Author: Molly Peters-Stanley
Publication Date: July 16, 2010
A consortium of Colombian banks and NGOs hopes to harness the power of REDD for a more broad-based ecosystem marketplace. Like emerging market exchanges around the world, this one comes with its own education campaign – and it starts with trees. First in an Ecosytem Marketplace series examining emerging-market exchanges in Latin America, Africa, and Asia.
Colombia’s ecosystems – and particularly its forests – have suffered like those across Latin America. Unlike its neighbors, however, Columbia has historically failed to leverage resource conservation to earn voluntary carbon credits by reducing greenhouse gas emissions from deforestation and forest degradation (REDD).
Recognizing that Colombia’s forest stocks present a wealth of untapped carbon mitigation potential for voluntary markets and a future UN REDD mechanism, partners Fundacion Natura, the Ministry of Environment, Housing and Territorial Development and the Inter-American Development Bank (IADB) this week launched their plan of attack on Colombia’s underwhelming carbon market presence.
Their weapon of choice is more carrot than stick – the “Mechanism for Voluntary Mitigation of Emissions Greenhouse Gasses in Colombia.” The “Mechanism” features an exchange-like platform to facilitate the flow of carbon credits and finance between Colombian projects and international and domestic buyers of voluntary emissions reduction (VER) credits.
Focusing foremost on driving domestic demand for VERs, Fundación Natura’s Roberto León Gómez explains that the Mechanism’s platform is the best tool to engage Colombian businesses in the carbon market.
“We needed to find a tool that was efficient, transparent and would give participating companies confidence in a market mechanism, something they understand,” he says.
But to overcome the challenges that have traditionally stunted Colombia’s role in the REDD market, from high transaction costs to low technical capacity, the Mechanism requires more than just a physical exchange.
Its proponents therefore take a three-pronged approach to market development: build the platform, educate participants and develop land-based projects with cross-cutting benefits to conservation and communities – that ultimately appeal to buyers in the voluntary marketplace.
The Glass Half Full
Deforestation and agriculture are among Colombia’s largest sources of national emissions, and Fundación Natura hopes to tap into the forestry sector’s potential for voluntary emissions reductions. In its initial phase, only land-based credits will be facilitated through the Mechanism, including credits from REDD, agro-forestry and other forest carbon project types.
The partners will approve at least five pilot projects generating forest carbon credits from two different regions in Colombia. Noting that the project’s “greatest condition to fulfill” is building market capacity among Colombian communities and ethnic groups, the Mechanism will finance the projects from baseline assessment through credit registration – while also providing training in measurement, monitoring, software training and maneuvering existing market structures.
Gómez believes that many existing programs will easily translate into carbon reduction projects, from biodiversity and conservation corridors to sustainable agriculture and cattle-ranching initiatives.
“We have a big potential to develop this kind of project because many of the conservation activities we do here in Colombia could become carbon projects very easily,” he says.
Fundación Natura is the Mechanism’s executing agency and, with financial support and direction from the Global Environment Facility (GEF), infuses the Mechanism with its own focus on conservation, particularly biodiversity. The Fundación Natura finds that forestry is well-suited to promoting projects’ co-benefits.
“We and the Ministry of Environment are interested in incorporating biodiversity and social criteria into the projects that will be part of this mechanism,” explains Gómez. “We don’t want carbon mitigation to be separate from conservation activities or vulnerability reduction and adaptation, but to find a way to link these criteria.”
Solidifying the Relationship Between Standards and Exchanges
Whether these conservation criteria will be enforced by mandating the use of third-party standards with strong co-benefits or through membership requirements remains to be seen. During the Mechanism’s preparatory phase – which they’re currently in – the program’s partners will decide which third-party standards to adopt for use on the exchange.
As the Mechanism’s primary ingredient, the exchange will host only domestic projects but will court both domestic and international buyers. Fundación Natura and partners initially considered developing an exchange-specific offset standard but were concerned about its international appeal.
