Maximizing Private Sector Engagement: How to keep nested projects aspart of the solution
Naomi Swickard (Verified Carbon Standard)

Session 2

Maximizing Private Sector Engagement: How to keep nested projects as part of thesolution 1
Naomi Swickard (Verified Carbon Standard)Thank you very much to FFPRI for inviting me to this session for putting on a great event again
this year.

I am going to focus on two main components: what is the role of the private sector in the

post-Paris world and how do we keep private sector engaged, particularly in terms of how we makethat work at a project level?

I am focusing on that nested architecture because the theme of theseminar here is reference levels, but I do want to be clear that we definitely agree that the private sector
can be engaged in REDD in a much broader number of ways and different types of financing
arrangements, and that this is one aspect of potential solutions.
Emerging REDD+ Market Opportunities

The first thing I want to start with is looking at some of the emerging REDD market
opportunities.
To put this in the context of the Paris agreement, I want to call out three key elements. One isthat there is strong language on REDD bringing that into the Paris agreement and recognizing the1

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previous decisions.

There is recognition of the importance of adequate and predictable finance.

Called out

specifically in this is the need for both public and private sources of finance. We are going to need tocontinue with the diversity of finance sources.

We are not going to have going forward a singularfinancing mechanism, which means we have a fairly diverse portfolio of finance options which mayhave different requirements.
Finally, there will be a mechanism contributing to greenhouse gas emission reductions andsustainable development.
private entities.

That needs to incentivize and facilitate participation by both public and

The critical component here is that it includes the opportunity to contribute emission

reductions between parties.

In other words, there is an opportunity for trading of emission

reductions among countries in order to meet INDC commitments.

What we have here is a future that looks bright in some ways in terms of being clear that market
mechanisms can be a part of the solution.

We know that, given the finance needs for REDD, weneed to go beyond donor sources of finance to include the private sector.
need both of them to cover different elements.

That goes both ways.

We

We will see a future that includes a variety of thesemechanisms that may have different accounting requirements.

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I just want to point out primarily that,Maximizing Private Sector Engagement: How to keep nested projects aspart of the solution
Naomi Swickard (Verified Carbon Standard)

Session 2in some cases where you have sort of bilateral negotiated efforts that are fund based, we see a systemof accounting which may be less vigorous or may be more streamlined, easier to meet at an earlier
stage phase, whereas some of the emerging sources of demand are going to need something thatremains more rigorous in terms of how you set the reference level and how you integrate different
scales.
An interesting one to point to here is the Green Climate Fund 2, which will have a significant
contribution to REDD expected, but in our discussions with the Green Climate Fund, it is clear thatwhat is being submitted to the UNFCCC so far in terms of reference levels from countries are notvery comparable.

They have concerns about making payments based only on that when it is meant tobe a results based mechanism that has some fairness in terms of how payments are made and volumes
that are paid for, prices, and etcetera.

Therefore, they think they may need some sort of additionalparameters or guidance that will allow the unlocking of that results-based finance.

Focusing more on the private sector, we also see a variety and a potentially growing area of needfor private and market demand within the REDD space.

This ranges from private funds andvoluntary markets to a number of emerging opportunities, including domestic markets likeinternational regulatory markets like Japan and California, as well as the aviation sector.

I want tofocus on two of these briefly.
In terms of regulatory markets, California for example is moving forward to incorporate REDD
in that market.

They are looking to leverage existing frameworks that countries can use to produce

offset-grade emission reductions into that market.

They are expected to move into rule-making in

the next year and bring those tons in California starting in around 2018.
The aviation sector is another area where we see a lot of potential for leveraging markets andpotentially using REDD as a part of that mechanism.

The aviation sector is expected to use amarket-based mechanism to achieve carbon neutral growth from 2020.

The organization thatmanages, the International Civil Aviation Organization 3 (ICAO), is very opaque, so it is hard to get up
to date information. However, what we understand from the airlines is that it is likely to be agreed by23http://www.greenclimate.fund/home
http://www.icao.int/Pages/default.aspx

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the middle of next year, and that there is a lot of desire from the airlines to bring REDD into thatmechanism because they need the scale of emission reductions.
profiles.

