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Carbon finance

Harnessing voluntary carbon markets (find more explanation on this term below) can be an effective way to fund and scale up your landscape restoration actions. Holistic carbon project finance helps generate benefits aligned with the 4 Returns framework, including natural, social, and economic returns, and to create inspiration for land users through the possibility of a better future.

In this chapter

  • The potential of holistic carbon project finance for 4 Returns landscape restoration.
  • The voluntary carbon market, carbon credits, and the importance of third party verification processes.
  • Carbon standards and methodologies: governance of carbon markets through standard organizations, methodologies for quantifying emissions reductions and removals, and various carbon standards.
  • How to develop a 4 Returns carbon project following the 4 Returns Carbon Finance Framework. Covering elements such as partnership establishment, feasibility studies, project implementation, measurement of carbon in soils, and monitoring.
  • Helpful tools to get started with your carbon project, including the Carbon Quick Scan, Feasibility Study Report Template, the Greenhouse Gas Accounting guidance, and the Responsible Use of Carbon Credits guidance.

This chapter explores how to unlock carbon finance for landscape restoration. It describes how carbon projects on the voluntary carbon market (find more explanation on this term below) can be used for landscape finance to create an additional revenue stream ‘from within’ a landscape. We elaborate on 4 Returns carbon credits, with a focus on carbon projects that can be combined with the landscape development process. This chapter provides guidance for restoration practitioners interested in developing a 4 Returns carbon project within the context of holistic landscape restoration programmes. It can also be useful for carbon project developers looking to add 4 Returns benefits (inspirational, natural, social, and financial returns) to standalone carbon projects.

We explain terms – such as ‘carbon markets,’ ‘carbon standards,’ ‘carbon methodologies,’ and ‘project development frameworks’ – then dive into the detail of how to develop a 4 Returns carbon project. Throughout the chapter we will link to tools to define the scope so you can start working on a 4 Returns carbon project for your landscape restoration endeavour.

Carbon credits for holistic landscape restoration

There are several ways to finance landscape restoration programmes through a blended finance approach. Payments for Environmental Services (PES) is one way of generating revenue streams within a landscape and can help turn landscape restoration into a ‘self-perpetuating’ process that creates multiple benefits for communities and their environment (see chapter Landscape finance). Carbon finance is an appealing ecosystem service finance that improves ecosystem health while mitigating climate change. While carbon markets are still in their infancy compared to other asset classes, and pricing and quality is still highly variable, they have gained popularity in recent years.

Social-environmental integrity is the touchstone for climate and market success. Supply of high-quality credits needs to be secured along with responsible corporate climate action that determines their demand and use. Find the report ‘The voluntary carbon market for safeguarding and restoring our wetlands” by Wetlands International here.

Recently, criticism from the public has contributed to the continuous improvement of carbon markets and their services. Scrutiny leads to more scientifically rigorous standards and tools, fostering the development of more reliable carbon markets and better carbon offsets.

The 4 Returns carbon approach focuses on high quality supply (see below), and we promote responsible use of carbon credits through guidance developed by Wetlands International, in collaboration with Commonland and Landscape Finance Lab (find the report here).

"The 4 Returns carbon finance framework is the basis for developing 4 Returns carbon projects with a 4 Returns landscape."

Financing landscape restoration initiatives through carbon projects is certainly not a panacea but an emerging option to support restoration. Revenue from carbon credits is a useful component to diversify revenue streams in landscapes as a part of alternative business models to de-risk the overall landscape restoration initiative.

Mandatory and voluntary carbon markets

There are two types of carbon markets: mandatory, or compliance, markets; and the voluntary carbon market. Cap and trade schemes, also known as emissions trading schemes, usually fall into the first category, with participants identified by governments based on carbon intensity, sector, or size. Under these schemes, a limit (cap) is set on the total amount of certain greenhouse gases that can be emitted by the companies covered by the scheme — effectively setting a carbon budget. The cap is reduced over time so that the total permitted emissions fall. Within the cap, companies buy or receive emissions permits (or allowances) which they can trade with each other as needed. At the end of each year, companies must surrender enough allowances to cover their emissions or incur heavy fines. If a company reduces its emissions, it can keep any spare allowances to cover its future needs or sell them to another company that requires additional allowances.

