A shared research agenda for landuse, landuse change, forestry and the clean development mechanism : developed through an international workshop held 6-8 March 2001, Bogor, Indonesia

Dans les changements climatiques, quelque 20% de l'effet de serre sont dus a l'utilisation des terres et aux changements intervenant dans cette utilisation, ainsi qu'a l'exploitation des forets. Dans ce contexte, les objectifs de l'atelier international de mars 2001 etaient de rassembler des chercheurs, des responsables des politiques d'environnement, des representants du secteur prive et des bailleurs de fonds de 19 pays, reunis pour identifier les domaines-cles en besoins de recherches pour un "developpement propre" en matiere d'utilisation des ressources foncieres, et definir les bases d'un agenda de recherches coordonnees. Le present document represente la synthese des differents groupes de travail de cet atelier


ANNEX IV. LIST OF PARTICIPANTS LUCF IN CDM WORKSHOP
Scale was identified as a main issue in the current negotiation process. A global review and evaluation of the potential for different CDM options is needed to provide insight into scale issues.
Estimates of each countrys capacity to produce certified emissions reductions (CER) could be combined to create a global CER supply curve. The tool could help to develop policy options that promote equitable distribution of opportunities to participate in and benefit from CDM activities. A key research output would be a review and evaluation of the potential for different CDM options within each countrys socio-economic and environmental contexts. Supply estimates would consist of an assessment of CDM options for each country, taking into account the volume of potential CER, the cost of producing CER, the risk factors involved, and the timing.
The need to reduce costs was identified and set up as the main agenda for further research. Transaction costs were considered most important, given that they increase the cost of doing business, reduce the magnitude of transactions, and therefore reduce efficiency. Both social and environmental costs require further consideration, as they are major issues. Of primary importance is the initial identification of social benefits, techniques to measure them and the development of sustainable development indicators. Also important is the need to address the inadequate understanding of community needs from the project and the problem of the equitable distribution of benefits. Outcomes should include: a method for the choice and measurement of benefits, assuming likely trade-offs between types and levels of benefits; a synthesis of existing information on indicators, minimum criteria and project benefits; a participatory assessment of community needs for individual projects; an initial list of stakeholders, individual benefits and methods on capturing overall project benefits; and finally, a process to develop/adapt existing valuation methods.
Solving the problem of permanence is crucial if forestry projects are to be included in the Protocol. Particular challenges associated with this include: establishing a value for the non-permanent capture of carbon; considering how best to equate the benefits of projects of different duration; assessing whether emission reductions in the LULUCF sector are fungible, in both economic and environmental terms, with emission reductions and removals in non-LULUCF sectors; establishing the various responsibilities and liabilities of investors and beneficiaries for the different components of a project over an extended lifetime. Overall, there is an urgent need to evaluate the range of possible carbon crediting procedures taking these issues into account. Risk assessment methods also need to be developed to forecast with a sufficient level of accuracy and precision the loss of carbon due to social and environmental factors.
Leakage is one of the main concerns raised by negotiators and other stakeholders opposed to the inclusion of LULUCF in the CDM. Detailed quantitative information is needed indicating the mechanisms and rough scale of leakage for several general project types to serve as a framework to synthesise available leakage research into a policy-relevant form. The information would be a complete listing of the possible mechanisms by which leakage might occur, how much leakage might occur through each mechanism, and some indication of variability and risks for this project category. The next step would be to develop guidance and best practices for the design of projects. Projects must be able to monitor whether any leakage has occurred. Monitoring and measurement methods must be developed at the project level.
The production of forest carbon requires consistent, reliable, accurate and verifiable monitoring. The lack of standards for LULUCF limits the progress that can be made in refining and applying methods. Critical questions on standards relate to acceptable levels of uncertainty, types and frequency of measurement and the relative roles of modelling, measurement and assumption. Improvements in monitoring methods relate primarily to increases in efficiency. The collation, synthesis and dissemination of existing information on methods, allometric relationships, decomposition and mortality rates and wood density would also help reduce the costs associated with monitoring and verification.
A reliable, verifiable and cost-effective baseline is needed to calculate the additional CER accruing from CDM projects. A research programme could deal with: methods for quantifying baselines ; the cost-effectiveness of methods; building technical capability to develop baselines in CDM host countries; the integration of development benefits for host countries into the baseline assessment; the determination of investment additionality with emphasis on barriers to project investments; the evaluation of the US proposal on performance thresholds for additionality determination in terms of its applicability to LULUCF projects; and the integration of stakeholder points of view in baseline determination in the process of validation.
A number of broader research topics were identified. No clear guidelines exist for assessing whether and how a particular activity contributes to sustainable development. Indicators of sustainability are needed that could help governments make choices, including what and how to measure sustainability. Similarly, standard methods for setting baselines, monitoring results and assessing leakage are required. Setting threshold criteria that landuse change and forestry projects must meet to be considered for CDM approval may help reduce other transaction costs. Better inventories are essential to address the setting of baselines, the precision and accuracy of monitoring and the measurement of leakage. In the short term, there is a particular demand for better estimates of the technical and economic potential for emissions avoidance and carbon storage projects including realistic analysis of the potential geographic distribution.

