TABLE OF CONTENTS

1........... Procedural issues and consultation of interested parties.................................................. 10

1.1........ Introduction.................................................................................................................. 10

1.2........ Organisation and timing................................................................................................. 12

1.3........ Consultation and expertise............................................................................................ 12

1.4........ Opinion of the Impact Assessment Board...................................................................... 13

2........... Problem definition......................................................................................................... 13

2.1........ What is the issue or problem that may require action?.................................................... 13

2.1.1..... Enhancing the environmental integrity of the EU's climate change commitments............... 13

2.1.2..... Strengthening synergies with wider policy objectives...................................................... 13

2.1.3..... Preparing the ground for more ambitious targets............................................................ 15

2.2........ What issues need to be addressed to include LULUCF in accounting and what is the current state of play? 15

2.2.1..... Addressing the non-permanence of emissions and removals and the influence of natural effects on emissions and removals....................................................................................................................... 15

2.2.2..... Ensuring robust monitoring and reporting....................................................................... 16

2.2.2.1.. Completeness of estimates............................................................................................ 17

2.2.2.2.. Accuracy of estimates................................................................................................... 17

2.2.2.3.. Time consistency and comparability of estimates............................................................ 18

2.2.3..... Ensuring robust accounting rules.................................................................................... 19

2.2.4..... Defining the policy context for the inclusion of LULUCF in the EU's climate change commitment 20

2.3........ Who is affected?........................................................................................................... 21

2.4........ How would the problem evolve, all things equal?........................................................... 22

2.5........ Does the EU have the right to act and is EU added-value evident?................................. 24

3........... Objectives.................................................................................................................... 24

3.1........ What are the general and more specific / operational objectives?.................................... 24

4........... Policy options............................................................................................................... 25

4.1........ What are the possible options for tackling the problem and meeting the operational objectives? 25

4.2........ Options for the policy context in which to include LULUCF in the EU's GHG emission reduction commitments.................................................................................................................................... 26

4.2.1..... Option 1 – No EU action.............................................................................................. 27

4.2.2..... Option 2 – Include LULUCF as a separate policy framework....................................... 27

4.2.3..... Option 3 – Include LULUCF in the Effort Sharing Decision........................................... 28

4.3........ Options for improving monitoring and reporting............................................................. 29

4.4........ Options for accounting.................................................................................................. 30

4.4.1.1.. Accounting option (a): Small changes to the current Kyoto Protocol rules....................... 32

4.4.1.2.. Accounting option (b): Likely outcome in the UNFCCC negotiations............................. 33

4.4.1.3.. Accounting option (c): UNFCCC+............................................................................... 34

4.5........ Which options have been discarded at an early stage and why?...................................... 35

5........... Analysis of impacts....................................................................................................... 35

5.1........ Environmental implications............................................................................................ 35

5.1.1..... Impact of the different options on GHG emissions.......................................................... 35

5.1.1.1.. Option 2.I – Separate framework for LULUCF (without mitigation targets)................... 35

5.1.1.2.. Option 2.II – Separate framework for LULUCF (with mitigation targets)....................... 38

5.1.1.3.. Option 3 – Inclusion of LULUCF in the ESD................................................................ 38

5.1.2..... Other environmental impacts......................................................................................... 39

5.1.3..... Possible contributions to an EU target........................................................................... 40

5.2........ Economic implications................................................................................................... 42

5.2.1..... Direct abatement costs.................................................................................................. 42

5.2.1.1.. Option 2.II – Separate framework with mitigation targets............................................... 42

5.2.1.2.. Option 3 – Include LULUCF in the ESD...................................................................... 42

5.2.2..... Costs for the various sectors......................................................................................... 43

5.2.2.1.. Agriculture.................................................................................................................... 43

5.2.2.2.. Forestry....................................................................................................................... 44

5.2.2.3.. Impacts by owner structure........................................................................................... 46

5.2.3..... Monitoring and reporting costs...................................................................................... 46

5.2.3.1.. Administrative burden of changing the scope and methods of accounting........................ 46

5.2.3.2.. Implications of improved monitoring and reporting......................................................... 47

5.3........ Social implications........................................................................................................ 49

5.3.1..... Costs by Member States.............................................................................................. 49

5.3.1.1.. Option 2.II – Separate framework with mitigation targets............................................... 49

5.3.1.2.. Option 3 – LULUCF included in the ESD..................................................................... 50

5.3.2..... Employment................................................................................................................. 50

6........... Comparing the options.................................................................................................. 51

6.1.1..... Choosing the right policy context................................................................................... 51

6.1.2..... Improving monitoring and reporting............................................................................... 53

6.2........ Concluding comments................................................................................................... 53

7........... Monitoring and evaluation............................................................................................. 54

8........... ANNEXES.................................................................................................................. 55

8.1........ Annex I – Monitoring, reporting and verification............................................................ 55

8.1.1..... Introduction.................................................................................................................. 55

8.1.2..... Completeness............................................................................................................... 55

8.1.2.1.. Convention reporting.................................................................................................... 55

8.1.2.2.. Kyoto Protocol reporting.............................................................................................. 62

8.1.2.3.. Concluding comments................................................................................................... 63

8.1.3..... Accuracy...................................................................................................................... 64

8.1.3.1.. Underlying methods used to estimate activity data.......................................................... 65

8.1.4..... Underlying methods used to estimate emission factors.................................................... 68

8.1.5..... Uncertainties................................................................................................................. 74

8.1.6..... Recalculations............................................................................................................... 76

8.1.7..... Time-series consistency and comparability between MSs............................................... 77

8.1.7.1.. Definitions.................................................................................................................... 77

8.1.8..... Verification activities..................................................................................................... 79

8.1.9..... Costs of improving monitoring....................................................................................... 79

8.1.9.1.. Step 1 – Achieving completeness in the reporting of categories and pools at a minimum level of tier 1 80

8.1.9.2.. Step 2 – Increasing the accuracy of the reported key categories and pools to a minimum of tier 2 81

8.1.9.3.. 3 – Harmonisation........................................................................................................ 82

8.1.9.4.. Results......................................................................................................................... 83

8.1.10... Appendix 1 – Overview of problems emerged during 2010 review and answers by MS. 84

8.2........ Annex II – Impacts on accounting of threshold values (natural disturbances) and caps (forest management) 87

8.2.1..... Implications of different triggers for the application of provisions for large natural disturbances 87

8.2.2..... Caps on credits and debits in forest management and their implications........................... 88

8.3........ Annex III – Methodology (models and calibration)........................................................ 90

8.3.1..... Description of the models, their linkages and their use.................................................... 90

8.3.2..... Description of uncertainties in the modelling results......................................................... 93

8.3.3..... Description of the calibration method used..................................................................... 94

8.4........ Annex IV – Model results: projected emissions / removals and abatement costs............. 96

8.4.1..... Projected emissions and removals (Reference scenario)................................................. 96

8.4.1.1.. Models average............................................................................................................ 97

8.4.1.2.. G4M and EUFASOM.................................................................................................. 97

8.4.1.3.. EFISCEN and EUFASOM.......................................................................................... 97

8.4.1.4.. Accounting results for individual MSs and the EU-27(models average)........................... 98

8.4.2..... Distribution of costs.................................................................................................... 101

8.5........ Annex V – Discarded options..................................................................................... 102

8.5.1..... Discarded policy options............................................................................................. 102

8.5.1.1.. Splitting LULUCF according to activities for the inclusion in different policy frameworks 103

8.5.2..... Discarded accounting options...................................................................................... 103

9........... Bibliography............................................................................................................... 105

COMMISSION STAFF WORKING DOCUMENT

Impact Assessment on the role of land use, land use change and forestry (LULUCF) in the EU's climate change commitments

Accompanying the document

Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on accounting rules and action plans on greenhouse gas emissions and removals resulting from activities related to land use, land use change and forestry

List of acronyms

AD || Activity Data

A || Afforestation

AR || Afforestation / Reforestation

ARD || Afforestation, Reforestation and Deforestation

BAU || Business as Usual

CAP || Common Agricultural Policy

CL || Cropland

CM || Cropland management

COP || Conference of the Parties

COST || European Cooperation in Science and Technology

D || Deforestation

E || Emissions

EF || Emission Factor

EFISCEN || European Forest Information Scenario

ESD || Effort Sharing Decision

EU ETS || EU Emissions Trading System

FAO || Food and Agriculture Organization of the United Nations.

FL || Forest land

FM || Forest Management

G4M || Global Forest Model

GDP || Gross Domestic Product

GHG || Greenhouse gas

GL || Grassland

GM || Grazing land management

GPG || Good Practice Guidance

HWP || Harvested Wood Products

IPCC || Inter-governmental Panel on Climate Change

JRC || Joint Research Centre of the European Commission

KP || Kyoto Protocol

LULUCF || Land Use, Land Use Change and Forestry

MRV || Monitoring, Reporting and Verification

MS(s) || Member State(s)

NFI || National Forest Inventories

NGOs || Non-Governmental Organizations

NIRs || National Inventory Reports

R || Removals

REDD || Reducing Emissions from Deforestation and forest Degradation

RES-D || Directive on the promotion of the use of energy from renewable sources

SMEs || Small- and Medium sized Enterprises

RV || Revegetation

TFEU || Treaty on the Functioning of the European Union

UNFCCC || United Nations Framework Convention on Climate Change

List of definitions[1]

Accuracy || Accuracy is a relative measure of the exactness of an emission or removal estimate. Estimates should be accurate in the sense that they are systematically neither over nor under true emissions or removals, so far as can be judged, and that uncertainties are reduced so far as is practicable. Appropriate methodologies conforming to guidance on good practices should be used to promote accuracy in inventories.

