IV – The Forestry Carbon Market

Forest ecosystems play a vital role combating climate change as tropical forests account for around 25% of the carbon in the terrestrial biosphere and cover 15% of the surface of the world where 90% of terrestrial biodiversity is found. Forests are an essential element in our ecosystems and provide water flow regulation, nutrient recycling, rainfall generation and disease regulation (Parker et al., 2008). Every year, 1,100 MtCO2e are released into the atmosphere, the equivalent of 7.3 million hectares or the size of Switzerland (Merger, 2008).

1         Afforestation and Reforestation

Carbon sinks are seen as one of the solutions to reduce carbon emissions in the atmosphere as established in the Kyoto Protocol, and which also recognises credits from afforestation (planting a forest for the first time in a designated area) and reforestation (replanting a forest that has recently being cut down).

Trees do have a limited life span, therefore the CDM developed two new types of credit known as temporary credits (tCERs) and long term credits (lCERs). Where CERs were only granted temporarily, new CERs will need to compensate once expired. They can be replaced by any other type of compliance credits (Dutschuke & et al., 2004). The results however are discouraging as only 0.3% of the CDM projects for afforestation or reforestation (CDM Pipeline, 2009a). This is mostly due to the high costs involved in CDM projects, length of documentation process and the lack of understanding of the market regarding tCERs and lCERs. It is very likely that tCERs and lCERs will not be used anymore after 2012 as the VCM brought new solutions to solve the permanence problem as will be discussed shortly.

Most of the voluntary standards accept afforestation and reforestation credits. Some standards such as CCBS and CarbonFix are only specialized in the forestry market. The standards in the US have been the fastest to move with CCAR and CCX trading carbon credits since 2007, in comparison to the first VCS credits recently validated in July 2009 (Myers, 2009).

The key points for any offset project are that the carbon credits must be measurable, verifiable and additional and unique. With regard to carbon forestry projects, two new key aspects need to be analysed to ensure that the project will reach its objective of emissions reduction.

Leakage: trees may only be planted in empty areas. If planting a forest in an agricultural area, then farmers will need to leave and possibly clear another forest in order to establish a new farm. Any kind of leakage must be calculated and the amount of credits must be reduced accordingly.

Permanence: the project needs to ensure that carbon will not be released into the atmosphere because of a fire, disease, logging, collapse of the ecosystem or for other reasons.

One of the advantages of the VCM is that it is not restrained by international politics whereby a deal must appease each participant and where sometimes even the most progressive ideas will not necessarily garner unanimous support. The VCM can therefore be extremely innovative and serve as a policy laboratory for new ideas to be tested. Regarding the planting of trees, the VCM designed a buffer zone. The buffer zone evaluates the risk of non-permanence and leakage of carbon credits and reduces the amount of credits to sell accordingly. The credits included in the buffer zone are transferred into a pool which cannot be sold (Bayon et al., 2007). If a project is analysed and there is a risk that 20% of the forest could disappear in the future, then only 80% of the credits can be sold. Some projects being assessed at the moment have buffer zones between 10 to 60%. The VCS was the first to include this buffer zone and has been followed by the CarbonFix standard and many other standards are now following the same route. It is very likely that this idea will be included in the compliance market in the future (Bayon, 2009).

2         Deforestation

Deforestation is the third largest source of carbon emissions in the world accounting for 17.4% of global emissions, the equivalent of all transport (car, aviation, maritime and train) and waste emissions in the world (Beaumert & et al., 2005). It is very difficult to correctly evaluate carbon emissions from various countries as the methodologies used to measure carbon emissions may differ from country to country as well as the amount of data available. In addition it is extremely difficult to evaluate the carbon emissions from land use and land use change and forestry (LULUCF). Baring this in mind it is possible to suggest that Indonesia and Brazil jumped from the 12th and 7th position to the 4rd and 6th largest producer of GHG in the world respectively when added emissions from land use and deforestation change (LUFC) as illustrated by Figure 6 – Top 7 Countries Emissions and Forestry Activities, source (The Author, 20009).