INTRODUCTION
Climate change is possibly the greatest environmental threat to sustainable forest management, biodiversity and local livelihoods in the tropics. While most of the human-induced causes of climate change come from the combustion of fossil fuels, some 20% of global greenhouse gas emissions are from landuse, landuse change and forestry (LULUCF). Most of these net emissions are from deforestation in the tropics.
Opportunities for mitigating a small proportion of global emissions through changes in landuse and forestry have long been seen as a means for tropical countries to contribute to the concurrent goals of slowing climate change and contributing to sustainable development.
Landuse, landuse change and forestry climate change mitigation options through the Clean Development Mechanism (CDM) continue to be constrained by a lack of knowledge and consensus. Issues such as duration, baselines, leakage and institutional constraints have not yet been comprehensively resolved. In some cases, this is because the international political process has not yet made the necessary decisions to move forward with what is now known. In other cases, we have neither a clear understanding of the key issues nor solutions to the problems we already understand.
While the number of studies on forest carbon has increased dramatically over the last decade, many important questions remain. Recognizing the need to develop a more complete research agenda that defines research needs, the Center for International Forestry Research (CIFOR) facilitated an international workshop of 70 scientists, climate change policymakers, and private sector and donor representatives from 19 countries to identify key research areas related to the CDM and LULUCF. The original workshop design was focused on research needs subsequent to The Sixth Conference of the Parties (COP 6). However, continuation of COP 6 and increases in the probability that the Kyoto Protocol may not be ratified soon (or if ratified may not include LULUCF in Article 12) have in some ways complicated the identification of research needs. As a result, the workshop sought to focus on research topics that would contribute to both the CDM and other bilateral and multilateral alternatives.
This summary does not include all of the detail of the full workshop report. That report can be obtained through any of the contact persons listed on the back cover of this summary. It is the hope of workshop sponsors that this summary will be seen as a living document taken forward by institutions that have volunteered to lead coordinated research efforts. We also hope it will be seen as a useful guide to those who seek to support renewed research on LULUCF issues.

Workshop Objectives
The primary workshop goal was a global agenda of high priority research questions related to LULUCF and the CDM. CDM is limited to countries without emission reduction commitments, primarily developing countries. As most but not all of these countries are in the tropics, the workshop focused mainly on tropical conditions.
The workshop, held 6-8 March 2001, was based on the following objectives: To share and assess the state of the art in terms of political processes, ongoing research activities and the state of knowledge in key research areas.
To identify critically required research outputs and questions to advance international processes and enhance the interdisciplinary understanding of these key research problems.
To identify key actors and stakeholders in those research areas and come up with future opportunities for collaborative research.
To identify opportunities for donor funding of collaborative research.
The primary workshop outputs were a matrix of key research questions, their relevance in terms of mitigation action and forest type, and a listing of research institutions that are either conducting research, or are committed to future research on these topics. These matrices can be seen in Annex I.

Workshop Process
The workshop was structured along the objectives. The workshop tried to recognise the different interests of the main stakeholders and adequately represent those in the programme and the content of the workshop. The main organisers set a frame, which was further refined and adapted through comments from participants before the workshop and through a process steering group at the workshop. This group consisted of a cross-section of the participants and stakeholders who represented the whole group.
In the first main phase, the frame of the discussions was set by keynote speakers who provided an overview of the issues related to the CDM and LULUCF. Key issues from these presentations were distilled, clustered and set up as guidance for further discussions.
The second phase of the workshop dealt with these key issues through working groups that discussed the COP 6 core research areas of social costs and benefits, permanence, leakage and monitoring, and baseline/additionality issues, as described in more detail under section 1.3. Additional institutional and scale issues and crosscutting aspects that were not to be adequately considered at the COP 6 were also discussed in the second phase of the workshop.
The third phase worked towards a synthesis and dealt with issues related to funding and collaborative research efforts.

Social costs and benefits
Forestry and large-scale estate crop plantation operations in the tropics often have unintended social costs and inequitable distributions of benefits. There are legitimate concerns that largescale CDM project activities will, in some circumstances, further disadvantage resource-poor people dependent on forested or marginal agricultural lands. There are also fears that small landholders will not be able to compete in a CDM project market that is dominated by large projects that take advantage of the economies of scale and lower transaction costs.

Permanence
Permanence is the longevity of a carbon pool and the stability of carbon stocks given the impacts of environment and management that modify these stocks. In many LULUCF uses, this term implies duration. For some users of the term, it suggests permanent stocks, which are a biophysical impossibility. Irrespective of the definition applied, the conceptual and practical problems related to permanence continue to dominate part of the LULUCF CDM debate. To date, solutions for fixed-term certified emissions reductions (CER), ten-year accounting and discounted crediting have been considered but inadequately studied. The capacity of international crediting processes to compare LULUCF-derived credits with energy sector credits and to equitably allow for LULUCF projects of varying length is limited by the lack of a clear understanding of solutions to the issues of permanence/duration.

Leakage
Leakage is the decrease in greenhouse gases (GHG) that occurs outside the project GHG accounting boundary as a result of project activities. While there is general agreement that leakage is an important concern, the significance of leakage at the project level is highly variable and often poorly understood, in part due to a lack of understanding of the drivers of leakage and the relative importance of supply and demand elasticities in influencing management decisions (particularly for harvest).

Monitoring
Methods for the monitoring and verification of GHG benefits have been developed by scientists from NGOs, research institutions and private sector firms. To date, technical and political consensus does not yet exist on standards for precision, or on which carbon pools to measure or on what combination of methods are acceptable. The costs of monitoring, the size and rate of change in carbon pools, and the levels of heterogeneity pose not only sampling design questions, but also broader issues related to the degree of acceptable uncertainty in estimates. In some cases, there are important interactions between these factors and the activity type (reforestation, forest management, agroforestry, etc.).

Baselines/additionality
Baseline assessments are essential in the determination of greenhouse gas emission reductions due to project activities. At present, no standard methods are in use for determining baselines, although a number of approaches are presently in use in pilot LULUCF projects. In order to guide policymakers, research must pay additional attention to questions of fixed or adjustable baselines, the quantification of carbon stock changes in proxy areas, and the use of modelling to predict counter-factual reference case scenarios.

INSTITUTIONAL ISSUES
(For matrix, see Annex I Table 1)

Introduction
There are three major institutional/organizational dimensions surrounding LULUCF projects. All three dimensions are likely to interact and influence project performance. They are as follows: The functioning of institutions at the national level and their implications for LULUCF projects.
The need for information dissemination and capacity building among national organizations and communities involved in LULUCF projects.
The so-called architecture of the Clean Development Mechanism (CDM) and the implications of the various structures proposed on conduct and performance.