Activity data || Data on the magnitude of human activity resulting in emissions or removals taking place during a given period of time. In the LULUCF sector, data on land areas, management systems, lime and fertilizer use are examples of activity data.

Afforestation || The direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural seed sources.

Biomass || Organic material both above ground and below ground, and both living and dead, e.g., trees, crops, grasses, tree litter, roots etc. Biomass includes the pool definition for above - and below - ground biomass.

Carbon pool* || The whole or part of a geochemical feature or system within the territory of a Member State within which carbon, any precursor to a greenhouse gas containing carbon or any greenhouse gas containing carbon is stored.

Carbon stock* || The quantity of the element carbon stored in a carbon pool.

Comparability || Comparability means that estimates of emissions and removals reported by Parties in inventories should be comparable among Parties. For this purpose, Parties should use the methodologies and formats agreed by the Conference of the Parties (COP) for estimating and reporting inventories.

Completeness || Completeness means that an inventory covers all sources and sinks for the full geographic coverage, as well as all gases included in the IPCC Guidelines in addition to other existing relevant source/sink categories which are specific to individual Parties (and therefore may not be included in the IPCC Guidelines).

Consistency || Consistency means that an inventory should be internally consistent in all its elements over a period of years. An inventory is consistent if the same methodologies are used for the base year and all subsequent years and if consistent data sets are used to estimate emissions or removals from sources or sinks. Under certain circumstances referred to in paragraphs 10 and 11 of FCCC/SBSTA/1999/6/Add.1, an inventory using different methodologies for different years can be considered to be consistent if it has been recalculated in a transparent manner taking into account any good practices.

Cropland || This category includes arable and tillage land, and agro-forestry systems where vegetation falls below the threshold used for the forest land category, consistent with the selection of national definitions.

Cropland management* || Any activity resulting from a system of practices applicable to land on which agricultural crops are grown and on land that is set aside or temporarily not being used for crop production

Deforestation || The direct human-induced conversion of forested land to non-forested land.

Disturbances* || Events including wildfires, insect and disease infestations, extreme weather events and geological disturbances, but not harvesting.

Emission factor || A coefficient that relates the activity data to the amount of chemical compound which is the source of later emissions. Emission factors are often based on a sample of measurement data, averaged to develop a representative rate of emission for a given activity level under a given set of operating conditions.

Forest || An area of land of at least 0.05 hectare with tree crown cover or equivalent stocking level of at least 10 per cent, covered with trees with the potential to reach a minimum height of at least 2 metres at maturity at their place of growth, including groups of growing young natural trees and all plantations which have yet to reach a tree crown cover or equivalent stocking of at least 10 per cent or tree height of at least 2 metres, and areas normally forming part of the forest area on which there are temporarily no trees as a result of human intervention, such as harvesting, or of natural causes, but which are expected to revert to forest

Forest land || The land that meets the definition of forest. This category includes all land with woody vegetation consistent with thresholds used to define forest land in the national GHG inventory, sub-divided at the national level into managed and unmanaged and also by ecosystem type as specified in the IPCC Guidelines.6 It also includes systems with vegetation that currently falls below, but is expected to exceed, the threshold of the forest land category.

Forest management* || Any activity resulting from a system applicable to a forest and aimed at improving any ecological, economic or social function of the forest

Grassland || This category includes rangelands and pasture land that is not considered as cropland. It also includes systems with vegetation that fall below the threshold used in the forest land category and is not expected to exceed, without human intervention, the thresholds used in the forest land category. This category also includes all grassland from wild lands to recreational areas as well as agricultural and silvo-pastural systems, subdivided into managed and unmanaged, consistent with national definitions.

Grazing land management* || Any activity resulting from a system applicable to land used for livestock production and aimed at controlling or influencing the quantity and type of vegetation and livestock produced.

Key category || A category that is prioritised within the national inventory system because its estimate has a significant influence on a country’s total inventory of direct greenhouse gases in terms of the absolute level of emissions, the trend in emissions, or both.

Reforestation || The direct human-induced conversion of non-forested land to forested land through planting, seeding and/or the human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land. For the first commitment period, reforestation activities will be limited to reforestation occurring on those lands that did not contain forest on 31 December 1989.

Removals* || Used, for the purposes of this report, synonymously with "sink".

Revegetation* || The direct, human-induced activity intended to increase the carbon stock of any site that covers a minimum area of 0.05 hectares, through the establishment of vegetation, where that activity does not constitute afforestation or reforestation

Sequestration || The process of increasing the carbon content of a carbon pool other than the atmosphere. It is preferred to use the term “sink”.

Sink* || The rate of build-up of CO2 in the atmosphere can be reduced by taking advantage of the fact that carbon can accumulate in vegetation and soils in terrestrial ecosystems. Any process, activity or mechanism which removes a greenhouse gas from the atmosphere is referred to as a "sink." Denoted in accounting and reporting with the negative (-) sign.

Transparency || Transparency means that the assumptions and methodologies used for an inventory should be clearly explained to facilitate replication and assessment of the inventory by users of the reported information. The transparency of inventories is fundamental to the success of the process for the communication and consideration of information.

Wetland* || Any activity resulting from a system for draining and rewetting land that covers a minimum area of 1 hectare and on which organic soil is present, provided the activity does not constitute any other activity referred to in Article 3(1), and where draining is the direct human-induced lowering of the soil water table, and rewetting is the direct human-induced partial or total reversal of drainage.This category can be subdivided into managed and unmanaged according to national definitions. It includes reservoirs as a managed sub-division and natural rivers and lakes as unmanaged sub-divisions.

1. Procedural issues and consultation of interested parties 1.1. Introduction

In order to avoid dangerous anthropogenic interference with the climate system, the overall global annual mean surface temperature increase should not exceed two degrees Celsius above pre-industrial levels. This ambition was recognised in the Cancún Agreements[2] and requires global greenhouse gas (GHG) emissions to be cut by at least 50% below 1990 levels by 2050, or by 80-95% in developed countries (IPCC, 2007), and has been embraced by the European Council as a long-term goal.[3] The European Parliament similarly endorsed the a long-term reduction target of at least 80% by 2050 for the EU and other developed countries.[4] As a step towards the necessary long-term efforts, the Union has committed to reduce its GHG emissions to 20% below 1990 levels by 2020, or to 30% if conditions are right. The commitment forms part of one of the European Union's five headline targets in the Europe 2020 Strategy for smart, sustainable and inclusive growth.[5]

Land use, land use change and forestry (LULUCF) is not yet part of the EU's GHG emission reduction target for 2020. However, the European Council and Parliament requested the Commission to assess the possibility to include LULUCF in the 2020 target and make a legislative proposal, as appropriate. The timing of this work was made conditional on the outcome of the negotiations of an international agreement on climate change. In the absence of such an agreement at the end of 2010, the Commission is required to report on the results of its assessment in 2011 with the aim of the proposed act entering into force from 2013 onwards.[6] Whilst substantial progress was made at the Conference of Parties to the United Nations Framework Convention on Climate Change (UNFCCC) in Cancún in December last year, no comprehensive agreement was reached. In fulfilment with the requirements and for the reasons provided in Section 2.1, this impact assessment accompanies a Communication and legislative proposal on accounting for LULUCF (agenda planning number 2011/CLIMA/008).

Emissions of greenhouse gases in the EU mainly come from energy production and other man-made sources, see Figure 1. But, countering some of the emissions, carbon is absorbed (removed) from the atmosphere through photosynthesis and stored in vegetation and soils. Different land uses and management practices in forestry and agriculture can limit emissions of carbon and enhance removals from the atmosphere, see Box 1. Carbon removed from land can also stay bound in harvested wood products for a long period of time without being re-emitted to the atmosphere and the recycling of wood and production of long-lived products can therefore contribute to mitigation efforts. These practices and uses are covered by the land use, land use change and forestry (LULUCF) sector.[7] In 2009, LULUCF removed an amount of carbon from the atmosphere equal to about 9% of the EU's total greenhouse gas emissions in other sectors.

Figure 1. Emissions and removals per sector in the EU-27 (2009)

Note: Negative numbers denote net removals and positive numbers net emissions.

Source: EEA (2011)

In addition, land resources can contribute to mitigation efforts in other sectors through the substitution of fossil fuels in energy production and greenhouse gas intensive materials such as steel and cement with biomass (see e.g. Sathre and O'Connor, 2010), see Box 1.

Box 1. Possible contribution of land use, land use change and forestry to climate change mitigation

Agriculture contributes in a number of ways. Measures include agronomic practices such as using improved crop varieties, extending crop rotations (a shift to perennial crops) and avoiding or reducing the use of unplanted fallow through green cover; agro-forestry practices which provide higher carbon stocks through the tending of livestock or growing of food crops on land that also grows trees for timber, energy or other wood products; adjustments of the intensity and timing of grazing on lands can influence the growth, carbon allocation and flora of grasslands and thereby the removals and storage of carbon in soils; enhanced productivity of croplands and grasslands through returning or leaving organic materials (farmyard manure, straw, crop residues) on the land; improved management of organic soils through avoiding the drainage of these soils or re-establishing a high water table on peat lands; and restoration of degraded lands.