Figure 6 - Top 7 Countries Emissions and Forestry Activities, source (The Author, 2009)

Figure 6 – Top 7 Countries Emissions and Forestry Activities, source (The Author, 2009)[1]

[1] All GHG [Data from China (National Development Republic of China (NDRC), 2007); data from the US (EIA, 2008); data from the EU (EEA, 2009); data from Indonesia (PEACE, 2007); data from Russia (Doyle, 2009); data from Brazil (UNFCCC, 2005); data from India (UNFCCC, 2005)]; All LUCF data from all countries are from (World Resource Institute, 2000); ranking of Indonesia and Brazil without LUCF (World Resource Institute, 2009)

There are multiple drivers for deforestation that vary from country to country. In Brazil, deforestation is mainly used to clear areas for commercial cattle ranching (80%), small scale agriculture (<10%), large scale agriculture (<10%) and logging activities only 3% (Butler, 2008). In addition, when a new road is built or an old one is improved in the middle of the Amazon, the risk of deforestation increases dramatically as there is easy access to the land. Historically, the Amazon has been used as a vehicle for political agendas; in the 1960’s the military government used the Amazon to alleviate the pressure of a growing population and noted that the region offered “unlimited” resources. It also served as a warning to other countries bordering the Amazon that Brazil’s sovereignty was to be respected. To put this plan into practice, roads were built and colonization began; and a free trade zone was created in Manaus (Pfaff, 1999).

In south East Asia the causes for deforestation include clearing land for large scale agriculture, such as palm oil. 80% of global production occurs in Indonesia and Malaysia. Regarding small scale agriculture, the main reasons for deforestation are rubber farms, and to a certain extent sugarcane and coffee. In addition, there is a land race to secure property rights and illegal logging activities (Wertz-Kanounnikoff, 2008).

To address this problem, a new mechanism is being discussed: Reduced Emissions from Deforestation and Degradation (REDD).

3         Reduced Emissions from Deforestation and Degradation (REDD)

At the moment, it is in the economic interest to cut down trees rather than preserve them. To alter this, carbon credits from REDD will pay the land owners to keep trees standing. By providing a monetary value to the carbon sequestered in the trees, it may be financially viable to preserve the trees rather than eradicate them (Bond & et al., 2009).

Using monetary incentives to discourage deforestation was previously not contemplated in the Kyoto Protocol as it met with strong opposition due to the uncertainties in predicting deforestation rates and monitoring deforestation. In 2005, the Coalition of Rainforest Nations, lead by the governments of Papua New Guinea and Costa Rica, developed a new proposal which was then discussed in Bali, Indonesia at COP-13 in 2007(REDD Monitor, 2009). In 2008, the UN-REDD program was incepted and collaborated with the UN Food and Agriculture Organization (FAO), the UN Environment Programme (UNEP) and the UN Development Program (UNDP). The World Bank’s Forest Carbon Partnership Facility (WBFCPF) created a trust fund named the BioCarbon Fund to finance the project, with Norway occupying the role of the largest contributor. It is expected that an agreement on REDD will be reached at COP-15 in Copenhagen, Denmark in 2009 (IIED, 2008).

3.1       Regulation proposals

At the moment there are three different proposals to regulate REDD (Myers, 2009):

Project based policy: this policy is an extension of the current carbon market into REDD. Private organizations will invest in local projects by protecting a delimited area, originate the credits and sell them in the market. The advantage of this approach is transparency similar to the carbon market, whereby each project provides the documents publicly, all the credits are third party-verified and it is easier to take a company to court if it fails the terms of contract. The disadvantage is mainly due to leakage as it is quite difficult to monitor if activities have been relocated to another area.

Policy based REDD: this policy would reduce emissions by reforming land use. For example, developing transport networks and subsidies for agriculture often create incentives to deforestation. Similar to reforms in energy policy where emissions are expected to reduce in order to produce electricity, the same could happen with land use reform. The main problem with this policy is that many governments do not have the capacity to implement these kinds of policies effectively.

Sectoral REDD: a cap will be imposed in the forestry sector in a country and carbon credits will only be delivered if the whole sector reduces its emissions. These credits could then be distributed to the sector. The main strength of this policy is that it significantly reduces and potentially removes the problem of leakage in that country as every forest is monitored. However, according to this proposal all the deforestation must be monitored. Many countries do not have the capacity to execute this, although satellite imagery and ground data monitoring mean it is fairly easy and inexpensive to track deforestation.

Each country will have differing areas of greatest and weakest contribution for each of these three policies. The most effective policy would be to combine all three policies with different proportionality according to local conditions (Myers, 2009).