Local and National Institutions
The potential for sustainable development achievements through South-North carbon credit transfers generated by LULUCF projects under the CDM of the Kyoto Protocol will depend inter alia on institutions, regulatory frameworks and organizational capacity. 1 There are many unresolved questions surrounding appropriate regulatory frameworks and the implications of less than robust institutions in developing countries for achieving sustainable development goals through CDM LULUCF projects. For instance: Using standardised methods of financial analysis, how are transaction costs affected by differences in institutional arrangements?
What are the implications of local and national institutions for project design (individual smallholders versus collective action projects, forest plantation projects, community forestry, etc.)?
What type(s) of incentive structure(s) are most likely to result in project participation and local ownership (e.g., cash, payments in kind, social infrastructure such as schools and dispensaries)?
What are the implications of underdeveloped insurance and reinsurance institutions on options for dealing with the risk of project failure?
What are economically and socially optimal means for mitigating this risk?
What will be the role of the government versus the private sector?
What can be learned from experiences to date?

Capacity Building and Information Dissemination
Capacity building and information sharing is critical for building popular support and political will for backing LULUCF projects. This must occur at three levels. At the national level, the issue is the capacity to develop and prioritise nationally acceptable sustainable development indicators and to develop capacity within some controlling authority for regulating, evaluating and validating acceptable LULUCF projects.
At an intermediate level, generating sustainable development will require local capacity for developing project proposals and for monitoring, verifying and certifying projects by accredited third parties. NGOs and the private sector need good practice guidelines and training programs regarding project design and formulation including leakage and duration issues, and baseline development. There is also a need for developing the capacity to apply indicators of sustainable development.
Where underdeveloped legal, land tenure, and property right institutions exist in conjunction with low levels of entrepreneurial skill, capacity building among entrepreneurs wishing to participate in these markets may be required.

Institutional Architecture
The initial implicit assumption for CDM architecture was a bilateral structure. This concept consists of an Annex I 2 investor seeking CERs for either its own reduction targets or to sell them on a carbon market, and a non-Annex I partner, either a public/private company/entity or a partner in business in the host country for implementation.
The so-called unilateral option is also under consideration in which a non-Annex I entity would undertake an eligible activity on its own, e.g., without an Annex I investor, and then sell its carbon credits on the international market. It is hypothesised that the unilateral case is more likely in countries with significant domestic investment capacities and dynamic local entrepreneurs.
Equity concerns over benefits in settings where institutions are not well developed has led to a multilateral proposal for implementing LULUCF projects; the launching by the World Bank of its Prototype Carbon Fund (PCF) has given some body to this option. This structure entails an investment fund managed by a specialised institution, guaranteeing investors that they will be granted a predefined amount of carbon credits from higher cost LULUCF CDM projects but with high co-benefits in terms of local development, poverty alleviation and biodiversity. Several investment funds can coexist at the same time, with specific focus in different activities.
Each architecture should be considered in respect of its most likely effects on key issues such as equity, efficiency, transaction costs and sustainable development.
The bilateral model is hypothesised to be the most efficient for many LULUCF activities, since project identification, design and implementation will benefit from entrepreneurial initiative and know-how. In some projects, carbon revenues will eventually be mixed with commercial revenues (i.e., timber sales) and the market institutions for commodities production and trade are already robust. However, there is also a significant risk that under the bilateral model only a narrow range of projects (i.e., the industrial large-scale plantation of fast growing species) would be undertaken in a limited number of countries.
The unilateral model might take advantage of the same entrepreneurial initiative and in addition be more likely to fit specific non-Annex I private sector needs (e.g., a wood industrialist willing to secure long-term supply with given species-type plantations in a situation where land tenure rights are not secured). However, it is quite unlikely to favour certain types of project that are less cost-effective.
The multilateral approach could theoretically avoid these drawback effects and be more effective in promoting small-scale projects or projects involving numerous smallholders. However, it is also likely that, under this regime, transaction costs (especially for contracting and monitoring) will be higher as the number of actors involved is higher.
From a research perspective, an in-depth assessment of the implications of each structure needs to be addressed with a multiple criteria analysis. Studies of similar arrangements in other contexts could provide useful insights. The bilateral model can be analysed by reference to joint venture endeavours. The unilateral structure might be compared with parastatal forest companies or marketing board experiences (e.g., SODEFOR in Côte dIvoire). Meanwhile, experiences drawn from the literature on primary commodity agreements (coffee, tin, cocoa, etc.) can shed light on the multilateral scheme, alongside the World Bank PCF and Global Environmental Facility (GEF) experience.
The following synthesis of the analytical framework is proposed (hypothesised effects are found in matrix cells): It is likely that CDM will be implemented under an open architecture, namely a coexistence at the country level of the three abovementioned models. In such a case, an assessment of the dynamic effect of competition (or the room for coexistence) on the three regimes is indicated. What institutional arrangements could be imagined, at different scales, to ensure, if needed, a mutual coexistence of the three regimes, each with its specific advantage? In connection with the competition issue, the prospect for reducing transaction costs in the multilateral model through a combination of different sources of funding (Official Development Assistance (ODA) and private investment) seems not to have been addressed adequately in the Kyoto Protocol. There is an understandable concern about price distortion on commodity markets (e.g., the timber market) if some countries were to take advantage of several sources of funding to increase their share into a competitive market. At the same time, if it could be shown that this increase was the result of a market failure (i.e., the correcting of prices to include carbon services), then WTO sanctions should be avoidable. If CDM is to be considered first and foremost as a sustainable development instrument, there are strong arguments for allowing a mix of both ODA and private funds for activities with low impact on international commodities prices, as agroforestry, community or smallholder plantations, wood fuel plantations etc. The same reasoning would apply to GEF projects targeting biodiversity. The investigation of possible combinations of CDM and already existing instruments was called for by the Convention on Biological Diversity in its Note to the COP 6 and the Subsidiary Body for Scientific and Technological Advice (SBSTA) (27 October 2000).

