3.1. Crediting period and project lifetime
Together with the experts, we identified time-dependent characteristics and processes over the life span of the projects, and integrated them into the model. In accordance with the experts, we assumed that completing the certification of the agroforestry and the reforestation project would take two years. In line with the Gold Standard requirements, we assumed a crediting period of 30 years for the agroforestry project, during which VER can be earned and marketed (The Gold Standard, 2018). We set the simulated project lifetime of the agroforestry project to 32 years. Gold Standard audits, the so-called performance certifications, take place every five years. The Gold Standard fees as well as the time required to maintain the certification (and therefore the model) differ between non-performance certification and performance certification years. After two years of preparation, the reforestation project would be added as a new area to the existing certification scheme in 2022 during a performance certification. Since the crediting period of the already certified reforestation sites ends in 2036, the crediting period of the newly added sites would be 15 years, with a project lifetime of 17 years. Performance-certifications would take place in years 7, 12 and 17 of the project lifetime.
3.2. Marketing strategies
The experts considered several marketing strategies for the VER generated by the agroforestry project to be feasible. Together we defined three marketing strategies and analyzed the outputs of an adapted version of the agroforestry decision model for each option. The generated VER could either 1) be put on hold to sell carbon-neutral agricultural products instead, 2) be sold directly or 3) be passed on to company shareholders, who could either sell the VER or offset their own emissions by putting them on hold.
3.3. Return on investment
3.3.1. Agroforestry project – Marketing strategy 1) Sale of carbon-neutral products
The cash flow analysis of the sale of carbon-neutral products illustrates that substantial initial investments are incurred during the first three years of the project (Fig. 3). Furthermore, only costs are incurred during this time, while no benefits are obtained, as VER can only be sold after completing the certification in year four. Therefore, the median of the 90% CI of the cash flow predicted by the decision model is negative in year one and two, at 13 thousand and 16 thousand EUR respectively. In year three, the highest investment costs are incurred, and the median of the cash flow drops to 265 thousand EUR. Due to the growth of the project area, the number of VER per year increases over the project lifetime and the cash flow grows from a median of 60 thousand EUR in year four to 79 thousand EUR in year 31. Slight declines in the cash flow occur in years 7, 15, 22, 27 and 32, which corresponds to the frequency of the performance certification years we had calculated. From year four until the end of the crediting period, the lower bound of the 90% CI of the cash flow is positive in all non-performance-certification years. In performance-certification years, where additional fees and staff time are required, the lower bounds of the 90% CI (i.e. the 5% quantile) of the cash flow become negative, ranging between -9 thousand EUR in year seven and -4 thousand EUR in year 27. The median of the cash flow range is slightly lower in performance-certification years than in normal years, but still positive (between 50 thousand EUR in year seven and 65 thousand EUR in year 32). While the range between the lower and upper bounds (the 5% and 95% quantiles) of the cash flow is quite narrow in years one and two (difference of 10 thousand EUR), the difference between the bounds is around 220 thousand EUR in the following 30 years.
The NPV of the sale of carbon-neutral products lies within a 90% CI between -230 thousand and 3.4 million EUR, with a median of 848 thousand EUR (Fig. 4). With this marketing strategy for the VER, the chance of a negative NPV, i.e. a loss, is 14%, the chance of gain is accordingly 86% for the project.
3.3.2. Agroforestry project – Marketing strategy 2) Direct sale of VER
Similar to the sale of carbon-neutral products, the strategy to directly sell the VER has high investment costs before the start of the crediting period and high marketing costs in year three. The initial costs are reflected in the negative cash flow in the first three years of the project lifetime (Fig. 3). For the direct sale of VER, the median of the 90% CI of the cash flow is -13 thousand, ‑16 thousand and -325 thousand EUR in year one, two and three, respectively. The increasing median of the cash flow range reflects the increasing number of VER that are generated through the growth of the project area, showing similarities to the sale of carbon-neutral products. After year three, the median of the cash flow increases slightly from around 57 thousand EUR in year four to 70 thousand EUR in year 31 and is positive in all non-performance-certification years. In the performance-certification years, the cash flow ranges between 46 thousand EUR in year seven and 57 thousand EUR in year 32 (end of the crediting period). The difference between the lower and upper bound of the cash flow is 10 thousand EUR in year one and two. From year three on, the difference between the lower and upper bound of cash flow fluctuates around 21 thousand EUR, similar to the sale of carbon-neutral products.
