Approaches to REDD+ Nesting Lessons Learned from Country Experiences April 2018 Approaches to REDD+ Nesting Lessons Learned from Country Experiences April 2018 Donna Lee Pablo Llopis Rob Waterworth Geoff Roberts Tim Pearson Table of Contents Executive Summary 3 Abbreviations 4 1.1. What Is Nesting? 5 1. Introduction: The What and Why of Nesting 5 1.2. Why Nest? 6 1.3. Objective of the Paper 7 2. Providing Incentives through Design of a Nested System 8 2.1. Ex Ante Finance versus Ex Post Rewards 9 2.2. If Ex Post Rewards, Whether to Allocate Finance or ERs 10 2.3. National (or Subnational) Action versus Local Action 13 2.4. Whether ERs Can Be Generated by Smaller Units 15 2.5. Combining Multiple Incentives 17 3. Technical Challenges of Nesting 19 3.1. Data and Methodological Mismatches 19 3.2. Baseline Setting or Allocation 21 3.3. Avoidance of Double Counting 23 3.4. Using Proxies Rather Than GHG Metrics 28 3.5. Why Has Nesting Failed in Some Cases? 30 4. Lessons Learned 31 Lessons Learned from Country Experiences 1 2 Approaches to REDD+ Nesting Executive Summary Mitigation of greenhouse gases in the land sector is subnational) programs, is increasingly being promoted complex and has a unique set of challenges. The most as a way to include the land sector in national significant challenges arise from the geographically mitigation actions. Having a mix of jurisdictional and diffuse nature of the emissions sources (compared local activities (including, but not always comprising, to, for example, point-based energy sources of carbon projects), however, raises the question: How emissions), the vast array of potential management can local and jurisdictional actions seeking to reduce responses, the ongoing effects of past actions, the greenhouse gas (GHG) emissions be integrated interaction of human and natural processes, and into a single system that supports both low-carbon the strong influences of policy and markets. These development and the transformation that countries are factors result in a large number and diversity of actors seeking, and that the Paris Agreement requires? involved, temporal variability in emissions sources and volumes, and higher uncertainty associated with The Forest Carbon Partnership Facility (FCPF) Carbon the processes generating the emission reductions. Fund and the BioCarbon Fund Initiative for Sustainable Because of this, achieving large-scale mitigation in the Forest Landscapes (ISFL) provide results-based land sector requires collective action involving multiple finance at the jurisdictional scale. Many jurisdictions stakeholders undertaking different activities. now in the pipeline for performance-based incentives include ongoing local-level activities—in some cases, The history of the United Nations Framework existing operational carbon projects—as well as Convention on Climate Change (UNFCCC) policies and programs that contribute to emission negotiations, and why countries agreed to only reductions. Lessons from emerging experiences to encourage jurisdictional (national or subnational develop nested REDD+ approaches are in general not as an interim measure) REDD+ efforts, is complex. well known or communicated, but they could provide Regardless, many now support jurisdictional REDD+ useful information and ideas for countries that wish to because of its potential to be transformational— stimulate local actions that contribute to overall national through reforming broader governance, landscape (or subnational) performance. management, and government policies. Jurisdictional approaches also have the ability to access and This paper synthesizes several lessons learned in integrate a range of financial streams, not just carbon efforts to develop systems that integrate incentive finance, ostensibly achieving more sustainable mechanisms at multiple scales. It illustrates a number of outcomes. Without such transformation, it is argued, we lessons through examples and the appendix presents can’t trigger the scale of reductions needed to reach individual case studies from a variety of geographies— global climate goals. Acre (state in Brazil), Australia, Brazil (Amazon), the Democratic Republic of Congo (DRC), Guatemala, and In sum, it could be said that REDD+ has Zambia. The hope is that the experiences of emerging transformational ambition, but the challenge of “nested” systems can provide inspiration to countries managing diffuse actions and providing incentives developing REDD+ systems, particularly those which across a landscape remains. “Nesting,” or integrating seek to catalyze across a landscape local actions that smaller-scale activities into larger national (or contribute to national mitigation.  Lessons Learned from Country Experiences 3 Abbreviations A/R afforestation/reforestation AAU assigned amount unit BNDES Brazilian Development Bank DRC Democratic Republic of Congo ER Emission Reduction unit ER Program Emission Reductions Program (DRC) ERF Emissions Reduction Fund (Australia) ERPA emission reduction purchase agreement FCPF Forest Carbon Partnership Facility FREL forest reference emission level FRL forest reference level FullCAM Full Carbon Accounting Model (Australia) GHG greenhouse gas IFM improved forest management JI joint implementation JNR Jurisdictional and Nested REDD+ KP Kyoto Protocol MRV measurement, reporting, and verification NDC Nationally Determined Contribution NGGI national greenhouse gas inventory PMU Program Management Unit UNFCCC United Nations Framework Convention on Climate Change VCS Verified Carbon Standard VCU Verified Carbon Unit WWC Wildlife Works Carbon (DRC) 4 Approaches to REDD+ Nesting 1. Introduction: The What and Why of Nesting 1.1. What Is Nesting? ●● Local level: Carbon projects may also develop baselines, measure performance, and generate The reduction of forest-related emissions involves the and sell carbon credits based on measured implementation of a range of activities, at times with emission reductions. overlapping objectives and spatial impact. Within a region, multiple activities using different methods are In most countries, drivers of deforestation and forest likely to be implemented by various actors (national degradation vary, requiring multiple types of activities and international), in different and overlapping and the participation of multiple stakeholders, as geographical locations and over different times. For illustrated in figure 1.1. Government policies will also example, communities may be engaged in a clean have impacts across the entire landscape. cookstove program while implementing new climate- The term “nesting” originated from a desire to integrate smart agricultural practices and protecting forests in existing forest carbon projects into larger-scale a conservation area. Other groups may be actively REDD+ programs while allowing them to continue involved in reforestation or restoration activities. generating and trading carbon units. Before large- The government may also implement broad-based scale approaches were endorsed by the UNFCCC, mitigation programs (such as land tenure reform), enforce policies, or implement better land use planning many forest carbon projects had been created that impacts forests across large landscapes, including and moved forward more quickly than international through local-scale activities. The process is made processes. Most of these projects use reporting and more complicated as policies, programs, and local accounting rules (including methods for calculating actions, though implemented independently, can baselines and accounting for displacement), apply impact each other—making it difficult to assess and environmental and social safeguards, and maintain quantify their individual effectiveness. registries that are inconsistent with emerging national systems. Many of them were developed independently While REDD+ activities are implemented at multiple of national policy and systems, with carbon rights scales, REDD+ (or forest GHG mitigation) results may typically moving offshore. As such, they can be also be measured and accounted at multiple scales. considered legacy projects, although many are still in There are benefits and challenges that arise when GHG active development. performance is measured at various scales, and further challenges arise when entities claim, sell, or trade in the This paper does not take the traditional view of nesting resulting emission reductions. These may occur at the (which focuses on integrating legacy projects); national, subnational, or local levels: rather, it considers a broader view—looking at how actions at smaller scales can best be catalyzed to ●● National level: Under the Paris Agreement, contribute to larger-scale jurisdictional (national countries must account for domestic achievement or subnational) performance. The concept has been of a Nationally Determined Contribution (NDC), considered as part of land sector mitigation policy by or “target” level of emissions (or removals), which some countries since the late 1990s, particularly by is a type of claim to the generation of emission those with Kyoto Protocol commitments. Countries reductions. In addition, Article 6 allows the trading that considered using the land sector within domestic of such units to meet targets. systems considered how carbon units generated ●● Subnational level: A state or province may within such systems could be consistent with, and create a baseline against which performance is represented in, the national accounts. In other measured, and seek payment for results (with no cases, considerations were driven by participation in carbon asset or credit generated) or generate mechanisms such as Joint Implementation. However, carbon assets and sell them to willing buyers while multiple options were floated, only a few of these anywhere in the world. domestic systems were developed—for example, Lessons Learned from Country Experiences 5 Figure 1.1: Options for the allocation of funds from the sale of ERs Cookstoves Climate-smart agriculture Protected area in Australia and New Zealand. For these systems, There are many different forms and definitions of projects form part of a national policy response (for nesting, each developed for specific policy purposes. example, a domestic carbon trading or tax system) and While focusing on REDD+, many of the issues are therefore more likely to be consistent with national described in this paper also apply to the broader land accounting and contribute to targets. This approach is sector—an important consideration in light of the Paris more likely to represent the future of REDD+ nesting— Agreement and countries’ efforts to meet their NDCs. for example, Colombia is pursuing a system that uses revenues from a carbon tax to provide incentives for 1.2. Why Nest? local-scale projects. Nesting requires considerable policy and technical By taking this broad view of nesting, the paper support from both the private and public sectors. As assumes that it can include the following: such, it is important to understand why a country may consider nesting and the potential costs and benefits. ● Benefit-sharing approaches, where a large-scale The many reasons to consider nesting include but not program (national or subnational) generates are limited to the following: emission reductions and/or receives carbon (or REDD+ results-based) finance, and shares it with Providing early and future benefits. Local-scale smaller-scale units to incentivize local actions activities (including carbon projects) can stimulate private investment, provide operational on-the- ● Systems that engage in carbon accounting at ground capacity often lacking in countries, and offer multiple scales—for example, countries that have lessons (and results) that, ideally, can be replicated. GHG commitments at higher scales (such as If the conditions are right, such activities/projects Kyoto Protocol or Paris Agreement NDCs) or may can support and become critical