Cap Management for LULUCF Options: An economic mechanism design to preserve the environmental and social integrity of forest related LULUCF activities under the Kyoto Protocol

Obersteiner, M. ORCID: https://orcid.org/0000-0001-6981-2769, Rametsteiner, E., & Nilsson, S. (2001). Cap Management for LULUCF Options: An economic mechanism design to preserve the environmental and social integrity of forest related LULUCF activities under the Kyoto Protocol. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-01-011

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Abstract

In this paper we identify four main problems that arise from a quantitative cap on land use, land-use change and forestry activities discussed at OP 6. These problems relate to environmental integrity and economic efficiency. First, in stark contrast to the wording of the United Nations Framework Convention for Climate Change and the Kyoto Protocol the proposed provisions for land use, land use change and forestry activities are only about carbon accounting and are devoid of sustainability criteria. This deficiency would make climate actions inconsistent with other international agreements and policy processes. Second, due to lower costs of sequestration activities a quantitative cap produces possibilities for arbitrage in the greenhouse gas market. Third, in a situation of oversupply a fair allocation of highly profitable sequestration projects is unlikely. Fourth, negotiators are overwhelmed by the complexity of the land use, land-use change and forestry issue.

The currently proposed mechanisms, such as adaptation levies or discounted crediting of flexibilities, do not provide adequate solutions. In order to solve these problems we propose a tender auction mechanism that could already be applied today for forest sinks. We distinguish between two information components in this economic mechanism. First, a qualifier component in the form of certification for sustainable forest management practices, which is already in use by market actors worldwide. Second, a competitive trait in the form of carbon sequestration intensities per greenhouse gas emission credit. Under such a regime, negotiators simply need to determine a quantitative cap (as they already started to negotiate at COP 6), while an efficient market mechanism guarantees integrity with respect to sustainability and economic efficiency criteria. The complexity of the issues surrounding land use, land use change and forestry activities is transferred to a decentralized decision making process. The proposed mechanism can also serve as a template for clean development mechanism projects and other international flexible mechanisms or subsidy programs.

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