Forest Carbon Markets
Written by Unna Chokkalingam on May 06, 2011
Link to the original article.
Are carbon markets critical for reducing forest carbon emissions and mitigating climate change, or are they risky or even evil propositions? In fact what exactly are forest carbon markets? Differing perceptions, suspected motivations, a language issue…
REDD+ or Reducing Emissions from Deforestation and Forest Degradation has emerged as one of the most advanced yet most contentious issues in the international climate change negotiations. A major point of contention that fuels the REDD+ debate is the business of carbon offsets and markets.
Carbon offsets and markets developed with their inclusion in the international climate change agreement, the Kyoto Protocol, as flexibility mechanisms for achieving cost-effective emissions reductions. What is an offset? Instead of directly reducing their own emissions, polluters can offset or compensate for their greenhouse gas emissions by purchasing credits from forestry and other emission reduction projects elsewhere. Offsetting is now a feature of both the Kyoto Protocol and the voluntary carbon markets that developed in the USA and elsewhere.
Another major market feature is carbon trading. Under the Kyoto Protocol and cap and trade systems such as the EU ETS, emissions are capped at a certain level and polluters (countries/businesses) are granted permitted emissions allowances. If they reduce their emissions below their caps, they can trade the spare allowances to others who are over their limits. Emissions reduction units from offset projects are also commonly traded in the carbon markets.
Why we need markets
A key point cited in favour of market mechanisms is that a large volume of money is needed to protect forests and that markets provide room for substantial private sector investment in REDD+. The private sector is unlikely to invest in larger diffuse national, provincial and district-level REDD+ activities.
Leslie Durschinger of Terra Global Capital as quoted in an article in The Hindu in December 2010, “Markets will enter in the scheme of things, as without them it is hard to catalyse private investment. It would require $17 billion to $33 billion a year to reduce deforestation emission by 50 per cent by 2030 and there would be a funding gap.”
Daniel Nepstad, the International Director of the Amazon Environmental Research Institute (IPAM) as quoted in an Ecosystem Marketplace article in December 2010, “Brazil made an ambitious target of reducing their emissions 36 to 39% by the year 2020 — a short period of time that will require a large sum of money. The size of the investment to do low-emissions development is going to have private investors coming in and the scale of funding that you can really only get with a market mechanism.”
Markets here mainly refer to compliance markets for emissions reductions. Most of the forest carbon activity in the past decade has been in the voluntary carbon markets. However, much voluntary market activity exists in anticipation of emerging compliance cap and trade schemes that can provide more robust demand for REDD and other offsets. The collapse of the voluntary Chicago Climate Exchange with the scrapping of the proposed US cap and trade emissions reduction scheme is a case in point.
The evils and perils of offset markets
Critics argue that carbon trading and offsetting is not good for the climate. Chris Lang writes in REDD-Monitor, a website focused on assessing REDD developments, “We need to reduce greenhouse gas emissions and stop deforestation. We cannot trade off one against the other.” Carbon offsets have now become a popular virtual commodity and engendered a multi-billion dollar new business. The notion of men in suits peddling forest carbon does not sit well with those concerned about the fate of indigenous communities that inhabit and depend on these forests.
The Bolivian president Evo Morales presented a final staunch lone opposition to the climate change agreements in December 2010, stating, “We came to Cancún to save nature, forests, planet Earth. We are not here to convert nature into a commodity. We have not come here to revitalise capitalism with carbon markets.” Brazil, a long-term opponent of market mechanisms to combat deforestation, relented on its use though it still had reservations about offsetting.
Market motivations – the commodification of nature and the focus on the business potential of carbon trading − are often suspected by NGOs and communities. Yes, markets could provide finance for protecting forests and rewarding people for protecting their forests. However, the risk is that such commodification could lead to land grabbing for carbon values and further marginalization of local communities.
Finally some money for environmental services – is it such a bad thing?
Researchers and policy movers have been working for years to get governments and society to move beyond exploitation of forests purely for their timber; and to recognize, protect and pay for the inherent environmental services that forests provide. They conducted pilot and early activities in China, Philippines, Vietnam and elsewhere. It is not only carbon on board but other environmental markets that are developing too, such as for water and biodiversity. There is finally some money, though not as much as is committed is materialising. Can these markets provide real environmental and social benefits? Are the original objectives still valid? Why so much passion and outcry? What changed?