building blocks for be generating carbon units or receiving results- jurisdictional programs. Some have been able to based finance at higher scales, but also allow access finance from the voluntary carbon market. smaller-scale units to generate benefits tied to GHG performance Creating a pathway for governments to implement policies to reduce emissions, particularly in countries ● The incorporation of local-scale activities/projects where mitigation is expected to occur on private or into jurisdictional REDD+ schemes as well as community-controlled land. For example, a government subnational programs into national REDD+ may enact a policy that provides incentives to schemes landholders or managers who operate at a smaller 6 Approaches to REDD+ Nesting scale than a national or subnational scheme, thus Projects designed to fit within national programs are engaging multiple players to contribute to jurisdictional more likely (though not always) to use reporting and performance and track the impact of such policies. accounting rules consistent with those used at the In this regard, nesting can create a standardized national scale. This is an important distinction when framework to test a variety of implementation options— considering nesting. including incorporating suitable technologies and approaches—and to integrate lessons from lower-level 1.3. Objective of the Paper units to the jurisdictional level in a structured way. Nested systems may also provide the opportunity The objective of this paper is to share a few lessons from to engage private sector actors operating land use– nested systems. While there are many positive benefits based supply chains in a jurisdictional REDD+ policy. to nesting, experience suggests that countries struggle with development of nested systems. Very few have Reducing the cost of mitigation actions. This can been operationalized (with exception to a few developed occur through domestic trading of Emission Reduction countries, such as Australia and New Zealand), units (ERs), including the transfer of carbon units and although several REDD+ nested systems are now flows of funds back to a group; international trading, emerging. Section 2 explores four high-level “typologies” including tracking of ERs and moving them from that countries may consider when developing a one country report to another; and the reduction of nested system. Section 3 summarizes three key measurement, reporting, and verification (MRV) and technical challenges that countries face: alignment of transaction costs. A nested system may also provide measurement systems, reference levels, and double potential purchasers of ERs with greater certainty, increasing demand (and price) for such units. counting. Both sections illustrate options using real-world examples from countries pioneering nested approaches Improving national MRV systems. Projects can and explain why certain choices were made. The paper support subnational and national estimates by concludes with thoughts on overall lessons learned, generating additional data at more refined scales. recognizing that the journey is still young. Box 1.1 The Starting Point for Countries: International Commitments Prior to the development of the Warsaw Framework (which supported REDD+ accounting at national or subnational scales only) and the Paris Agreement, developing countries did not need to worry about nesting. Projects within their borders could generate carbon units that could be sold offshore to companies or countries without concern about how such sales affected their overall country-level mitigation performance. The Paris Agreement, in particular, changes this situation, as most developing countries now have quantified NDCs. Such commitments fundamentally change the picture for developing countries. Countries that have stated in their first NDC that they will achieve a certain target “unconditionally” may be limited in their ability to transfer units internationally. In this situation, where a portion of emission reductions by a country must be used for the national achievement of an (unconditional) NDC, there may still be opportunities to access financing for remaining emission reductions (figure B2.1.1). The rest of section 2 builds on this context. Figure B2.1.1: Countries achievement of an NDC and remaining ERs Country achievement of emission reductions at national scale ERs used for achievement of the (unconditional) NDC Remaining ERs Lessons Learned from Country Experiences 7 2. Providing Incentives through Design of a Nested System The design of a nested system should consider first ●● Whether to provide smaller-scale (nested) units and foremost how best to catalyze actions and actors ex post rewards for past actions/performance needed to reduce emissions (or enhance removals)— versus ex ante finance to generate emission that is, how to provide the most effective incentives to reductions a variety of actors across a landscape. A secondary consideration may be the availability of finance for ●● If providing ex post rewards, whether to share various scales, that is, the demand for jurisdictional emission reductions or finance ver­sus project-based carbon, and the extent and types of finance the country aims to access. The choice of ●● What portion of the finance or emission scenarios may also depend on where effort for data reductions achieved at the higher level should be collec­ tion and management will reside, how a system used to catalyze local actions (versus kept at the can manage mismatches and non-delivery risks, and national or subnational level) pate which potential projects (or smaller units) may partici­ in a nested system. In sum, no one method of nes­ ting ●● Whether to allow smaller-scale units the ability to suits all circumstances. The exact methods will de­ pend generate ERs separately, that is, not as part of a on the political, legal, and market requirements of each top-down allocation scheme. country. Despite this, a number of high-level decisions will likely be common across multiple countries. In the sections that follow, each of the above points is explained in greater detail and examples illustrate each We have identified four fundamental decisions that of the options and the motivations behind why such emerging nested systems appear to make: options were chosen. Figure 2.1: Options for the allocation of funds from the sale of ERs Country achievement of emission reductions at national scale ERs used for achievement of the (unconditional) NDC Remaining ERs Country sells ERs Allocation of funds Two basic models: Use of funds to achieve future Use of funds to reward past reductions at subnational/project reductions at subnational/project scale by providing ex-ante finance scale by providing ex-post rewards to local actors in the form of finance 8 Approaches to REDD+ Nesting 2.1. Ex Ante Finance versus Ex Post associated with the carbon finance received and being allocated. There are a number of possibilities Rewards for use of the funds (including noncarbon-related uses). However, most schemes funded by donor Countries may wish to consider what is the best way governments (for example, the Green Climate Fund, to generate action on the ground—either by providing FCPF, bilateral agreements) have requirements for the ex ante finance to local actors to achieve certain “use of proceeds”—often they must support further outcomes, or by rewarding ex post performance progress on reducing forest-related emissions or by local actors. In the first instance, carbon finance support low-carbon development strategies. may be received at the higher level (national or subnational) linked to emission reductions (or carbon In contrast, performance achieved at the higher stock enhancement) performance, but how such funds scale can be used to reward past performance, are then allocated are delinked from local performance thus incentivizing actors on the ground to engage (carbon or otherwise). In other words, funds may be in activities that, ideally, help to generate emission used to carry out activities that contribute to reducing reductions. This option—allocating funds (or emission emissions (or increasing removals) in the future, reductions) through ex post performance metrics—is but they are not tied to the (past) GHG reductions covered in section 2.2. SUMMARY Ex ante finance Ex post finance Use of funds to incentivize actors by Use of funds to generate additional (future) DESCRIPTION providing rewards for (past) results-based activities to sustain mitigation performance. performance. Simple: This option is the simplest from a Stronger incentives: Certain types technical perspective. There are no concerns, of stakeholders may respond well to for example, with double counting or aligning performance metrics (e.g., the private multiple MRV systems. sector). BENEFITS Flexible: A country can decide how to spend Catalyzes private investment: Because a the funds in a variety of ways (including to potential return on investment can engage achieve non-carbon benefits). This may also private finance, this option may be useful for include using funding to leverage private governments with insufficient resources or investments. that do not have strong fiscal levers. Requires up-front investment: This finance Risk of non-performance: In some will likely need to come from the government cases, the allocation of finance or emission unless development assistance may be used reductions will only be as high as the (without concerns of “double payment”). jurisdictional performance. In such cases, there are risks to either subnational units, Weaker incentives: Because it does not or the private sector and local actors, who reward performance, it may be said to have engage in programs or projects that are CHALLENGES weaker incentives; as such, it will be difficult to nested within the higher-level envelope—in engage some private sector actors. particular, if a local project performs well, but the jurisdiction does not perform equally Allocation inefficiency: A key challenge is well, depending on the approach to nesting, how to determine an equitable allocation of the financial rewards are limited. The risk of the funds, and if funds are intended to further non-performance will need to be borne by mitigation, how to ensure funds are used for the jurisdiction or projects—and in the latter higher value efforts. case, will dampen local investments. Lessons Learned from Country Experiences 9 Figure 2.1 illustrates the two options available in the 2.2. If Ex Post Rewards, Whether to case where a country achieves emission reductions at a higher scale and then monetizes them. It can allocate Allocate Finance or ERs funds to either: (a) provide ex ante (grant) finance Countries may wish to provide ex post rewards to to achieve future emission reductions, or (b) reward smaller-scale units as a catalyst for implementing actors that contributed to the emission reductions. Two activities that contribute to larger-scale performance. examples are provided of countries that chose to use performance-based finance to provide ex ante grants These rewards may take two different forms: finance to local actors: Brazil (box 2.2) and Guyana (box 2.3). or emission reduction units. In other words, countries Examples of ex post rewards are provided in section 2.2. that generate emission reductions at the national or Box 2.2 Brazil Prior to the completion of the Warsaw Framework, Brazil set up the Amazon Fund to receive payments for reduced emissions from deforestation in the Amazon region. The national government provides the measurement and monitoring system that covers the entire Amazon biome, and BNDES (the Brazilian Development Bank) manages “donations” to the fund. To date, Norway, Germany, and Petrobras (a Brazilian petroleum company) have made donations, totaling more than US$1 billion. The distribution of these funds is not related to past emission reductions. Instead, the funds are