Similarly, there are many mitigation opportunities in forestry. They include the conversion of non-forest land to forest (afforestation); avoiding conversion of forest land to other types of land (deforestation); productiivity increases, conservation of carbon in existing forests e.g.through optimized tending and thinning, continuous crown harvesting (selective logging), longer rotation periods of trees, avoidance of clearfelling; conversion to wilderness forests and more widespread use of prevention measures to limit the impacts of disturbances such as fires, pests and storms.

In addition to the opportunities directly linked to forestry and agriculture, there are potential mitigation benefits in the industry and energy sectors if agricultural land and forests are managed for production of timber and energy. In this respect enhanced production in existing forests through adjusting rotations closer to the productive maximum, more production from low-production forests, increasing the harvest of timber offcuts and branchwood and changing species composition and growth rate are equally important. While carbon is stored in vegetation and soils, it can also be stored for several decades in products, and industry can make an important contribution to mitigation through increasing the recycling of wood and / or production of pulp, paper and wood products. The bio-based industry can make use of crops grown for material substitution (e.g. hemp and grass for insulation instead of glass fibre, straw used for furniture production, biodegradable cutlery made from maize starch, car door panels made from flax or sisal plants, hemp plastic) or energy (e.g. biomass for energy instead of fossil fuels).

The measures in the different sectors have different advantages and limitations. An important consideration is that the positive impacts of measures that increase carbon stocks in vegetation and soils eventually saturate and are potentially impermanent. Equally, measures that avoid greenhouse gas emissions through the use of wood or other biomass instead of other materials may have negative impacts on carbon in vegetation in soil. It is therefore important to substitute materials and energy sources that have relatively high greenhouse gas emissions during their lifecycle. See Matthews et al. (2011) for more details on the different measures and their potentials.

1.2. Organisation and timing

For the preparation of this initiative, close inter-service consultation was ensured through the establishment of an inter-service group and impact assessment steering group which oversaw and followed the impact assessment work. DG Environment, DG Agriculture and Rural Development, the Joint Research Centre (JRC), DG Research and Innovation, DG Energy, DG Economic and Financial Affairs, DG Enterprise and Industry, DG Legal Services and the Secretariat General were directly involved.

The work draws on input from two contracts; one which involved investigating different options for the inclusion of the sector in the EU's reduction commitment (Matthews et al. 2011; Watterson et al. 2011) and one which involved modelling the projected emissions and removals from the sector as well as the impacts on the sector and Member States (MSs) of different options (Böttcher et al., 2011). The work also builds on input from the JRC on modelling and on monitoring and reporting (JRC 2011a and 2011b, see Annexes II and IV to this report).

1.3. Consultation and expertise

A number of consultative initiatives were undertaken in support of the work:

· An expert group on climate policy for LULUCF was established in 2010 under the European Climate Change Programme . The group involved a wide range of stakeholders: environmental NGOs, trade associations, experts from public administrations and researchers. The objective was to define and provide input on critical issues related to the inclusion of the LULUCF sector in the EU's climate change mitigation efforts, i.e. a scoping and steering exercise. The summary report is available on the Commission's website http://ec.europa.eu/clima/events/0029/index_en.htm

· In addition, an online public consultation was carried out in 2010 to collect views on the opportunities and challenges related to the inclusion of the sector in the EU's commitments. A total of 153 responses were received, representing the views of private companies, business and industry organisations, individuals and private land owners, NGOs, academia and research and public authorities. The same questions were subsequently used in a separate consultation with MSs and received 14 responses. The results of both consultations have been published in reports (Entec, 2011a and 2011b) http://ec.europa.eu/clima/events/0029/index_en.htm

· The Commission also held a stakeholder meeting on 28 January 2011 in Brussels. Around 75 participants representing MSs, trade associations, environmental NGOs and research institutes took part in the discussions. The proceedings are available on the Commission's website. http://ec.europa.eu/clima/events/0029/index_en.htm

The key findings of the consultation process are presented in boxes at the beginning of the relevant sections of this report.

1.4. Opinion of the Impact Assessment Board

The impact assessment (IA) was discussed at a meeting of the IA Board (IAB) on 4 May 2011. Following the IAB's recommendations, the report now clearly states that the option (2.II) which incorporates mitigation targets for LULUCF is included for illustrational purposes and to initiate further discussions. This impact assessment considers accounting for LULUCF in the context of the 20% GHG emission reduction commitment and not in the context of a step-up of the EU's overall efforts, as discussed in Sections 4 and 6, and there are uncertainties associated with the modelling and inventories which affect the potential to set targets at this stage, see Annex III. A commentary on the model-based predicted impacts and references to more information is provided in Annexes III and IV. The report also provides a description of the practical and political context in which the accounting for LULUCF is assessed throughout the report, in particular in Sections 2.1 and 6. Finally, references to the results of the various stakeholder consultations have been integrated in Sections 1 and 4.

2. Problem definition 2.1. What is the issue or problem that may require action?

The purpose of this report is to assess how LULUCF may be addressed in relation to the EU's GHG emission reduction commitments. Accounting for the sector would enhance the environmental integrity of the commitments, strengthen the overall coherence of climate policy and improving the economic efficiency when taking on more ambitious commitments.

2.1.1. Enhancing the environmental integrity of the EU's climate change commitments

The current partial accounting risks hiding real emissions and negative trends in emissions and removals. The IPCC Good Practice Guidance (GPG) for estimating GHG inventories (1996; 2003, see p. 3.261) says that emissions from biomass used for energy should be noted but not included in accounting for the Energy sector or other sectors that produce biomass energy. In other words, emissions from biomass based energy production are recorded as zero and it is instead assumed that these emissions are accounted for in the LULUCF sector. Furthermore, unless harvested biomass is used for energy or industrial purposes or remains in situ it will ultimately end up in solid waste disposal sites (SWDS) but the waste sector does not estimate changes in the carbon stock in SWDS.

In summary, this means that unless emissions due to utilisation of harvested biomass are accounted for in the LULUCF sector, they will not enter accounting at all. Important emissions will therefore be disregarded and apparent GHG savings in other sectors (stemming from the use of biomass for energy production instead of e.g. fossil fuels) may in fact not be real.

2.1.2. Strengthening synergies with wider policy objectives

Including the sector in accounting would also enhance the coherence of the EU's overall climate policy for several reasons:

· Combating climate change is one of the five headline targets of the "Europe 2020" strategy.[8], [9] By reducing GHG emissions by 20% compared to 1990 levels, increasing the share of renewables in final energy consumption to 20%, and moving towards a 20% increase in energy efficiency the EU will contribute to the overall objective of smart, sustainable and inclusive growth. The Council and Parliament have agreed that all sectors should contribute to reaching the targets. This is important also for the EU's role in promoting a level playing field for businesses and a fair distribution of effort.

· Climate change mitigation will continue to play an important role in the reformed Common Agricultural Policy (CAP). Agricultural emissions of CH4 and N2O from fertilization, livestock and manure are already reflected in targets (because they are included in the reporting of the "Agriculture" sector) whereas CO2 emissions and removals from soils and vegetation are not (since they are reported under LULUCF). Thus, closely correlated emissions, often occuring on the same land, and sometimes as a result of the same activities, are not reflected in their entirety in accounting. The 2010 Communication on the future CAP[10] outlines how the environmental performance of the CAP could be enhanced through a mandatory "greening" component of direct payments that supports environmental measures and give priority to actions addressing climate change and environmental goals. One benefit which these greening components hold in common is carbon sequestration, see Table 1. Accounting is necessary for the efforts invested by MSs, foresters and farmers to be reflected in the EU's efforts to reach more ambitious GHG reduction targets. Measures to enhance and protect carbon stocks also demonstrate co-benefits for adaptation, through e.g. increased water holding capacity and reduced erosion, and for biodiversity (Natura 2000).

· In addition, the provision of renewable energy is an integral part of the "Europe 2020" targets and the legitimacy of policies that directly or indirectly promote the use of biomass for energy production, such as the Renewable Energy Directive (RES-D)[11], hinges on the correct accounting of resulting emissions and removals. The accounting of LULUCF can ensure that emissions and removals are correctly reflected and will balance incentives between different uses of biomass.

· Finally, the LULUCF sector forms part of the EU's commitment under the Kyoto Protocol (KP) in 2008-12. Therefore, whatever reductions in emissions or increases in removals the EU and its MSs achieve and use for compliance with that commitment have to be maintained also in future commitment periods. Indeed, COP16[12] confirmed that LULUCF will continue to count towards Parties' efforts in future commitment periods and this would need to be mirrored by the EU in its domestic commitments.

