2.3.5.2. Leakage
Leakage refers to the indirect impact that a targeted LULUCF activity in a
certain place at a certain time has on carbon storage at another place or time.
In spite of the linguistic implication of the term "leakage" that the flows
involved are small and abnormal (as in water dripping from a leaky pipe), leakage
may also include carbon flows that are large and predictable. The term "leakage"
has generally been used in the context of project-based accounting to refer
to impacts outside the project boundary (see Section 5.2.3),
but leakage can also occur across other types of system boundaries. For example,
action to reduce logging in Annex I Parties to reduce emissions reported under
Articles 3.3 or 3.4 could result in leakage of benefits if a resulting reduction
in timber supply led to increased deforestation in non-Annex I Parties. This
effect would become much larger if tropical countries with high current rates
of deforestation were to join Annex I. Similarly, the benefits of reduced logging
could leak within Annex I Parties as a result of induced increases in activities
that are not covered in the Kyoto accounting system, such as logging in areas
that remain forested and fall outside the remit of Articles 3.3 and 3.4. The
potential for leakage need not be a bar to undertaking LULUCF activities; unless
these effects are either prevented or their magnitude quantified and deducted
from the carbon benefits attributed to the activity, however, credit will be
awarded in excess of the true benefits, and net GHG emissions may be higher
than targeted levels. Although "leakage" has a negative connotation, in some
cases positive effects can occur outside of a project area-as when a demonstration
effect from a mitigation project leads to replication of the activities beyond
the project boundaries (see Section 5.2.3). Leakage is
not unique to LULUCF-the subject of this Special Report; it also can occur in
energy-sector mitigation.
Leakage can be induced through several different mechanisms, such as activity
displacement, demand displacement, and investment crowding. Activity displacement
could occur, for example, if a silvicultural plantation or a forest reserve
were created at a given location and the people who were formerly living at
the site were displaced and continued to clear forest elsewhere. This kind of
leakage can occur across international borders. An example is provided by the
logging ban in Thailand instituted in 1989. Much of the logging activity formerly
occurring in Thailand moved to neighboring Mynamar (Burma) and Kampuchea (Cambodia)
(Leungaramsri and Malapetch, 1992). A similar effect is likely to result from
the logging ban begun in 1998 in 18 provinces of the Peoples' Republic of China;
the demand is likely to be satisfied by increased logging in other countries
throughout Asia and beyond.
In addition to leakage at identifiable sites, a diffuse form of leakage occurs
through global markets. Demand displacement occurs when a forest protection
or management project reduces the supply of a marketed product, resulting in
increased logging elsewhere to satisfy the demand for that product. Leakage
can also result from supply displacement. For example, plantations that have
been subsidized as global warming response options may have their carbon benefits
negated when wood products derived from them simply replace products that would
otherwise have come from elsewhere, or when output from subsidized plantations
causes the price of plantation-produced wood to fall and unsubsidized plantations
elsewhere consequently are cut and replaced with pasture or other low-biomass
land uses (Fearnside, 1995). Leakage may also occur because of an investment
crowding effect in which the targeted investment project (e.g., reforestation)
crowds out the demand for other beneficial investments (e.g., replanting after
harvesting) that are not targeted by projects.
Changes in national or international policies can lead to leakage-for example,
when a government changes policy to lower the country's overall emissions but
the emissions are displaced to other countries. This type of leakage is only
a concern if the LULUCF activities are displaced to a country that does not
have a full inventory of its emissions and a national cap (i.e., Annex I countries).
For example, U.S. analysts assessed a scenario of 21-percent reduction of national
forest harvests over the 2000-2040 period, which would lead to increases in
wood imports from other countries. The net impact would depend on the relative
efficiency of harvest of the imported wood compared to that of U.S. forest stands
that the wood would replace (Andrasko, 1997). If the logging were shifted to
Canada, the emissions might be captured in Canada's national inventory and consequent
mitigation commitments, but if the logging were shifted to a country with no
cap, carbon would be emitted but not accounted for.