used to finance project activities intended to further reduce deforestation. BNDES set criteria for the types of activities it wants to fund and then invited organizations to apply for funding based on the criteria. Entities may propose a project in any of the predetermined areas (see figure B2.2.1) and request support from the Amazon Fund. See the appendix for more information on the original design of the Amazon Fund. Figure B2.2.1 The Amazon Fund DONORS Donots pay for There is no linkage between ex post performancethat performance catalizes donor finance and the allocation to projects that follows. Positive performance The Amazon fund supports projects in the following of Amazon Amazon Fund areas: region AMAZON FUND provides grants to projects • Management of public forests and protected areas Brazil • Environmental control, monitoring and inspection • Management of susuatinable forests Amazon • Economic activities developed through sustainable use of the forest PROJECT PROJECT PROJECT • Ecological and economic zoning, land use planning and land title regularization • Conservation and the sustainable use of biodiversity • Recovery of deforested areas Box 2.3 Guyana The Guyana REDD Investment Fund (GRIF) was developed along the same lines as Brazil’s Amazon Fund, with the difference that finance is used to fund its low-carbon strategy more generally, not just for forest-related investments. Norway has provided US$250 million in results-based finance, which has been used to fund investments in low-carbon sectors, including a large hydropower project, grants and loans to a variety of micro and small enterprises (from farming to various artisans), economic development in indigenous communities, and also adaptation projects, such as reducing Guyana’s vulnerability to floods. The World Bank has served as trustee of the fund. 10 Approaches to REDD+ Nesting Figure 2.2: Options to allocate ERs or funds Country achievement of emission reductions at national scale ERs used for achievement of the (unconditional) NDC Remaining ERs Country sells ERs Allocation of ERs Allocation of funds Use of ERs to reward Use of finance to reward Use of finance to provide past performance past performance ex-ante grants Ex post rewards Ex ante finance subnational scale may consider whether to: (a) issue, allocating a share of issued ERs (at the jurisdictional sell, and monetize ERs, and then share that finance level) to local actors, or (b) allowing local actors to with local actors; or (b) allocate ERs (figure 2.2). If a issue (for performance achieved at the local scale) a country decides to fully monetize ERs from performance prescribed number of ERs themselves. In most cases, achieved at the higher scale, there will likely not be ER a government will likely want to ensure that the total generation at smaller scales (to avoid double counting). number of ERs issued (at local scales) is at, or below, This is an instance where the jurisdiction is in full control the total number of ERs verified at the highest (for of ERs generated and uses the subsequent finance example, national) scale. received as part of a benefit-sharing system. Boxes 2.4 and 2.5 illustrate two examples where a If a country decides to share a portion of the ERs country has chosen to allocate finance or ERs as ex with local actors, it may do so through two means: (a) post rewards. Box 2.4 Brazil In 2017, the Brazilian government decided to switch the incentive system for the Amazon from an ex ante grant system for use of funds received for Amazon-wide performance (as explained in box 2.2) to an ex post reward-based system. In July 2017, CONAREDD+ (the governmental body responsible for coordinating and monitoring the implementation of Brazil’s National REDD+ Strategy) issued a resolution that outlines a new allocation structure that provides incentives to the nine states of the Amazon region to achieve positive performance. The government allocates a certain percentage of the ERs achieved at the Amazon-wide scale to each state based on performance. Each state may then use their assigned ERs to collect payments for results. This approach allows the states to access different potential sources of funding; for example, Germany’s REDD Early Movers program is providing results-based payments to the states of Acre and Mato Grosso. Lessons Learned from Country Experiences 11 Box 2.5 Democratic Republic of Congo The DRC’s Mai Ndombe Emission Reductions (ER) Program has defined a benefit-sharing plan that combines allocation of both finance and ERs.* The FCPF Carbon Fund intends to purchase some, but not all, of the ERs achieved by Mai Ndombe Province. A portion of the funds received will be allocated to local- scale activities, both ex ante grant finance to some and performance-based rewards to projects that have demonstrated a contribution to the success of the overall jurisdictional program performance. Performance- based payments are included to engage and incentivize, in particular, private sector players to contribute to the overall performance of the jurisdiction. In the DRC, providing such incentives to nongovernment actors will be critical given the limited operational capacity of the government. The structure of the benefit- sharing plan is influenced by a “legacy” project and the potential for further private sector participation (for example, timber concessions), and also community-driven projects. Projects are capped with regard to how much they may receive from the Carbon Fund payments. This is due to the risk that projects may perform extremely well compared to the overall jurisdictional (province- wide) performance, and thus claim a high percentage of payments from the Carbon Fund. For this reason, the remaining ERs not purchased by the Carbon Fund will go into a pool of in-kind ERs that can be provided to individual projects (which may then monetize them) for performance achieved beyond that rewarded by the Carbon Fund (for example, due to the imposed cap). *The DRC case study is based on an advanced draft benefit-sharing plan developed by the country in consultation with ER Program stakeholders. The negotiations between DRC and the FCPF Carbon Fund regarding an ERPA are ongoing; it is not clear at this stage if the provisions (which are analyzed in this paper) will be accepted by donors for contract signature. SUMMARY Allocate finance Allocate ERs ERs generated at the higher scale are either ERs generated at the higher scale (national issued and allocated to smaller-scale units DESCRIPTION or subnational) are sold and monetized, (subnational or project) or such units are and the finance shared with local actors. allowed to issue ERs, but within a prescribed envelope (of jurisdictional performance). • Access to national (or subnational) • Management and administration of results-based finance, which currently “distributed action.” exceeds project-based finance and • May diversify access to finance, opening provides higher bargaining power opportunities for subnational or project- BENEFITS through negotiation at the national level; based finance for emission reductions (e.g., enables planning through the signing voluntary carbon markets); externalizes part of a forward contract (e.g., an emission of the administrative cost to the smaller units reduction purchase agreement or ERPA). (e.g., project developers would bear the cost • Centralized financial accounting. of selling the units). • Technical challenges related to allocation of • Projects may not have an incentive to ERs, that is, the need to develop technical operate at their optimum. approaches to monitor, report, and verify CHALLENGES • The cost to administer allocation of GHG emission reductions at different levels. financial resources may result in lower • Imbalances in performance between private amounts for actors generating GHG and public initiatives can jeopardize the emission reductions. stability of the jurisdictional program. 12 Approaches to REDD+ Nesting 2.3. National (or Subnational) Action at the jurisdictional (higher-level) scale. A government may also wish to retain funding to cover the operational versus Local Action costs of managing an ER program. In other cases, a Another decision a government may take is related to government may wish to use a higher percentage of the allocation of finance or ERs for catalyzing local (sub­ finance/ERs generated to spur local action—due to a national or project) activity (figure 2.3). In some cases, the preponderance of private lands, a lack of government national (or federal) government implements a variety of capacity to operate at local scales, or other reasons. policies and programs that contribute to emission reduc­ tions—and, in this instance, the govern­ ment may argue Boxes 2.6 and 2.7 provide examples of allocating a that it should receive a portion of the finance generated portion of finance for national versus local action. Figure 2.3: Allocation of finance or ERs between a jurisdiction and smaller scale units Country achievement of emission reductions at national scale ERs used for achievement of the (unconditional) NDC Remaining ERs Country sells ERs Allocation of ERs Allocation of funds Use of ERs to reward Use of finance to reward Use of finance to provide past performance past performance ex-ante grants Ex post rewards Ex ante finance % of $ to % of $ to % of $ to % of $ to % of ERs to % of ERs higher level smaller higher level smaller higher level to smaller jurisdiction scale units jurisdiction scale units jurisdiction scale units Box 2.6 Brazil Figure B2.6.1 New Amazon Incentive Structure As mentioned in box 2.4, the Brazil Amazon incentive structure is AMAZON shifting to provide a different set of incentives. Under the new structure, the federal government will receive 40 percent of the funds (figure Various source of carbon finance B2.6.1). According to the resolution that sets up the new structure, the federal government is allocated 40 percent of the emission reductions justified by the efforts it makes at the national level to reduce Brazilian government sets limitations on payments for emission reductions received by emissions from deforestation, including conservation of native forest the federal government and states in conservation units and indigenous lands. Currently, the portion received by the government is being used to capitalize and continue the operations of the Amazon Fund. The remaining 60 percent of the Federal Amazon States emission reductions are allocated to the nine states that comprise the government (60%) legal Amazon based on performance metrics (see the appendix or (40%) sections 2.2 and 3.2 for further information on the new Amazon system). Lessons Learned from Country Experiences 13 Box 2.7 Democratic Republic of Congo Figure B2.7.1 Mai Ndombe Benefit-Sharing Plan Under the DRC’s benefit-sharing plan for Mai MAI NDOMBE Ndombe, the government will reserve a portion of Mai Ndombe province generates and issues ERs for the funds received from sale of ERs to the FCPF jurisdictional performance Carbon Fund to pay for “fixed (operational) costs” of administering the Emissions Reduction (ER) Program. This includes support for a Program Management Unit (PMU) that assists the provincial government Carbon Fund ERPA In-Kind ERs in managing the ER Program, including monitoring (purchase of X% of ERs (remaining Y% of ERs and reporting, coordination with subprojects, achieved) achieved) capacity building, assistance to the private sector and communities, the sale of ERs, and monitoring of safeguards. It also includes institutional support for the provincial government. Such allocation is part of Payments to stakeholders or Costs to administer the “Category 1” payouts, that is, it has senior rights the program programs designed to benefit to ERPA payments. This smaller portion of funds (for stakeholders example, compared to the Amazon) is made possible, in part, because the DRC is supported by programs CAFI support to province under the Central African Forest Initiative (CAFI). SUMMARY Sharing finance or ERs between the national (or subnational) government and local actors is a continuum from 0 percent to 100 percent; deciding the best proportional split will depend on needs and an assessment of the costs and benefits of national versus local allocation as well as other available financial sources. Finance or ERs to the higher-scale entity Finance or ERs to local actors The share of finance/ERs distributed to the The share of finance/ERs distributed to local DESCRIPTION national or subnational government for its actors (e.g., for their contributions to overall contribution to performance. performance of the jurisdiction). • The interventions are designed taking into account the local context. • National allocation incentivizes the alignment of decision-making processes in • Subnational governments and projects have the jurisdictional program. an incentive to perform at their optimum. BENEFITS • There is no negotiation process with local • The upward feedback process is simpler. entities. • Provides direct reward for performance, • Increases national commitment to encouraging private sector engagement achievement of REDD+. in REDD+ in the country and achieving the efficient and cost-effective emission reductions. • The process of negotiation for the attribution • Decision power is centralized and lobby of funding to each local unit is much more activities are easier, which can detract from complex and can jeopardize the overall CHALLENGES optimal jurisdictional performance. operation of the jurisdictional system. • The incentive for local entities to perform at • Monitoring of financial flows is complex and their optimum is lower. may be subject to corruption, if it exists. 