3.2       Additionality, leakage and permanence

As well as afforestation and reforestation, there are many points that need to be addressed before giving any REDD credits to a project. The key terms regarding REDD are additionality, leakage and permanence (IIED, 2008).

Additionality: similar to other carbon reductions projects, additionality means that a project would not be possible without carbon finance. In REDD terms, it means there is evidence that logging will occur and only carbon finance could avoid that.

Leakage: arises when activities are relocated to another area because they are unable to continue where trees are protected. For example, if a rancher wishes to clear land to create a ranch, the rancher will then receive a monetary incentive to keep the trees, however he may cut trees in another location to create his ranch. This is leakage in the REDD context. REDD credits must provide evidence that leakage will not occur.

Permanence: a REDD project must ensure that trees are protected. If a forest burns or a disease kills the trees, the carbon sequestered will be released back into the atmosphere and carbon sequestration will not occur. In addition, a measure like a carbon pool must be adopted to deal with the risks.

3.3       REDD baseline

In addition to these three key terms, a project must prove that there will be deforestation in the area; therefore it must provide a baseline. Many countries argue a different approach to a baseline as discussed in “Climate Change and Forestry:  a REDD Primer” (Myers, 2009) and in “The Little REDD+ Book” (Parker & et al, 2009):

Historical baseline: past rates of deforestation are used to determine future rates. In other words, if 2% of a region’s forest was cut down each year during the last 10 years, then there is an assumption that future rates will stay at 2%. One can be confident with previous data as there are reliable deforestation records in many regions of the world based mostly on existing remote sensing imagery.

Historical adjusted baseline: many countries argue that rates of deforestation vary year to year and therefore it is not possible to know what will be the real rate of deforestation in the future. They also argue that with the decrease in political instability and the increase of income in populations, a higher demand will increase the rates of deforestation even more. Therefore they are calling for an adjusted historical baseline where future drivers of deforestation are taken into account.

Projected baseline: does not consider past deforestation rates as part of the calculations and only predicts how rates of deforestation might change in the future. Complex econometric models can be used to guarantee the most likely rate of deforestation by analysing the socio-economic and structural forces driving deforestation. The main problem with this approach is the lack of accurate data on which a model can be built. The Terrestrial Carbon Group (Ashton, 2009) defends a “baseline to establish areas that would be biophysically and economically viable to deforest over a given time period and to classify all of that land as at risk.”

Other countries such as Costa Rica are not happy with REDD as they have successfully prevented deforestation without external assistance and now countries that have not contributed to reducing deforestation will receive REDD incentives. However, these countries do need to be rewarded as well, otherwise we could assist in creating a perverse incentive for these countries to stop preventing deforestation in order to receive REDD credits. However, if REDD credits are also given to Costa Rica, these credits will not be additional and therefore the REDD system will collapse. Other means should be explored in order to help these countries (Myers, 2009).

3.4       Indigenous People and Local Communities

REDD also needs to involve Indigenous People (IPs) and Local Communities (LCs) to ensure that effective environmental results can be achieved. As negotiations are mostly held at a governmental level, addressing IPs and LCs issues will be challenging in Copenhagen. According to the REDD: An Options Assessment Report from the Meridian Institute (Angelsen & et al., 2009), IPs and LCs may face the risk of potential loss of access to land and other natural resources in order to protect the forest. However, there is also a potential for an increase in financial flow to poor rural areas and an improved forest management. Including IPs and LCs views and collaboration may reduce the risks and enhance the opportunities.

3.5       Land rights

Recognition of land rights is an important issue with REDD to determine who owns the carbon credits. LCs living for centuries in the middle of a tropical forest would have never signed a document testifying the land to be theirs, although the land rights should be theirs because they lived there for centuries. An example of this is how Mayan communities in southern Belize have successfully convinced the Supreme Court that they are (Samjee, 02/11/2007) constitutionally entitled to land rights they currently occupy. The Supreme Court advised that “the Government of Belize was wrong in failing to recognize, protect and respect their land rights, which are rooted in traditional custom” (Samjee, A. 2007). Any future REDD credits for that area will then go directly to the Mayan community.