We posed these questions to Meine van Noordwijk from the World Agroforestry Centre Southeast Asia, who led early research and testing on Payments for Environmental Services or PES across Southeast Asia under the RUPES (Rewarding the Upland Poor for Environmental Services) program. “The real objection is to the offsets part of the market, about carbon markets shifting emissions around and not reducing them,” he said. “The moral basis for commodification is weak when people do not see enough global commitment to cutting emissions. Market mechanisms would be more acceptable if they were linked to deep and serious emission reduction commitments. At present the feeling is that they want to pay some money and keep doing what they are doing.”
“PES and markets also underestimated the role of governments and land use issues,” added van Noordwijk. “Implementation becomes difficult at the local scale given unclear tenure. Who can trade with whom? Who can deliver what? There is risk of increased conflict if some parties benefit over others. A lot of investment has to be made in first building tenure and institutions for PES to work on the ground. Under the present conditions, it may be easier for market mechanisms to work at a national scale between countries, rewarding national-level performance.”
van Noordwijk thought that half the problem was with language. “It may be easier for people to view it as a co-investment in a new national development strategy that combines emissions reduction commitments with economic growth, rather than as a carbon market,” he noted.
A different sort of market: national-scale between countries
National-scale country-to-country market? Small-scale private transactions is the traditional concept that jumps to mind when thinking of markets. Versus the one billion dollar REDD+ commitments from the Norwegian Government, and possible future commitments from Germany and other developed countries. Norway’s pledges vastly outshadow the total estimated US$ 149 million forest carbon market from the 1990s to mid-2009.
The difference between fund-based and market approaches is hazy. A more basic definition of market as in Wikipedia: “Sellers offer their goods and services in exchange for legal tender from buyers”, and in NetMBA Business Knowledge Center: “Group of consumers or organizations interested in a product, having the resources to purchase the product, and permitted by law and other regulations to acquire the product”. As per these definitions, national-level voluntary commitments into the Amazon fund and to Indonesia and Guyana for performance-based forest emissions reductions qualify as markets, albeit of a different sort with different motivations.
What these motivations are and whether it will translate into long-term stable financing for REDD+ is unclear. Is it a form of overseas development assistance? Will it be subject to changing government priorities and pre-occupations? Is it early action in anticipation of future compliance targets? Is it an image-boosting tactic for heavily polluting countries?
Large-scale financing commitments impact private sector markets
Scott Stanley, Managing Director of Forest Carbon, a technical consulting firm based in Indonesia, believes that all possible mechanisms are needed to raise money for maximum effect – private and public sector investments through market and non-market mechanisms. “Recent large top-down government-to-government agreements have all but killed the private sector forest carbon markets in Indonesia,” he says. “Focus and priorities have shifted to building national level processes and institutions while efforts to support the voluntary markets have come to a standstill.”
He suggests that bilateral and multilateral funding could instead be gainfully used to support both national-level policies and planning, and facilitate private sector actions through available voluntary market standards. “Both are critical”, he notes, “national-level activities to set the scene and account for leakage, and project-level activities to provide rigorous ground-based performance.”
“REDD+ methodologies are not easy to develop and project-based activities have some advantages in this regard. They tend to be flexible and quick, and voluntary carbon standards and projects have acted as an incubator for innovative ideas and solutions. Projects also provide room for other actors including communities and NGOs to directly initiate and benefit from forest carbon activities,” observes Gabriel Eickhoff, GIZ REDD technical advisor in Lao PDR.
Yes, forest carbon projects are easier to start on sites where tenure is not an issue, or tenure and institutions have already been built by earlier research and development activities in the area. However, the private sector, NGOs and development agencies have also been investing in land use planning, and tenure and institution building on sites as a pre-requisite for setting up or piloting REDD+ activities on the ground.
The definition of a forest carbon market appears to be wider and more fluid than commonly thought of. Much of the needed financing for forest carbon or REDD+ activities at present is linked to some form of market mechanism − compliance or voluntary, public or private sector, for national or project level performance. They could well be viewed and designed as co-investment strategies or partnerships to reduce forest-based emissions rather than as carbon markets.
Responses from a wide range of actors including grassroots NGOs working with local communities suggests interest in directly linking to and benefitting from forest carbon activities and markets. What needs to be put in place is safeguards to ensure that local communities can indeed participate and benefit equitably.
If some level of offsetting through forest carbon activities is allowed in any future climate change agreement, it will need to be linked to serious and deep global emissions reduction commitments to make it credible as a potential climate change mitigation measure, to offset the perception that it is a mere distraction.