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A Study on A/R CDM Application of Deforested Land in North Korea June 7, 2007 Young-Chool OH Dong-Kun Lee Jae-Uk Kim Seoul National University, Korea Slide 2 2/36 Contents . Introduction . Literature Review . Result & Discussion . Conclusion A/R CDM Criteria Forest Area in North Korea Analysis of Forest Changes in North Korea Selection of A/R CDM Sites Project Simulation Economic Analysis Background Method of Study Slide 3 3/36 Background . Introduction Kyoto Protocol came into force (Feb 2. 2005) - North Korea : joined on April 27,2005 - South Korea : Annex country in the 2nd Commitment Period (2013 2017) Deforested land is increasing after mid 1970 s in North Korea Alternative approach to restoration of deforested land in North Korea Slide 4 4/36 Method of Study . Introduction Kyoto Mechanism A/R CDM Criteria Data on NK Forest Changes Earlier Studies A/R CDM & Restoration Review Mid 1970 s Landsat Image Good Forest Period - 1975/76/77/79 CDM Base year - 1987/88/89 Recent Forest - 2000/01/02 GIS/RS Late 1980 s Landsat Image Recent 2000 s Landsat Image Eligible Species for A/R CDMEligible Sites for A/R CDM Site Survey Suitable Site & Species Experts Interview Yes No Project Simulation Economic Analysis Slide 5 5/36 Kyoto Mechanism Emission Trading (ET) Allow the developed countries to transfer emissions credits to each other (Unit : AAU, RMU, ERU, CER) Joint Implementation (JI) To be implemented between two or more Annex countries Clean Development Mechanism (CDM) To promote sustainable development by encouraging invest by governments and private firms in projects in developing countries . Literature Review Slide 6 6/36 Credit Limit on Forest Activities Division Afforestation /Reforestation Forest Management Credit Units DomesticNo Limit 3% of the base year emissions (Domestic + JI) RMU (Removal Unit) Oversea s JINo Limit ERU (Emission Reduction Unit) CDM 1% of the base year emissions Not Eligible CER (Certified Emission Reduction) . Literature Review Slide 7 7/36 CDM Project Criteria Non Permanence of carbon stored in A/R CDM projects Temporary credits . Literature Review CER (long-term CER) - Be used in the commitment period issued - Expire at the end of the crediting period tCER (temporary CER) - Be issued periodically - Expire at the end of the commitment period subsequent to the period issued E-D A B-A C-B D-C A C D E B Slide 8 8/36 Definitions of LULUCF activities Afforestation Land that has not been forested for at least 50 years . Literature Review Reforestation Land that was non-forest on 31st Dec. 1989) TTime Forest cover Non-forest forest 90 TTime Forest cover Non-forest forest T-50 Slide 9 9/36 CDM Project Criteria Net Human-Induced CO 2 Absorption by Sinks tCO 2 TimeT Net Human-Induced Absorption (C-B-A) = Credit Baseline Net Absorption (A) Net Absorption (C) Leakage (B) . Literature Review Slide 10 10/36 Forest Changes in North Korea YearForest Area (ha) Sources 19709,773North Korea 19809,449the National Statistical Office (SK) 19869,007 Korean Federation of Science and Technology Societies (SK) 19878,965FAO 19878,870East Germany 19916,298China 19968,446Korea Forest Research Institute 19987,533FAO/UNDP Deforested forest area is increasing after 