Forest carbon markets: Critical or evil?

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.

In conclusion
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.

Bypassing Resistance, Brazil Prepares to Build a Dam

NYTIMES
By ALEXEI BARRIONUEVO

ALTAMIRA, Brazil — For Raimunda Gomes da Silva, the impending construction of a huge hydroelectric dam here in the Amazon is painful déjà vu.
About 25 years ago, the building of another dam more than 200 miles east of here flooded her property, driving a plague of poisonous snakes, insects and jaguars onto her land, she said, before submerging it completely.

Now, after starting a new life in Altamira, the government is telling her she needs to leave again, this time to make way for the Belo Monte dam, which will flood a large swath of this city, displacing thousands of people.

Colombia Launching National Ecosystem Marketplace Share >>> Forest Carbon Portal

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 mpeters-stanley@ecosystemmarketplace.com.