14 Approaches to REDD+ Nesting 2.4. Whether ERs Can Be Generated by applicable in the situation where ERs are not dependent on the higher jurisdiction succeeding in its emission Smaller Units reduction aims. For example, systems such as that In some instances, a country may wish to allow smaller- emerging in Colombia, or operating in Australia, where scale units to generate emission reductions separately finances to reward projects are derived from carbon from the higher-scale jurisdictional program (figure taxes or alternative government revenue, are not 2.4). Countries may use such carbon credit generation dependent on national emission reduction reporting. as a policy or incentive mechanism to reward domestic actors (for example, landholders; see box 2.8 for one Alternatively, instilling sufficient technical requirements such example). It is anticipated that REDD+ countries on projects for baselines, or reference levels, and (for example, Colombia) will develop internal carbon monitoring can minimize the risk to governments project systems where finances, including carbon of overpaying for emission reductions. In Australia, taxes, fund domestic projects that reduce national for example, the projects align closely with the greenhouse gas emissions but do not generate carbon national inventory, while an auction system ensures credits that can be traded internationally. the government receives the best cost emission reductions. However, it is worth noting that to date only Developing such systems may provide the highest developed countries have created such systems. possible incentives to local actors, but these systems also create risks that must be managed. These risks Finally, there are increased challenges where include the potential for the higher-scale jurisdictional projects issue and trade emission reduction units program to overcompensate emission reductions at internationally. If project proponents are allowed smaller scales, or for the lower-scale jurisdiction or to generate, issue, and sell credits internationally, a project to be inadequately compensated for achieved country must set up systems to avoid double counting emission reductions due to failures at the higher level. (or “double claiming”), if it wishes to use the emission It is possible to mitigate such risks through design of reduction for its NDC or Kyoto Protocol commitment. the system. The risk of projects not receiving payments See section 3.3 for further discussion on double due to the failure of the higher-level jurisdiction is not counting. Figure 2.4: Illustration of stand-alone projects Country achievement of emission reductions at national scale Separately issued and ERs used for achievement of traded ERs may need the (unconditional) NDC Remaining ERs to be debited from national registry FINANCE (e.g. from carbon taxes, government budget) Projects issue Domestic system ERs and engage in that rewards projects international trading STAND ALONE PROJECTS Lessons Learned from Country Experiences 15 Box 2.8: Illustration of Australia’s Emission Reduction Fund As a policy tool to support achievement of its international commitments, Australia allows landowners the opportunity to generate Australian Carbon Credit Units and, through this, generate finance through the sale of such units to the government’s Emissions Reduction Fund (ERF). Such projects feed into the overall national performance and help Australia meet its Kyoto Protocol (KP) commitment (although not directly) (figure B2.8.1). However, the national government takes the risk of overpaying for emission reductions by projects (that is, if the aggregated, measured, and rewarded project performance is lower than the project’s contribution to national performance, as measured by the national system). To reduce such mismatch, the government imposes certain MRV requirements on projects. Figure B2.8.1: Illustration of Australia’s Emission Reduction Fund Australian government: KP target and NDC There may be mismatches between what is paid to a project under the ERF and what is accounted by the Projects government to achieve its contribute Emission Reduction Fund KP target or NDC to national achievement of commitments MRV requirements for projects to align accounting, to the extent Forest carbon Forest carbon Forest carbon possible, with the national project project project system SUMMARY ERs generated by smaller-scale units separately from the jurisdictional program The case where projects generate carbon units separate from the higher-scale, jurisdictional DESCRIPTION program • Provides stronger incentives for local actors to perform. • Catalyzes the investment of the private sector, which would be likely absent in the business- as-usual scenario. BENEFITS • Research and development activities can be tested for their implementation in the jurisdictional program, minimizing the necessary investment and creating incentives for the private sector, and without any impact on the jurisdictional performance. • MRV mismatch: Allowing projects to generate their own ERs may require development of MRV rules and systems to minimize mismatch at different scales and for some entity to take on the liabilities for mismatches. CHALLENGES • Double counting: Where projects are allowed to sell carbon units internationally, systems are needed to avoid counting the same unit twice within the same context (e.g., Paris Agreement). • Special care needs to be taken to separate emission reduction certificates created by the smaller units, that is, registry procedures need to be reliable. 16 Approaches to REDD+ Nesting 2.5. Combining Multiple Incentives a nested system, or to provide finance for government programs, while reserving a percentage of carbon Allocation systems may also be designed to combine finance or ERs to distribute to various stakeholders (for the concepts above. Doing so may be more complex, example, projects) based on performance metrics. but it allows the flexibility to provide different types of benefits and incentives to stakeholders. For example, Figure 2.5 illustrates the sum of all the options the private sector responds well to performance-based described in sections 2.1 through 2.4. In box 2.9, we metrics, whereas some government policies may be describe the DRC’s Mai Ndombe benefit-sharing plan, more difficult to measure in quantitative terms and/or a system that combines multiple incentives. As can be correlate strongly with carbon performance. A country seen, providing different types of incentives (ex ante may decide to allocate a predetermined amount of finance and ex post rewards) is complex, but it allows funding to the government to cover operating costs of the most appropriate incentives for different actors. Figure 2.5: Illustration of key decisions in the design of nested systems Country achievement of emission reductions at national scale Flow of ERs “Nested” Flow of finance activities feed back or ERs used for achievement of Remaining ERs contribute, the (unconditional) NDC to national emission reductions Allocation of ERs Country sells ERs Separately issued and traded ERs may need to be debited from national Allocation of funds registry Use of ERs to Use of finance Use of finance to reward past to reward past provide ex-ante performance performance grants FINANCE (e.g. from carbon taxes, government Ex post rewards Ex ante finance budget) % of $ to % of $ to % of $ to % of $ to % of ERs to % of Projects issue Domestic higher level smaller smaller higher level higher level ERs to ERs and engage system jurisdiction scale scale jurisdiction jurisdiction smaller in international that rewards units units scale trading projects units STAND ALONE PROJECTS Lessons Learned from Country Experiences 17 Box 2.9 Democratic Republic of Congo The DRC’s Mai Ndombe benefit-sharing plan is an example of a system that combines multiple incentives. The plan defines two categories of “payouts” for funds received from performance at the highest level. Category 1 has “senior rights” to ERPA payments, after which Category 2 payments are made. The Carbon Fund will purchase some portion of the ERs generated, and finance from the sale will be allocated to both Category 1 and 2 stakeholders. Additional ERs not purchased by the Carbon Fund may also be distributed, including to projects that perform well but whose finance from the Carbon Fund ERPA is capped (figure B2.9.1). In this regard, the plan includes the following: ●● Ex ante payments to indigenous peoples and local communities through two mechanisms: 2 percent of the proceeds, respectively, under Category 1 payments and a dedicated finance window for new community projects, as described in section 2.1 ●● Ex post rewards, including finance and possibly also ERs, to private sector and possibly also community projects, as described in section 2.2 ●● The provincial government, as described in section 2.3 Figure B2.9.1 Mai Ndombe Benefit-Sharing Plan Mai Ndombe province generates and issues ERs for jurisdictional performance Carbon Fund ERPA (purchase of X% of ERs achieved) In-Kind ERs (remaining Y% of ERs achieved) Possible distribution of ERs Allocation of funds to projects Category 1 payments (senior rights) Category 2 payments Fixed costs Variable costs Finance window Ex-post performance based • Provincial govt • Indigenous peoples to support new • REDD+ projects • PMU • Local Communities community projects • Timber concessions 18 Approaches to REDD+ Nesting 3. Technical Challenges of Nesting Different design pathways will result in different technical on REDD+, would be needed in order for jurisdictional challenges or demands. Systems developed purely for REDD+ schemes to implement nested systems toward the purposes of meeting UNFCCC requirements will the far right of figure 3.1. Such systems require MRV likely be unable to support nesting (or other reporting systems that go beyond those designed only for requirements) efficiently and will lead to inconsistencies. reporting to the UNFCCC, aligned baseline setting, It is critical that countries looking to nest projects, be and means to avoid double counting. In addition, they legacy or future projects, consider