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State of the Forest Carbon Markets: Unaccountable and non-transparent

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State of the Forest Carbon Markets: Unaccountable and non-transparent

Last month, Ecosystem Marketplace published a report on the state of the forest carbon market. The report, “State of the Forest Carbon Markets 2009: Taking Root & Branching Out“, provides a fascinating glimpse into the upside-down world of carbon trading.

According to the report, the Bali Action Plan included REDD not because the Coalition for Rainforest Nations introduced the idea of REDD in Montreal in 2005, but because “the role of forests in mitigating climate change has increasingly gained credence.” This “credence” came about “thanks largely to the resolution of scientific disputes over how to measure and monitor the amount of carbon captured in trees.” If we can measure it, we can sell it, in other words.

According to the report, the Copenhagen Accord is great, because it “explicitly stated the need to develop mechanisms that would reward sustainable land-use practices that capture carbon in trees.” The proposed US climate legislation is great because “The regulatory developments have the potential to stimulate tremendous demand for land-based carbon credits.”

There is plenty of useful information in the report, based on surveys of 61 project developers and 34 intermediaries, representing 226 projects in 40 countries. Not surprisingly, given the hype about REDD in recent years, the transaction volume in the forest carbon markets is increasing. Historically the vast majority of forest carbon deals (73 per cent) are “over the counter” deals (deals which take place between two parties outside of any stock exchanges are part of the over the counter markets). The Chicago Climate Exchange (CCX) accounts for 12.5 per cent, the New South Wales Greenhouse Gas Reduction Scheme (NSW GGAS) for 8.7 per cent and Kyoto Protocol markets account for only 6.25 per cent.

While the amount of money involved is increasing, the amounts remain small. The total value of forest carbon traded between 1990 and mid-2009 is US$149.2 million. Of this, US$137.6 million was in the voluntary market and US$11.6 million in the compliance markets.

In total, the 226 projects that Ecosystem Marketplace looked out covered an area of 2.1 million hectares. In 2008, afforestation and reforestation was the main source of “forest” credits with 53 per cent. A combination of REDD, afforestation and deforestation and improved forest management accounted for 24 per cent of projects.

Throughout the report are small gems of information about how the carbon markets work (or don’t). For example, Silvia Gomez Caviglia of Uruguay’s Greenoxx Global Environmental Program explains why her company sells carbon credits on the CCX:

“We were first developing projects under the CDM, but found it was very costly and bureaucratic. So, like most people working on forestry, we ended up looking towards the voluntary market.”

The authors are hedging their bets on the future of forest carbon markets. “At the end of 2009,” the authors write, “the market for forest carbon stands in an uncertain position on the verge of potentially enormous growth.” Given the uncertainty it would be just as reasonable to write that the forest carbon market stands on the verge of collapsing. Later on in the report, Ecosystem Marketplace acknowledges that the future is “uncertain”:

“With three years to go before the end of the first Kyoto Protocol commitment period, the future of forests in a post-2012 marketplace remains uncertain. The fate of REDD and LULUCF are largely still to be determined in UNFCCC negotiations. Currently, it seems many investors are waiting for greater clarity on regulations to move forward.”

The carbon cowboys in Papua New Guinea get no mention in the report. Neither does carousel fraud, nor phishing fraud that has seen millions of euros go missing from the carbon markets in Europe. And of course there is no mention of the warnings coming from Peter Younger of Interpol:

“Alarm bells are ringing. It is simply too big to monitor. The potential for criminality is vast and has not been taken into account by the people who set it up. . . . Organised crime syndicates are eyeing the nascent forest carbon market. . . . Fraud could include claiming credits for forests that do not exist or were not protected or by land grabs. It starts with bribery or intimidation of officials, then there’s threats and violence against those people. There’s forged documents too. Carbon trading transcends borders. I do not see any input from any law enforcement agency in planning Redd.”

The scale of the problem is illustrated in Ecosystem Marketplace’s report when they attempt to find out how many carbon credits sold over the counter had been “retired”. As Ecosystem Marketplace explains, retirement of carbon credits is kind of important:

“A carbon credit in the voluntary market does not fulfill its life’s goal of offsetting another GHG emission until it is ‘retired’ by a supplier or final buyer. When an entity purchases carbon credits to offset its emissions, the carbon credit must be retired and cannot be sold again. Retirement is critical in the voluntary markets because it represents the market impact from an environmental perspective and relates to the fundamental demand in the market for offsetting GHG emissions.”

Ecosystem Marketplace accounted for 6.1 million tonnes that had been retired, out of a total of 15.3 million tonnes from 78 projects. “This number should be considered especially conservative since many suppliers do not know the fate of the sold credits.” So does anyone know how many credits have actually been retired?

One area that fascinates me about the forest carbon market is the sale of “ex-ante credits”. Ecosystem Marketplace explains that these are “credits sold prospectively, before they are created”. Sales of such credits are included in Ecosystem Marketplace’s survey of the forest carbon market (although the report doesn’t clarify how many credits belong to this category). But what would happen if the credits were never created? What mechanism would be used to recall these fictitious credits, that didn’t exist when they were sold and will in fact never exist? What happens if they are packaged together with “real” credits in innovative financial instruments? Is it possible to track individual forest carbon credits, from the forest to the retirement home? One thing is sure: The greenhouse gas emissions that magically became “carbon neutral” as a result of the non-existent carbon credits, will remain in the atmosphere.

