A new financial mechanism to help combat climate change by getting funds flowing into forest carbon credits is under development and could be launched by spring next year.
Forest deforestation and degradation contributes to approximately 20 percent of global greenhouse gas emissions per year, and so protecting forests has the potential to have one of the largest and most immediate impacts on climate change.
Forest carbon credits hope to provide incentives to do just that. They are generated by initiatives and projects that reduce deforestation, plant new trees and promote carbon-conscious land management — all of which results in a reduction of carbon dioxide emissions. Each ton of CO2 not emitted translates into one carbon credit, which can then be traded on either the voluntary or compliance carbon markets, enabling governments and companies to meet their carbon emission allowances or voluntary targets.
However, forest carbon credits have largely stayed off the table when it comes to climate finance discussions to date and were only officially recognized as a climate change mitigation tool in the Paris agreement which came out of last year’s U.N. COP21 negotiations.
Furthermore, Reducing Emissions from Deforestation and Forest Degradation (REDD+), which offers developing countries financial incentives to reduce emissions from deforestation, is still not yet viewed as a compliance offset by existing carbon markets, and therefore carbon credits produced by REDD+ programs cannot be traded.
Forest credits were rules noneligible for compliance markets under the 1992 Kyoto Protocol, due to a variety of concerns. These included how to accurately measure the amount of carbon stored in forests, a debate about whether forests never targeted for clearing should generate a credit, how to deal with forests that burn down in natural disasters and how to account for when preserving one area of forest simply simply moves deforestation to another area.
There is also a wider problem at play, that forest carbon trading as it stands is not working for developing countries.
Read more stories on climate funding:
► Forests and finance trends — role of forests in meeting the Paris climate targets
► The promising private sector climate finance debate
► Is the Paris agreement the lightning rod we're looking for?
The latest State of Forest Carbon Finance report, released last month, revealed that only approximately 20 percent of the $888 million committed to new forest carbon finance actually went to supporting forest conservation projects in developing countries. The majority of the remainder went to projects in California and Australia.
Now the REDD Acceleration Fund is being developed to address these some of these concerns by creating a source of demand for carbon credits generated by REDD+ programs in developing countries.
"This problem boils down to creating the right economic incentives for the protection and restoration of forests," according to Lorenzo Bernasconi, senior associate director at the Rockefeller Foundation, which is funding the RAF’s development.
The concept for the Fund, which is the brainchild of private investment firm, Climate & Forest Capital LLC, The Environmental Defense Fund, with law firm Baker & McKenzie, is to do this by pooling funding from public, private and philanthropic sources to create an investment vehicle which provides investors with enough security to start buying high-quality REDD+ credits in the hope that they become compliant, and thereafter fetch a good price on the carbon market.
By doing this, it is hoped the fund will encourage private investment into avoiding tropical deforestation by significantly reducing the risk of investing in REDD+, and bolster confidence in the scheme among regulators and policy makers, encouraging more to recognize and trade forest credits.
Eron Bloomgarden, a partner at the investment first, Climate & Forest Capital, explained: “What is needed is sustainable long-term demand for REDD+ credits. There also needs to be a signal to the market that REDD+ is moving to the compliance market. I am encouraged to see increasing interest from the private sector and think the private sector can and should play an important role in climate finance.”
Ruben Lubowski, chief natural resource economist at EDF, added: “We cannot solve climate change without reducing tropical deforestation and that will require private capital. The goal of the RAF is to help jump-start a market that can deliver long-term and durable finance that is up to this challenge.”
Recent policy developments mean the timing is right to for this strategy, according to Bloomgarden.
He said the Paris agreement represented a “paradigm shift” for carbon markets, moving from the vision of a single global carbon market, to multiple subnational markets, such as California which recently initiated a regulatory review which could mean forest credits are accepted by Spring 2018. If these markets start accepting REDD+ credits, this could present a “real opportunity for investors”, and also for the world’s forests, he said.
The aviation industry also recently announced an industrywide “market-based measure” under development by the International Civil Aviation Organization. This new market is likely to consider including REDD+ in its carbon offsetting scheme.
“The policy outcomes are not guaranteed, but we now have two separate compliance markets which may move in the direction of accepting REDD+ and that presents an opportunity for investors,” Bloomgarden said.
The proposed strategy is structured like a traditional investment fund. Corporate precompliance investors (expected to be companies which have carbon emission caps, such as airlines or utilities) invest in an option to purchase REDD+ credits in the future but only if compliance markets are accepting REDD+ credits at that time.
Mission-driven investors (impact investors) provide upfront equity, while public and philanthropic investors (foundations, governments) supply the upfront development funding to support programs producing REDD+ credits, and take a “buyer of last resort” position should compliance markets reject the credits. This serves as huge risk mitigator for the mission-driven investors.
The combined funding from the mission-driven equity investors and the corporate precompliance investors is then combined to purchase REDD+ credits from eligible tropical forest jurisdictions and REDD+ programs.
This portfolio of credits will then be held until a pre-determined “strike-date”, between two — six years from now, at which time if a compliance carbon market has emerged, for example in California, then the corporate investor will have the option to purchase credits at a discounted price, which can then be used to meet their offsetting requirements.
The money from these sales would then be used to repay the equity investor, with a return, and also provide additional payments to the REDD+ developers to support forest communities and sustainable development.
In terms of timeline, Bloomgarden said they are currently developing an investment blueprint with funding from Rockefeller. The team plans to reveal a draft investment blueprint during the COP22 negotiations in Morocco this weekend, after which they will publish the blueprint in early 2017.
Bloomgarden says the approach has potentially wider applications than forest carbon, and could be applied to other markets.
Read more international development news online, and subscribe to The Development Newswire to receive the latest from the world’s leading donors and decision-makers — emailed to you FREE every business day.