Table 1. Possible carbon sequestration benefits of a post-2013 CAP

|| Pillar One "Greening Components"

|| Permanent Pasture || Crop Diversification || Ecological Set-aside || Natura 2000

Description of measure || Protect permanent pasture || Several crops at the same time on the farm || Share of farm area to be devoted to green infrastructure || Assure survival of valuable and threatened species and habitats

C sequestration benefits || Maintain and enhance carbon stocks || Increased soil organic matter || Carbon sequestration for permanent crops || Maintain but not increase carbon stores

|| Grasslands contain three times the carbon in arable land || Potential reduction in carbon losses || Greater benefit if non rotational || Extensive systems = above ground biomass (carbon storage)

|| Grassland conversion is a hotspot for emissions || Reduced bare soil = reduced carbon loss || Of high benefit if encouraged on organic soils ||

2.1.3. Preparing the ground for more ambitious targets

There is also scope for economic efficiency gains from including LULUCF in accounting. The Roadmap for moving to a competitive low carbon economy in 2050[13] shows that significant additional climate mitigation efforts will be required across all sectors, and that agriculture and forestry will become even more important over time both in terms of preservation and enhancement of carbon stocks and as a feedstock for energy and material production. Whilst opportunities to remove additional GHGs from the atmosphere appears relatively limited in the short term (see Section 5 of this report), the potential cost-efficiency of both short- and long-term efforts to reach higher targets than the current one would be compromised if mitigation opportunities are not taken into account.

2.2. What issues need to be addressed to include LULUCF in accounting and what is the current state of play?

Whilst there are good reasons to account for LULUCF in the EU's climate change commitments, accounting is not trivial. The Council and Parliament require[14] that three issues are addressed in this impact assessment; in particular (1) how to ensure permanence and the environmental integrity of the sector's contribution to the commitments, how to achieve robust (2) monitoring and (3) accounting. Another important issue is to determine (4) the policy context in which to include the sector. These aspects are elaborated in this section.

2.2.1. Addressing the non-permanence of emissions and removals and the influence of natural effects on emissions and removals

Non-permanence refers to the reversibility of carbon sequestered in, or released from, the biosphere (Schlamadinger et al., 2007a). Reversals can be caused by natural disturbances such as fires, droughts, pests etc. and to some extent storms. Events which may increase in frequency and magnitude in the future (see e.g. IPCC, 2007), but also as a result of management decisions, e.g. to harvest or plant trees. The IPCC (2003; 2010) has concluded that there is currently no practicable methodology that can factor out direct human-induced from indirect human-induced effect and natural emissions and removals at one point in time. The IPCC GPG has therefore introduced estimates of GHG on managed land as an approximation of human-induced emissions and removals. Accounting methods are important to factor out natural influences between different points in time (see e.g. Canadell et al., 2007).

Fluctuations in emissions and removals in forests are significant. Figure 2 shows year-on-year changes in emissions and removals between 1990 and 2008 relative to the total emissions in the non-trading sectors (regulated by the Effort Sharing Decision; ESD). Whereas the EU average over the period varies between 1 and 4%, the fluctuations in individual MSs are as large as 60%, as illustrated by the spread of dots (each representing a MS) in the figure.

The high variability of removed or emitted GHGs caused by natural phenomena may affect countries' ability to comply with commitments and raise the question of how to deal with large natural disturbances in a commitment regime. The inter-annual fluctuations complicates the possibility of including LULUCF in the commitment on the basis of annual compliance – a key feature of both the ESD and the EU ETS which currently regulate the EU's 2020 target.

Figure 2. Year-on-year fluctuations in emissions and removals (in forests remaining forests) over the period 1990-2008 as a percentage of 2008 emissions in the non-trading sectors (ESD)

Note: Each dot represents the inter-annual fluctuations of a MS in a given year. Percentages are expressed in absolute terms.

Source: Calculations are based on data from EEA (2011) and the EU ETS data viewer (2010)

2.2.2. Ensuring robust monitoring and reporting

GHG dynamics in the LULUCF sector involve vegetation and soil carbon pools and often a complex web of emissions and removals (for a detailed description, see Matthews et al., 2011). Their estimation requires investments in monitoring and reporting capacity. MSs are obliged to report annually to the UNFCCC on emissions and removals from forest land, cropland, grassland and all land use changes. The Kyoto Protocol adds additional reporting requirements for afforestation, reforestation and deforestation activities and, where applicable, forest management, cropland and grazing land management and revegetation. Three important aspects of the current state of monitoring and reporting are discussed below, and more details are provided in Annex I.

2.2.2.1. Completeness of estimates

In 2010 reporting under the UNFCCC was nearly complete for forest land but there were important gaps in reporting for cropland and grassland (see Table A1.2 in Annex I). At the same time, the expert review of the first reporting under the KP pointed to the need for improvements, particularly as regards soil and dead organic matter (JRC, 2011a). There were differences in reported data between MSs where reporting in the new MSs was generally less complete than in the EU-15. However, the completeness of reporting improved in recent years (Ciencala et al., 2010; and JRC, 2011a), especially for land use changes, likely as a result of the requirements to report under the KP which is expected to bring about further improvements in the next few years.

2.2.2.2. Accuracy of estimates

The IPCC GPG defines accuracy as a relative measure which means that estimates should not be systematically over nor under true emissions or removals (see List of definitions). Countries should seek to provide the highest possible accuracy of the estimates with the resources available. This is captured by two methodological concepts: “key category”[15] and “tier”[16]. A higher tier generally provides more accurate estimates. Key categories should be estimated with higher tiers (i.e. tier 2 or 3). Usually, MSs use a combination of different tiers (depending on the land use category or carbon pool) and higher tiers are more often used in the EU-15 than in the new MSs. Higher tiers are commonly applied to calculate emissions for forest biomass, whereas the lower tiers are frequently used for dead organic matter and soils. Currently, in some MS lower tiers than those required are applied[17].

Another measure of the accuracy of the data is the level of uncertainty associated with estimates. Based on information included in MSs’ GHG inventories, the uncertainty in LULUCF is 35%, with estimates for forest land at 26% and for cropland and grassland combined at 64%, see Table 2. The uncertainty is high compared to e.g. fuel combustion, transport and industrial processes, but similar to fugitive emissions and smaller than that of agriculture (non-CO2 GHGs), all which are already part of the EU's GHG reduction target for 2020.

Table 2. Uncertainty of GHG emission estimates at the EU level

Sector || Level of uncertainty (%)

Fuel combustion || 2

Transport || 6

Industrial processes || 5

Waste || 21

Fugitive emissions || 32

Agriculture (all categories) || 68

Enteric fermentation || 12

Manure management || 26-61*

Rice cultivation || 20

Agricultural soils || 50-157*

LULUCF (all categories) || 35

Forest land || 26

Cropland and grassland || 64

Note: * The level of uncertainty varies with the type of GHG. The estimates are for the EU-15 and indicative, but are similar for the EU-12 (JRC, 2011a).

Sources: EEA (2010), JRC (2011a) and Leip (2010)

2.2.2.3. Time consistency and comparability of estimates

The term “consistency” of data means that the same methodologies and consistent datasets should be used in the calculation of whole time series. The consistency of data over time within MSs appears to be reasonably good. Recalculations of reported data are frequent and sometimes substantial (see Annex I) but as long as the whole time series of data is updated this is not an issue for time consistency. However, the variability in tiers applied by different MSs and the existing flexibilities in definitions (see Annex I and e.g. Lawrence et al. 2010) suggest that data may not be fully comparable among MSs. For instance, National Forest Inventories have been developed for different purposes (socio-economic, historical and ecological) and over different time periods. This has resulted in variations in definitions (e.g. forest, growing stock volume and land use change) and in methodological approaches. Official frameworks, exist for comprehensive monitoring of soils in most MSs Soil inventories exist in very few MS. They are generally heterogeneous in methodology and coverage, both between and within countries (Arrouays et al., 2008). However, for the purpose of UNFCCC and KP reporting, the term “comparability” essentially refers to the fact that countries should use IPCC methodologies and agreed formats for estimating and reporting inventories. Compliance by MSs with the IPCC GPG is therefore a priority.

In summary, monitoring and reporting improved significantly in the last years and will likely continue to do so during the first commitment period of the KP. The current situation is sufficient for accounting for LULUCF; indeed, it is already being done in the KP. However, further consideration is needed in terms of how to improve the reporting of carbon pools, particularly dead organic matter and soils, especially so in the view of the more stringent reporting requirements for tier 1 level set in the 2006 IPCC Good Practice Guidance. The level of uncertainty in estimates of emissions and removals is higher than in other sectors (in particular those regulated under the EU ETS) but notably lower than that of the agriculture sector which is already part of the EU's climate change commitments. Recalculations are more common and significant in LULUCF than in other sectors and make it problematic to incorporate LULUCF in a system of annual compliance, a requirement which underpins the ESD and EU ETS.

2.2.3. Ensuring robust accounting rules

Although LULUCF does not yet count towards the EU's GHG emission reduction target for 2020, it does count towards the EU and other Parties' commitments under the KP in 2008-2012 and will do so for the second commitment period. For the first commitment period under the KP, a set of rules is used to account for different directly human-induced activities: afforestation, reforestation, deforestation, forest management, cropland management, grazing land management and revegetation. The rules differ for the different activities (see Watterson et al. 2011 for a description). They have been subject to much criticism[18] and, as reflected in the international negotiations over the last years, there is generally a consensus that improvements are needed.