this fact in such systems must assign responsibilities for non- the initial design of a national system. Where it is not performance and liabilities for mismatches that will occur considered, there are likely to be more challenging between the different system levels, as well as manage problems with alignment and double counting. potential non-permanence and force majeure events. Allowing stand-alone projects, where carbon This section of the paper describes several of these performance is measured and accounted at multiple challenges and gives examples of how different levels in parallel, is the most challenging. When nested systems have tackled each issue—noting that smaller units within the jurisdiction are generating resolving the technical challenges for, in particular, and issuing carbon credits and/or directly receiving avoided deforestation—are still in the early stages. payment for results, this situation may require aligned Two of the examples (Acre, Guatemala) illustrate as yet MRV systems. By contrast, nesting structures that focus unsuccessful nested systems—and explain why this on allocating finance or ERs generated at the higher has been the case. scale (that is, through benefit-sharing plans) are less challenging, and they may range from simple systems (for example, use of funds to provide ex ante finance to 3.1. Data and Methodological projects) to more difficult systems (distribution of ERs Mismatches based on ex post GHG performance). These variations There are differences in the data used by the national are illustrated in figure 3.1. governments compared to forest carbon projects (table A number of additional technical and governance 3.1). Such differences are typically more significant elements, well beyond those required by COP decisions with legacy projects. Most national governments Figure 3.1: Nested systems vary regarding the level of required MRV alignment NESTED SYSTEMS Allocating Allocating Allocating Allocating ERs Stand-alone Stand-alone finance, finance, finance, based on GHG projects with projects with ex-ante grants ex-post rewards ex-post rewards performance own MRV in own MRV and using proxy based on GHG domestic only trading ERs measures performance systems Requires aligned MRV EXAMPLES Amazon Fund Mai Ndombe ER Program Australian ERF (original) Amazon (new) GRIF Lessons Learned from Country Experiences 19 Table 3.1: Differences between national and project scale GHG estimates National Project • Uses (medium resolution) Landsat to measure • May use higher resolution imagery to measure forest cover change forest cover change • Carbon stock estimates from national forest • Often collects and uses own site-specific carbon inventory or default values stock estimates • Stratification based on national forest classes; • More strata than national GHG inventory due to may combine strata to reduce uncertainties use of data with finer spatial scales • Often only includes above- and below-ground • May choose or be obligated to measure biomass; excludes non-CO2 gases deadwood, litter, soil, and non-CO2 gases measure land cover change using Landsat imagery accuracy. In most cases, this led to the use of site- and derive carbon stock and carbon stock change specific ground data and project-specific assumptions estimates from national forest inventories, International of additionality and leakage. Panel on Climate Change default emission/removal factors (for gap filling), and, in some developed Given these differences, it is not surprising that countries, existing growth models. In many developing national systems will produce different estimates of countries, initial estimates from national systems forest-related emissions (and/or removals) compared have only been developed over the past two to three to projects. At the national scale, a country may years and will require ongoing improvement. When also aggregate data differently than smaller scales forest carbon projects were being developed, many for various reasons. For example, some countries developing countries could not provide national data for the purpose of developing a national forest or systems to consider or work with. Furthermore, many reference emission level (FREL) have stratified their of the guidelines applied, such as the Verified Carbon data into fewer forest classes—balancing availability Standard (VCS), had very different requirements, such of data, measurement costs, and uncertainty, and as shorter time series of data but a higher degree of also simplifying the implementation of an accuracy Box 3.1 Australia The Australian government’s Emissions Reduction Fund provides financial incentives for landholders to mitigate climate change. The permitted activities and methods for quantifying abatement are aligned but not identical to those in Australia’s national greenhouse gas inventory (NGGI). For example, the environmental plantings method is premised on the establishment of forests with native endemic species on cleared land; the method requires that the plantings be of sufficient size to be detected by the national inventory system, with an identical definition of forest as used for Australia’s NGGI. Abatement is estimated using the Full Carbon Accounting Model (FullCAM), the same modeling system that underpins Australia’s NGGI. However, unlike the approach used for the NGGI, within the ERF methods, FullCAM is configured using project-level information, not regional or national default values. For example, the project proponent enters specific management events relevant to their forests (planting dates, fertilizer treatments, tree species, and so on), as opposed to the management regime being applied based on statistical data. This approach creates a mismatch between Australia’s NGGI and individual projects; however, across all the projects within the scheme, it is expected that the two abatement estimates would be comparable. Furthermore, by using the same underpinning framework it is possible, should it be decided, to ensure that the project-level management is represented in the national inventory. The issue of how to include projects in the national accounts was thought about early in the original system design (1998), providing the government with considerable policy flexibility when designing its mitigation policies. 20 Approaches to REDD+ Nesting Box 3.2 Brazil Figure B2.6.1 New Amazon Incentive In Brazil’s new Amazon system, states are Structure allotted emission reductions based on each state’s performance and allowed to raise funds based on this Government MRV system for the Amazon (PRODES) allocation. The monitoring of each state’s performance (of forest National accounting of GHGs for the Amazon cover and change) uses the same data used to measure Amazon-wide GHG performance, that is, the data generated by the federal monitoring system PRODES through INPE (Brazil’s National Institute for Subnational (state-level) accounting of GHGs for the Space Research). In this regard, data flows down from Amazon national systems, not up from subnational units. KEY POINTS There are differences in data used by national governments, for example, for reporting GHG inventories to the UNFCCC, compared to that used by forest carbon projects. Such differences are typically more significant with legacy projects. Data to measure results may flow top-down or bottom-up (or both). In Brazil, data are flowing from the national system to the states; in Australia, a more sophisticated system integrates data flows in both directions. It is much easier to nest subnational units than projects. Alignment of data reduces the level of mismatches that occur when measuring performance at multiple scales. Subnational jurisdictions typically use national data and therefore are more easily aligned to national estimates. There may be instances where subnational jurisdictions use higher-resolution spatial data or region-specific carbon stocks—in such cases, the national system can integrate data into its systems more easily than project data, particularly if such units use administrative boundaries that aggregate to cover 100 percent of the national territory. assessment. Other differences may exist through use. Higher levels of accuracy may require resources projects requiring data to be at more regionally or unavailable to a government, and more granular locally specific scales. For example, carbon stock data can be a trade-off with uncertainty estimates— estimates (typically from a national forest inventory, which at higher scales is sometimes larger than the or NFI, plot system across the entire country) may expected change (or performance). The level of differ when averaged up at the national scale versus accuracy of measurements required at multiple scales provided at a project or regional scale. may also depend on the risk tolerance of the actors involved (and who bears that risk). Precision may If a country’s nested approach allows stand-alone be less of an issue so long as the system does not projects, a higher level of accuracy and precision, generate biased results. and a more granular stratification (of areas and estimates of carbon stock for forest/land classes), 3.2. Baseline Setting or Allocation may be needed at the national level. In some instances, it is simply not possible for a project to Currently, the way in which carbon projects develop use national-level data—for example, there may baselines and account for emission reductions is be insufficient accuracy of the spatial data that is often fundamentally different to the methods used required for the standard that the project wishes to for jurisdictional approaches. Large-scale reference Lessons Learned from Country Experiences 21 Box 3.3 Why Avoided Deforestation Projects Cannot “Apply the Jurisdictional Baseline” Once a jurisdictional reference level is set, in most cases, it is not possible to simply “apply the jurisdictional baseline to projects” (as is suggested in the Verified Carbon Standard Jurisdictional and Nested REDD+, or VCS JNR, framework). Projects within a jurisdiction are based in areas with different dynamics and deforestation (or forest degradation) pressures, such that it is not possible to simply “divide up” the baseline based on, for example, a ratio of area coverage, unless the jurisdiction experiences a near-perfect mosaic of deforestation or degradation. If projects are asked to apply a jurisdictional deforestation rate, the result is incentivizing projects to choose the least risky lands as accounting areas (where expected deforestation is lower than the overall jurisdictional deforestation rate). Where legacy projects exist, nesting can become both politically and technically challenging—particularly if projects developed baselines prior to the higher-level jurisdiction. Table B3.3.1 illustrates three very different baseline methods used within Zambia (at project and national scales). Table B3.3.1 Three Baseline Methods Used in Zambia BCP’s Lower Zambezi COMACO’s Landscape National FREL REDD+ Project Management Project Ref. period: 2006–14 Ref. period: 1984–2009 Ref. period: 2002–13 Method: Historical average Method: Logistic function Method: Modeled emissions modeled after a “reference region” TerrSet Land Change Modeler was used to calculate expected deforestation based on assumption that small-scale farmers are the main agent of deforestation; the key variables used in the model include distance to settlements and roads and topography. If a project is located in an area of high-expected deforestation (for example, a “hot spot” or frontier), it is fair to expect higher than average deforestation. However, it is also the case that several projects—applying project-based methodologies and located within a single region—may quickly exceed a historical average baseline of the region. In such cases, agreements will need to be made that often require projects to take a “haircut” on their baseline (and thus their expected performance), sometimes