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• Convention on Climate Change in July 2001.
• Defining and Issuing the "Sink Credit"
• Obligations for Responsible Parties
• Enforcement and Compliance
• Taxation
• Scenario 1
• Diagram 3 Scenario 1: Mr Pine
• Scenario 2
• Diagram 4 Scenario 2: Mr Douglas

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A POSSIBLE FRAMEWORK FOR TRADING SINK CREDITS

The section below describes a possible framework for how a sink credit trading system might operate.

The presentation of this system is intended to promote discussion amongst foresters. A further discussion document containing details of this system will be developed later in the year as part of the formal consultation exercise on sinks. In due course, elements of this conceptual framework for sinks will be included in the Government's Climate

Protection Bill, which will form the platform for formal ratification of the Kyoto Protocol. Much of this work will be dependent on the successful negotiation of the rules for sinks under the Kyoto Protocol at the resumed session of the Conference of the Parties to the United Nations Framework

Convention on Climate Change in July 2001.

At its simplest, a sink credit trading framework could enable changes in carbon stocks in Kyoto forest sinks over commitment periods to be measured, reported, verified and issued to "responsible parties".

Sink credits could be issued for increases in carbon stocks, or surrendered and cancelled for decreases in carbon stocks. Once issued, sink credits could be traded on an emissions trading market.

Points to consider include:

• defining and issuing the sink credit;
• obligations for responsible parties;
• the sink credit and emissions trading interface;
• measuring, monitoring, reporting and claiming Sink Credits;
• enforcement and compliance; and
• taxation.

Defining and Issuing the "Sink Credit"

A sink credit could be created by statute. This could establish the basis for claiming ownership to the carbon sequestered in Kyoto forests and enable the sink credit to be recognised as a right that could be separated from the trees or land and able to be sold or borrowed against. Preliminary legal analysis by the Government suggests that there is presently no provision in New Zealand law that would define the legal ownership of carbon credits.

Those undertaking sink activities (responsible parties) could be issued sink credits in proportion to each unit of CO₂ sequestered in a Kyoto forest.

Eligible or qualifying sinks and sink activities are limited to afforestation, reforestation and deforestation under Article 3.3 of the Kyoto Protocol.

Conversely, the responsible party would be a "point of obligation" for emissions associated with reductions in carbon stocks and deforestation (see below). Sink credits could be surrendered or cancelled, or emissions units purchased to cover emissions.

When would responsible parties receive sink credits and incur obligations i.e. debits? This could occur annually or at the end of a longer period e.g. the commitment period.

Obligations for Responsible Parties

Decreases in carbon stock in sinks would be treated similarly to points of obligation in the domestic emissions trading system. This would apply to all harvesting of Kyoto forests included in the accounting system and to deforestation of non-Kyoto forests.

A point of obligation could be placed with responsible parties, e. g. forest owners. A point of obligation would require a responsible party to monitor and report emissions during the commitment period and, at the end of each reporting period, to hold a quantity of 'emission units' or to have surrendered sufficient sink credits, greater than or equal to their emissions.

Sink Credit and Emissions Trading Interface Emissions units and sink credits would be interchangeable, having the same unit of measurement (e.g. 1 tonne of CO₂ equivalent), and being freely transferable amongst trading participants. The Government has agreed "in principle" that all or most sink credits will be tradable within an international emissions trading system under the Kyoto Protocol. New Zealand's domestic emissions trading system would be linked to an international emissions trading system, so that sink credits could be bought and sold domestically and internationally in the same way as emissions units.

An emission unit could enable a point of obligation in a domestic trading regime to emit a specified amount of CO₂ . A sink credit would also enable a point of obligation to emit a specified quantity of CO₂, as it would be issued in acknowledgement that the same quantity of CO₂ had been sequestered. Emissions units and sink credits could therefore be able to be surrendered by emitters to the Government or a body responsible for authorising emissions.

Measuring, Monitoring, Reporting and Claiming Sink Credits Procedures for measuring, monitoring and reporting carbon sequestration will be essential to ensure that the amount of carbon sequestered, and subsequently credited, was established and verified. This would establish and maintain the credibility of sink credits as equivalent to genuine emissions reductions, giving the market necessary confidence in the trading system.

Costs could be borne by sink owners in meeting measuring, monitoring and reporting requirements, as well as in the process of selling sink credits through an emissions trading system. The entire sink system must ensure that administration and transaction costs are minimised so as not to make the value of sink credits uneconomic.

To encourage participation it would be necessary, in the design and implementation of the sinks system, to find the most cost-effective approach for measuring, monitoring, verifying and reporting carbon sequestration that meets international requirements and international good practice.

Responsible parties could claim sink credits through verified demonstration of the carbon

absorbed by their sinks. This could be handled in several different ways, including:

• arranging for contestable third party verification and reporting of sequestered carbon by registered verifiers to the Government/Government agent; or
• measuring sequestered carbon on a regular basis using either accepted standards or rules established in regulation and self reporting to the Government/Government agent; or
• periodic measurement and reporting by a Government agent.

Enforcement and Compliance

An enforcement/ compliance regime would guard against over claiming of sink credits or under-reporting of deforestation or reductions in carbon stock. A regulator could supplement reporting with regular field audits. Penalties would be imposed for non-compliance with the system.

Taxation

The taxation implications for the allocation and trading of sink credits will need to be considered in due course.

Scenarios for Foresters under a Ratified Kyoto Protocol Listed below are two possible scenarios facing foresters under the Kyoto Protocol. It is important to stress here that responsible parties may potentially be eligible to gain the value of carbon accumulated in trees during the commitment period, but decreases in carbon stock in Kyoto forests and deforestation will incur a cost. For those foresters who do not have Kyoto forests, this could mean costs without the benefit of sink credits if there is a land-use change from forestry to some other land use.

Scenario 1

Mr Pine plants a 10 hectare woodlot on his farm in the winter of 1990. The woodlot is planted onto existing pasture - it is a "Kyoto forest". In the year 2008, the forest will have accumulated carbon in its total biomass, which will have increased over the period to 2012. He will therefore be eligible for sink credits proportional to the carbon stock increase between 2008 and 2012 (represented by arrow X in Diagram 3).

Assuming future commitment periods beyond 2012, Mr Pine will have to account for changes in carbon stocks, both positive and negative in this forest. Suppose he decides to fell the trees at age 27 years old (i. e. at the end of the 2013-2017 commitment period) and replant. Because his operation is part of the normal harvest regeneration cycle there is no deforestation. However, there will be a need to take account of the carbon change associated with the forest harvest. This means he would receive credits proportional to X tonnes of carbon for the first commitment period and Y tonnes of carbon for the second period, but be possibly obligated to account for carbon stock losses proportional to X+ Y+ Z tonnes at harvest. To address this problem, New Zealand has advanced the position in the international negotiations that the debits upon harvesting a Kyoto forest should never be greater than the credits previously earned.

We are optimistic that this approach will be accepted.

Diagram 3 Scenario 1: Mr Pine

Scenario 2

Mr Douglas wants to clearfell his mature forest (planted in 1982) and convert to pasture in the year 2010 (in the middle of the first commitment period). Comparing the carbon content of his property on 1 January 2008 and on 31 December 2012, he would be responsible for a loss of carbon.

Mr Douglas's deforestation is considered to be equivalent to emissions of carbon from combustion of fossil fuels. Under this scenario, and the same for a Kyoto forest, a land use change that deforests will result in an overall cost. The cost to Mr Douglas would necessitate him purchasing sufficient emission units to take account of the reduction of carbon on his property (the arrow in diagram 4).

Diagram 4 Scenario 2: Mr Douglas

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