Rules for the second commitment period, addressing some of these improvements, was laid down with the draft decision in Durban in December 2011. However, these rules will apply internationally only when a second commitment period is finally agreed on and enters into force through ratification by the Parties. Therefore, when considering the inclusion of LULUCF in the EU's climate change commitments, the below points and possible alignment with the revised rules decided upon in Durban need to be considered:

· Accounting for forest management does not reflect human-induced emissions and removals in the first commitment period. Far from all emissions and removals in LULUCF are the result of human intervention. As noted above (see Section 2.2.1), the anthropogenic and natural factors cannot be separated at a single point in time. The rules laid down for the second commitment period address this issue by introducing accounting using a reference level. A reference level is an estimate of future emissions or removals based on a continuation of historical emissions and the effect of the implementation of known measures. Credits or debits are thus calculated based on whether the actual performance in the sector provides for more emissions or removals than anticipated.

· The provision of incentives for mitigation efforts in forest management is insufficient. With current accounting rules, credits are generated as long as a party reports removals that are greater than emissions, whether or not they are the result of human intervention. They are limited by a politically established cap. There is no incentive to mitigate once removals (or emissions) exceed the cap as the resulting changes will not be counted. This principle will be carried into a second commitment period also, as it was confirmed in the draft decision on LULUCF in Durban in December 2011.

· Emissions resulting from deforestation may be understated in accounting. Despite the existence of a cap on credits from forest management (see above bullet), countries may use removals above the cap to compensate emissions from debits that result from deforestation. The maximum allowance (equivalent to 165 MtCO2) for each Party over the commitment period is very generous, meaning that large emissions from deforestation may potentially not be accounted for. The so-called compensation rule was left out of the Draft Decision on LULUCF and will not apply for a second commitment period under the Kyoto Protocol.

· Accounting of emissions and removals is partial and inconsistent. Accounting is currently partly mandatory (afforestation, reforestation and deforestation) and partly voluntary (any or all of forest management, cropland management, grazing land management and revegetation). Just over half of the MSs account for forest management and only three for cropland and / or grazing land management (see Table 3). Whilst there are some benefits associated with the voluntary nature of accounting of some activities, e.g. countries have the option not to take on the burden of reporting and accounting if emissions and removals are deemed to be insignificant, it also gives little incentive for parties to select an activity if it is thought to generate debits. In addition, it introduces inconsistency and limited comparability between countries in the sense that some MSs account and others not, and because non-CO2 emissions from managed land must be accounted in the agriculture sector but CO2 from the same land may be ignored. The Durban decision made accounting for Forest Management activities mandatory, and thereby adressed the issue partly. However, accounting for CO2 emissions from agricultural land and wetlands remain voluntary.

· Accounting does not always reflect the actual time of emissions. Current accounting rules make the assumption that carbon is released to the atmosphere instantaneously as a result of harvesting. Whilst this may be a good proxy for very short-lived products such as biomass that is used for energy purposes, wood used for more durable products such as sawn-wood or wood panels used for construction can retain carbon for several decades (IPCC, 2006). The different life time of products and the time at which emissions occure are not reflected in the KP rules for the first commitment period. In Durban the parties agreed that it should be possible to account gradually for emissions from harvested wood products better reflecting the actual time of emission. In future reporting, internationally agreed half lifes of products, or equivalent country specific data of sufficient quality can be used to calculate the amount of carbon still retained in a given category of products at a given point in time for each country.

Table 3. Overview of activities that MSs have chosen to account for during the first commitment period of the KP

|| Forest management || Cropland management || Grazing land management || Revegetation

Member States that have chosen to account for the different activities || Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Poland, Portugal, Romania, Slovenia, Spain, Sweden and the United Kingdom || Denmark, Portugal and Spain || Denmark and Portugal || Romania

Total number || 17 || 3 || 2 || 1

Note: Accounting is mandatory for afforestation, reforestation and deforestation

2.2.4. Defining the policy context for the inclusion of LULUCF in the EU's climate change commitment

Once monitoring and accounting have been addressed, the overarching question is in which policy context the sector should be brought in to the EU's GHG reduction commitments. The current commitments are regulated through the EU ETS and the ESD which require trading sectors to jointly reduce emissions by 21% below 2005 levels and non-trading sectors to reduce emissions by 10%, see Figure 3. In theory, LULUCF could either form part of these existing policy frameworks, although the EU ETS as an option has been discarded early on (see Annex V), or be brought in under a new framework which is separate from the existing ones. Watterson et al. (2011) outlines the key features of the ESD and EU ETS that are relevant for the incorporation of LULUCF. Defining the policy context requires the consideration of the following issues:

· Link to the overall commitment. How would the link with the EU's overall target be regulated? Would targets be set? If so, how (taking into account the varying circumstances between MSs)?

· Compliance and compliance risk. How would compliance be defined? How could risks, in particular related to the high inter-annual variability of emissions and removals in the sector, be mitigated?

· Flexibilities. Would credits and debits generated be transferrable, either between policy frameworks (i.e. EU ETS, ESD and a potential separate policy framework) or between MSs to create flexibility?

Figure 3. Illustration of how the EU's current GHG reduction commitment is regulated

2.3. Who is affected?

The accounting of LULUCF in the EU's GHGs reduction target would affect MSs directly. Firstly, it would extend the scope of the accounted emissions and removals by about 10% at the EU level but with varying importance across MSs. Both natural conditions, relating to e.g. climate and vegetation cover, and the size of LULUCF relative to other sectors in Member States play an important role in this regard. For instance, in Sweden and Finland net removals in LULUCF are more than half the total emissions in other sectors and in Latvia the double, see Figure 4. This highlights the importance of considering national circumstances when assessing the role of the sector in the climate change commitments. Also, accounting rules are of key importance. For example, accounting for LULUCF in the first commitment period of the KP is expected to generate credits of about 1% at the EU level, although there are variations across MSs (JRC, 2011a). Also, MSs would be required to improve monitoring and reporting in accordance with 2006 IPCC GPG in order to fulfil obligations. For some MS's some of these data are currently not yet routinely collected. Additional data collection would be done at country level as part of national reporting rather than at landholding level, which could impose an initial administrative burden on authorities and farmers. No impacts are expected on large businesses or small- and medium-sized enterprises (SMEs).

Figure 4. Relative importance of LULUCF: emissions and removals of the sector relative to total GHG emissions (excl. LULUCF) in MSs, 2008

Note: A negative number indicates that removals are greater than emissions in LULUCF for that Member State. (2) Due to inter-annual variations in emissions and removals the share varies between years.

Source: EEA (2011)

Secondly, it would adjust accounting to better reflect real changes in emissions and removals and to provide a level playing field between different mitigation options (i.e. sequestration / conservation in carbon in vegetation and soils in agriculture and forestry vis-a-vis substitution of materials with biomass in the energy and industrial sectors). In principle, this would affect agriculture and forestry and users of biomass for energy production, manufacture of pulp, paper and paper products, manufacture of wood and wood products or substitution of materials in construction. However, the extent to which these different sectors would be affected depends on at least three factors; firstly, how accounting rules are formulated, secondly, whether a target for LULUCF is introduced (either sector specific or more indirect via the ESD) and, thirdly, whether MSs translate the accounting framework into incentives at sector level (or else the impact will be on government expenditures and revenues).

2.4. How would the problem evolve, all things equal?

As noted in Section 2.1 above, omitting the sector from accounting would risk undermining the environmental integrity of the commitments, reducing the coherence of EU climate policy and limiting the economic efficiency in reaching more ambitious targets. This section elaborates on how these aspects might evolve further if no action is taken.

Figure 5 shows the results of the projected emissions and removals in the reference scenario (see Annex IV for more detailed results of the projections and Annex III for the models and methodology used). Models project a decrease in the EU by 2020 under a business-as-usual scenario.[19] For the LULUCF sector as a whole, a decline of about 10% is expected in 2020 compared to the period 2005-2009, equivalent to emitting 33 MtCO2 more per year. This roughly amounts to all greenhouse gas emissions in Latvia and Lithuania put together or twice those of Estonia in 2009.

A closer look at this projection shows that there are big differences between the individual activities within the sector. The decrease is expected to be very pronounced in forest management, for which a decrease in net removals of about 60 MtCO2 is expected, i.e. roughly the equivalent of the total GHG emissions of Bulgaria, Denmark, Ireland or Sweden in 2009. Whilst this is partly the result of ageing forests (and related saturation in CO2 uptake) it is also partly the effect of EU and MS policies, notably the expected impact of increased wood demand related to reaching the targets for renewable energy (Böttcher et. al, 2011, p. 19). This is partly compensated by plantation of "new" forests (afforestation). Emissions and removals from agricultural activities such as cropland management and grazing land management are expected to remain fairly stable or to improve. The predicted trend is consistent with findings of other studies, see Box 2, and illustrates the increasing importance of the problem discussed under environmental integrity; negative trends and emissions risk being disregarded unless LULUCF is part of climate policy and accounting.

Figure 5. Projected emissions and removals in LULUCF 2000-2020

Notation key: ●–●–● LULUCF (sum of all activities), ▲–▲–▲ Deforestation, +–+–+ Cropland management, ––– Grazing land management, ♦–♦–♦ Afforestation, and ■–■–■ Forest management. Unconnected points show reported / historical data.

