Tag Archives: forest carbon markets

Can We Change Path? Saving Forests and Cutting Carbon

No ecosystem is more important in mitigating the effects of climate change than tropical rainforest. And South-East Asia is home to the world’s third-biggest patch of it, behind the Amazon and Congo basins. Even though humans release carbon from these forests through logging, clear-felling for agriculture and other disruptions, some are so vast and fecund that the growth of the plants within them absorbs even more from the atmosphere. The Congo basin, for instance, locks up 600m tonnes of carbon a year more than it releases, according to the World Resources Institute (WRI), an international NGO that is equivalent to about a third of emissions from all American transport.

In contrast, such is the extent of clearing for plantations in South-East Asia’s rainforests, which run from Myanmar to Indonesia, that over the past 20 years they have turned from a growing carbon sink to a significant source of emissions—nearly 500m tonnes a year. Indonesia and Malaysia, home to the biggest expanses of pristine forest, have lost more than a third of it this century. Cambodia, Laos and Myanmar, relative newcomers to deforestation, are making up for lost time.

The Global Forest Watch, which uses satellite data to track tree cover, loss of virgin forest in Indonesia and Malaysia has slowed for the fourth year in row—a contrast with other parts of the world…The Leaf Coalition, backed by America, Britain and Norway, along with such corporate giants as Amazon, Airbnb, and Unilever, aims to create an international marketplace in which carbon credits can be sold for deforestation avoided. An initial $1bn has been pledged to reward countries for protecting forests. South-East Asia could be a big beneficiary,

Admittedly, curbing deforestation has been a cherished but elusive goal of climate campaigners for ages. A big un initiative to that end, called REDD+, was launched a decade ago, with Indonesia notably due for help. It never achieved its potential. Projects for conservation must jump through many hoops before approval. The risk is often that a patch of forest here may be preserved at the expense of another patch there. Projects are hard to monitor. The price set for carbon under the scheme, $5 a tonne, has been too low to overcome these hurdles.

The Leaf Initiative would double the price of carbon, making conservation more attractive. Whereas buyers of carbon credits under REDD+ pocketed profits from a rise in carbon prices, windfalls will now go to the country that sold the credits. Standards of monitoring are much improved. Crucially, the scheme will involve bigger units of land than previous efforts, the so-called jurisdictional approach. That reduces the risk of deforestation simply being displaced from a protected patch to an unprotected one.

Excerpts from Banyan: There is hope for South-East Asia’s beleaguered tropical forests, Economist, May 1, 2021

Keep Forests Standing: the forests bond

Launched on November 1, 2016, the Forests Bond will provide investors the opportunity to invest in a traditional financial product that offers the unique option of receiving interest payments in the form of environmental impact — in this case, verified carbon credits generated through REDD, an initiative that rewards landholders for protecting forests, thereby reducing carbon emissions that worsen climate change. The development of the bond is a collaboration of the International Finance Corporation (IFC), a member of the World Bank Group, and BHP Billiton with technical support from Baker & McKenzie and Conservation International (CI).

REDD (short for Reducing Emissions from Deforestation and forest Degradation), which offers financial incentives to landholders in tropical countries to keep their forests standing, has met with mixed success since its launch in 2005, in part because the lack of a carbon market left it dependent on voluntary action and bereft of the certainty needed to attract private funding.

“If you look at the scale of the problem, roughly US$ 100 billion to 300 billion needed to cut deforestation by half over the next decade, it’s clear that we need to mobilize private institutional investors, who control vastly greater amounts than public or philanthropic aid can deliver,” said Agustin Silvani, Conservation International’s vice president of conservation finance. “The REDD mechanism has mostly excluded them because it required specific carbon expertise or a specific interest in forests to engage with it.”

The Forests Bond supports a REDD project in Kenya, and investors can choose between a cash or carbon credit coupon (the interest received from the bond), or a combination of both. This unique element of the bond is made possible by the price support that BHP Billiton**is providing, which means that investors can either 1) elect to take the carbon credits to offset corporate greenhouse gas emissions or 2) sell them on the carbon market, or 3) take a traditional financial return instead. This provides the certainty needed to attract institutional investors while still generating verified reductions in deforestation, in the form of REDD credits…

The REDD project that the Forests Bond will support takes place in the Kasigau Corridor in eastern Kenya….Forest protection activities include forest and biodiversity monitoring, funding for community wildlife scouts, forest patrols, social monitoring and carbon inventory monitoring. Community development activities include reforestation of Mount Kasigau; establishment of an eco-charcoal production facility; support to community-based organizations; and expanding an organic clothing facility.

The bond is listed on the London Stock Exchange and has raised US$152 million from institutional investors.

**BHP Billiton is providing a price support mechanism of US$12 million that ensures that the project can sell a pre-defined minimum quantity of carbon credits every year until the Bond matures, whether or not investors in the Bond elect to receive carbon credit coupons.

Excerpt from Bruno Vander Velde  New bond aims to unlock private investment to protect forest, Reuters, Nov. 1, 2016 and BHP Billiton and IFC collaborate on new Forests Bond, Press Release of BHP Billiton, Nov. 1, 2016

Markets for Natural Resources: China

A nationwide  carbon-trading scheme, to be set up in 2017, is the most visible example of a broader trend in China towards using market mechanisms in environmental matters…[A] reform plan issued by the government on September 21st, 2015  laying out the basis of future policy, talks about developing “a market system which allows economic levers to play a greater role in environmental governance”. If the plan is to be believed, China will go further than any other country in developing environmental market mechanisms.

The plan talks of selling “green” bonds, ie, those financing projects certified as environmentally sound. The government will improve financial guarantees for low-carbon projects. But those are becoming common. More fundamentally, the reform says China will separate the ownership of all natural resources from the rights to use them—and sell the usage rights at market.

This is much more radical. The idea is rooted in communist dogma, which says all natural resources—land, rivers, minerals and so on—are collectively owned. The reform plan begins by calling for a massive Domesday-like inventory of who owns what, whether central government, provincial governments or lower tiers. It then says, with utter insouciance, that “with the exception of natural resources which are ecologically important [eg, national parks], the ownership rights and use rights for all other natural resources can be separated”. And, having separated them, the usage rights can be bought and sold, rented out, used as collateral or as the basis of loan guarantees, and so on.

The carbon-trading scheme suggests what this could mean in practice. It is like a market in energy-usage rights, with the carbon treated as part of the cost of using fossil fuels. A market in water rights will also be set up. Trials will be held in Gansu and Ningxia, two north-western provinces. The plan talks cryptically of setting up a “natural resource asset exchange”.

Excerpts from Markets and the environment: Domesday scenario, Economist, Oct. 3, 2015, at 46