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Carbon markets are the best way to raise funds to pay for forest conservation, argues Ben Caldecott

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Conservation can only work by putting a value on forests

Ben Caldecott

29th November, 2011

REDD+ type projects to protect rainforests face many obstacles but we should not give up on market-based solutions, says Ben Caldecott from the investment bank Climate Change Capital

We can't possibly tackle climate change or many of the other environmental challenges we face without halting deforestation. At the heart of making this a reality is ensuring that forests are worth more alive than dead. While it's impossible to place a simple monetary value on things of such significance, to permanently shift preferences toward forest conservation, this is exactly what we must do.

The framework that policy makers are creating to ensure that forests are better valued is called REDD+, or reducing emissions from deforestation and forest degradation, plus enhancing forest carbon stocks. REDD+ will allow for emission reductions from activities that conserve and restore forests to be authenticated and then paid-for by countries, companies and individuals. The promise of future cash-flows means that capital can be raised and then front-loaded into REDD+ activities today.

But to make REDD+ operational at scale we need to address a number of outstanding issues, particularly around the best way to actually pay and finance REDD+ activities, as well as how to mobilise wide-spread support for such activities. These are important questions that have yet to be satisfactorily answered.

Who pays?
       
The costs of forest conservation and restoration must be borne by all those that benefit: everyone on the planet. Socialising these costs should be done in a way that takes account of means, so that richer regions will pay for the bulk of the investment required. The revenues to pay for REDD+ will have to be generated via tax systems, philanthropic contributions and cap-and-trade schemes. The latter can and should play the largest role because it makes polluters pay and can achieve scale in a way that grants funded through general taxation or philanthropy cannot.

We are, unfortunately, far from achieving any of this. While an international carbon market able to drive REDD+ is essential, in the near term direct payments from developed countries and multilateral funds will dominate. Ultimately this means that we’ll probably fail to raise the quantum of capital required to deal with the problem.

This limited pot of public money can, however, achieve a great deal if it’s deployed effectively. Funds such as the UK’s £2.9bn International Climate Fund (ICF) and the proposed Green Climate Fund (GCF) can lay the ground work for REDD+ to scale up rapidly when there is an international carbon market able to do the financial heavy lifting.

Results-based payments for REDD+


In the absence of an international carbon market for REDD+, other mechanisms supported by public money can start to catalyse investment into forest conservation and restoration. These can be established quickly and the first made available in early 2012. There is no excuse for delay as money has already been pledged and needs to be spent.

So-called Emission Reduction Underwriting Mechanisms (ERUMs) would be a highly effective way of creating the income streams needed to make REDD+ projects and programmes economic, and therefore financeable. ERUMs guarantee payments for emission reductions from REDD+ activities authenticated using a UN-based monitoring, verification and reporting (MRV) system. By creating guaranteed revenue streams for projects and programmes that delivered verifiable emission reductions they would enable public and private actors in developing countries to raise capital against future income.

To take an example, the UK climate fund could offer an ERUM for 10Mt of reduced emissions from REDD+ activities in Papua, Indonesia. Different public and private partnerships would bid to win the ERUM as part of a tendering process. The lowest and best bid was at, say, $5 per tonne of CO2e abated and this is for a number of small REDD+ projects throughout Papua. As this programme delivers verifiable emissions reductions it will receive a contractual payment from the UK climate fund of $5 per tonne of CO2e abated. This suddenly creates a visible, predictable and long term revenue stream that can be invested against. As a result, public money and private risk capital can be deployed today, knowing that it will be remunerated on performance in the future. All this has been achieved through a transparent tendering process, ensuring that emission reductions are secured by the UK ICF at the lowest possible cost.

Role of the private sector


The list of interests that have a stake in whether a forest is protected or felled is a long one. Getting REDD+ activities right involves trying to permanently align an ecosystem of often conflicting interests: the individuals that interact with the forest; the communities that live within or around them; the local and provincial governments that might lack enthusiasm or capacity; and the central government looking for economic growth at almost any cost.

REDD+ projects and programmes cannot succeed without some sort of sustained support from all of these different actors. This makes them much more complex and challenging that any other climate mitigation investment. And this is all exacerbated by the fact that many of the countries that might host REDD+ projects have insecure and poorly defined property rights, amongst many other challenges.

So while there is a significant role for the private sector in helping to deliver REDD+ activities and to raise the capital required, it’s fanciful to believe that private companies acting alone and in a vacuum will be able to secure the long term buy-in necessary for projects to succeed. As a result, REDD+ activities will only thrive as public-private partnerships with strong support from all tiers of government, as well as local communities.  Private sector involvement can definitely improve outcomes, but this will only work with consent and active support.

Who gets paid?


Creating cash-flows for REDD+ activities through ERUMs and the international carbon market is only one part of the story. Getting payments to the right decision makers on the ground is essential.

In theory, REDD+ payments, together with the other benefits derived from intact forests (such as wellbeing, biodiversity, clean air, water and food), should be enough to convince local people and governments to protect forests. But, without secure property rights, how do you get the cash provided through REDD+ to those making the decision about whether to protect a habitat or not? If the cash from REDD+ goes to national governments, the only ones with clear ownership in many less developed countries, is the money likely to be passed on to those on the ground who are taking decisions? The answers to both questions are hardly satisfactory.

Although we don't know what will happen for sure – some developing country governments will be much better than others – the evidence suggests that in areas without secure and devolved property rights, REDD+ cash will fail to get to those it needs to influence. Ensuring that the individuals and communities that matter actually receive payments and other incentives to protect forests will be a critical part of any successful REDD+ projects. So will structuring some payments based on measurable performance, for example via "bonus pool" type incentives, so that the communities that do the most are appropriately rewarded.

Conclusion

Although an international carbon market able to finance the scale of REDD+ activity necessary is still way off, the limited public funds that have been committed already can build momentum and get successful projects and programmes going in the interim.

The key prerequisite is providing visible cash-flows for REDD+ projects that perform, so that capital can then be front-loaded into forest conservation and restoration. This can be done quickly and easily, whether bilaterally or multilaterally.

In addition, we need to work hard to create the right public-private partnership models that can allow REDD+ activities to succeed. This means bringing people, communities and governments together with private actors in a way that benefits all, while delivering value-for-money and the outcome we desperately need - an end to deforestation itself.

Ben Caldecott is head of European policy at Climate Change Capital

 

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