SCALE ISSUES
(For matrix, see Annex I Table 2)

Introduction
Scale was identified as a main issue in the current negotiation process. In implementing the Kyoto Protocol, there are widespread concerns about the relative magnitude of abatement between Annex B and non-Annex B countries via the CDM; between sink and non-sink projects within the CDM; and about the equity of distribution of opportunities for the CDM between countries. Various concerns have led to calls for quantitative restrictions (caps) on emissions trading and the CDM, and restrictions on project type eligibility under the CDM. The design of CDM rules will have impacts on distribution between regions, between project types, and possibly for the standard of sustainability of financially viable projects.
A research agenda can be easily identified. A global review and evaluation of the potential for different CDM options is needed to provide insight into scale issues related to the CDM, and LULUCF activities in particular, and to take into account each countrys socio-economic and environmental contexts. Estimates on each countrys capacity to produce certified emissions reductions (CER) could be combined to create a global CER supply curve This would show the potential CDM volume under each project type and country as a function of the international permit price, and as a function of the eligibility criteria. Combined with estimates of Annex II demand for emission offsets from the CDM, this could form the basis of an analytical tool for the scenario analysis of different policy proposals. The tool could help to develop policy options that promote equitable distribution of opportunities to participate in and benefit from CDM activities, and/or to help identify outcomes that are politically palatable.
The key research outputs would be required in a short timeframe, since scale issues have figured prominently in the negotiations leading up to COP 6-bis. In the longer term, research could focus on the possibilities and consequences of developing countries adopting emission targets. The gathering of data would need to be both timely and reasonably accurate. As a first step, a group of participants is proposing to conduct a review of the potential for LULUCF activities cited in the IPCC Special Report, using data sources that have become available since the completion of the report.

Critical Issues
Scale issues were a major sticky point at the negotiations in The Hague, and continue to figure prominently in the ongoing negotiation process. Five key aspects of scale in the current negotiations relevant to LULUCF in the CDM can be identified: Share of CDM-the balance between reducing emissions domestically in parties, and investing in carbon offsets in developing countries through the CDM.
Share of LULUCF-the ratio between LULUCF and non-LULUCF activities within the CDM.
Geographical equity-the difference in the potential volume of CDM projects within and between countries and regions.
Sustainability-the relationship between the cost of carbon reduction and the sustainability of CDM activities.
Cherry picking-the CDM, using easy and cheap options first.
These concerns have led to calls for both caps on emissions trading and/or CERs from CDM, and limits on eligibility of project types.
The first issue relates to concerns about party countries avoiding domestic action by using the CDM. It is argued that CERs from the CDM are less certain than emission reductions achieved in Annex B countries; that the CDM leads to reduced incentives to develop new technologies in Annex B countries; and that there should be limits on industrialised countries buying their way out of their obligations to address climate change. This has led to calls for a quantitative limit (cap) on the use of Kyoto mechanisms and the CDM in particular. A number of policy proposals have been put forward in the supplementary debate.
The share of LULUCF issue encompasses concerns that the CDM market might be dominated by LULUCF projects, which are likely to provide carbon credits at lower cost than many other project types; and by concerns that the problems in monitoring, verification, permanence, and possible adverse social and local environmental impacts may be greater in LULUCF than in other projects. As a result of these concerns there have been calls to limit the proportion of sinks in the CDM, or to exclude certain types of (or all) LULUCF projects from the CDM.
The issue of geographical equity is closely related to project eligibility. The potential for CDM projects in any given category depends on the characteristics of countries and varies substantially.
For example, there tends to be large potential for LULUCF projects in humid Latin American, whereas options to reduce emissions from energy are generally limited. By contrast, in countries such as India and China the potential in the energy sector is far greater. Therefore, the degree to which countries and regions can benefit from the CDM depends heavily on eligibility rules and caps.
The question of sustainability and scale relates to the fact that if the price of CERs in the international markets is low, higher-cost CDM projects will not be feasible. If there is a systematic positive relationship between the cost of carbon reduction and the sustainability of CDM activities, this means that rules that lead to CER at a lower cost may also lead to CDM projects that are financially viable having an overall lower standard of sustainability.
The issue of cherry picking refers to the likelihood of the CDM making use of easily achievable, low abatement options first. This may turn out to be a disadvantage in later commitment periods when developing countries take on targets. This issue is therefore of longer term concern, and has not yet been widely addressed.

Research Outputs
A key research output would be a review and evaluation of the potential for different CDM options, over time, within each countrys socio-economic and environmental contexts. This could lead to an estimate of the global supply of CDM credits, which could form the basis of a tool to analyse policy proposals on CDM caps and the eligibility of project types.
Information about the supply potential for the CDM is probably the most important requirement to adequately assess the concerns and policy proposals relating to scale issues within the CDM. Supply estimates would consist of an assessment of CDM options in disaggregated project categories for each country (or group of countries), taking into account the volume of potential CER, the cost of producing CER, the risk factors involved, and the timing, namely when the CER can be created.
To create estimates with sufficient detail and accuracy to inform the policy debate, a number of factors would need to be assessed. For LULUCF projects, for example, the list of factors includes land suitability; land availability (technical, social and legal aspects such as land tenure and competing uses); the technical capacity for implementation; the implementation cost; the biophysical risk (fire, pest, El Ninõ); sovereign risk (illegal logging, institutional failure, legal uncertainty); additionality; and sustainability criteria.
With regard to sustainability standards, a relevant research output would be an analysis of the relationship between project cost per carbon unit and the sustainability impacts of the project.
This could be used to assess any potential tradeoff between trading restrictions, eligibility rules and minimum sustainability standards.
A tool for scenario analysis under different policy proposals would combine the global estimates of CDM supply with estimates of Annex I demand for CDM credits, which in turn can be derived from cost estimates of domestic abatement in parties. Such a tool could provide insight both into the geographical distribution of CDM activities between countries (equity) and the proportion of CERs likely to be achieved in different project types, under any particular set of rules. The tool could be used to assess if policy proposals on caps and eligibility are: a) needed to address a specific concern, b) likely to succeed in addressing that concern. It could also be used to assess the likely side effects.

Practical Approaches
The key research outputs would be required in a short timeframe, given the prominence of scale issues in the negotiations leading up to COP 6-bis. Research outputs could also filter into the expected post-COP 6-bis Subsidiary Body for Scientific and Technological Advice (SBSTA) process. However, a question was raised regarding the relevance of technical research for highly political issues such as that of scale.
In order to be relevant to policymakers, the data gathered would need to be relatively accurate, which realistically would only be achieved on a comprehensive scale in the medium to longer term. The research could synthesise and build on completed and ongoing research, such as the World Banks National Strategy Study program.
In the short term, efforts to review and compile estimates of LULUCF supply potential under the CDM will be useful to inform the policy debate. As a first step, a group of participants is proposing to conduct a review of the potential for LULUCF activities cited in the IPCC Special Report, using data sources that have become available since the completion of that report.

