Forests and carbon trading
Seeing the wood and the trees

Should deforestation be part of the carbon trading market? Many experts believe it should. Here is why.

©Reuters/Hardi Baktiantoro

With the world’s attention focused on climate change, the main question is how can global carbon emissions be reduced effectively? There is no single solution, which is why we must look seriously again at the importance of forests, in particular at an approach known as Reducing Emissions from tropical Deforestation and Degradation (REDD), and the incentives needed to achieve it.
Policymakers have been actively debating this issue since 2005, while conservation NGOs have been attempting to get things off the ground for the last 15 years, only to see their hopes dashed with the exclusion of avoided deforestation from the Clean Development Mechanism (CDM) in 2001. Yet, forests are vital for managing global warming: they absorb carbon dioxide and so can counter emissions, while conversely, deforestation releases carbon dioxide into the atmosphere. Avoiding deforestation means points scored in fighting climate change.It is now imperative that the global community finally get serious about a sector that contributes up to 25% of annual global emissions, but that has so far effectively been kept outside climate change policy. Instead it has been demonised for distracting attention away from reducing the burning of fossil fuels. This grave mistake has caused billions of tonnes of emissions to go unchallenged since 2001. Climate change is a threat of such magnitude that no options to fight it should be disregarded, especially not ones of such significance. Furthermore, deforestation also causes the loss to mankind of many other useful goods and services, such as biodiversity, soil conservation and hydrological regulation.The timing is right because parties to the Kyoto Protocol are preparing for the next round of negotiations on emission reduction targets after 2012. REDD is seen as an attractive mechanism to entice developing countries to join more fully in the fight against climate change. In addition, the final reduction targets to be agreed upon in, hopefully, December 2009, will no doubt be influenced by the possibility of being able to use what are generally regarded as cost-effective carbon emission offsets from avoided deforestation. In other words, firmly embedding REDD into a post-2012 policy agreement is likely to make countries more comfortable to take on higher targets.This should in itself assuage opponents who fear “market flooding”, as an added supply of large amounts of REDD credits risks reducing prices and diminishing the environmental effectiveness of this market-based instrument in other sectors. These fears are unjustified when the potential increase in supply of credits is matched by a corresponding increase in demand, which are after all to be determined by the targets set in 2009. In effect this means that if OECD countries want to maintain the carbon incentives for non-forestry sectors and include REDD in the system, it is essential that they agree to accordingly higher targets for emissions reductions.Many issues need to be sorted out between now and 2009. There are technical issues such as determining baselines and setting up monitoring systems, but in principle these are manageable with the current technology and approaches already developed by forestry projects in the last decade. Data gaps should be filled rapidly once the system is up and running.However, a big question remains: how will REDD actually work? Proposals range from rewarding entire countries for their national performance against a national deforestation baseline, to a CDM-like crediting mechanism based on individual projects. The national approach, which seems to be favoured by most policymakers, was brought forward to capture any possible leakage from activities in a national monitoring system, such as the displacement of logging from one area to another area in the country. If most tropical countries sign up to a REDD agreement, even international leakage could be monitored and accounted for.A further argument used in favour of a country-level reward system is that it would provide incentives for governments to use some of their powerful command-and-control and fiscal instruments to reduce deforestation. However, in reality, constraints in capacity, governance and efficiency mean the instruments available to most developing countries’ governments might not be effective enough to reach the hoped-for results.This is where project-based crediting would help. Most conservation work is achieved by grassroots activities, with people working locally alongside the agents of deforestation. Direct rewarding of their activities in a project-based crediting mechanism would seem more efficient in terms of ensuring that the incentives really benefit those who currently wield the chainsaws. Important in this context is that credits in either case (national or project) would only be rewarded after the conservation activity has successfully been implemented. Consequently, the success of the incentive system depends on trusting the reward will indeed follow, and that it will be delivered over time periods needed to sustainably finance REDD activities. Clearly, this trust is essential for upfront investments and forward sales of carbon credits, and more conservation activities will take place if their reward does not depend upon a national government, especially one with a low credit rating, but directly on an internationally regulated, project-based system. This is key if, in addition to conservation organisations, we are serious about encouraging the private sector to engage fully in REDD activities.The financing and facilitating power of the private sector should not be underestimated. Banks and carbon traders have embraced the CDM market and invested billions of dollars into emissions reduction projects. They also provide a credit transaction platform for projects and buyers whose core business is not carbon trading.Kyoto compliance buyers have shown little interest in understanding the technical details of projects, which means they cannot properly assess risks associated with the forward buying of credits. Private sector intermediaries, such as this author’s company, do have this expertise, and by aggregating credits from many projects in different sectors and regions, can mitigate these risks for buyers.The private sector clearly plays an enabling role in bringing the carbon finance incentive to emissions-reducing activities, and in its search for profit it can achieve this very effectively. Similarly, if the forthcoming REDD system were to incorporate a CDM-like market-based trading system, financiers and trading intermediaries could lift REDD activities to a much larger scale than, say, the proposed fund-based alternative could ever achieve.In short, there are good arguments for both a country-level and a project-level crediting system, yet each on their own face shortcomings. But there is no reason why they cannot be combined to reinforce each other. A registry system would be needed to avoid double-counting of avoided deforestation achievements by projects and governments. Projects could pay a commission to governments for monitoring services, so making it more attractive for governments to allow credits to be sold by others than themselves. Such a hybrid system would combine the best of both worlds and maximise much-needed reductions in tropical deforestation.Jan Fehse can be contacted at jan@ecosecurities.com
See www.ecosecurities.com©OECD Observer No 267 May-June 2008


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