putting at risk the business models in place. levels often use historical averages to calculate (or It is easier to nest afforestation/reforestation (A/R) project forward) a reference level. Results-based and improved forest management (IFM) projects than financing for large-scale programs (largely funded it is to nest avoided deforestation projects. by donor governments) also has preferred the use of This is largely the case because for A/R, in most cases, historical averages (with upward adjustment for high the baseline is zero since the starting point is an area of forest cover, low deforestation, or HFLD, countries). land that is non-forest, which is similar to the baseline By comparison, projects use a range of methods and assumed at the jurisdictional level (for example, the models to project forward an assumed business-as- Kyoto Protocol’s accounting rules for A/R are “gross- usual scenario. net,” which basically sets the baseline to zero). For 22 Approaches to REDD+ Nesting IFM, the baseline would be the historical GHG flux Boxes 3.4 and 3.5 provide examples of setting baselines rate (which is analogous to FRELs under the Kyoto for smaller units within a jurisdictional program. Protocol). In both cases, these baselines are more aligned with national reference level approaches— 3.3. Avoidance of Double Counting unlike the “counterfactual” baseline setting of avoided deforestation or forest degradation projects. In Double counting (or double claiming) is a term used addition, both A/R and IFM are spatially explicit and to describe the use of a single emission reduction unit can more easily apply national carbon stock estimates more than once. If countries design nested systems and growth rates, and drivers are not outside the that are based on allocating finance or ERs generated accounting area (as is often the case for deforestation at the higher scale, there is no risk of double counting and forest degradation). because the allocations are designed to fit within the Box 3.4 Democratic Republic of Congo Mai Ndombe province exhibits the classic case where an existing legacy project—Wildlife Works Carbon (WWC) Mai Ndombe project—was validated with a projected baseline methodology prior to the jurisdiction determining its own baseline.* The jurisdictional reference level is an average historical baseline with a small adjustment (per Carbon Fund guidelines). To nest the existing WWC project within the historical average jurisdictional reference level, WWC was required to reduce its baseline over the ERPA period of 2018 to 2022. Differences between the two baselines are illustrated in figure B3.4.1 (see the appendix for more details on the baseline calculation). Figure B3.4.1 VCS Baseline and the Nested Reference Level 14 12 10 8 MtCO2 6 4 2 0 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 VCS Baseline Nested Reference Level In Mai Ndombe’s ER Program, projects will be able to receive a portion of payments from the Carbon Fund based on performance. In return, such projects will be required to: (a) use agreed baselines, (b) only generate credits against the agreed baseline (that is, they may not develop a separate baseline under, for example, the VCS, and separately issue Verified Carbon Units), and (c) accept the capped amount that any one private sector or large community project may receive from the Carbon Fund. The PMU is expected to develop guidance and information on how future project baselines may be developed. *The DRC case study is based on an advanced draft benefit-sharing plan developed by the country in consultation with ER Program stakeholders. The negotiations between DRC and the FCPF Carbon Fund regarding an ERPA are ongoing; it is not clear at this stage if the provisions (which are analyzed in this paper) will be accepted by donors for contract signature. Lessons Learned from Country Experiences 23 Box 3.5 Brazil Under the new Amazon incentive system, states receive a portion (60 percent) of finance. This finance is allocated to states using a stock-flow method. This method was developed to address the challenge of different circumstances among states, that is, high versus low deforestation rates, high versus low forest cover. The method provides incentives both to conserve standing forests (carbon stock) and to reduce deforestation (that is, a reduction in the flow of emissions to the atmosphere). It does so by combining two criteria: (I) the amount of forest area within each state as a percentage of the total forest area in the Amazon, and (II) the amount that each state reduced its area of deforestation as a percentage of the total area reduced in the Amazon. The addition of these two criteria forms the overall percentage of Amazon emission reductions apportioned to each state (that is, the “catch” limit) for fund-raising. The metrics used can be considered proxies for carbon performance—that is, forest conservation and reducing deforestation. This allocation method is illustrated in the table below (reproduced from the CONAREDD+ Resolution). Each state is allocated at least 2 percent of the total finance received by the Amazon Fund. Thereafter, the percentage is a function of performance on the two metrics. Table 3.5.1 Amazon Fund Stock-Flow Allocation Method Criteria I: Criteria II: % Distribution of Criteria I + STATE % of Amazon contribution to “catch” limits Criteria II native forest area reduced forest loss among states ACRE 1.35% 0.60% 1.92% 2.00% AMAZONAS 13.45% 0.60% 14.04% 13.28% AMAPÁ 1.05% 0.0% 1.05% 2.00% MARANHÃO 0.32% 1.6% 1.95% 2.00% MATO GROSSO 2.93% 13.0% 15.93% 15.06% PARÁ 8.22% 9.8% 18.01% 17.03% RONDÔNIA 1.16% 3.7% 4.90% 4.63% RORAIMA 1.43% 0.3% 1.70% 2.00% TOCANTINS 0.09% 0.4% 0.49% 2.00% TOTAL 30% 30% 60% 60% When the resolution from CONAREDD+ was issued, 13 REDD+ projects developed in the Amazon biome had already been validated under the VCS, and few of them had used PRODES data to identify their baseline and build their reference levels. The CONAREDD+ Resolution means that projects within states— specifically those states that will further allocate funds through a state-level nested system that provides incentives to projects—will need to invest in remodeling the baseline and, in many cases, will have to assume a lower generation of credits that may jeopardize their financial feasibility. When the resolution from CONAREDD+ was issued, 13 REDD+ projects developed in the Amazon biome had already been validated under the VCS, and few of them had used PRODES data to identify their baseline and build their reference levels. The CONAREDD+ Resolution means that projects within states—specifically those states that will further allocate funds through a state-level nested system that provides incentives to projects—will need to invest in remodeling the baseline and, in many cases, will have to assume a lower generation of credits that may jeopardize their financial feasibility. 24 Approaches to REDD+ Nesting Box 3.6 Australia Australia’s national system includes the baselines for Forest Management Reference Levels as well as for reporting against the 1990 baseline for Kyoto. These baselines represent a historical average and a point- based baseline, which current scenarios are compared against. Both baselines were in place prior to the implementation of Australia’s domestic carbon market. This market generally uses national or state-based information for determining additionality of an activity type (for example, environmental planting or avoided deforestation when a certain permit is owned) and project-level information for quantifying the baseline scenario in terms of tonnes of abatement. The methods used at the project level aim to only quantify abatement that would be detected by Australia’s NGGI; however, the success of this is measured at the scheme level. That is, an individual project may report more or less abatement than would be detected by the NGGI, but as a whole it is expected that the aggregate estimate of projects’ performance would be comparable to the estimate of abatement at the national level. Box 3.7 Guatemala Guatemala has three REDD+ projects validated under the VCS, two of them in the northern lowlands, in the department of Petén, and one in the east of the country, in the department of Izabal. The two validated projects located in Petén were designed using the subnational jurisdictional baseline that was generated to comply with the requirements of the VCS JNR and which includes a geographically explicit logistic future deforestation model, that is, a model forecasting where and how much deforestation will occur in the future based on the tendency observed in the historical data. The development of a geographically explicit subnational reference level and future deforestation model, in this specific case, incentivized the establishment of public-private REDD+ activities. Guatemala developed in 2017 a national forest reference emission level and forest reference level (FREL/FRL) to comply with the requirements of the FCPF, which has been calculated as the aggregation of the FREL/FRLs of each of the five subnational jurisdictions considered in the country’s National REDD+ Strategy. A future deforestation model remains to be developed. In the current scenario, unless the specific FREL/FRL of each subnational jurisdiction can be used and a geographically explicit future deforestation model is calculated and applied, projects do not have an incentive to nest because they would have to assume a FREL/FRL that considers lower generation of emission reductions per area unit, and this impacts the financial feasibility of stand-alone REDD+ projects. KEY POINTS For avoided deforestation or avoided forest degradation, because there are different dynamics and pressures on forests occurring across a landscape, jurisdictional baselines (for example, average deforestation rates) in most cases cannot be simply downscaled to project-level actions. The stock-flow method used by Brazil is one solution to providing incentives for both standing stock (that is, conservation of existing forests) and reductions in deforestation—but it is more easily applied to nesting of subnational areas into a national system. It is much easier to nest A/R and IFM projects than avoided deforestation because baseline or reference level construction methods are more similar at small and large scales. Smaller-scale baselines (and results measurements) do not necessarily need to perfectly match higher (jurisdictional) baselines as long as, in aggregate, they add up and do not exhibit bias—that is, that smaller- scale performance, on average, is aligned with the overall higher-scale performance. Developing nested baselines can change significantly the incentives (and validity of business models) for smaller-scale activities. Lessons Learned from Country Experiences 25 Box 3.8 Joint Implementation Joint implementation (JI) under the Kyoto Protocol may also be thought of as a type of nesting. Under JI, countries (typically with surplus assigned amount units, or AAUs) generate and sell emission reduction units (ERUs) to countries that face deficits or find it more cost-effective to purchase ERUs than to reduce emissions domestically. Once the project verifies emission reductions, the host country transfers ERUs to the investing country (figure B3.8.1). In general, JI functions as a nesting scenario that allows stand-alone projects—where individual projects generate units that are measured separately from the national monitoring system but included within the national accounting scheme. This “flexibility mechanism” was developed under the Kyoto Protocol to allow countries to lower the cost of meeting their target if additional abatement was possible (at a lower cost) in other countries. Table B3.8.1 Illustration of trading ERUs under Joint Implementation Emission Reduction Unit (ERU) transferred to Country B Country A: AAU Assigned surplus amount (KP target) Country B: AAU