SOCIAL COSTS AND BENEFITS
(For matrix see Annex I Table 3)

Introduction
The need to reduce costs was identified and set up as the main agenda for further research.
Depending on the type of cost, different institutions and different methodologies and strategies will have to be developed in order to meet this objective.

Costs
The following social and production costs were identified:

Production costs
These are costs directly related to the production process of a specific good, in our case, carbon permits. The major components are implementation, operation and maintenance costs, the opportunity costs of land, and capacity building.
Production costs were not considered a relevant issue for the workshop, given that private cost reduction is an activity that is triggered by the system itself. However, some people felt that developing techniques and methods to reduce production costs for projects with smallholders was a relevant research area.

Transaction costs
These are the costs of doing business or the costs of buying and selling a commodity. Activities such as searching for clients costs, information costs (costs that occur for measuring the valuable characteristics of a product), enforcement and others were considered part of transaction costs.
Transaction costs were considered important, given that they increase the cost of doing business, reduce the magnitude of transactions, and therefore reduce efficiency. In regard to transaction costs, the following issues were identified for a research agenda: Baselines and additionality test costs, particularly for smallholders.
Clean Development Mechanism (CDM) management costs (administration at the local and regional level, including institutions and policy).
Legal costs and government requirements.
The validation and certification of carbon.
Leakage measurement and coverage.
The monitoring of carbon.
The measurement of sustainable development.

Social and environmental costs
These costs refer mainly to externalities at the social and environmental level and can be thought of as the impacts on communities and on the physical and ecological environment in the area of a project.
Concerning externalities, both social and environmental costs require further consideration, as they are a main issue being discussed at the negotiations. Further research should consider measuring physical, cultural and activity displacement, assessing and managing issues related to the lack of land for landuse change, inequities in the distribution of social benefits and compensation (including the consequences of a hierarchical set) and the loss of diversification activities that can occur within a plot of land. The issue of compensation to landholders was also discussed and was considered important for project success. More research should be devoted to the opportunity cost of land and discount rates and layout studies to design long-term sustainable projects that end in win-win situations.
In regard to environmental costs, analysis should consider the impacts of biodiversity (specifically when a landuse change occurs or when mono-specific plantations are settled) and ecological disruptions, such as nutrient cycling, water cycling, fire regimes and pests.
At the more general level, the following questions were identified: How have development projects minimised transaction, environmental and social costs (particularly in projects that involve smallholders)?
How will CDM rules for baselines, leakage, monitoring, certification and verification affect transaction and production costs? How do they relate to project type (e.g., projects with many landholders, forest conservation, reforestation, etc.)?
How can social and environmental costs be internalised in such a way that sustainable development is achieved? (The answer to this question opens itself to a wide range of research agendas which will include aspects such as impact valuation and assessment, criteria development and others) How can research reduce production costs? Where will research generate higher benefits on the production side?
Given the wide range of development projects and the long experience of these projects in dealing with externalities and transaction costs, short-term opportunities for gathering information on how these issues have been dealt with might support climate change negotiations. Similar experiences can serve as examples of the best ways to reduce transaction costs, minimise production costs and account for and internalise social and environmental costs.

Benefits
On the benefits side, wherever destructive forest practices are having negative social impacts, or local livelihoods are strongly restricted by economic and or environmental conditions, LULUCF projects may also have profound and positive social outcomes. Social benefits from LULUCF projects can be financial (mainly profits from the carbon storage service) or environmental (such as in the form of the restoration of degraded land or forest).
A research agenda focusing on the area of social benefits from LULUCF projects needs to address a number of issues. Of primary importance is the initial identification of social benefits, techniques to measure them and the development of sustainable development indicators. It is contended that benefits derived from LULUCF projects are not well understood and that the potential social costs of LULUCF projects have dominated the research agenda.
Also important is the need to address the inadequate understanding of community needs from the project and the problem of the equitable distribution of benefits. Each LULUCF project will have a range of social benefits, and a multi-objective decision making framework needs to be defined to facilitate the selection process. The problem of project permanence or duration is a particular challenge in this area.
The identification of stakeholders and the valuation of benefits are key research issues, despite the fact that they are relatively well understood in methodological terms. The problem will be how to aggregate the range of benefits flowing to communities at a range of scales, from international to local levels.
In dealing with many of these research problems, it is expected that existing experience from rural development, community forestry and Activities Implemented Jointly (AIJ) projects may be used to provide data or insights. The challenge, therefore, will be to modify existing development models to incorporate unique features of carbon projects.
Outcomes that a research agenda should aim to produce include: a method for the choice and measurement of benefits, assuming likely trade-offs between types and levels of benefits; a synthesis of existing information on indicators, minimum criteria and project benefits; a participatory assessment of community needs for individual projects; an initial list of stakeholders, individual benefits and methods on capturing overall project benefits; and finally, a process to develop/adapt existing valuation methods.

PERMANENCE ISSUES
(For matrix see Annex I Table 4)

Introduction
Article 12.5(b) of the Kyoto Protocol requires that the certification of emission reductions resulting from a project be based on their real, measurable and long-term benefits in relation to the mitigation of climate change. There is no agreement on what constitutes long-term in the context of the Protocol, nor on the process by which agreement might be reached. Emission reductions resulting from improvements in the efficiency of industrial equipment, power generation plants and other uses of fossil fuels (or from switching to renewable or non-green house gas (GHG) emitting sources of energy) can be considered permanent, whereas carbon stored in a forestry stand is transient. Plants grow and die, or are eventually harvested for use. Moreover, the rate of increase in carbon storage slows considerably in later years in the growth of a stand, so that the amount of carbon stored effectively reaches an asymptote. Given these temporal dynamics in both the rate of carbon uptake and storage, certified emission reductions (CERs) in the LULUCF sector must be based on units that are some function of time.