“We decided that was a big mistake because no one in the world would know what the standard was. We will instead use an internationally recognized standard like the VCS or VER+ so everybody will want to buy Colombian VERs,” says Gómez. While the Mechanism’s platform was inspired by the Chicago Climate Exchange, its platform will therefore differ from CCX in the use of a variety of standards.
Also unlike the CCX, exchange participants will not be required to commit to a cap on emissions – partly because a rigid program may turn off prospective participants but also because of Colombian companies’ perspective on the carbon markets.
Gómez explains, “We don’t want a mechanism that’s so tight, so rigid that the actors involved in the market will be constrained to act the same way from year to year.”
“In Colombia, businesses perceive the carbon markets as an opportunity rather than an obligation or a tool.”
Re-Tooling Domestic Demand
To outsiders, the idea of developing from scratch a viable domestic market for VERs may seem farfetched. In reality, the Mechanism was conceived to respond to large Colombian companies that approached Fundación Natura about offsetting their emissions.
The problem, Gómez explains, is that while a few companies are carbon neutral savvy, for most the carbon market remains a source for selling credits rather than a tool for measuring and offsetting their carbon footprint.
It’s not often that one wants to be seen as a “tool.” In the case of this program, however, the Mechanism’s multilateral approach to market education it is intended as a tool to educate Colombian buyers about the benefits of participating in the voluntary carbon market – by and for Colombia.
Though Gómez expects that demand will initially be low, he proposes incentives for private sector participation – “not the tax kind” – including finance industry alliances to aid in funding mitigation strategies and technical teams to help companies inventory their emissions and devise strategies for achieving mitigation goals.
This effort will no doubt be aided by supporters like the Colombia Stock Exchange (Bolsa de Valores de Colombia) and the Colombian Business Council for Sustainable Development (Consejo Empresarial Colombiano para el Desarrollo Sostenible).
Right Time and Place
Still, the question remains, “Why the voluntary carbon market?” Historically, Colombia’s presence in the UN’s Clean Development Mechanism (CDM) market eclipses its voluntary market activity. According to Luisa Lema, IADB’s Global Environment Facility (GEF) Consultant, the government advocates strongly for the country’s participation in the CDM. As a result of its diligence, in Latin America Colombia falls only behind Brazil, Mexico and Chile in the number of CDM projects the country hosts.
While the government was busy advocating and building capacity for CDM projects, Gómez suggests that voluntary market development was lost in the shuffle, “maybe because they didn’t have a lot of trust in the voluntary market at the time or didn’t understand it that well.”
“It seems they just forgot about the voluntary market,” he concludes.
Until now, that is. Despite the fact that last year was defined by uncertainty and sluggishness in both markets, the voluntary market – often less rigid and so a source of market innovation – has made progress in the forest carbon sector ahead of a UN mechanism for REDD.
For this reason, Fundación Natura and partners see the voluntary market as the most viable option for their forestry-based Mechanism. “In the voluntary carbon markets you have dozens or maybe hundreds of forestry projects all over the world,” Gómez explains, “but in the CDM you have three or four that actually generate CERs. So the voluntary market is the best option for this program.”
He has a point. In Building Bridges: State of the Voluntary Carbon Markets 2010, Ecosystem Marketplace and Bloomberg New Energy Finance reported that voluntary offset volumes from Latin America experienced significant growth in 2009, with 80% of these credits sourced from forestry projects. Moreover, the market also saw an increase in the volume of credits transacted through non-CCX exchanges, valued at US$12 million in 2009. In other words, the Mechanism appears to be well-positioned.
For this reason, Gómez asserts that the risks are worth the reward in the pursuit of carbon and conservation finance: “The voluntary carbon market is the most viable way to bring these kinds of projects to the carbon markets – especially because we want to create a local market for companies in Colombia to really get involved.”
Molly Peters-Stanley is the Voluntary Carbon Associate in the Ecosystem Marketplace's Carbon Program. She can be reached at email@example.com.