1970 in North Korea : 2.2 million ha . Literature Review Slide 11 11/36 Forest Changes in North Korea TotalForest Deforested AreaOthers Sub TotalcultivatedNon-stockedOpen Cropland/Residence 12,299 (100%) 7,534 (59.6%) 1,632 (13.3%) 972 (7.9%) 534 (4.3%) 126 (1.1%) 3,133 (27.1%) (Unit : 1,000 ) (Lee, 2004) Deforested Area (1998) Deforested mountain Naseunsi Diverted for cultivation in Hwaeryung . Literature Review Slide 12 12/36 Forest Species (KFRI,2004) RegionsMain Species High mountain Abies nephrolepis, Abies holophylla, Larix kaempferi, Pinus densiflora, Larix kaempfrri, Picea jezoensis, Picea koraiensis, Juglans mandshurica etc. Middle mountain Castanea crenata, Acer palmatum, Betula platyphylla, Dendropanax morbifera, Picea jezoensis, Pinus koraiensis etc. Low mountain Zizyphus jujuba, Acer palmatum, Ulmus davidiana, Quercus mongolica, Populus euramericana, Fraxinus rhynchophylla etc. Plain Vitis coignetiae, Prunus tomentosa etc. Natural Forest Artificial Forest - Fuel Wood & Fruit Bearing Tree - Main Species : Japanese larch, Korean pine, Robinia pseudoacacia, Chestnut tree, Mongolian oak . Literature Review Slide 13 13/36 Forest Changes 9,393,227 in mid 1970s . Result & Discussion 8,648,314 in late 1980s (744,913 ) Slide 14 14/36 Forest Changes 7,426,921 in recent 2000s 1,966,306 since mid 1970s . Result & Discussion Slide 15 15/36 Forest Changes (Unit : ) Districts NK Area Mid 70s Forest (A) Late 80s Forest (B) 2000s Forest (C) Decreased Area (A-C) Ratio (A-C)/A Pyungyang-si262120102823831.6% Pyungan-namdo1,27587076663423627.2% Pyungan-bukdo1,24174870758116722.4% Jagang-do1,6711,5631,4981,34921313.7% Yanggang-do1,3801,1281,08388324521.7% Hwanghae-namdo8513563132926417.9% Hwanghae-bukdo93463052340822235.2% Kangwon-do1,1171,04688674530228.8% Hamkyung-namdo1,8551,6181,4791,28233620.8% Hamkyung-bukdo1,6851,3141,2911,17114310.9% Total12,2719,3938,6487,4271,96620.9% Forest Ratio76.6%70.5%60.5%16.0% . Result & Discussion Slide 16 16/36 Forest Changes Verification of land cover classification results SubjectsComparison TargetsAccuracy Land cover classification Of mid 1970s Topographical map of 197790.76% Late 1980s Land cover classification of 1980s ma de by the Ministry of Environment in 20 00 83.13% Recent 2000sGoogle Earth & Site inspection- . Result & Discussion Slide 17 17/36 Forest Changes (Deforested mountain along Pyungyang-Hwaecheon Expressway, 2006.2.27) (Diverted for cultivation near the Cheongcheon River, 2006.2.26) . Result & Discussion Slide 18 18/36 Forest Changes (Deforested land in Nampo, 2006.2.27) (Deforested mountain around Pyungyang-Hwaecheon Expressway, 2006.2.26) . Result & Discussion Slide 19 19/36 Selection Criteria for A/R CDM Suitable Site Criteria : Overseas Forestation Data Valuation -. Minimum size of unit site : 200 -. Slope : 20 -. Altitude : 600m Suitable Species : Indigenous Species Valuation -. Japanese larch -. Korean pine -. Mongolian oak . Result & Discussion Slide 20 20/36 Eligible Site for A/R CDM Decreased Area 744,913 of late 1980s since mid 1970s Eligible A/R CDM Site : 605,156 (Non-forest land in recent 2000s) . Result & Discussion Slide 21 21/36 Suitable Site for A/R CDM Unit Site Size : 200 Slope : 20 Altitude : 600m Suitable Sites satisfied with Site Selection