Critical Issues
Solving the problem of so-called permanence is therefore crucial if forestry projects are to be included in the Protocol. Particular challenges associated with this include: Establishing a value for the non-permanent capture of carbon; Considering how best to equate the benefits of projects of different duration; Assessing whether emission reductions in the LULUCF sector are fungible, in both economic and environmental terms, with emission reductions and removals in non-LULUCF sectors; Establishing the various responsibilities and liabilities of investors and beneficiaries for the different components of a project over an extended lifetime.
Overall, there is an urgent need to evaluate the range of possible carbon crediting procedures taking these issues into account.
The viability of LULUCF projects will depend ultimately on their capacity to generate long-term social and atmospheric benefits. To secure the environmental and social benefits of LULUCF activities, the projects presumably must be of some minimum duration. How long this is, and how it might vary in different social and environmental contexts, is not known. We also do not know to what extent, or how, projects that are shorter than this minimum time can be evaluated and whether they could be credited. It is unclear how the economic and social development benefits of projects of different duration compare, and how the values of these benefits in turn equate with the opportunity cost of land under alternative landuses. Even within the forest sector, we have little information either on the comparative efficiency with which managed natural forests and plantations could produce both emission reduction credits and social benefits, or the pattern of these benefit streams over time. A better understanding of the likely fixed and variable costs of different kinds and sizes of LULUCF projects and the impacts of these on the financial sustainability of the projects is needed. In particular, we require information on the marginal costs of such projects in developing countries.
In the current absence of a fully developed carbon market, we do not know the actual value of carbon under circumstances of temporary capture and how this might compare with its value under permanent emissions reduction. There is also no clear understanding of how the value of carbon is likely to change with the duration of carbon storage, nor what impact market fluctuations in both the supply of and demand for CERs (and hence price) will have on the long-term viability of LULUCF CDM projects. Analytical tools need to be developed both to enable potential investors to evaluate whether a proposed project will produce enough CERs of sufficient value to ensure a projects financial viability and therefore its attractiveness. Tools are also needed that allow the operational entities to assess more accurately a projects capacity to produce long-term atmospheric and sustainable social benefits.
Precisely how LULUCF projects will function within the CDM is not known. Some insight may come from the existing small crop of AIJ forestry projects, but it is likely that at least some of the details will need to be worked out adaptively as knowledge and experience accumulate. Nevertheless, there are some elements which will need to be agreed upon in the guidelines for such projects. These include the issues of responsibility and liability for the various inputs and outputs of these projects (financing, carbon, sustainable development benefits, and others). Given the inherent asymmetry in the interests, knowledge, skills and experience of the parties to a project, it is questionable whether all these details can be left to be contracted individually through negotiation among the parties. An inequitable agreement at the outset is unlikely to last. The implications of different options for assigning responsibility and liability need to be assessed in terms of the viability and attractiveness of projects to investors and hosts, the gains to both the atmosphere and social development, and project longevity.
With all these uncertainties, the analysis and appraisal of risk becomes crucial. Risk assessment methods need to be developed to forecast with a sufficient level of accuracy and precision the loss of carbon due to social and environmental factors. Whether this is possible, given the uncertainties, remains to be seen. Ideally, such methods should also indicate the potential for risk mitigation, as well as what level of this would ensure an economically viable project.

LEAKAGE
(For matrix see Annex I Table 5)

Introduction
Leakage is one of the main concerns raised by negotiators and other stakeholders opposed to the inclusion of LULUCF in the CDM. Unfortunately, insufficient research is being conducted to address these concerns, relative to efforts on baselines and additionality. Some research on monitoring and validation for individual projects is being conducted but this has not been synthesised and linked to the policy process, and may not have been conducted in sufficient detail or scope.
Four areas of research were suggested: A typology of leakage Guidance for project design and selection to avoid potential leakage Guidance on project measurement boundaries and methods to assess leakage Methods to assess leakage occurring beyond the measurement boundary, and to adjust CER accordingly In addition, it was suggested that the CDM Project Cycle should be analysed to identify where leakage must be addressed in the functioning of the CDM.

A Typology of Leakage
The Intergovernmental Panel on Climate Change (IPCC) special report on LULUCF included a table indicating the mechanisms and rough scale of leakage for several general project types. This type of table needs to be expanded (at greater levels of disaggregation, and to include more detailed/quantitative information). A typology can serve as a framework to synthesise available leakage research into a policy-relevant form, and can also guide specific research questions.
Project categories should be analysed according to their general type (e.g., avoided deforestation, reforestation), location, total size, and type of landowners/land parcels. The information required for each category would be a complete listing of the possible mechanisms by which leakage might occur (drivers), how much leakage might occur through each mechanism, and some indication of variability and risks for this project category. The appropriate level of disaggregation in developing a typology deserves careful thought.

Project Selection and Design
Having identified the mechanisms of concern for project categories in the Typology, the next step is to develop guidance and/or best practices for the design of projects. During the design phase, developers can add additional project components or otherwise modify projects to minimise leakage. This guidance would help project developers to anticipate leakage mechanisms before project implementation. In addition, best practice guidelines could be used to evaluate projects submitted to the CDM for registration.

Measurement Boundaries and Methods
Projects must perform monitoring to measure whether any leakage has occurred. Monitoring and measurement methods must be developed at the project level. These methods must be costeffective, sufficiently accurate, and rely on obtainable data. Considerable research opportunities exist for developing and testing possible methods, including evaluations of existing projects. Leakage assessment methods should be integrated into the broader project monitoring/ measurement research agenda.

Leakage Beyond the Measurement Boundary
For some project types, leakage will occur beyond any reasonable monitoring boundary. The first research question is how to clearly identify the mechanisms and magnitude of this type of leakage. If leakage is a problem, then methods must be developed to address it. Three options exist: Ignore such leakage (this would be a policy decision that projects are not responsible, or that the level of such leakage is insignificant) Make projects that suffer from this leakage ineligible (also a policy decision) Develop some estimation methods to adjust the CERs issued These macro level methods do not currently exist, although the IPCC Special Report does suggest some approaches. It was suggested that the necessary expertise and data to develop these methods lies less in project researchers and more with those researching global/regional trade in forest and agriculture products.
An additional topic that needs research is the cumulative effect of CDM projects on markets to produce leakage. It is suggested that a number of CDM projects in the same market could be sufficient to have an identifiable market effect (leakage), and that this effect might need to be measured and then allocated across projects.