Conversely, baseline-and-credit mechanisms, also known as carbon credit schemes, are voluntary carbon markets usually. They allow anyone to purchase credits without the legal obligation to do so. Despite the voluntary aspect of these projects, they are subject to a rigorous third-party verification process. Both individuals and organizations can choose to utilize carbon credits for offsetting emissions. However, responsible use of carbon credits involves adhering to a mitigation hierarchy designed for CO2 emitters, which is informed by scientifically-based targets. Under the mitigation hierarchy companies should set science-based targets, both near and long term, to address their value chain emissions and implement strategies to achieve these targets as a first order priority ahead of actions or investments to mitigate emissions outside their value chains. Wetlands International, in collaboration with Commonland and Landscape Finance Lab, has developed a guide for responsible use of carbon credits.

Voluntary carbon markets provide a market-based system to lower greenhouse gas emissions while promoting the protection and restoration of natural ecosystems and enhancing the resilience and income of communities. So, they are a crucial stepping stone in achieving the Paris Agreement goals through landscape restoration. The agreement, signed in 2015, is an international treaty aimed at limiting global warming to well below 2 degrees Celsius above pre-industrial levels.

A wide range of methodologies is available to harness the voluntary carbon market, including: various carbon standards; credit registries; measurement, reporting and verification (MRV) providers; and carbon credits traders and brokers. Some are provided by non-profit and for-profit actors to help measure greenhouse gas emissions and carbon sequestration.

Different methodologies can be combined using the GHG landscape carbon accounting guidance by Wetlands International and Conservation International in collaboration with Commonland, Landscape Finance Lab and Silvestrum.  The guidance offers a set of steps and decisions underpinning the development of a landscape-scale Verified Carbon Standard (VCS) project.

Carbon projects and carbon credits

Carbon projects aim to mitigate greenhouse gases, including carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O). All greenhouse gases are converted into CO2-equivalents using global warming potentials. One carbon credit represents one metric ton of carbon dioxide equivalent that has been avoided or removed from the atmosphere. Broadly, there are two types of credits – emission reduction and emission removal.

Emission reduction credits are generated from project actions aimed at lowering the greenhouse gas balance of a system. They are determined by comparing retrospective emissions data for the baseline activity with the emissions of a project scenario. Certain projects are committed to reducing emissions through the adoption of sustainable land management practices. These efforts focus on safeguarding ecosystems like forests and wetlands, thereby safeguarding carbon reserves. Wetlands, especially peatlands, which constitute the world’s terrestrial area with the largest natural carbon stores, play a critical role in storing significant amounts of carbon within their soils and biomass. However, when wetlands degrade, they release substantial amounts of CO2, methane (CH4), and nitrous oxide (N2O) from their soils, contributing to global warming. Furthermore, adjustments to agricultural methods help in preserving the carbon already stored in the environment. Another important initiative is the reduction of emissions from deforestation and forest degradation. This endeavour promotes the conservation and sustainable management of forests to combat climate change by decreasing greenhouse gas emissions. It’s worth noting that mangroves typically contain five times as much carbon as a similar area of rainforest.

‘Avoided emissions’ are those that would have emerged had it not been for a project action, for example, use of improved cooking stoves or renewable energy systems.

Emission removal credits involve storing additional carbon in land-based systems, such as afforestation, reforestation, and natural revegetation (ARR), soil carbon enhancement in agriculture, and ecosystem restoration. Also, wetland conservation and restoration have the potential to remove CO2 from the atmosphere through photosynthesis and sequester it as carbon in organic matter. In some cases, this removal can contribute to net-negative emissions of the entire carbon ‘project boundary’.