There are still many conflicts arising due to land rights. In Colznia, Mato Gross, Brazil, not even the mayor was able to secure the land rights of his house; this part of Brazil belongs to an area known as no-man’s land where people fight for the land mostly due to gold mining, an industry which leads to deforestation. This region of Brazil is one of the most violent in the country as the government has no control over in that part of the Amazon (Baraldi, 28/02/2007).

In Papua New Guinea, for example, the government is facing criticism as it took over all the forest carbon rights in the country by blocking private land owners from directly signing deals involving forest carbon. Land owners, NGOs and carbon traders are alarmed and do not trust that the government will handle the carbon market reliably as transparency and carbon rights are a key issue in the carbon market (Marshall, 13/11/2008).

3.6       Co-benefits and Sustainable Development

Essentially, the carbon forestry market only accounts for the carbon sequestered in the biomass of the forest, but there are obvious other benefits such as water resources and ecosystems. People like the idea of reducing carbon emissions whilst also preserving ecosystems and helping local communities (Myers, 2009). For these reasons businesses are ready to pay a premium for credits that deliver those extra benefits. This gives the company an opportunity to market its own sense of humanity, and through purchasing these products customers are not only reducing emissions, but also helping to protect endangered species and sustainable living for indigenous people. Increasingly, this is a very profitable angle for a company to adopt. The Climate, Community & Biodiversity Alliance (CCBA) is one of the standards in the market that focuses on accounting biodiversity and sustainable development in addition to carbon (Bond & et al., 2009).

3.7       REDD +

There is an increasing amount of discussion to develop REDD to another stage, Reduced Emissions from Deforestation and Degradation and Enhancement of carbon stocks (REDD+). REDD only refers to the carbon sequestration or removals, although the co-benefits to save tropical forests for example are real and important, they are not accounted. The objective of REDD+ is to quantify the co-benefits, in other words REDD+ will not only reduce carbon emissions, it will also alleviate rural poverty, conserving biodiversity and sustain ecosystem services. The argument is to what extent the co-benefits should be included and whether or not it may jeopardize the success of REDD in the international negotiation rounds. REDD + is now supported by Australia, the EU, Japan, USA, China, Colombia, India and Indonesia (Parker & et al, 2009).

3.8       BioCarbon Fund

REDD projects are usually of considerable size. They usually consist of thousands of hectares of land and therefore needs large investment at front for monitoring and for developing a plan to protect it from deforestation. In addition, there is no experience in REDD projects, this considerably increases the risks taken by investors. Due to these obstacles, the World Bank created the BioCarbon Fund which is mainly financed by the government of Norway to create a REDD market and to develop pilot projects. The aim is to “deliver cost-effective emission reductions, while promoting biodiversity conservation and poverty alleviation” (World Bank, 2009). The fund is also financing the development of a dozen projects around the world, in countries such as Indonesia, Papua New Guinea, Brazil, Democratic Republic of Congo and Madagascar.

The BioCarbon Fund can buy carbon credits from afforestation, reforestation and REDD and is exploring innovative ways to develop agricultural carbon.

In August 2009, the fund bought its first 500,000 CDM credits from a reforestation project in Democratic Republic of Congo. The Ibi Bateke Carbon Sink Plantatino Project is expected to absorb 2.4 million tCO2e over the next 30 years and it is the first to receive CERs in the country. The World Bank director country for DRC, Marie Francoise Marie-Nelly said that “We hope that this first initiative will lead to many more such projects, thus establishing a mechanism to finance sustainable development in DRC” (Coelho, 05/08/2009).

3.9       North America versus European forestry demand

The EcoSecurities forest carbon offsetting survey (EcoSecurities, 2009) shows the difference between the US and Europe towards forest carbon credits. 74% of North American firms have a positive view about forestry carbon projects, whereas in Europe only 36% have positive views. Also 16% of European buyers have mixed views about forestry carbon projects; this may be explained from its exclusion from the EU ETS and the little support received from NGOs in Europe. Also, permanence and regulations were a cause of concern. The US has shown more support for forestry projects, many companies find a high potential to create domestic forestry projects. California backed forestry projects and there is a large public support to fight climate change with forests.

While all these policies are being discussed in international negotiations, the VCM has again taken the lead. The VCM has begun to develop the first methodologies, issue the first REDD credits and has innovated and developed in greater detail the regulations for afforestation and reforestation projects. The next chapter will analyse in depth the different standards available in the market.

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