MONITORING
(For matrix see Annex I Table 6) The production of forest carbon requires consistent, reliable, accurate and verifiable measurement. While methods developed by Winrock International and SGS are widely used, they are perceived to be costly. The lack of monitoring standards for LULUCF limits the progress that can be made in refining methods and the application of methods. This also constrains an understanding of the costs of monitoring under various project scenarios.
The determination of both monitoring standards and standard methods of monitoring would reduce uncertainties in the quantification of carbon benefits from LULUCF projects and would help to reduce the costs of measurement and data handling. Additional refinement of methods would help reduce per unit costs of establishment of monitoring, thus reducing overall transaction costs and contributing to greater cost-competitiveness of LULUCF projects relative to other mitigation actions.
Critical questions on standards relate to acceptable levels of uncertainty, types and frequency of measurement and the relative roles of modelling, measurement and assumption. Improvements in monitoring methods relate primarily to increases in efficiency. The collation, synthesis and dissemination of existing information on methods, allometric relationships, decomposition and mortality rates and wood density would also help reduce the costs associated with monitoring and verification.

BASELINE/ADDITIONALITY ISSUES
(For matrix see Annex I Table 7) Article 12.5 of the Kyoto Protocol states that a CDM project must result in carbon credits that are additional to any that would occur in the absence of the certified project activity. Thus, a reliable, verifiable and cost-effective baseline is needed to calculate CER from CDM projects to demonstrate additionality to what would have happened otherwise. So far, research on baseline and additionality determination has focused on the energy sector and neglected LULUCF. While baseline issues have played a relatively minor role at The Hague, they are likely to become more important at The Sixth Conference of the Parties (COP 6bis) and beyond when methods will be discussed by the IPCC or the subsidiary bodies of the UNFCCC.
We propose a research programme dealing with seven issues: 1. Methods for quantifying baselines 2. The cost-effectiveness of methods 3. Building technical capability to develop baselines in CDM host countries 4. The integration of development benefits for host countries into the baseline assessment.
A key issue for developing countries is how to ensure that sustainable development benefits accrue to the host countries of the CDM. However, there is also a fear that an externally imposed sustainable development criteria is not compatible with national sovereignty. Research should explore ways of integrating national sustainable development goals into the baseline determination 5. The determination of investment additionality with emphasis on barriers to project investments 6. The evaluation of the US proposal on performance thresholds for additionality determination in terms of its applicability to LULUCF projects 7. The integration of stakeholder points of view in baseline determination in the process of validation. There is a concern that stakeholders will not have meaningful participation in the process of baseline determination. Research can be done to determine the time and scale of stakeholder participation in baseline determination Issues 5 to 7 should yield outputs before COP 6bis as they have a clear political implication while issues 1 to 4 are of a longer-term nature.

CROSSCUTTING ISSUES
(For matrix see Annex I Table 8)

Introduction
Research topics that cut across other synthesis groups were identified, as were research topics that had not been discussed but which were important to landuse, landuse change and forestry. Finally, a discussion was held of the actions to be taken before COP 6 scheduled for July 2001 in Bonn.

Crosscutting Research Topics
Four crosscutting research topics were identified:

Identify sustainable development indicators;
Reduce transaction costs; Synthesise experience from other development sectors; Build a science-enhanced global inventory.

Identify sustainable development indicators
The CDM was established to help developing countries achieve sustainable development. However, no clear guidelines exist for assessing whether and how a particular activity contributes to sustainable development. Negotiators frequently argue that each country should determine what activities are most important and the rules for assessing their sustainability.
Science can help identify indicators of sustainability that could help governments make choices, including what and how to measure sustainability. Common and meaningful indicators with clear methods and procedures for measurement and reporting would allow the comparison of results over time as governments acquire experience with project implementation. Case studies would be a useful format for showing the effectiveness of indicators.

Reduce transaction costs
The framework for advancing projects under the CDM has been discussed in detail over the past few years. Many questions have been raised about the purpose of the CDM and the administrative procedures that should be set up to oversee the approval and implementation of CDM projects. Currently, landuse change and forestry projects under the CDM appear to face more requirements than other categories of projects. Some fear the transaction costs required for CDM projects to move forward will put CDM projects at a disadvantage compared with Joint Implementation or Emissions Trading projects.
Science can provide standard methods for setting baselines, monitoring results, assessing leakage, and judging the sustainable development of landuse, landuse change and forestry projects. Setting threshold criteria that landuse change and forestry projects must meet to be considered for CDM approval may help reduce other transaction costs.
Small projects face many if not all of the same transaction costs as large projects. Setting default values for small landuse, landuse change and forestry projects with clear sustainable development benefits could help small projects compete with large projects. Unless ways can be found to reduce the transaction costs for small projects, small projects that can produce substantial sustainable development benefits are less likely to be implemented as CDM projects.

Synthesise experience from other development sectors
A review of the development experience from other sectors could help guide policymakers as they evaluate such issues as: The efficiency of larger projects versus the equity of smaller projects; The use of scarce local capacity for CDM projects rather than more traditional development activities; Management systems to distribute benefits among smallholders equitably; The cost of building capacity for CDM projects versus projected benefits; How to evaluate sustainable development benefits; and How to evaluate and monitor unintended positive or negative impacts associated with a particular project (leakage).