They like the diversity of country

They want to be able to purchase tons from the places that they fly, and their interest in the

additional social environmental benefits.

However, because that is a market mechanism, they aregoing to be looking for something that has credibility of operating at the level of rigor that would beneeded in that mechanism.
Forest Carbon Markets

Taking a brief look at where we are at beyond today in terms of market opportunities, we see that
forest carbon markets in the voluntary space continued to grow, particularly if you exclude 2010,
which was an outlier year in many ways, but we still see steady growth there in terms of forest carbon
markets as well as the voluntary market as a whole.

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Maximizing Private Sector Engagement: How to keep nested projects aspart of the solution
Naomi Swickard (Verified Carbon Standard)

Session 2

One key component in that sector is the potential that demand could really increase with strong
policy signals.

Out of the Paris agreement, I think we do have a strong signal that markets will be apart of the solution, but we do not have clear rules on what that will look like, and we do not haveclear rules on how it will relate to INDCs and the ability to trade tons outside of countries other than
the recognition in the text that it is possible.

Therefore, there is still a need, if this is to become a realpart of the solution, for clarity on the policy side.

ICAO and the aviation sector moving forwardwith the market based mechanism that includes REDD could be a very strong policy signal.

Finally, we also see growing confidence in REDD projects on the ground in terms of the fact thatthey have become a major source of emission reductions in these markets.

You see that with theforest emblems starting to grow throughout the years and becoming the dominant source in 2013 and2014.
You see that as well in the total cumulative sales where REDD has become this voluntary offset ofchoice.

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Session 2Jurisdictional and Nested REDD+

Where does that really leave us?

We have within the agreements clear references to REDD and aclear need for private finance. We need mechanisms to ensure that that private finance can continue
to operate in this space.

In other words, we need to design the mechanisms going forward andelaborate the rules around the use of markets in a way that can incentivize that private sector action.
This is only one part of the solution, but I want to focus on this today because I think one of the key
things that many of you are thinking about, particularly related to the JCM, is how we incentivize moreof this investment at the project scale but make sure that it aligns with what is happening at the higher
level; in other words, within national and sub-national accounting.
The VCS has worked for a number of years on a framework called the Jurisdictional and Nested
REDD+ standard or framework.

It is meant to be a high quality, rigorous, or market-readymechanism for jurisdictional accounting and nested activities.

We are working with a number of countries that are using that, particularly those that are trying toaccess regulatory markets like California.

Many others are using it as guidance.

When we designed

this, the idea at the time was that more momentum would continue around market mechanisms.
Because of that, there would have been an incentive for jurisdictions or governments to grow further
with reference levels to do something that was spatially explicit.

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In other words, that it was predicting

Maximizing Private Sector Engagement: How to keep nested projects aspart of the solution
Naomi Swickard (Verified Carbon Standard)

where and when deforestation would occur in the jurisdiction.

Session 2If the reference level does that,nesting or making sure that projects are aligned with jurisdictions becomes quite easy.

The project

can simply draw its area out of the higher reference level and use it, but what we are finding is that inmost countries that is not happening, at least not yet in terms of the spatial projection that would
predict deforestation across the entire jurisdiction.

How do we deal with this?

We see two main timeframes where we need to be able to reconcile

what is happening at a project scale and what is happening at a higher scale.

The first timeframe is in

the grand-parenting period, which is a period of time where projects are using project level reference
levels, but we need to make sure there is not a major conflict with the results at a higher level.
However, these projects are not yet fully integrated into the higher reference level, which may taketime.
There are a number of options where that can be used in the scenario.
to recognize full project accounting.
reductions from projects.

Governments can decide

In other words, they could recognize the total emission

They would then need to deduct that from the total emission reductions

that are at a jurisdictional or national scale to avoid double counting.

That would recognize the early

action of projects and provide them clear requirements, but it does mean that you could have a
discrepancy in results.

A lot of that stems from the fact that projects have primarily chosen tooperate in areas of high threat.