Note: (1) A negative number indicates that removals are greater than emissions for that activity. (2) Instant oxidation is assumed for the harvested wood products (HWP) pool. If this pool were included the projected forest management curve would shift downwards (increased removals) by approximately 55 Mt in the period 2013-2020 and by a similar amount for reported data (Rüter, 2011).

Source: Böttcher et al. (2011) and JRC (2011b)

Box 2. How do the model results in this report compare with other studies?

In 2011 MSs and other Parties to the UNFCCC submitted projected emissions and removals from forest management to facilitate the decision on accounting rules at the global climate change conference in Durban in december this year.[20] Some 10 MSs used country-specific models but 15 MSs based their submissions on the models used for this report (see Annex IV for more detailed results of the projections and Annex III for the models and methodology used here). The decline in the sink in Figure 5 is consistent with (although smaller than) the results obtained when combining the country-specific model results with the ones used here. Also the expected increase in wood demand for both material and energy use (i.e. a key driver for the evolution of the sink) is consistent with work undertaken by Mantau et al. (2010) The magnitude of potential supply in the latter study varies with assumptions about environmental, social and economic factors. As shown in the Roadmap for moving to a competitive low-carbon economy in 2050 (Op cit.), this trend is expected to continue in the long run and the role of agriculture and forestry in energy production is expected to increase.

The projected development of the sink would increasingly affect policy coherence and economic efficiency. If the decline in net removals stemming from non-action remain unaccounted for this would risk disincentivizing preservation and enhancement of carbon stocks and thereby creating an unlevel playing field between different mitigation options, that could result in an excessive use of resources for mitigation measures that count towards other objectives (substitution of fossil fuels in energy production and of GHG intensive materials in industry). This risks resulting in economic efficiency losses that may increase over time given that significant additional efforts will be required in all sectors to meet the long-term climate objectives.

2.5. Does the EU have the right to act and is EU added-value evident?

The legal basis for this initiative is Article 192(1) of the Treaty on the Functioning of the European Union (TFEU). Article 9 of the ESD, also based on Article 192(1) TFEU, tasks the Commission with assessing if and how LULUCF should be included in the EU's GHG reduction commitment, and to make a legislative proposal, as appropriate. Climate change is a trans-boundary issue which requires joint action by countries. In particular, since the EU has a common emission reduction target any changes will require Union wide action. The principles of subsidiarity and proportionality have been duly considered.

3. Objectives 3.1. What are the general and more specific / operational objectives?

The general objective of the proposal which accompanies this impact assessment is to support the EU's ambition of limiting global warming to a maximum of two degrees Celsius above pre-industrial temperatures. The EU's short term commitment for 2020 is to reduce its overall GHG emissions by at least 20% below 1990 levels. As agreed by the European Parliament and Council, the contribution of all sectors should be reflected in the efforts of reaching the target.

For this objective to be achieved, the emissions and removals related to LULUCF would need to be reflected in accounting. However, they must be included so as to address the issues identified in Section 2.2; namely to ensure permanence and the environmental integrity of the EU's GHG reduction commitments as well as accurate monitoring and accounting. The correct policy context also needs to be defined. To this end, the following operational objectives have been identified:

· Monitoring and reporting activities undertaken by MSs should comply with the latest IPCC methodological guidance approved by UNFCCC to ensure the transparency, completeness, consistency and comparability and accuracy of estimates;

· Accounting rules should:

(1) be extensive in terms of emissions and removals covered and, to this end, shall include at least all main LULUCF activities (afforestation, reforestation, deforestation, forest management, cropland management and grazing land management)[21],

(2) ensure that the non-permanence of emissions and removals is fully reflected in accounting,

(3) provide incentives for climate change mitigation whilst avoiding bias towards any particular measure to ensure an appropriate balance of measures in the contribution to climate change mitigation,[22]

· The policy context in which LULUCF is included should be such that the ability of MSs to comply with GHG reduction targets is not put at risk due to inter-annual variability of emissions and removals or large natural disturbances.

4. Policy options 4.1. What are the possible options for tackling the problem and meeting the operational objectives?

The problem definition shows that accounting for the sector would enhance the environmental integrity, policy coherence and economic efficiency of the EU's GHG emission reduction commitments. In the light of this, different objectives have been defined. Options can be divided into two levels to address, on the one hand, the objective related to the policy context and, on the other hand, the objectives related to accounting and monitoring and reporting.

Firstly, it is necessary to define the policy context in which the sector should be accounted since there is already legislation in place to regulate the existing commitment to reduce GHG emissions by 20% in 2020. Three options have been defined. Option 2 involves creating a legislative framework for LULUCF which is separate from the existing frameworks provided by the ESD and the EU ETS. This option was divided into one without targets (Option 2.I) and one with targets (Option 2.II). It should be noted that the target option was included in the analysis for illustrational purposes only and to initiate discussions. Option 3 involves including LULUCF in the existing legislative framework of the ESD. The EU ETS as an option was discarded at an early stage (see Annex V for further details). It is good practice to consider also a non-regulatory / "no EU action" option (Option 1).

Secondly, different sub-options have been developed to assess how robust accounting (options (a) to (c)) and monitoring and reporting can be achieved. The sub-options are the same for Options 2 and 3 but their impacts differ depending on the policy context. Figure 6 illustrates how the two levels of options relate to one another.

A summary of stakeholder views on the different options is given at the beginning of each section to explain why particular options have been included in the assessment.

Figure 6. Outline of options

4.2. Options for the policy context in which to include LULUCF in the EU's GHG emission reduction commitments

This section describes the options for including LULUCF in the EU's commitments as regards the policy context. Option 1 involves no EU action. The implementation of Options 2 and 3 are described in terms of their link to the overall commitments, compliance and compliance risk and flexibilities. Both options would require new or amended legal acts.

What are the views of stakeholders? The majority in both the consultation with the public and with MSs responded that LULUCF should be part of the EU's GHG emissions reduction target in 2020. In both consultations, but most notably in the consultation with MSs, there was a majority in favour of making the sector part of the target only if the EU were to take on a more ambitious commitment than the current one of a 20% reduction compared to 1990. In the public stakeholder consultation there was a slight preference for regulating the role of LULUCF in the climate change commitments through a policy framework which is separate from those that currently regulate the EU's GHG reduction commitment (i.e. the ESD and the EU ETS), preferably with a sector target of some sort. The option of regulating the sector through the ESD was second. The reverse was true for the MS consultation where the ESD was the favoured option. Only a small share of the respondents in the public consultation and none in the MS consultation wanted the sector to form part of the EU ETS. See Section 1.3 for links to more detailed information.

4.2.1. Option 1 – No EU action

This option involves not accounting for LULUCF in the EU's climate change commitments at all. In practice, this is only realistic in the absence of an international agreement; given that the EU is a Party to the KP, any commitment there would have to be shared between MSs and would necessitate a common approach to both accounting rules (determined internationally) and to how debits and credits would be treated in relation to existing commitments under the ESD and the EU ETS. Therefore, "do nothing" really translates into delaying all action until an international agreement on a second commitment period has been reached.

4.2.2. Option 2 – Include LULUCF as a separate policy framework

This option involves establishing a policy framework which is separate from the ones currently regulating the EU's GHG reduction target (the ESD and the EU ETS). Emissions and removals would be accounted for at the level of MSs.

In terms of linkages to the EU's climate change commitments, two sub-options are considered.

Sub-option 2.I – No mitigation targets: The EU is already on track to achieve its 20% reduction target of GHG emissions without the contribution of LULUCF. Before the level of ambition is increased beyond that target conditions need to be right. In Sub-option 2.I credits and debits generated by LULUCF would therefore not count towards the current level of the EU's commitments. As a first step, the objective would be to ensure that emissions and removals from the sector will be properly accounted for. Any credits or debits generated in LULUCF would be treated as a memo item. However, as a second step, and as part of a step-up of the EU's climate change commitments beyond 20%, a specific target for the sector to increase net removals or reduce net emissions could be envisaged as illustrated by Sub-option 2.II below, or the sector could be included in Option 3. As an intermediate step, action plans would be formulated by MSs to ensure that mitigation action is taken in the sector.

Sub-option 2.II – Sector mitigation targets (included for illustrational purposes only): Targets could be set as part of an economy-wide step-up of efforts beyond 20%. This impact assessment does not analyse targets that support a legislative proposal to this end. Rather, the option of setting targets is analysed in a preliminary way and only to initiate discussions. If targets were to be introduced at a later stage, a similar approach to the ESD could be adopted such that targets set for individual MSs would be fair and achievable. Credits and debits generated by LULUCF would count towards the EU's GHG reduction commitment in accordance with agreed accounting modalities. Targets to increase net removals (or decrease net emissions) could be set explicitly for individual MSs based on one of several parameters; for instance the estimated mitigation potential in LULUCF (underpinned by modelling), GDP per capita, or a uniform percentage change compared to business-as-usual projections. However, sufficient flexibilities would have to be ensured to minimise adverse risks of the uncertainty in estimates (see Section 2.2.2 and Annex III) which would otherwise have implications for reaching targets. For illustrational purposes only, this report takes a closer look at the possible impact of introducing targets based on mitigation potential, underpinned by modelling (see Annexes IV).