Leakage is one effect of ARD activities that cannot be avoided through choices
of definitions. Any large-scale establishment of new forests will create off-site
effects, especially if the new forests generate a commercial wood supply. Additional
wood supply on the world market will reduce the price of wood compared to prices
without this additional supply. This reduction in wood prices will reduce the
profitability of establishing or continuing forestry operations elsewhere (Adams
et al., 1993; IEA GHG R&D, 1999). Thus, reducing the establishment of other
new forests would have a negative consequence, although where it occurs within
Annex B countries it will be accounted for within those countries' adjustments
to their assigned amounts. Any such effects in non-Annex B countries would not
be accounted and are not readily prevented. If the lower wood price leads to
reduced harvest from existing forests, on the other hand, it would be a beneficial
side effect that further increases the atmospheric benefit. If Article 3.4 were
to encourage increases in carbon stocks in existing forests, this effect could
lead to lower harvest levels and counteract leakage effects from afforestation/reforestation.
As the scale of accounting increases, leakage errors should become less important.
For instance, if accounting is based on observed changes in carbon stock levels
at the national level, the data will implicitly capture leakage between sources
within the nation. To the extent that national-level estimates omit certain
LULUCF activities within the nation as well as indirect effects across nations,
however, some leakage may still be a factor.
Program-level actions are generally much less prone to leakage than narrow
projects that are tightly circumscribed in space, time, and subject matter.
For example, broad policy initiatives are more likely to influence deforestation
rates than are direct actions of limited scope. In tropical countries with large
areas of remaining forest, reduction of deforestation has much greater potential
climate benefits than other land-use change and forestry options (Fearnside,
1995). Reduction of deforestation also captures many more complementary benefits,
such as maintaining biodiversity, watersheds, and water cycling. On the other
hand, quantifying the direct effects of a program is much more difficult than
quantifying the direct effects of more discrete activities. A probabilistic
approach would be needed to compute the expected value of different options;
under this approach, one would need to multiply the value associated with each
outcome by the probability that the outcome will occur (Raiffa, 1968). For example,
because of the great difference in potential benefits, investing in deforestation
avoidance rather than relatively safe plantation silviculture options can be
advantageous even in the face of a low probability of success for deforestation
avoidance (Fearnside, 1999b). Optimal approaches are likely to include a mix
of broad policy reforms and site-specific activities.
If accounting is to be adjusted for leakage, estimates would be needed of the
magnitude of carbon benefits that are lost by each possible mechanism, and the
carbon credit would have to be reduced accordingly. Because uncertainty in estimates
of leakage magnitudes inevitably would be present, a further downward adjustment
in carbon credit would be needed to assure a given certainty of achievement.
Global climate benefits may be reduced not only through leakage but also by
other forms of project failure. The adjustments that would be needed to accurately
represent net GHG benefits are similar regardless of the origin of the failure.
Because the probability of success varies greatly among global warming response
options, an adjustment of credit for these probabilities would be necessary
to assure valid comparisons of the benefits for global climate associated with
each option. Such adjustment is sometimes called "discounting," but we prefer
to reserve this term for its traditional use as a time-preference weighting
mechanism.
CDM projects that are undertaken to avoid tropical deforestation would face
problems of minimizing, quantifying, and adjusting for leakage, as well as difficulties
in establishing additionality and the possibility of reductions in credit resulting
from uncertainties regarding the without-project baseline and the attribution
of project effects. The large potential carbon and collateral benefits of avoiding
tropical deforestation explain the high priority being given to achieving continued
progress in addressing these matters. Many of these issues, including leakage,
would cease to pose problems for crediting avoided deforestation, however, if
tropical forest countries (other than Australia) were to join Annex I, thereby
gaining access to emissions trading under Article 17, with the guarantee that
deforestation reduction would be accounted for and potentially producing salable
credits (Fearnside, 1999c).
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