 20 years to be eligible create VCUs.  Shorter-term projects are not eligible since they have too high a non-permanence risk.

The VCS requires all AFOLU projects to identify potential negative environmental and/or socio-economic impacts and take steps to mitigate them prior to generating VCUs.  Proponents will also be encouraged to meet the Climate, Community and Biodiversity Project Design Standards and/or obtain Forest Stewardship Council certification to ensure that projects are managed sustainably.  Such holistic management strategies can lower the risks associated with forestry projects such as non-permanence and leakage of carbon.

The VCS approach for addressing non-permanence is to require that projects maintain an adequate buffer of non-tradable VCUs in reserve to cover unforeseen losses in carbon. The buffer VCUs from all projects are held in a special account.  The buffer VCUs will be credited back to each project over time as it demonstrates longevity, sustainability and appropriate risk minimisation strategies.

Some of the risks that will be faced by offset providers, especially for AFOLU projects include:

• Risk of unclear land tenure and potential for disputes over land.
• Risk of financial failure.
• Risk of technical failure. 
• Risk of management failure. Risk of rising land opportunity costs that endanger the future viability of the project (i.e. alternative land uses that are more immediately profitable).
• Risk of political instability. 
• Risk of social instability. 
• Devastating fire risk.
• Risk of pest and disease attacks. 
• Risk of extreme climatic events (floods, drought, etc). 
• Geological risk (volcanoes, earthquakes, landslides etc).

VCUs from the buffer pool will be cancelled when carbon is lost due to one or more of these risks eventuating.  The buffer pool will provide security and confidence to purchasers of VCUs, and ensure the atmospheric integrity of each project, since the buffer pool will always maintain an adequate surplus to cover losses from individual offset project failures.  All VCUs in circulation will therefore remain valid, regardless of the status of individual projects.

Aside from the methodologies included in the VCS Program, other GHG emission reduction scheme methodologies will be given pre-approval if they are accepted by the VCS Board.  At present, only the CDM methodologies have been approved, but methodologies from the Californian Climate Action Registry are also being considered.  Australian programs such as the Australian Greenhouse Office’s "Greenhouse Friendly" initiative and the NSW Greenhouse Gas Reduction Scheme (GGAS) are not being included at this stage, but may be in the future.

If you would like more advice about the VCS, purchasing offsets in general, or are interested in becoming an offset provider, and want to know more about how to minimise your risk exposure, please contact us.

Louise Hicks, Partner
Tel +61 3 9274 5459
louise.hicks@dlaphillipsfox.com

Anne McCasland-Pexton, Solicitor
Tel +61 3 9274 5070
anne.mccasland-pexton@dlaphillipsfox.com