Flexibility mechanisms are only relevant in the case of Sub-option 2.II where they would safeguard cost-efficiency and ensure that a failure to meet sector-specific targets could be compensated by efforts in other sectors to preserve the overall EU target. This could be allowed through purchases and sales of LULUCF credits among MSs to facilitate their compliance with LULUCF targets, or through compensation with credits resulting from over-compliance in the ESD. Again for illustrational purposes only, this report looks at the possibility of transferring LULUCF credits between MSs.

As regards compliance (again relevant when accounting towards a target), Section 2.2.1 shows that the inter-annual variability of emissions and removals is very high. This makes annual compliance unsuitable (see the discussion in Option 3 for more details). Instead, compliance would be based on the average of emissions and removals over the period 2013 to 2020. Annual reporting would still be required as currently done under the UNFCCC and the KP. Compliance risk due to large natural disturbances would be addressed by way of specific accounting provisions (see below).

4.2.3. Option 3 – Include LULUCF in the Effort Sharing Decision

This option involves amending the ESD in order to include LULUCF among the sectors covered by existing commitments. Hence, liability for both emissions and removals would fall on MSs. An overview of the key features of the legislation is provided in Watterson et al. (2011).

In terms of linkages to the EU's climate change commitments, the ESD specifies binding targets for MSs between plus / minus 20% in 2020 relative to emissions in 2005, estimated on the basis of GDP per capita. If LULUCF were to be included, the distribution of individual MSs' efforts would have to be adjusted accordingly.[23] In theory, this could be done by changing the MS targets (based on GDP per capita) on the basis of the estimated mitigation potential in LULUCF, underpinned by modelling (see Annexes VI and VII). Or, given sufficient flexibilities, the targets could also be adjusted based on simpler metrics such as a uniform percentage change compared to business-as-usual projections. The most straightforward option is to maintain the current targets based on GDP per capita. This approach would mean that the challenge for MSs to reach their targets would most likely change with the inclusion of the sector, the reason being that diverse natural conditions relating to e.g. climate, vegetation cover, age of forests and soil throughout the EU play an important role in the mitigation potential of MSs. Given the difficulties associated with including LULUCF in the ESD in its current form, particularly in relation to the requirements of annual compliance (see discussion in Section 2.2 and below), the present analysis is limited to the impacts of maintained targets only.

The ESD contains different flexibility mechanisms. Within a MS, over-achievement during 2013-19 can be carried over to the subsequent years, up to 2020. Up to 5% of the annual emission allocations of the following year may be brought forward during 2013-19. A transfer of up to 5% of annual emission allocations for a given year can be transferred between MSs. Such a transfer may be used for the implementation of a MS's obligations for the same year or any subsequent years until 2020. These flexibilities would continue to apply if LULUCF were included in the commitment, but the possibility for borrowing and lending between years would need to be significantly expanded in several MSs due to the inter-annual variability of emissions and removals.

In terms of compliance, MSs are required to annually limit their GHG emissions, in accordance with a linear trajectory for 2013-2020. This includes also making use of specified flexibilities in order to make sure that emissions do not exceed their limit in 2020. The starting point for the trajectory is the average emission level in 2008-2010. To address some compliance risks, there are provisions for extreme meteorological events so a MS may request an increased carry-forward rate in excess of 5% in 2013 and 2014 if substantially increased GHG emissions occur in those years compared to normal years. This provision would not be adequate if it were to apply also to large natural disturbances such as wildfires and storms. It would be difficult to recover emissions related to such events through removals, both because of the short time span and because of the high global warming potential of non-CO2 emissions associated with fires which would take a long time to recover (since removals of CO2 is the only way to compensate). As this provision was designed for sectors other than LULUCF, changes would be needed to address disturbances (see accounting options below).

4.3. Options for improving monitoring and reporting

This section outlines an approach for meeting the monitoring and reporting objectives defined in this report. In practice, the implementation would involve revising the Monitoring Mechanism Decision[24]. A separate impact assessment and proposal from the Commission address this issue but complementary information is provided here.

What are the views of stakeholders? Whilst both the public consultation and the consultation with MSs have shown that the majority favours an inclusion of LULUCF in the EU's GHG commitment, a common reason amongst those who did not wish to include the sector related to perceptions about the reliability and comparability of data. This suggests that improvements to monitoring and reporting may be needed.[25] In both the public and MS consultations the majority agreed that there is a need for further harmonisation and standardisation between MSs in terms of monitoring, reporting and verification of emissions and removals. See Section 1.3 for links to more detailed information.

There is no unique way of reaching the objective because the IPCC methodological guidance allows for different methodologies and approaches to be applied according to national circumstances. For instance, a number of tools exist for representing land areas (e.g. use of existing data, remote sensing and ground-based surveys) and for deriving emission factors (e.g. default values, literature, measurements and models), and these can be combined in a number of ways. However, in a broader sense, a three-step approach can be envisaged (see Annex I for more details).

A first step is to ensure complete reporting of land categories and carbon pools using at least simple methodologies. The objective of this step is to ensure the level of completeness stipulated by the IPCC / UNFCCC to a minimum level of tier 1. Fulfilling this objective require increased collection of activity data.

A second step would involve increasing the accuracy of the reported key categories and carbon pools to a minimum of tier 2. Tier 1 methodologies only distinguish between the broad categories of land management, which means that the effects of some of the available mitigation activities are not reflected in the inventories. This step would therefore mainly imply requirements to improve the level of accuracy of monitoring and reporting of emissions and removals related to soils as this is where most efforts are needed. This step would ensure the completeness stipulated by the IPCC methodological guidance and a methodology consistent with key category analysis.[26] Moving to tier 3 (including modelling) would be encouraged to further increase accuracy (and in some cases for cost efficiency), but it is not an essential requirement of Step 2.

A third step would aim to improve the comparability between MSs by harmonising monitoring, reporting and related nomenclature. Cienciala et al. (2010) investigated harmonised methods for assessing carbon sequestration in European forests. Tomppo et al. (2010) showed that harmonisation is possible and on-going in COST Action 43, which reviewed the potential for common reporting in the context of National Forest Inventories. In addition, Kibblewhite et al. (2008) have described requirements for a harmonised soil monitoring system in the EU. Steps 1 and 2 would go some way towards harmonisation. However, processes leading to change in inventory practices, such as acceptance of new definitions, are usually slow. McRoberts et al. (2010) concluded that whilst important differences in national forest inventories remain, because of the use of different national definitions and methodologies, prospects are generally positive for developing procedures leading to compatible estimates among countries. This step should be seen as a gradual process which will need to take place over the next compliance period and beyond and could involve collaborative efforts between the Commission and MSs through workshops and working groups.

4.4. Options for accounting

This section outlines different options for meeting the objectives related to accounting. Consultations carried out with a range of stakeholders and MSs and on-going discussions under the auspices of the UNFCCC suggest that there are three main options to account for emissions and removals resulting from afforestation, reforestation, deforestation, forest management, cropland management, grazing land management, revegetation, changes in the harvested wood products (HWPs) pool, and disturbance events. The practical implications of implementing either of the options would be to define the accounting modalities in EU legislation.

What are the views of stakeholders? In the public stakeholder consultation, the majority of respondents suggested that emissions and removals related forestry activities should be accounted for on a mandatory basis. About half wanted accounting for GHG associated with some agricultural activities to be mandatory. The tendency was similar across MSs, but few wanted agricultural activities to be included on a mandatory basis. As regards how accounting should be done, in particular for forest management, the public consultation showed that there were two dominant groups; one that thought that changes in emissions and removals should be measured against a benchmark of some sort, either emissions in a base year (1990) or a business-as-usual projection ("reference level"), and one group that believed that no benchmark should be used (meaning that credits would be generated as long as forests remove more carbon from the atmosphere than they emit, regardless of the trend in emissions and removals). MSs felt that accounting for changes against a benchmark ("reference level") was the most appropriate option. See Section 1.3 for links to more detailed information.

Table 4. Summary of accounting options

Activity/Provision || Accounting rules by option

Accounting option (a) Small changes to the current KP rules || Accounting option (b) Likely outcome in the UNFCCC negotiations || Accounting option (c) UNFCCC+

Afforestation and reforestation || Accounting for emissions and removals without a benchmark (so-called "Gross/Net accounting") Mandatory || Accounting for emissions and removals without a benchmark (so-called "Gross/Net accounting") Mandatory || Accounting for emissions and removals without a benchmark (so-called "Gross/Net accounting") Mandatory

Deforestation || Accounting for emissions and removals without a benchmark (so-called "Gross/Net accounting") Mandatory || Accounting for emissions and removals without a benchmark (so-called "Gross/Net accounting") Mandatory || Accounting for emissions and removals without a benchmark (so-called "Gross/Net accounting") Mandatory

Forest Management || Accounting without a benchmark (so-called "Gross/Net accounting") but emissions and removals are discounted by 85% Mandatory || Accounting relative to a reference level based on business-as-usual projections for 2013 to 2020 Mandatory || Accounting relative to a reference level based on business-as-usual projections for 2013 to 2020 Mandatory

Cropland Management || Accounting for emissions and removals relative to 1990 (so-called Net/Net accounting) Voluntary || Accounting for emissions and removals relative to 1990 (so-called Net/Net accounting) Voluntary || Accounting for emissions and removals relative to 1990 (so-called Net/Net accounting) Mandatory

Grazing Land Management || Accounting for emissions and removals relative to 1990 (so-called Net/Net accounting) Voluntary || Accounting for emissions and removals relative to 1990 (so-called Net/Net accounting) Voluntary || Accounting for emissions and removals relative to 1990 (so-called Net/Net accounting) Mandatory

Revegetation || Accounting for emissions and removals relative to 1990 (so-called Net/Net accounting) Voluntary || Accounting for emissions and removals relative to 1990 (so-called Net/Net accounting) Voluntary || Accounting for emissions and removals relative to 1990 (so-called Net/Net accounting) Voluntary

Changes in the Harvested Wood Products carbon pool || Accounting for emissions from harvested wood at the time of harvest || Accounting for emissions from harvested wood at the time they actually occur (depending on the lifetime of wood products) || Accounting for emissions from harvested wood at the time they actually occur (depending on the lifetime of wood products)

Natural disturbances || No specific provisions for emissions related to natural disturbances || Emissions from natural disturbances exeeding a background level, may be excluded from accounting Voluntary || Emissions from natural disturbances, exceeding a background level, may be excluded from accounting Voluntary

Note: Shaded areas indicate a change from the accounting rules under the Kyoto Protocol in the period 2008-12.