Build a science-enhanced global inventory
While the subgroup addressing issues of scale recommended action to develop better inventories, the importance of better inventories cuts across all groups. As more powerful imagery and data management techniques become available each year, science can provide better global inventory data to address the setting of baselines, the precision and accuracy of monitoring, and the measurement of leakage.
Substantial effort has already been put into the development of standard data sets and model scenarios (e.g., the International Geosphere-Biosphere Program (IGBP) data set, the Forestland Oriented Resource Envisioning System (FLORES), the Global Trade Analysis Project (GTAP)) and the science community clearly should seek to enhance existing work and avoid duplication. The compilation and use of better data may proceed more quickly if lead research centres were identified for the coordination of the evaluation and integration of multiple data sources (e.g., official government statistics, timber inventories, university research projects, detailed data gathered for environmental assessments, carbon storage projects, data from new remote sensing tools). Lead centres could set standards for which data could be used, identify data gaps and prioritise new research efforts.
In the short term, there is a particular demand for better estimates of the technical and economic potential for emissions avoidance and carbon storage projects including realistic analysis of the potential geographic distribution. In particular, assessments of technical potential must consider the opportunity costs of alternate uses for land resources.

Matters Not Discussed during the Meeting
Five areas of potential importance to landuse, landuse change and forestry (LULUCF) that were not discussed during the meeting were also identified:

The integration of biofuel, timber and carbon
Conversations at the meeting focused on avoiding emissions from forest loss and on the carbon storage potential from the development and restoration of forestlands and from changes in land management practices. On a global basis, biomass in the form of timber products and energy already provides benefits to a substantial percentage of global population. Global trade models that integrate potential values for trading in carbon with existing markets for timber and energy could yield useful tools for scenario development and forecasting.

The economic analysis of agent behaviour in developing markets
Most of the models being used to project impacts from market-based trading of CERs assume rational behaviour on the part of landowners and managers. They have not analysed or considered likely behaviour or looked carefully at possible perverse incentives. Changed market and price scenarios will impact on agent behaviour in more complex ways than can be easily represented in supply and demand analysis. Some landowners will not change management practice no matter how large the incentive. Others may respond disproportionately to small incentives or take action in anticipation of high prices in the future. Better economic analysis could improve estimates of the size of future supplies of CERs from landuse change and forestry projects.

The analysis of cost of capacity building versus potential value of CERs
Estimates of the potential value of CERs varies widely. In general, future buyers of CERs estimate significantly lower prices for CERs than potential sellers foresee. Depending on the actual value of CERs, certain classes of credits may cost more to develop than the credits will be worth. Conversely, the development of effective, low-cost intermediaries that can help develop large numbers of smaller, community-based projects could attract projects to areas where experts feel there is little opportunity.
Could science help define critical skills and know-how across different levels that would be useful not only to the development of landuse change and forestry projects under the CDM but to broader sustainable development objectives?

How does the transfer of best practice technology apply to landuse, landuse change and forestry projects?
One explicit objective of the CDM is to transfer technology from developed countries to developing countries. Does this objective also apply to landuse, landuse change and forestry projects where best practices will often be specific to a particular site and climate? Governments of developing countries are concerned about sovereignty with respect to land management.
Science can help evaluate and disseminate best practices for the management of various classes of land and landuse. The Consultative Group on International Agricultural Research produced an evaluation of the impact of the introduction of higher yielding varieties on greenhouse gas emissions. In its report, higher productivity on some lands reduced the overall land needed to meet global food needs.

Other multilateral environmental agreements
Landuse, landuse change and forestry projects can store carbon and help provide food and fuel as well as serve other environmental objectives. Either by conditionality or through the sustainable development objectives of host countries, the CDM may interact with the biodiversity, desertification, Ramsar or other international conventions. Although proposed CDM projects may produce costs and benefits relevant to other conventions, it is unclear how these multiple benefits could be valued and whether public investments in benefits or official aid-flows under other conventions would preclude the sale of CERs from multipurpose projects.

Actions Needed Prior to COP 6
Overall, the group felt there was little that could be done to move the process forward in advance of the COP 6 scheduled for July 2001 in BONN. Individuals could prepare materials to address various outstanding issues but the limited time would make it difficult to circulate materials and develop consensus positions.

Global inventory
Create inventory framework using existing official sources for carbon stocks and flows since 1990.
Integrate data from carbon, timber and environmental surveys.
Identify data gaps and prioritise data collection to enhance value of inventory.
Prepare spatial analysis of potential carbon benefits.
How accurate are existing projections of potential CERs? For Annex 1 countries? For non-Annex 1 countries?
Are there other credible sources of data that would enhance existing inventories and projections?
Where could additional resources to conduct inventories be most helpful?
What is the geographic distribution of potential CERs?

Other issues
Integration of biofuel, timber, and carbon markets 2. The purpose of the clean development mechanism shall be to assist Parties not included in Annex 1 in achieving sustainable development and in contributing to the ultimate objective of the Convention, and to assist Parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments under Article 3.
3. Under the clean development mechanism: (a) Parties not included in Annex I will benefit from project activities resulting in certified emission reductions; and (b) Parties included in Annex I may use the certified emission reductions accruing from such project activities to contribute to compliance with part of their quantified emis sion limitation and reduction commitments under Article 3, as determined by the Conference of the Parties serving as the meeting of the Parties to this Protocol.
4. The clean development mechanism shall be subject to the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to this Protocol and be supervised by an executive board of the clean development mechanism.
5. Emission reductions resulting from each project activity shall be certified by operational entities to be designated by the Conference of the Parties serving as the meeting of the Parties to this Protocol, on the basis of: (a) Voluntary participation approved by each Party involved; (b) Real, measurable, and long-term benefit related to the mitigation of climate change; and (c) Reductions in emissions that are additional to any that would occur in the absence of the certified project activity.
6. The clean development mechanism shall assist in arranging funding of certified project activities as necessary.
7. The Conference of the Parties serving as the meeting of the Parties to this Protocol shall, at its first session, elaborate modalities and procedures with the objective of ensuring transparency, efficiency and accountability through independent auditing and verification of project activities.
8. The Conference of the Parties serving as the meeting of the parties to this Protocol shall ensure that a share of the proceeds from certified project activities is used to cover administrative expenses as well as to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.
9. Participation under the clean development mechanism, including in activities mentioned in paragraph 3(a) above and in the acquisition of certified emission reductions, may involve private and/or public entities, and is to be subject to whatever guidance may be provided by the executive board of the clean development mechanism.
10. Certified emission reductions obtained during the period from the year 2000 up to the beginning of the first commitment period can be used to assist in achieving compliance in the first commitment period.