Comment Log Display

April 22, 2016

Dear Air Resources Board,
Thank you very much for you tremendous effort in creating the
recommendations for California’s inclusion of REDD+ jurisdictional
offsets into the AB 32 compliance program. Terra appreciates the
significant amount of work is going into designing the sector-based
crediting program. We at Terra, completely support the inclusion of
jurisdictional REDD in the AB 32 compliance program, as a way to
both deliver cost effective compliance grade offsets, and if
designed properly, benefit communities who manage their land and
forests sustainability.
Terra Global Capital, LLC was founded in 2006 to facilitate market
and payment-for-performance based approaches for forest and
land-use emission reductions that provide community benefits. Terra
is now the leader in forest and land-use analytics and finance,
providing technical expertise and investment capital to their
global client base in a collaborative and innovative manner. As a
group, Terra has more global experience in the land-use carbon
sector than any other entity and is committed to working with its
local partners to build capacity and support local communities and
governments to sustainably manage their land. Terra has extensive
developing country experience and is the leading developer of
protocols to measure GHG emissions reductions from a full range of
agricultural activities in the United States.  
For jurisdictional REDD+ Terra was one of the lead technical
writers of the VCS Jurisdictional Nested REDD Requirements (JNR)
and is on the JNR Permanence and Leakage work groups. Terra
developed one of the first papers on Operationalizing
jurisdictional REDD for the Governors’ Climate and Forest Task
Force and recently has provided technical finance, operational, MRV
and leakage support the Forest Carbon Partnership Fund. Terra
provides technical support to the government of Congo in the
preparation of the emission reduction program document (ER-PD), for
their participation in the results-based payment of the World Bank
Carbon Fund. In addition, Terra work on the design and
implementation of the USAID BIOREDD jurisdictional program along
the Colombian coast.  Please accept the following high level
comments:
Buffer Pool
Terra suggests that ARB use a buffer pool to account for potential
reversals. The buffer pool is an appropriate cost-effective
approach to risk management, and can be applied to all
jurisdictions in a similar manner. There are many standards that
use a risk-buffer and years of knowledge can be leveraged from
these existing standards. Terra does not suggest that a specified
percentage of credits should be set aside for each jurisdiction,
but that there are “risk ratings” given at each verification period
(similar to that of the AFOLU Non-Permanence Risk Tool). This
step-wise approach can be applied to 1) Human-caused risk broken
down into Management Risk (or risk associated with implementation
and maintenance of REDD+ activities), Political Risk (such as legal
and regulatory, political stability), and 2) Natural Risk
(wildfire, pets or other ecological risks, including a changing
climate). By defining risks on a more granular manner, the
appropriate risk mitigation and non-permanence buffer methodologies
can be applied. Over time, as the jurisdiction reduces risk (such
as implementing climate mitigation activities, deeply engaging
communities, has better political stability, etc.), the risk rating
should be reduced, and less credits should be held in the buffer
pool. The use of the buffer pool and the reduction of the buffer
pool over time encourages jurisdictions to improve in all methods
from political stability, to improved forest management, and
community engagement. 
Insurance
The effectiveness of insurance to reduce reversal risk depends on
the type of risk that would lead to the reversal and whose risk is
being insured. If sectoral credits carry with them the same buyer
liability that domestic offsets carry for invalidation and this is
applied to cases where reversals were over a threshold, then
sectoral credit buyers could seek to use insurance instruments to
reduce this risk.  The threshold could be set such that it is
triggered only after the jurisdiction’s own risk buffer pool, as
defined in their methodology and funded with credits, does not have
adequate credits to cover the reversal.  In this way, it 1)
requires jurisdictions to have risk buffers (based on their
methodology and program risk), 2) provides protections within AB 32
through buyer liability for any reaming reversals, and 3) sets up a
structure where credits from different jurisdictions can trade
according to their specific risk. This use of insurance by sectoral
credit buyers will then be a decision of risk/return versus other
compliance instruments.  Depending on the legal instrument between
California and the jurisdiction, there may also be an interesting
case for the state to use insurance to protect the integrity of
their program. 
For specific applications of insurance there are two possibilities,
