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commented
2 years ago NCX response: Leakage is poorly studied across existing IFM projects, especially short-term harvest deferral projects. We agree that leakage is a possible outcome of purposefully delaying a harvest. Based on comments received, we have updated the methodological approach to include a more conservative deduction. We look forward to working with other developers and academic researchers to explore methods of measuring leakage directly in the future.
Commenter Organization: Finite Carbon
Commenter: Sarah Wescott
2021 Deferred Harvest Methodology Section: 8.3
Comment: Leakage is a foundational principle of carbon accounting and well-crafted offset methodologies. Defined as “unintended carbon outcomes outside a project as a result of project activities,” leakage from forestry projects can be due to activities shifting within an ownership or from the market effects of other actors taking up activities forgone by the project. Addressing both sources of leakage for harvest deferral projects is integral to the quality of the offsets produced. Market effects leakage is defined as carbon emissions occurring outside the project as a result of the project activity, due to shifts in external demand or price changes. Market leakage outcomes can be positive or negative in terms of carbon quantification (Schwarze et al 2002). While this form of external leakage is a known dynamic of offset projects, it is also one that can be very challenging to quantify. While most offset activities create leakage, “LULUCF projects are often perceived as being particularly leakage prone” (Schwarze et al 2002). Leakage rates can vary depending on project design, demand/supply elasticity, duration, product uniqueness, and a variety of other factors (Murray et al 2004). We also know from Murray’s paper that “leakage is proportionately larger when the relative size of the restriction falls” and that empirical results suggest leakage for forestry activities could be “larger than the energy sector estimates (…roughly 5-20%)” (Murray et al 2004). Considering these science-based dynamics, our concerns about the leakage component of this methodology are twofold, relating to the temporal hierarchy within the calculation and the market leakage rates chosen for use.
The methodology specifies the use of standard deductions of 10% for market leakage for the first 7 consecutive years of participation with potentially higher rates starting in the 8th consecutive year of participation. The approach in the VCS Standard and this methodology, wherein a project starts out with low initial market leakage rates that increase later in the project life, seems contrary to research on the topic. Studies point to global wood markets as generally inelastic in aggregate demand (Sohngen et al. 1999). When volumes are withheld from a market with inelastic demand, the initial response is a price adjustment and high leakage rate, as the market readily replaces the volume withheld with alternate sources in the short-term (see Prestemon and Murray 2003, Murray 2008, and Mead 2020). Over time, the positive impacts of leakage dynamics can ameliorate the negative initial leakage effect. This can be seen through reduced demand for timber volume due to product substitution or increased mill efficiencies able to meet the same end product demand with less raw material (Schwarze et al 2002). By taking smaller leakage deductions in early years of the project and potentially heightening those deductions over time, the methodology’s approach is contradictory to these proven relationships.
Regarding the 10% rate specified in the methodology, we understand this is taken from the VCS Standard. However, the VCS Standard was based on an assessment of projects with terms of 30 or more years and this approach does not match the 1-year term specified in the methodology for instances participating in grouped projects. While the updated VCS Standard proposes that the 30-year minimum time commitment could be met at the project level (rather than the instance level), there is not adequate detail in the proposed language to assess how these varying time commitments will impact leakage dynamics. Furthermore, assessing minimum time commitments at the project level, but assessing leakage – a very time-dependent mechanism – at the instance level creates inconsistencies in the program. Verra should reassess the appropriate leakage rate in the context of this grouped project structure, and in a manner that is supported by science and industry standards. A 10% reduction does not match up with the literature on the topic, nor current industry standards - especially given the short-term nature of the deferrals involved in this methodology.
Currently, among other US forest carbon methodologies, standard deductions for leakage with contract terms ranging from 30 to 100 years use leakage rates that range from 20% to 70%. These leakage adjustments are consistently assessed for each year the project generates offsets, and the rates have been borne out of research and adjusted to match the associated project qualities. However, these rates have not been without scrutiny, with some offset critics claiming the rates are too low and may potentially be underestimating leakage. The California Air Resources Board Compliance Offset Protocol (COP) for US Forests has been a target of much of this criticism. This criticism comes despite the fact that the COP includes features that reduce the overall risk of leakage. First, forest projects are permitted to harvest under that protocol. By not relying on pure harvest deferral, projects may contribute to both timber and carbon markets. Additionally, those projects are required to make a 125+ year commitment, which allows the timber market to adapt in the long-term with increased mill efficiency and other adjustments that avoid the removal of carbon from other properties. We assert that a 10% standard deduction rate for single year harvest deferrals falls considerably short of safeguarding against market leakage. Policy makers in the carbon market today must be cognizant of the potential for scrutiny in our industry, particularly related to forest carbon offset projects. Without implementing sufficiently conservative, science-based measures addressing leakage, this methodology will not produce real emission reductions.
Proposed Change: We recommend revisiting the leakage policy in the VCS Standard to ensure it correctly considers landowner commitments as short as one year in length. We suggest that Verra staff may consult with academic experts who have conducted research and modeling work related to carbon leakage. Work has continued to evolve in this space, and we are concerned that a 10% deduction does not align with industry standards.