Land Use, Land-Use Change and Forestry

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5.4.2.2. Accounting for Risks and Uncertainty

Projects have dealt with risks and uncertainty in different ways, depending on the type of uncertainty (see also Section 5.3.4). Mensuration error can be dealt with by the following methods:

• Error acceptance: Acknowledging that measurement error is inevitable and listing a range of acceptable errors for different pools.
• Error minimization: By setting acceptable errors at a low level, this method forces projects to engage in more effective inventorying and monitoring exercises by increasing the number of samples, the sample size, and the frequency of sampling (see Section 5.4.3). This approach may affect the eligibility of certain types of projects that present mensuration difficulties.
• Error deduction: This method consists of deducting the error from a carbon estimate. This approach has the advantage that it allows the project to decide what is more cost-effective: data gathering or carbon claims (see Section 5.4.3). This approach was used by the international certification company SGS in the certification of the Costa Rican national carbon offset program (SGS, 1998; Moura-Costa et al., 2000).

Methods to account for baseline uncertainty include estimation of the effect of different uncertainty assumptions on the baseline adopted and deduction of the claims. In the case of quantifiable risks, these uncertainties can be accounted for by keeping a portion of the project's GHG benefits as a reserve to insure against any shortfalls. This reserve could be financial or in-kind (GHG benefits), as in the Costa Rican PAP (SGS, 1998). If damage does not occur, this reserve may be used at the end of the project lifetime.

5.4.2.3. Accounting for Time (Discounting)

The time frame of project benefits can affect their attractiveness. Projects that bring benefits at an earlier stage may be favored by some planners, which raises the issue of time preference. Time preference relates to society's preference for benefits that accrue at an earlier rather than a later stage. In the context of climate change, time preference can be used to introduce a sense of urgency in relation to GHG emission mitigation measures. Not using it implies an endorsement of the assumption that a GHG mitigation activity can be postponed indefinitely without any effect on the overall objective of reducing the impacts of GHG concentrations in the atmosphere.

To account for the value of time and include the concept of time preference, the discounting method has been proposed (Richards and Stokes, 1994; Fearnside, 1995). It consists of using a discount rate to calculate the present value of the total amount of carbon stored over the lifetime of a project, according to the following equation:

where i is the discount rate and n is the project's time frame (usually in years).

One problem in using discounting, however, relates to the selection of an appropriate discount rate to reflect financial (interest rates), economic, or social degrees of time preference attached to the carbon mitigation benefits of a project. High rates favor short-term projects, discouraging long-term sustainability and forest maintenance. Rates that are two low discourage efficiency and approaches that promote more rapid results. Discounting, however, favors activities that prevent the release of carbon, such as conservation or reduced-impact logging, instead of activities that actively remove carbon from the atmosphere over a longer period (e.g., forest establishment). This dynamic is obtained because conservation activities internalize large amounts of carbon at the beginning of the project cycle, so they suffer less from the effects of discounting.