The NPV of the direct sale of VER lies, with 90% confidence, between -342 thousand and 3.2 million EUR, with a distribution median of 687 thousand EUR (Fig. 4). While the upper bound is similar to the sale of carbon-neutral products, the lower bound and the median of the NPV of the direct sale of VER are slightly lower than for the sale of carbon-neutral products. The chance of a loss is 20% for the project, if the direct sale of VER is chosen.
3.3.3. Agroforestry project – Marketing strategy 3) Pass VER on to company shareholders
The cash flow of the strategy to pass the VER on to company shareholders is negative in the first two years of the project, with a median of the 90% CI of -13 thousand EUR in year one and -16 thousand EUR in year two, similar to the sale of carbon-neutral products and the direct VER sale (Figure 3). The positive median of the cash flow in year three (28 thousand EUR) reflects the lower initial investment costs (especially in the area of marketing) of passing VER on to the shareholders, compared to the other two strategies. Unlike when selling carbon-neutral products or the VER directly, the median of the cash flow range of passing the VER on does not increase after year three, but stabilizes around 51 thousand EUR, slightly lower than the median of the other two marketing strategies. As neither VER nor carbon-neutral products are sold, the increase of the certified area does not generate an income increase over the lifetime of the project. The median of the 90% CI of the cash flow declines slightly in performance-certification years. It lies around 37 thousand EUR in year 7, 12, 17, 22, 27 and 32. The difference between the lower and upper bound of the 90% CI is around 10 thousand EUR in years one and two and fluctuates around 200 thousand EUR from year three until the end of the project lifetime. The 90% CI for the cash flow from year three onwards is considerably wider than the ranges of the other two strategies.
The NPV of the marketing strategy of passing VER on to company shareholders had a 90% CI between -130 thousand and 3.2 million EUR, with a median of 783 thousand EUR (Fig. 4). When passing VER on to the shareholders, the chance of a loss is 13% for the project.
3.3.4. Agroforestry project – Comparison of the three VER marketing strategies
In case of the Gold Standard certification of the agroforestry project, the NPV distributions of all three VER marketing strategies have positive medians that do not differ significantly (Fig. 4). The sale of carbon-neutral products, however, has a slightly higher median than both the direct sale of VER and passing them on to the company shareholders. The probabilities of a net loss when selling carbon-neutral products and passing VER on to shareholders are quite similar, while the direct VER sale has a slightly higher risk of a negative NPV. The direct sale of VER has the highest investment costs of all three strategies, showing the lowest median of the cash flow range in year three. The median of the cash flow range of the sale of carbon-neutral products also reaches its low point in year one, but is slightly higher than the direct VER sale option. Passing the VER on to the company shareholders is the strategy with the lowest investment costs. The low median cash flow (achieved in year two) of passing the VER on to the shareholders is higher than in the other two strategies (not achieved until year three) (Fig. 3).
3.3.5. Reforestation project
The cash flow range of the reforestation project (Fig. 5) reflects the low initial investment costs and shows a positive median in year one (nine thousand EUR) and year two (eight thousand EUR). In year three marketing and communication costs are incurred, and the certification process is completed. VER from the three previous years can be sold in addition to the VER generated in the year of the certification due to a retroactive issuance scheme of the Gold Standard (The Gold Standard, 2018). The cash flow is therefore clearly positive in year three. The median of the 90% CI of the cash flow is 127 thousand EUR in year three, the highest median throughout the project lifetime. The median of the cash flow remains positive in all non-performance-certification years, with negative values occurring in the performance-certification years seven (-10 thousand EUR) and 12 (-12 thousand EUR). In the last performance-certification year (year 17), the median of the cash flow range is one thousand EUR. Throughout the years of the project lifetime, the cash flow range shows high variability, reflecting the harvest and reforestation cycles of the reforestation site, which change the number of available VER. In non-performance-certification years, the median of the cash flow range decreases from 28 thousand EUR to one thousand EUR between year four and year 11, then increases to 17 thousand EUR in year 13 before decreasing again to 15 thousand EUR in year 16.