In other words, they have a higher deforestation risk in the project

area than the average across the jurisdiction.
than their share.

It can appear that they are sort of carving off more

This has become a problem in countries particularly where there are a higher

number of projects.
There is a need to reconcile this, so there are other opportunities that could be taken during thisperiod to make sure that you do not have the scale discrepancy.

Those could include different kindsof set-asides that take some type of a conservative discount on projects in the early stages to avoid thisdiscrepancy, but that has plusses and minuses as well.

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Beyond the grand-parenting period; in other words, once projects become fully nested in ajurisdictional approach, they need to essentially be as harmonized as possible with the higher levelreference level or baseline.

There are a number of options for that. When we were initially looking

at this architecture and nested system, the idea was that a spatially explicit reference level that predicted
where and when deforestation would occur at a jurisdictional scale would mean that the project can
simply draw out its area. However, that has challenges as well and I will come back to that.
The second option would be for projects to essentially use as much of the higher level reference
level as possible while doing the spatial component at the project scale.

In other words, they might

use the same emission factors as the jurisdiction. Perhaps some of the same activity data, though
they may have more fine grained results at a project scale that could be added to that, but then looking
at how that impacts within the project area and doing the modeling at a project scale.
The third option would be something along the lines of applying the jurisdictional reference level
equally to all areas of the jurisdiction and just making a policy call that any project that wants tooperate can, but it would be tied to essentially the rate of deforestation across the jurisdiction applied
to the project area.

These all come with a number of plusses and minuses.

I can see wheels turning from some ofyou involved in projects going, “Hey, wait a minute.

What does this due to my baseline, and what is

this due to the financial architecture of my project?”

It is a risk, but I think we have to recognize thatthese projects, A, must come into line with higher level of jurisdictional programs, and to be a part of148

Maximizing Private Sector Engagement: How to keep nested projects aspart of the solution
Naomi Swickard (Verified Carbon Standard)

Session 2

the solution, we need a mechanism that works both for the projects and for the jurisdiction.
Briefly, some of the opportunities or pros and cons to these different options: if the jurisdiction
does a spatially explicit reference level, this would recognize the fact that you have different rates ofdeforestation across the jurisdiction and that projects are oftentimes located in a high threat area.

Itis easily reconcilable with jurisdictional results because it would essentially be the same as the higher
level of reference level, and would provide clear guidance and certainty to projects.

However, it does

have some risks that model predictions that would be required to do this are open for debate or could
be very complex.

The second option of allowing projects do the spatial component at the project level using as
much of the jurisdictional data as possible, it would provide clear guidance to projects and perhaps themost sort of oversight of their own future, but could result in still needing some reconciliation.
Finally, the third option is easily reconcilable, but could very well bankrupt many projects.

That

is a major risk, not just for the project, but also for the country, because the failure of projects thathave existed for the last number of years could really mean negative perceptions of REDD andfailures to deliver to the communities that they made promises to.

We are working on some guidance to go much deeper on this.
options for reconciling these different scales?

What are the actual technical

We will be sharing that and completing it sometime in149

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the next three months. Hopefully, that will be useful to many of you working at the national andproject scale that need to figure these elements out.
Conclusion

Finally, I just want to highlight in terms of going forward the continued role of the private sector
in projects.

I think we can clearly see the standalone projects that are not integrated in the higher

level have a very risky future, and one that is risky to both the project and the jurisdiction.

There is aneed to integrate those scales, but many in the private sector are very nervous about engaging directlywith jurisdictional programs, that there is a high risk of credit delivery and many other issues in termsof interacting at that scale.
Therefore, what we really need is partnerships going forward between the public and the private
sector where we can work together to ensure that we create mechanisms that make sense for all of theparties, that we can clarify how this relates to the INDCs, and allows the private sector to do what theycan, particularly where they have a strength in forcing change on the ground in specific locations in away that can tie to a segment of the demand and finance that is needed for REDD, particularly
targeting areas where there is a need for those mechanisms, like aviation.
from any of you.

I welcome any comments

These are initial recommendations or thoughts on how this structure can work.

Thank you very much.

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