insuring 1) natural risk and 2) political risk. There are products
that have been developed to protect against weather damage to crops
and timber, but to date there has been limited use of these to
insure carbon values against natural risks.  The existing products
could evolve if there is meaningful demand from the users of
sectoral credit under AB 32.  
For political risk, Terra developed a product with Overseas Private
Investment Corporation (OPIC), that was used to protect Terra
against loss of carbon linked investment value due to expropriation
by the government and/or political violence.  This was applied to
an investment made by Terra in a REDD+ project in Cambodia and
provides protection in the case where the government beaches its
agreement or if there is political violence in the REDD+ area that
destroys carbon credits.  Besides OPIC, MIGA provides political
risk insurance, but has yet to underwrite a pure carbon based
policy like OPIC. This product could be very valuable to credit
buyers and possibly the state to protect against loss of value.
OPIC has in the past indicated that they would also be in a
position to insure against changes in law that demands investment
value.  This could be very useful in the REDD+ sector which is
still in the early stages of regulatory development.  
These products could be a compliment but not replacement for sound
risk assessment that funds jurisdictional non-permanence risk
buffer pools. Any methods that discount the future or apply general
not risk based deductions will be counterproductive.  
Leakage
At a high level, the leakage risk being addressed appears to
represent market and commodity leakage, and does not include
activity shifting leakage, or geographically constrained,
subsistence based leakage. Activities, such as sustenance
agriculture, shifting from one jurisdiction to another need to be
clearly addressed and quantified. 
In order to properly address market or commodity leakage, Approach
1 is most appropriate.  Approach 1 more closely aligns with
internationally recognized standards, although the data required to
measure the loss in production and determine the proxy of land
maybe difficult to obtain in a credible way. In order to address
this, accepted jurisdictions must demonstrate the availability of
the required data. Approach 1 must include conditions in which a
decrease in production should not be penalized due to a downturn in
market or other market forces.
Approach 2 does not appear to capture a quantifiable leakage
discount and it is unclear how that approach can contribute to
managing leakage. In general, activities suggested to reduce
leakage within the jurisdiction, are just activities to reduce
deforestation. 
Jurisdictional Offset Tracking System
With regards to the proposed minimum standards for the
jurisdictional offset tracking systems, Terra agrees with the list
set forth by ARB. However, we would add to the condition that the
system is transparent and publicly available free of charge, that
there would need to be mechanisms in place to protect commercially
sensitive information. 
We support the inclusion of nested projects within a jurisdictional
program to also be accounted for and tracked within the offset
tracking system, some of which include REDD early movers, The
Forest Carbon Fund and ISFL.
Monitoring, Reporting and Verification
At a high level, ARB should specify in the regulations an
overarching set of principles and criteria, or set of standards,
that all jurisdictions need to meet at a minimum in order to be
considered in the sector-based crediting program. Jurisdictions
must define methods followed in order to meet the principles and
criteria. Terra would like to make it clear that there should be
separate validation and verification events. Methodologies used for
sector-based crediting programs should be validated by a third
party to verify that the methods used follow ARB’s set of
standards. Terra views verification as the event where activities
implemented are confirmed and credits are issued. Verification
should be separate then monitoring, as monitoring should be
continual for different events and activities implemented through
or triggered by the program. 
Terra suggests that there is an independent third-party used for
both validation and verification. This is the most objective
approach to give guidance on the success of the program. ARB’s
current verification standards could be followed for the design of
and definition of the verification procedures 
Terra supports that jurisdictional sector-based crediting programs
should be fully transparent with sufficient information provided on
methods and underlying uncertainty estimations to permit full
evaluation and verification. Terra also supports that jurisdictions
can be transparent on procedures used while protecting intellectual
property. The use of an independent third-party can help with both
meeting transparency requirements and the protection intellectual
property.

Thank you,

 
Leslie Durschinger
Founder, Managing Director 
Terra Global Capital, LLC