Criteria among Eligible A/R CDM Sites . Result & Discussion Slide 22 22/36 Suitable Site for A/R CDM Suitable A/R CDM Site : 174,542 ha . Result & Discussion Slide 23 23/36 A/R CDM Site in North Korea (Unit : ) Districts Decreased between mid 70s and late 80s Eligible A/R CDMSuitable A/R CDM AreaRatioAreaRatio Pyungyang-si18,27414,15777.5%5073.6% Pyungan-namdo104,12183,83780.5%17,95021.4% Pyungan-bukdo40,87034,51084.4%9362.7% Jagang-do65,09152,27280.3%3,6156.9% Yanggang-do45,06931,65570.2%-- Hwanghae-namdo42,73334,35780.4%3,0008.7% Hwanghae-bukdo107,03890,21084.3%27,73130.7% Kangwon-do160,500143,27889.3%90,39863.1% Hamkyung-namdo138,929106,85376.9%29,90528.0% Hamkyung-bukdo22,28814,02862.9%5003.6% Total744,913605,15681.2%174,54228.8% . Result & Discussion Slide 24 24/36 Project Simulation . Project Area : 174,542 Project Period : 30 years (Monitoring cycle : 5 year) Planting Species : Japanese larch, Korean pine, Mongolian oak Carbon Pool : Above-ground biomass, Below-ground biomass (Not considered Litter, Dead wood, Soil organic carbon) Biomass & CO 2 Calculation Index SpeciesGrowing IndexBasic Wood Density Biomass Expansion Factor Japanese larch160.4921.6512 Korean pine120.4681.6512 Mongolian oak120.6531.7061 Baseline : present land use will continue by the end of the project, Additionality and No Leakage in North Korea (Han, 2005). Slide 25 25/36 Biomass & CO 2 per Biomass : MAI 4.42 / CO 2 : 7.21 tCO 2 / /year Planted 3 species at the same rate . Result & Discussion Slide 26 26/36 Total Biomass & CO 2 Biomass : 23,158,814 (771,960 ) CO 2 : 37,728,272 tCO 2 (1,257,609 tCO 2 /year) . Result & Discussion Slide 27 27/36 Economic Analysis Preconditions Project Size : 174,542 Period : 30 years Species : Japanese Larch, Korean pine, Mongolian oak Land Cost : free (North Koreas expenses) Labor Cost : 2.4 U$/day (real wages in Kaesong Industrial District) Carbon credit : CER CER price : 15U$/tCO 2 Exchange Rate : 930 \/U$, 1.3 U$/Euro Discount rate : 4% . Result & Discussion Slide 28 28/36 Economic Analysis ItemTotal5yr10yr15yr20yr25yr30yr Timber (1,000 ) 23,1591,3854,69810,33115,08119,33923,159 CO 2 (1,000tCO 2 )37,7282,3247,94617,12424,82131,65137,728 CER (1,000tCO 2 )31,6512,3245,6239,1777,6976,830 ERU or RMU (1,000tCO 2 )47,9592,3245,6239,1777,6976,8306,078 Products of A/R CDM Project 2,324 5,623 6,830 9,177 7,697 CER classified by period ERU : JI Project, RMU : Domestic Afforestation/Reforestation . Result & Discussion Slide 29 29/36 Economic Analysis Forestation Cost : 4,939 U$/ Item U$/ Remarks Planting 1,022.2Japanese Larch, Korean pine, Mongolian oak Forest management294.6Weeding, Tending, Thinning, Pruning Facilities153.7Office, Warehouse, Supplies, etc. CDM fee3.5Negotiation, Meth. Development, Approval, etc. Harvesting3,239.4Logging, Transportation, etc. General management225.65% Total4,939 Timber Revenue : 9,185 U$/ Amount ( ) Price (U$/ ) Income (U$) U$/ Japanese Larch8,778,29994.98833,749,6234,777 Korean pine7,539,63348.39364,820,9322,090 Mongolian oak6,840,88359.14404,568,3372,318 Total23,158,8141,603,138,8929,185 . Result & Discussion Slide 30 30/36 Economic Analysis CER Income : 1,067 U$/ ItemTotal5y10y15y20y25y CER (1,000tCO 2 ) 31,6512,3245,6239,1777,6976,830 Price (U$/tCO 2 )9.598.376.875.032.77 