Considering the project boundary can make emission removal credits a complex endeavour that’s difficult to achieve. While removal through carbon sequestration occurs in many land-based carbon projects, not all removed carbon can be traded as an emission removal credit. This is because credits are always issued for the total balance of a project boundary and not for the individual components (reductions and removals). This means that ongoing, albeit reduced, emissions from farm practices often outweigh the CO2 removed through soils. Additionally, removals must be permanent for 50-100 years, which makes carbon credits that include emission removals a challenging way of achieving net-zero emissions.

Due to this complexity around achieving verified emission removals, credits created from emission reductions, including avoided emissions, make up the largest share of carbon credits available in registries (see Ecosystem marketplace – state of the voluntary carbon markets 2023 report).

Carbon standards, methodologies and certification frameworks

A governing body made up of ‘standard organisations’ sets rules and protocols for certifying projects and verifying carbon credits. The organisations’ carbon crediting programmes provide the framework for the development, implementation and verification of carbon projects that contribute to climate change mitigation. For a project to be verified, developers must follow rules and explain how the project reduces or removes emissions. For large projects, it is best to use standard organisations that are endorsed by the International Carbon Reduction & Offset Alliance (ICROA)and ensure that the crediting programme is aligned with the core carbon principles of the Integrity Council for the Voluntary Carbon Market. Examples of standards and programmes include the Gold Standard, Verified Carbon Standard (VCS), and Plan Vivo, all of which ensure robustness, transparency, credibility, and effectiveness for the creation of carbon credits through their ICROA endorsement.

A standard organisation also provides carbon project methodologies. A methodology is a set of rules and procedures that regulate how greenhouse gas emissions, their reduction and removal components are quantified, verified, and monitored. Project methodologies are the core guidelines for accounting, quantifying, and monitoring the carbon benefits of project actions (see the Landscape GHG Accounting Guidance). Later in this chapter, we will see how projects are developed following these methodologies and what requirements need to be fulfilled.

Clear rules stabilise the use of carbon projects to unlock investments for landscape restoration programmes. So, policymakers play a critical role in creating a favourable environment for carbon projects to de-risk their development by introducing clear legislation and frameworks for nature-based solutions, and by introducing PES into landscape climate planning for multi-jurisdictional projects. These help to avoid sudden modifications in carbon market policies.

How to develop a 4 Returns carbon project

Here we present an approach to guide restoration practitioners and other project developers in the development of carbon projects. These can be either projects that are part of a 4 Returns landscape restoration, or standalone holistic projects that follow the main purpose of yielding 4 Returns benefits.

While many projects are developed with climate change mitigation as the main goal, 4 Returns carbon projects primarily aim at generating natural, social, financial, and inspirational returns. In addition to cooling the climate, 4 Returns carbon projects foster the restoration of landscapes by improving soil health and biodiversity, by generating employment opportunities and income for land users, and by inspiring them through unique business opportunities and innovative land use practices.

Through 4 Returns carbon projects, stakeholders gain a sense of being able to contribute to landscape restoration, while reducing the sensation of being largely dependent on external support; it incentivises them to become the main actors of the restoration process and improves their resource base.

"4 Returns carbon projects primarily aim at generating natural, social, financial, and inspirational returns for the landscape and its stakeholders holistically. "

Planning your 4 Returns carbon project

Landscape carbon projects require careful planning. For landscape restoration, it often makes sense to start with a small project and grow it to the ecosystem scale and eventually the entire landscape scale. Like this, restoration practitioners or carbon project developers can review success in a pilot project and let it grow organically. The most common international carbon standards allow carbon projects to grow organically over time (see grouped projects of VCS).

Different carbon project types can be combined within individual ecosystems or across the ecosystems of a landscape. So, developing a landscape-scale carbon project requires a combined approach that integrates different methodologies across multiple ecosystems and scales (see the Landscape GHG Accounting Guidance). It can range from targeting large, homogenous land areas dominated by one ecosystem, for example forest carbon, to combining the paddocks of numerous landowners with varying plot sizes in heterogenous land areas, for example agricultural carbon.

Developing a carbon project takes time. The carbon project cycle evolves from the preparation stage, which includes scoping with carbon quick scans, through the feasibility stage to project certification. The implementation of the project, with recurring MRV cycles, covers the longest period. Each MRV cycle generates carbon credits that are traded and retired by organisations that seek to improve their greenhouse gas footprint.