Actual deficit emissions Country A: Country B: Actual Assigned emissions amount (KP target) Mismatches between national GHG inventories and calculation of units by projects are generally unknown; however, the relatively low volume of traded units compared to AAUs minimizes the risks of misalignment. envelope of jurisdictional performance. However, not tied to the generation of credits (assets) or not where jurisdictions and projects or subunits with the used in compliance systems. Where carbon finance jurisdictional area are accounting simultaneously, there operates more akin to payments for (ecosystem) needs to be a mechanism to avoid double counting. services, and no rights or titles are transacted, double In addition, because often it is not possible to perfectly usage of the emission reduction is less problematic nest projects within a jurisdiction, there will be a need to (although some donor governments are concerned “true up” the accounting and manage liabilities for the with double payment for such reductions). Selling into expected quantitative correction that may occur. This voluntary carbon markets—for example, to entities requires clarity on which party or parties are responsible whose purchase of the offset does not appear under both for managing the mismatches and for the liabilities any accounting within the UNFCCC—also is less for any “overshoot” that occurs. Alternately, systems problematic. These may be considered as situations (for example, buffers) may be developed to share the where double claiming may not be desirable, but it burden up front of such overshoot. does not affect the integrity of any single system. It is worth noting for this topic that these issues Boxes 3.8 and 3.9 describe examples of avoiding are less critical for performance-based payments double counting. 26 Approaches to REDD+ Nesting Figure 3.2: Example of a REDD+ country selling ERs while achieving its NDC REDD+ country This requires: Conditional ERs sold as part NDC of the conditional NDC? • Achieving (or overperforming against) the NDC • Robust GHG inventory Unconditional Opportunity to NDC sell ERs due to overperformance • Possible alignment between REDD+ accounting and GHGI (if large volumes are traded) Actual emissions • National registry system to track ERs Box 3.9 Australia In Australia, the risk of double counting across different schemes is managed through the legislative restrictions on projects that participate within the domestic scheme. The scheme does not permit projects that are part of other offset schemes to participate. Similar provisions in voluntary schemes also reduce the risk of double counting. For example, Australia did have forest protection projects registered and operating under the VCS; however, when Australia started reporting on forest management under the second commitment period of the Kyoto Protocol, the VCS suspended crediting of those projects to ensure the avoidance of double counting. In this circumstance, the projects were transitioned through a specific method under the domestic scheme. As Australia’s NGGI does not directly incorporate project-level reporting—it relies only on the national inventory system for emissions information—there is no risk of double counting abatement from project areas or activities within the NGGI. To maintain consistency with Australia’s international obligations, the Emissions Reduction Fund project proponents are issued Australian Carbon Credit Units, which are managed through a centralized registry, the Australian National Registry of Emissions Units. These credit units are directly exchangeable for Kyoto units, and then can be traded, surrendered, or canceled through the registry. Thus, if a project is issued a credit that can’t be reconciled through the national inventory system, the Australian government has this as a liability. The methods, therefore, aim only to recognize abatement that can be identified through the national inventory system. Box 3.10 Brazil In Brazil’s new Amazon approach, the challenge of performance mismatch between the higher level (total Amazon) and the states is managed through a system that does not create nominal (emission reduction) units for each state’s performance; instead, it allocates a percentage of emission reductions from an overall envelope based on jurisdictional performance. In other words, each state is given the right to raise funds for a portion of the emission reductions generated at the Amazon region level. They are not provided a baseline against which to generate and issue separate emission reductions. Lessons Learned from Country Experiences 27 KEY POINTS Nested systems will need to consider how to avoid certain types of double counting; this will become increasingly critical for countries as the Paris Agreement is implemented—although final rules are still unknown. Where volumes traded internationally are small, it may not be necessary to align measurement systems— if credits traded can simply be deducted from national totals. However, this requires knowledge of overperformance and the total number of available units for trading. If a system is entirely domestic (that is, no international trading), it may not be necessary to perfectly align measurement systems—since reporting to the UNFCCC, for example, can be considered separately from the domestic carbon trading system. However, for reasons of efficiency, it may still be useful to require projects to use certain data and methods to align as closely as possible with national-level accounting. Double counting can also be avoided by allocating emission reductions, as in Brazil’s new Amazon incentive system, which provides states with a percentage of emission reduction units achieved at the higher scale rather than allowing the issuance of nominal units against baselines. This may, however, reduce incentives for subunits to perform. With regards to REDD+, countries with conditional 3.4. Using Proxies Rather Than GHG NDCs may consider selling ERs as part of the conditional portion of emission reductions. Or, if a Metrics country expects to overachieve at the national level— If a jurisdiction is allocating finance or ERs based on ex that is, exceed its unconditional NDC—it has the post performance, it will need to decide what metrics flexibility to allow even more ERs to be sold (figure to use, and these may be best determined based 3.2). If a purchasing country uses these reductions on the actions or outcomes it wishes to incentivize. to achieve its NDC, those reductions will need to be Carbon performance may be one option, or metric, debited from the selling country’s national accounts, as used to allocate finance. Performance could also in the Kyoto Protocol, to avoid double counting. be measured, for example, by hectares of forest Box 3.11 Australia In Australia, the government provides financial incentives through the Emissions Reduction Fund to promote project-level action to mitigate climate change. Abatement must be estimated using methods that are provided for through legislation. These methods must only recognize abatement that can be used to meet Australia’s climate change targets, as determined by the national accounting framework. The adoption of this scenario was influenced by the status of the NGGI system, forest management, and the associated governance arrangements around these. Australia has a spatially explicit NGGI system, which uses a Tier 3 model (FullCAM) to estimate the emission and removals from forests. This modeling framework was designed to overcome differing governance and data collection arrangements for the forests; where the national government is responsible for reporting GHGs to the UNFCCC, it is the state governments who have constitutional responsibility for managing public lands, including forests. As a result of this approach, for nesting, the spatially explicit nature of Australia’s GHG inventory supports the adoption of payments based on project-level performance in reducing GHG emissions, as all project areas are covered by the national system (that is, the same tools can be used for projects as are used by the national system), and the national system can in turn be improved to better match the project-level estimates. 28 Approaches to REDD+ Nesting protected, which allows for simpler measuring while higher level, the activities may not contribute to the GHG still contributing to emission reductions. Other options, performance needed to access carbon finance. For or metrics, could be considered, such as use of example, measuring forest cover change as a proxy clean cookstoves to reduce charcoal consumption, may be strongly correlated with carbon performance demonstration that improved agricultural practices are at the higher level, but it may also be problematic if put in place that reduce pressure on forests, protection forests of lower carbon stock are protected while higher of certain ecosystem services (for example, important carbon stock forests are cut. The optimal metrics differ watersheds), and so on. If more than forest carbon is by context—for example, the use of carbon metrics may being considered (for example, agricultural emissions), be strongly correlated with GHG performance, but it also other criteria may be added, such as tillage, residue, or may be technically challenging for local communities and burning practices. not well understood. If non-carbon metrics are used, and if there is not a Boxes 3.11 and 3.12 illustrate examples where GHG strong correlation to the mitigation measured at the metrics (Australia) are used versus proxies (Zambia). Box 3.12 Zambia COMACO, a nongovernmental organization operating in Zambia, has built a system to provide market premiums to communities in Eastern Province. They have created what is called a “Conservation Compliance Scoring” system that rates participating chiefdoms on a number of metrics: conservation farming practices (for example, fire management, minimum tillage, crop rotation, use of residues and compost, non-burning of farm), wildlife protection (for example, poaching, habitat protection), forest conservation (for example, illegal logging, charcoal production), and conservation and community leadership. Scoring is based on information from COMACO’s internal auditing of conservation farming practices as well as additional information on wildlife conservation and forest management. Scoring is adjusted for the varying landscapes in which chiefdoms reside. The plateau area chiefdoms have their sustainable agriculture and forestry scores more heavily weighted, whereas the valley area chiefdoms have their sustainable agriculture and wildlife protection scores more heavily weighted. This difference in weighting takes into account that the plateau has lost most of its forests (deforestation), while the valley is home to a variety of wildlife. COMACO acts as an off-taker of farm products generated by local communities. In the past, scores were used to provide premium commodity prices (around 10-20 percent above market), and now are used to support farmer cooperatives. One can envision that a system such as this could also be used as a basis for distributing carbon finance. Building on other revenue streams, such as agriculture or tourism, allows for a broader set of incentives than carbon and more diverse revenue streams, which can mitigate the risks of an uncertain future carbon market. Figure 3.12.1 COMACO’s Conservation Compliance Scoring System Goods are sold at premium price Farmers improve practices that include forest and soil conservation Profits are distributed back to farmers, or their cooperatives, based on scoring Lessons Learned from Country Experiences 29 KEY POINT The use of GHG metrics to reward smaller-scale activities within a jurisdiction may be viable for countries with more advanced MRV systems that include spatially explicit data. For countries that do not have such systems, or where carbon accounting may not resonate with