The NPV of the certification for the reforestation project lies with a 90% CI between -29 thousand and 750 thousand EUR, with a median of 252 thousand EUR (Fig. 6). The chance of a negative NPV, i.e. a loss, is 7% in case of the certification of the reforestation project.
3.4. Sensitivity analysis
3.4.1. Agroforestry project – Marketing strategy 1) Sale of carbon-neutral products
Sensitivity analysis indicated that three variables had an important effect on the outcome of the simulation (NPV and cash flow) in case of the Gold Standard certification of the agroforestry project with marketing strategy 1) “Sale of carbon-neutral products”. Variables are commonly considered important when their VIP values exceed 0.8 (Luedeling & Gassner, 2012). The variable “Additional shares sold”, an indirect benefit of the certification, has the highest VIP of all variables, with a score of 4.2 (Fig. 7). The impact of using the generated VER to create carbon-neutral products is reflected in the VIP of the variable “additional product sales”, which has a score of 1.17. The last variable with an important effect on the outcomes is the “discount rate”, although its VIP score of 0.95 lies only slightly above the threshold of 0.8. For the direct sale of VER, “Additional shares sold” is the only variable with a non-zero EVPI in case of project implementation (Fig. 7). The EVPI of the variable is two thousand EUR which corresponds to the decision-maker’s rational willingness-to-pay to obtain perfect information on the variable.
3.4.2. Agroforestry project – Marketing strategy 2) Direct sale of VER
Three input variables are considered important for the outcome of the direct sale of VER. Similar to the sale of carbon-neutral products, the variable “Additional shares sold”, an indirect benefit of the certification, has the highest impact on the outcome of the simulation, with a VIP score of 4.28 (Fig 7). The VIP score of “Carbon dioxide sequestration” is 0.86, indicating that the direct certification benefits of being able to sell the generated VER have an important, but much smaller impact than the indirect benefits. The third variable considered important is the discount rate, with a VIP score of 0.83. “Additional shares sold” is the only variable with a non-zero EVPI in case of the implementation of a Gold Standard certification with marketing strategy 2) “Direct sale of VER” (Fig. 7). The EVPI of the variable is nine thousand EUR.
3.4.3. Agroforestry project – Marketing strategy 3) Pass VER on to company shareholders
Marketing strategy 3) “Pass VER on to company shareholders” is primarily focused on the indirect benefits, as the VER are neither sold nor used for carbon-neutral products, but given to the shareholders. This approach is reflected in the VIP score of 4.4 of the variable “Additional shares sold” (Fig. 7). It is the only variable with a VIP score above 0.8 for passing the VER on. Similar to the sale of carbon-neutral products and the direct VER sale “Additional shares sold” is the only variable with a non-zero EVPI (Fig. 7). The variable has an EVPI of three thousand EUR.
3.4.4. Reforestation project
Sensitivity analysis indicated that the output of the model was sensitive to the variables “VER price” (VIP = 3.422) and “additional stock sales” (VIP = 2.393). The two variables reflect the impact of both the direct and the indirect benefits of the certification (Fig. 8). The VER price is related to the benefits from the direct VER sales, while the additional stock sales are the indirect outcome of the impact the certification has on the shareholders’ willingness to purchase shares. The only variable with a non-zero EVPI was “VER price”. The calculation indicates that the decision maker should be willing to pay three thousand EUR to know more about the effect of this variable on the decision outcome (Fig. 8).