Developing your 4 Returns carbon project

Your 4 Returns carbon project will be structured in line with the 5 elements and integrated with the landscape development process. We refer to this integrated process as the 4 Returns carbon finance framework. This framework forms the basis for developing 4 Returns carbon projects in a landscape.

Element 1: Landscape partnership

The purpose of establishing a landscape partnership is to develop a strong coalition of stakeholders across different sectors and communities, based on a shared vision. Fruitful collaboration will be imperative for the success of your 4 Returns carbon finance project. Ideally, carbon project partnerships are integrated into existing landscape partnerships (see chapter Cultivating a lasting partnership). Sometimes carbon project development can act as a lever for initiating new landscape partnerships.

Element 2: Shared understanding

When developing a carbon project, the primary goal among landscape stakeholders should be to establish a shared understanding about the 4 Returns framework among all stakeholders involved – especially land users and restoration practitioners. The focus should extend beyond theoretical frameworks and produce tangible outcomes, specifically fostering shared intentions among partners and crafting a dynamic stakeholder map that includes all groups having an interest in the project.

  • Identifying Stakeholders in carbon offset projects vary based on a project’s location and scope. Local, regional, or national governments may be involved, alongside local communities, companies, NGOs, universities, forest users, and owners, as well as representatives from the agriculture sector. When the main actors have been identified, the next step is to map other carbon actions in the project area. At an early stage, it is fundamental to spot opportunities to align project objectives and assess the possibility of upscaling or interconnecting different areas. The chapter Understanding the landscape includes useful tools for stakeholder mapping.
  • Mapping carbon actions in the landscape. The objective is to identify potential actions that impact carbon balance across the landscape. Depending on the project area, this could include combining different types of carbon credits from different types of project actions as calculated using combinations of methodologies, as explained in Landscape GHG Accounting Guidance . Economy of scale is important because it helps make possible the big projects that would not be feasible at a smaller scale. You should explore project synergies on a landscape level to maximise the impact of carbon finance. For more guidance on mapping actions across the landscape, chapter Defining the landscape.

At this stage, the focus should be on identifying opportunities in a landscape, aiming to understand where it is best to direct efforts and investments towards carbon project development. A carbon quick scan will help you decide whether it is worth delving deeper into a specific carbon initiative. This tool is also useful in the landscape to compare different carbon project types. It assesses the enabling environment of potential carbon project types, and for each project type a separate scan is conducted.

Landscape GHG accounting guidance provides a detailed overview of methodologies for a wide range of carbon project types that can be used for landscape 4 Returns carbon projects. The most relevant ones for landscape restoration are from the agriculture, forestry, and other land use (AFOLU) sectors, as well as the energy demand and efficiency sectors. AFOLU has the widest range of actions to choose from. All these project types involve different interventions in an existing system, such as the preservation or restoration of ecosystems (Reducing Emissions from Deforestation and forest Degradation (REDD+) and Wetlands REstoration and Conservation (WRC)), a change to a more sustainable land management practice or land use (Improved agricultural land management (IALM), Improved Forest Management (IFM), Aforestation, Reforestation, Revegetation (ARR)) or the introduction of clean cooking technology (ICS) to households within communities in the landscape. More project actions for restoring landscapes are detailed in the Landscape GHG Accounting Guidance.

The core components or ‘items-to-be-assessed’ of a carbon quick scan are shown below. Other components can be added if needed and the scan can be adapted to different cases individually. The most promising projects are selected based on a final score, which is the average of all components of equal weight. This quick scan is not stand-alone and should be used together with the other 4 Returns carbon tools to ensure a holistic approach.