In Table 4 above, shaded areas indicate where the options differ from the accounting rules under the KP in the period 2008-12. A more detailed explanation and rationale for the different rules is given under each option. Background reading is provided also by Watterson et al. (2011). Some options, such as accounting for the specific activity of rewetting and drainage on land with organic soils, were excluded at an early stage for the reasons given in Annex V. It should be noted that where cropland and grazing land management are accounted for the vast majority of emission from organic soils are captured anyway.

4.4.1.1. Accounting option (a): Small changes to the current Kyoto Protocol rules.

In this option, accounting for forest management would be done on the basis of so-called Gross/Net accounting and discounted at a rate of 85%. This means that credits (debits) would be calculated as 15% of all net removals in the commitment period without consideration of net removals in a base year or period, i.e. no benchmark. In the example given in Figure 7, this translates to credits equal to "b" which is a fraction (15%) of "a". As discussed in Section 2.1, in the absence of a benchmark it will be impossible to separate anthropogenic from natural factors but the discount factor is a proxy for the share of human-induced emissions and removals. This accounting option for Forest Management is no longer on the table in the international negotiations.

Afforestation and reforestation involve establishing forests on land that was not forested at the very beginning of 1990, and deforestation involves converting areas, which in 1990 were covered by forest, for other uses or activities. Emissions and removals related to these activities in the commitment period would be accounted for in their entirety ("Gross/Net accounting") as they are a direct result of human activities (i.e. it is possible to determine human-induced impacts).

Figure 7. Illustration of accounting methods

Note: Gross/Net – Credits are equal to all net removals during the commitment period = "a"; Gross/Net with a discount factor – Credits are equal to all net removals during the commitment period and discounted by a factor of X% = " b"; Net-net compared to 1990 – Credits are equal to the difference between the removals during commitment period and the net removals in 1990 = "c".

As under the accounting rules of the first commitment period of the KP, accounting for emissions and removals in cropland and grazing land management and revegetation would be voluntary and done on the basis of changes relative to 1990 (see "c" in Figure 7). This means that credits (debits) would be generated to the extent that net removals are higher (lower) in the commitment period as compared to the base year. Soils have different characteristics to biomass and the inter-annual variations in cropland and grassland are much smaller than those of forests. This means that accounting will not be as sensitive to the choice of base year (cf. fluctuations in forest management in Figure A5.1 in Annex V).

4.4.1.2. Accounting option (b): Likely outcome in the UNFCCC negotiations

This accounting option reflects aligning to the outcome on accounting rules in the UNFCCC negotiations in Durban in December 2011. It differs from accounting option (a) in three ways. Firstly, accounting for emissions and removals in forest management is done relative to a reference level in order to factor out the impact of natural influences on removals and emissions, see Box 2 and Figure 8. The reference level is combined with a quantitative limitation ("cap") on credits corresponding to 3,5 % of base year emissions (excluding LULUCF) to limit the effects of the inherent uncertainty of (any) projections and to avoid that unwarranted credits arise. The quantitative limitation is expressed as a percentage of a MS's total GHG emissions in 1990 in order to ensure the link to compliance risk (because GHG reduction targets are expressed relative to this year). The cap ensures that some incentives for improvements in management practices are provided., see Annex III for more details on the impacts of different caps.

Figure 8. Accounting emissions and removals in forest management against a reference level

Note: Accounted emissions and removals are equal to the average of actual net removals in the commitment period minus the projected emissions and removals under business-as-usual, the so-called reference level. Credits are obtained when actual net removals exceed the reference level, and debits are obtained when actual net removals are less than the reference level.

Box 2. Accounting for forest management on the basis of a reference level

What is a reference level? The reference level is set as the average of the projected removals and emissions under business as usual in the period for which the EU commits to reduce its overall emissions, in this case the period from 2013 to 2020, see Figure 8. In essence, accounting against the reference level means that a Member State will receive neither credits nor debits if the average of actual net removals in the compliance period equals the reference level, but that if net removals are higher (lower) this will result in credits (debits). In fact, in response to a decision[27] in the Cancun Agreements, Member States submitted numbers for reference levels to the UNFCCC for review by expert teams for consideration prior to the decision on accounting rules at the Conference of Parties in Durban last December. The outcome of the review process (http://unfccc.int/bodies/awg-kp/items/5896.php) has been assessed by the CMP7. The reference levels take into account the effect of removals or emissions from forest management as shown in greenhouse gas inventories and relevant historical data; forest characteristics such as age class structure, increments and rotation lengths; and domestic policies implemented and adopted no later than June 2009. Importantly, the cut-off date means the expected impacts on harvesting of reaching the renewable energy targets (as set out in Directive 28/2009/EC) are not included in the reference levels. What is the rationale behind reference levels? Emissions and removals depend on a number of natural (regional/geographical) circumstances such as variations in growing conditions (temperature, precipitation and droughts) and natural disturbances (storms, fires) as well as past and present management practices (e.g. rotation lengths which affect the distribution of age classes in forest stands) and therefore the rate of removals. Ultimately, the capacity of forests and soils on a given area of land to remove carbon from the atmosphere will saturate because a steady state will occur in the balance of emissions and removals. By measuring changes in emissions and removals relative to business-as-usual projections these circumstances are "factored out" so that only changes related directly human-induced activities are measured. This also provides incentives for improving on the current situation and gives an equal value to mitigation whether through sequestration or conservation or material and energy substitution.

Secondly, provisions for disturbance events would be needed to deal with substantial natural disturbances that are beyond the control of and not materially influenced by MSs and the resulting compliance risks, see Box 3.

Box 3. Accounting for natural disturbances

In the case of extraordinary occurrences whose associated total annual GHG emissions and removals are a minimum of e.g. 3-5% per cent of the total national emissions (excl. LULUCF) in 1990, it should be possible to exclude part of the associated emissions from accounting. The trigger for the application of these provisions would be defined in terms of base year emissions because it is designed to address compliance risk with the EU's climate change commitments (which are determined on the basis of total GHG emissions in 1990). MSs would be able to exclude part of emissions from the lands affected minus any subsequent removals on those lands until the end of the commitment period. However, in the case of land-use change following substantial natural disturbances, MSs would not be able to exclude emissions. The application of this provision would be voluntary but requires solid and evidence-based justification[28]. In the rules laid down for the second commitment period under the Kyoto Protocol, a corresponding provision is set that includes the use of a background level to be calculated fro each party. The 3-5% mentioned above, can be seen as such a background level.

Carbon is stored in various "pools", primarily in above- and below-ground biomass, such as wood, leaves, roots, and in soils (see Matthews et al. (2011) for more details). But carbon is also stored in products made from harvested wood. In the KP rules emissions are accounted as if they occur at the time of harvest. However, harvesting does not generate emissions per se, it is a transfer of carbon from one pool (e.g. above-ground biomass) to another (harvested wood products). In accounting option (b) and (c), emissions would instead be accounted for when they occur, as also decided for the next KP commitment period by COP17/CMP7 at the Durban meeting in December 2011. In accounting option (b) and (c) and in the next commitment period, sawn wood, wood panels and paper would be accounted for on the basis of exponential decay (i.e. loss) or emission with default half-lives of 35, 25 and 2 years respectively. Wood that is used for energy production, which is generally combusted within a year, and wood put in land-fills would still be accounted for at the time of harvest. Net removals will occur as long as the transfer of carbon to the harvested wood products pool is greater than the loss from the pool. The Durban decision allows for substitution of the default half lives values, where transparent and verifiable country specific data are available.

4.4.1.3. Accounting option (c): UNFCCC+

This accounting option is based on the outcome in the UNFCCC negotiations in Durban (Accounting option (b)) but goes further in addressing the criticisms against the accounting rules under the first commitment period of the KP. In particular, the scope of accounting and coverage of emissions and removals would be extended to accounting for cropland management (already accounted for by Denmark, Spain and Portugal) and grazing land management (accounted for by Denmark and Portugal) on a mandatory basis. Regardless of the outcome of the ongoing international negotiations, the EU (as a Party) is able to decide whe