local communities, use of a proxy measure may be an option worth consideration. The Zambia model (box 3.12) is not currently used to government of Acre as the jurisdictional REDD+ share carbon revenues; however, it is provided as an program proponent. example of a potential model that could be adapted. It shows how a system may be built on an already existing The government of Guatemala has been involved system to provide benefits to local communities. directly or indirectly in the development of different REDD+ projects and considered the certification of a sub­ national jurisdictional REDD+ program under the 3.5. Why Has Nesting Failed in Some VCS JNR. The subnational baseline and the future Cases? defo­ restation model developed for the jurisdictional REDD+ program were geographically explicit and In some cases, although there may be utility in had different strata that represented the various forest providing projects with incentives, circumstances types occurring in the subnational region. This created have created barriers to developing a nested system. a significant source of economies of scale for the In the Brazilian state of Acre, Law 2308 (SISA Law, implementation of private initiatives in the northern October 22, 2010) created a legal framework for lowlands of Guatemala. The projects seeking validation operationalizing a jurisdictional REDD+ program. in the subnational region could use the data and This legal framework considered a registry in which information from the subnational baseline to construct projects developed within the geographical scope of their own baselines and nest into the subnational the jurisdictional program could be registered if they jurisdiction. When the Guatemalan government were previously recognized and integrated into Acre’s decided to seek finance from the World Bank’s FCPF, IES Carbon Program. When the legal framework of the the process of validation of the jurisdictional scheme jurisdictional REDD+ program was promulgated, there under the VCS JNR was left on standby. This is were already REDD+ private initiatives in Acre that had because the reference level developed under the VCS been validated and verified (that is, had issued carbon JNR only considered the deforestation component; per credits) under the VCS. The divergence between the approach assumed by the country under the FCPF, technical aspects employed in the private initiatives forest degradation and carbon stock enhancement and in the jurisdictional REDD+ program, however, components also would need to be included. As a were significant and created disincentives for nesting— result, the projects were not nested and, instead, for both the developers of private projects and the continued operating as stand-alone activities.   30 Approaches to REDD+ Nesting 4. Lessons Learned Experience with nesting is still in its infancy. This For most countries, a nested system will be paper attempts to consider some of the early lessons “allocation” driven. Systems that allow stand-alone emerging from efforts to develop nested REDD+ (or projects to trade internationally are more challenging— forest GHG mitigation) systems. While jurisdictional from both the policy and technical point of views. For REDD+ is assumed by many to be the pathway to this reason, many of the emerging nested systems—for “transformation,” there are many policy reasons for example, in Brazil and the DRC—are based on how considering the development of nested systems within to allocate either finance or emission reductions, but jurisdictional programs. they do not recognize or allow projects to freely trade emission reduction units. The Paris Agreement suggests a rethink of the concept of nesting for REDD+. Developing countries Donors can impact jurisdictional programs, must now consider how to achieve national targets (that including nested systems. To date, the is, NDCs), which fundamentally change the dynamic for establishment of jurisdictional REDD+ schemes carbon projects operating within countries. Meanwhile, and support for new low-carbon economic models governments must consider the right blend of policies would not have been possible without the crucial and incentives that will drive change at scale, and role played by donor governments. Donors have many lack the resources needed to implement multiple largely been responsible for establishing the programs with and in communities. For this reason, this requirements to receive payments linked to REDD+ paper suggests reconsidering nesting—going beyond performance—which influences the way jurisdictional the traditional concept of “project to jurisdictional GHG REDD+ programs are developed, including the accounting integration” to the broader consideration of relative balance of resources spent on MRV systems how to catalyze local actions to support national GHG compared to implementing activities to reduce performance. emissions. This not only affects the quality of the emission reductions claims and the co-benefits If well structured, a nested system can increase the accrued, but also can impact the structure and performance of large-scale jurisdictional mitigation sustainability of the program itself. In some instances, efforts. The Australia example illustrates that such such as in the Brazilian state of Acre and Guatemala, a system can mobilize investments and operational donors have, perhaps inadvertently, discouraged the capacity that otherwise may not occur if only national development or continuity of projects, including those government policies and measures are at play. that can support jurisdictional programs. Development of such systems should consider how best to allocate incentives across national, subnational, Nesting projects is as much a policy issue as it and local actors. The variety of emerging systems is a technical one. There is a tendency to focus on shows there is no one-size-fits-all solution. the technical implementation of nesting projects, with less regard to the policy requirements. It is Experience suggests that projects can best support evident from the examples that the national policy jurisdictional efforts if they are part of the initial setting and directives have as much, if not more, of design of a REDD+ system. It is easier to create a bearing on the approach to nesting as technical a nested system if this goal is identified as a policy issues. Careful consideration of shifting costs, risks, requirement early in the process. The initial choices and rewards must be undertaken in the design of the on whether, and how, to nest efforts by smaller units framework for nesting before any technical solutions have implications for the design of MRV systems. are researched. As the DRC Mai Ndombe case suggests, technical requirements are more easily incorporated from the That said, there are a number of lessons learned start rather than retrofitting the system to accommodate related to technical issues: legacy projects. The longer the delay to set up such systems, the more challenges a country may face—as ●● Most project methodologies were developed prior more projects with disparate systems are created. to the creation of jurisdictional methodologies. Lessons Learned from Country Experiences 31 As such, methods used by projects to measure A focus on the development of national (only) performance do not align well with methods estimates of GHGs and FREL/FRLs may be less used by national or subnational governments resource intensive at the start, but more costly in to measure REDD+ results. Similarly, current the end—particularly if more highly stratified systems methods for estimating carbon stock changes at lead to stronger incentives for action. There is a need the national level are not always “fit for purpose” to balance the cost of an MRV system that can operate for incentivizing action on the ground. Thus, at national and project scales effectively with the flexibility on all sides is needed to transition benefits of enabling local actions, including catalyzing legacy projects into a national (or subnational) investments and engaging local, operational capacities system. to implement activities that reduce emissions (or enhance removals). ●● Suggesting that projects “apply the jurisdictional rate of deforestation” will not work in most One barrier to the development of nested systems instances, as it does not provide the right is a lack of technical capacity within developing incentives for projects to invest in high-risk country governments. There are clear asymmetries areas—as is evident in the DRC Mai Ndombe of knowledge and information that exist between (often case. Other options will need to be developed international) project developers and forest/REDD+ for, in particular, nesting avoided deforestation country governments, which can be an impediment projects. to cooperation. Models should be investigated that embed centralized technical support within ●● Nesting of avoided deforestation—where governments to ensure continuity over time, objectivity, counterfactual baselines are more difficult to accuracy, and quality. It is critical to have technical estimate—is more challenging than A/R (where a personnel aware of the jurisdictional context at different baseline can be set to zero for non-forestland) or levels and trusted by political decision makers. forest management (where similar methods can be applied at small and large scales). Finally, the establishment of jurisdictional REDD+ is a learning-by-doing process. It has been a decade- ●● The more spatially explicit information is available long journey to date for the development of national (and can be applied to nested systems), REDD+ systems, and while there are some existing the stronger the incentives, as illustrated by experiences, there remain many areas still in the early the Guatemala case study. Conversely, the stages of learning, including how best to involve local establishment of non-stratified, single-value actors and catalyze local activities to contribute to large- FREL/FRLs often disincentivizes the protection scale jurisdictional results. This paper only scratches of high carbon stock, deforestation-threatened the surface of issues in nesting—and we expect many forests. more lessons to emerge in the years to come. 32 Approaches to REDD+ Nesting Box 4.1 Considerations for the Future The authors and reviewers of this paper raised a number of additional issues critical to the design of a nested system, but we couldn’t address them all in a single paper. Here are some questions to possibly consider in further explorations of nested systems: • What are the policy (setting of reporting/accounting rules, transparency requirements, whether and how to integrate legacy versus new projects, etc.) and operational (sharing of data, process for transferring funds/units, operation of underpinning systems, etc.) challenges of nesting and how can they be overcome? • What technical measurement and monitoring systems could best support nested approaches? • What are the risks inherent in a nested system (for example, MRV mismatches, double counting, etc.) and how should responsibility for them be shared? Who is willing to take on such risks? How can registries help to manage some of these risks? • What are the conditions under which a nested approach or system makes sense (for example, centralized versus decentralized government systems, balance of private versus public lands, where decision-making authorities lie)? What legal frameworks enable nesting (or not)? • Where should the costs be borne for both the implementation actions that reduce emissions (or enhance removals) and the MRV of GHG performance? Where does the intellectual property sit for measurements of GHGs? • What are the technical and administrative requirements expressed by demand-side actors (to date, donor governments or voluntary standards) for the jurisdictional REDD+ initiative? Lessons Learned from Country Experiences 33