Table 1: Components of a carbon quick scan assessment

1. Host country acceptance
  • Evaluation of the host country’s willingness to embrace the initiative
  • Examination of national carbon trading policy
2. Land tenure and use rights
  • Scrutiny of policies and agreements regarding land tenure and use rights and the ownership of carbon rights
  • Identification of land ownership and usage agreements, with a focus on formalised agreements and potential conflicts
3. Stakeholder acceptance
  • Evaluation of the receptiveness of organisations and local populations to collaborate, with a demonstration of added value to their interests
4. Suitable project proponent
  • Assessment of the proponent’s capacity to initiate, design, implement, and sustain the carbon project. Which of the landscape partners is best placed to be the project proponent, given that carbon projects are long term (> 30 years) and require professional project management and MRV?
  • Consider stakeholder participation in the project governance set-up
5. Carbon Potential
  • Quantify the carbon impact of the project on a high level based on the information listed in the carbon quick scan template.
6. ‘Additionality’ or carbon impact
  • Preliminary estimate of the carbon impact of the project in comparison with the baseline scenario
  • Investigate if the emissions reductions or removals would occur without revenue from the sale of carbon credits
7. Permanence
  • Preliminary examination of strategies ensuring the project endures and its long-term climate mitigation outcomes
8. Business case is satisfactory
  • Preliminary analysis of the cost-benefit ratio, encompassing intervention costs and carbon revenue benefits

Element 3: Landscape vision and plan

Progressing from the carbon quick scan, embark on crafting a landscape vision and landscape plan to regenerate degraded landscapes. Carbon projects play a crucial role in this journey, forming one part of the integrated landscape finance that will enable the landscape plan. It is best to combine carbon projects with other types of projects and sustainable businesses that contribute to the same vision and goals of landscape restoration.

It is time to conduct a feasibility study. As outlined in the Landscape GHG accounting guidance, this involves defining project boundaries, and establishing a baseline and project scenarios. Then you can estimate the carbon credit potential by comparing the most ‘additional’ project scenario with the baseline. ‘Additional’ refers to the reduction in the amount of CO2 released into the environment that happens only as a result of trading carbon credits. Following-up on the carbon quick scan, this section addresses key elements of a feasibility assessment, such as leakage, permanence, and additionality, in more detail. The study should also inform the choice of a suitable methodology for implementing the project. A carbon project is additional if the emissions reductions or removals would not have occurred without revenue from the sale of carbon credits. Additionality is intrinsic to the environmental integrity of a carbon project (find more detail here).

Feasibility assessments unfold in two stages: a preliminary exploration called the pre-feasibility assessment, which offers insights into basic project viability; and a comprehensive study, the full feasibility assessment, which contributes to the initial stages of project design and development. The feasibility assessment, with an estimate of available capital, must precede the project and can be used to attract investors or donors. A template for the presentation of the feasibility study for a 4 Returns carbon project can be found here.

A feasibility study has two main elements.

  1. The core element is the estimate of the amount of GHG reduction or carbon sequestration in natural ecosystems from the most additional and suitable project action that prevents the release of GHG, or actively removes CO2 emissions from the atmosphere. The balance between reductions and removals is the final GHG balance for both baseline and project scenario, from which we calculate the total amount of CO2equivalents (tCO2e) to become carbon credits. The revenue generated through these carbon credits is instrumental in covering project costs and ensuring project sustainability, for example future funding of MRV and project management costs.
  2. The second component of the feasibility study is financial viability, a critical feature of project success! This is assessed by calculating the expected revenue from carbon credits, estimating implementation and transaction costs, and exploring other funding streams. Inclusivity is key, so it’s important to identify all stakeholders and ensure their voices are heard. Legal and land tenure assessments are undertaken to navigate potential risks.

Element 4: Collective action

At this stage, project implementation should be the focus. The quick scan will have pinpointed actions that will render high carbon benefits, and the feasibility study provides definite figures for expected credits and the cost and benefit of the project.

A successful carbon project requires actions on the ground to ensure project interventions are implemented well. To define the roles and responsibilities of such a complex, multi-stakeholder process and to ensure that requirements defined by the standards for independent verification are met, agreements and contracts between the project owner and implementing partners need to be set up.