Income (1,000U$)186,20321,84746,12261,77437,92318,537 CER Value (Discount rate : 4%) Expired Period25y20y15y10y5y Relative Value against CER64%56%46%34%18% Price against CER 15 U$ (U$)9.598.376.875.032.77 ERU or RMU Income : 3,177 U$/ ItemTotal5y10y15y20y25y30y Credits (1,000tCO2)37,7282,3245,6239,1777,6976,8306,078 Price (1,000U$/tCO2)15 Income (1,000U$)554,60634,15882,655134,904113,146100,40289,341 . Result & Discussion Slide 31 31/36 Cash Flow Analysis A/R CDM Project IRR : 6.70% (unit : 1,000U$) Item Total 1~5y6~10y11~15y16~20y21~25y26~30y NPV Planting 178,420 171,558 178,420----- Forest management 51,428 37,056 17,18719,82412,7201,696-- Facilities 26,825 16,366 6,4254,080 CDM fee 607 539 51523 - Harvesting 565,412 174,327 -----565,412 General management 41,135 19,992 10,1271,19684129020528,475 Total Cost 863,827 419,837 212,67425,12417,6656,0894,308597,967 Timber 1,603,139 494,278 -----1,603,139 CER 186,203 107,677 21,84746,12161,77437,92318,537- Total Income 1,789,342 601,955 21,84746,12161,77437,92318,5371,603,139 Net Income 925,515 182,117 -190,82720,99844,11031,83414,2291,005,172 . Result & Discussion Slide 32 32/36 Cash Flow Analysis A/R CDM Project (Without Timber Sales) (unit : 1,000U$) Item Total 1~5y6~10y11~15y16~20y21~25y26~30y NPV Planting178,420171,558 178,420----- Forest management51,42837,056 17,18719,82412,7201,696-- Facilities26,82516,366 6,4254,080 CDM fee607539 51523 - General management12,86411,276 10,1271,196841290205204 Total Cost270,144236,794 212,67425,12417,6656,0894,3084,284 CER Income186,203107,677 21,84746,12161,77437,92318,537- Net Income- 83,941-129,117 -190,82720,99844,11031,83414,229-4,284 45% of Total Cost can be covered by CER Income. . Result & Discussion Slide 33 33/36 Cash Flow Analysis JI Project or Domestic Afforestation/Reforestation IRR : 5.16% (unit : 1,000U$) Item Total 1-5y6-10y11-15y16-20y21-25y26-30y NPV Planting 178,420 171,558 178,420----- Forest management 51,428 37,056 17,18719,82412,7201,696-- Facilities 26,825 16,366 6,4254,080 CDM fee 630 546 51523 General management 12,865 11,276 10,1271,196841290205 Total Cost 270,168 236,801 212,67425,12417,6656,0894,308 ERU / RMU Income 554,606 275,668 34,15882,655134,904113,146100,40289,340 Net Income 284,438 38,867 -178,51757,532117,239107,05896,09485,032 . Result & Discussion Slide 34 34/36 Sensitivity Analysis IRR changes of A/R CDM and JI/Dom. project according to carbon credit prices Linear Regression Analysis : goodness of fit 99% A/R CDM project y = 0.1178x + 6.3495 R 2 = 0.9999 JI or Dom. A/R project y = 0.4854x + 3.7653 R 2 = 0.9967 . Result & Discussion Slide 35 35/36 Conclusion of study Confirm the eligible A/R CDM sites in North Korea - Eligible sites for A/R CDM : 605,156 Suitable sites : 174,542 - Better accessibility for forestation than other countries Confirm the feasibility of A/R CDM Project for restoration of deforested land in North Korea - A/R CDM project : IRR 6.70% - A/R CDM (without timber) : 45% of total cost is covered by CER Income - JI or Domestic A/R : IRR 5.16% (without timber) JI : When both South and North Korea are Annex country Domestic A/R : If we are unified in the future A/R CDM Project is Alternative approach to South and North Economic Cooperation . Conclusion Slide 36