A project design document is central to project certification. It details the various aspects of a carbon project and follows a structure. It entails the calculated estimate of the amount of greenhouse gas emissions avoided, reduced, or removed from the atmosphere, the assessment of additionality, and a project monitoring plan, including the approach used for measurement, reporting and verification. This official document leads to project certification after successful validation through the carbon standard hosting the GHG programme. To ease the process, standard organisations usually provide templates for project developers. A template for a project design document of the Verified Carbon Standard can be found here.

Element 5: Monitoring and learning

Measurement, reporting and verification (MRV) is an important link within the carbon project development chain because it proves that the emission reductions are real and can become credits. Project developers need to conduct MRV repeatedly throughout the entire project. Within a carbon project, the crediting cycle is repeated every one to five years, depending on the type of eligible action, the type of carbon pool and carbon emissions which are measured. Some carbon project types require different MRV cycles in one project, for example ALM. MRV is necessary to provide a scientific basis for quantifying the amount of emission avoidance, reduction, or removal, resulting from an eligible activity implemented during a carbon project’s lifetime.

It consists of three separate parts, all of which are milestones toward the successful creation of real, verified carbon credits.

  1. Measuring is where the greenhouse gases avoided, reduced, or removed, and the CO2 sequestered in different pools, are quantified using state-of-the-art methods. VCS prescribes stratified random sampling (a method of sampling from a population that can be partitioned into subpopulations) to collect data for such assessments, but often also Tier 2 emission factors should be used. You could take a pure measurement approach (measure and re-measure) or combine a quantification model (measure and model) into the project MRV.
  2. Reporting refers to analysing, summarising, and describing results in a format suitable for presenting the amount of carbon credits generated within the current monitoring cycle. This is usually done with a verification report, which is submitted to the standard organisation.
  3. The last step involves verification of the results, checking their correctness, first by an external, independent auditor, and finally by the auditing team of the carbon standard organisation.

The amount of carbon credits is determined by each MRV cycle. The verification report details how the specific amount of GHG for each cycle was achieved. The credits are then stored in the registry of the carbon standard organisation and interested organisations can purchase them to offset residual emissions resulting from their activities. Increasingly, buyers want to be sure they are buying carbon credits that create the expected impact. The guiding document on responsible use of carbon credits (How project developers can mobilise buyers) offers a set of criteria that underpins responsible use of carbon credits.

Methods of measuring carbon in vegetation and soils

There are different ways of measuring the carbon present in vegetation and soils. The classic way involves directly measuring carbon or greenhouse gases using a sampling scheme and emission factors, with subsequent measurement using standardised methods in a laboratory. An emerging technology allows for the measurement of carbon using different spectra of light through the type and amount of reflection from a surface where vegetation or bare soil is present. We distinguish between ‘proximal’ and ‘remote’ sensing.

Proximal sensing involves using a handheld device to scan the surface of an area measuring the amount of reflection from emitted near- or visible-infrared spectra of light (VIR or NIR). An example of measuring soil carbon using proximal sensing can be found in this webinar.

Remote sensing works similarly but on a much larger scale. It is the science of obtaining information about an object or an area from a far distance. Typically, information is gathered from aircraft or satellites. Numerous remote sensing products exist, all derived from remote sensors which detect the energy that is reflected from Earth (for example, Global Mangrove Watch). Monitoring natural resources is one of the main applications of remote sensing, and while it has been proven to work relatively well for above-ground carbon pools, there is current research is directed at making the technology applicable for monitoring soil organic carbon reliably. When using remote sensing with carbon projects it is important to know where to source remote sensing products from the best satellites and to process large amounts of data using automated data processing and analysis.

Landscape restoration stakeholders and partners usually are interested in how successful the restoration programme and its actions are. For a 4 Returns landscape initiative, a set of indicators need to be collected, analysed, and presented within categories (see chapter Monitoring the 4 Returns). The MRV process can be combined easily with a landscape restoration monitoring plan.

Digital soil mapping is the state-of-the-art approach to establishing robust soil carbon maps and can also be used to map out carbon in above-ground vegetation, such as for ARR projects. More information can be found in the Soil organic carbon mapping cookbook.

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