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  1. Well ,

    Lot´s of issues is raised by the article above. But I haven´t red one single sugestion to solve this problems. We all know that forestry credits carry a risk. But we are know also that LULUCF may represent aprox 20% of the emissions worldwide. We also know that forestry is the sector that best improve livehood of local people, besides biodiversity. So no time to acusse each other but instead work toghether to find solutions.

  2. This may be naively optimistic but I would have thought that the VCS safeguards, for one, will go a long way to quieten such fears. Their double validation and issuance of credits into recognised registries and the subsequent tracking and retirement of the credits leaves little room for manipulation or outright fraud.

    Selling ex-ante (or forward trading if we want to give it a common name) is a legitimate practice in commodity and financial markets and should not, in and of itself, cause worry though I accept that such actions leading to claims of carbon neutrality are misrepresentative at best and downright fictitious at worst. Nevertheless these markets improve the flow of capital to projects and provide liquidity and if other commodity markets can live with derivative markets thriving off the back of them why can’t the carbon market – forestry carbon or otherwise?

    If the UN adopts a parallel forestry market to the CDM or incorporates REDD into the CDM market they should do so by opting-in (or at least copying) the VCS system.

    In summary I believe the remaining issues we need to resolve in order to create a vibrant and genuine forest protection market are small (we’ve dealt with the complex stuff) and we can look to the other commodities markets for answers to the trading and accountability issues.

    I can buy oil on the spot market, over the counter or forward with ease and no question of legitimacy. We should expect the same for forestry carbon credits and it shouldn’t be difficult.

  3. There are obviously a huge amount of questions, intransparency and “dubious” claims in the absence of established standards in ANY market (yes, I know, markets are bad). Robust standards now exist for the majority of carbon project types (including reforestation) and are about to be finalised for REDD projects (the VCS standard guidelines exist and specific methodologies are undergoing validation). There is little point (other than looking for evidence that markets are bad) in accusing those trying to develop and finance projects before external standards are developed and finalised of not following standards or those trying to track activities of lacking certain data.

    No-one could define what “organic” food is before detailed standards were worked out. Of course, you might accuse the farmers of your grandparents’ generation of making dubious and non-verifiable claims about the naturalness of their produce. You might also condemn them for forward-selling next summer’s wheat harvest to the local trader or mill in order to buy seeds.

    On this latter point, it is certainly true that some forward-sold carbon credits (from forestry or renewable energy or other project types) may never materialise and may be used to wrongly underpin carbon-neutral claims in green-washing strategies. Those claims are non-substantiated if the credits that did after all not get created (e.g. because a project under-performed) are not replaced with others. It is up to shareholders, customer-protection organisations, and watchdogs such as yourself to expose such false claims, and this is a very valuable thing to do.

    Other than that, ex-ante credits are no less real than your laptop that you may have ordered on Amazon but not yet received or the plane ticket you booked via Expedia. If the plane you booked a seat on is cancelled you should have a right to demand a seat on a different flight or to be compensated (at the airline’s expense). Despite the uncertainty, this is undoubtedly more convenient for you (i.e. the carbon buyer) than to walk down to the airport and wait for a plane to fill up, and it allows the airline (i.e. the project developer) to do some advance planning while also assigning a useful role to Expedia (i.e. the evil carbon broker).

    Now it depends on the contract the carbon offset buyer signed with the project or the carbon market intermediary. If the carbon-neutral claim (or whatever the reason for buying a carbon credit) is to be assured and the buyer does not want to worry about possibly having to purchase yet another carbon credit if the one bought on a forward basis fails to materialise (usually specified by a certain date and at a specific volume, just like your plane ticket specifies date and destination), then the seller should have the duty to replace those credits with others (seller liability). This way the buyer gets what he/she paid for. In addition, by purchasing ex-ante credits, the buyer can pre-finance a project that he/she (or even you) find worthwhile. Finally, if the credits are created using a system like the VCS, then each credit gets registered once the emission reduction has been verified independently, every onward sale of this credit is tracked via its serial number, and it is eventually retired by cancelling it in the registry.

    So it’s really not that complicated and perhaps not so evil.

  4. No it’s not necessarily ‘evil’ – just plain wrong, and your answer only goes to show how little appreciation you have of the real world of tropical forests.

    Saving an area of tropical forest is not at all as straightforward as arranging to have an aeroplane available to carry all the passengers that have booked tickets for it. First of all, aeroplane flights are a tried and tested technology, with decades of proven experience and specific systems of control. REDD credits, ex-ante or otherwise, have none of these benefits. The only thing that decades of forest conservation history has shown is just how complicated and unpredictable are programmes to protect tropical forests. Buying an ex-ante REDD credit would, at this stage, be comparable to buying an aeroplane ticket or making an advance order for a laptop in, say, 1860.

    Secondly, the timescales are massively different. Buying a laptop or a ‘plane ticket in advance usually requires only a delay of a few days or weeks before the product becomes ‘real’; in the case of true forest protection, the period of demonstration that the product is real is going to be at least years, and possibly decades (and of course, is only ‘real’ in climatic terms once the carbon has been out of the atmosphere for a hundred years or so). During this time, the net carbon benefit of the project (if traded against some actual emission somewhere else, which of course ultimately it would have to be, otherwise there would be no demand for the REDD credit) would be entirely speculative.

    Forward-funding of REDD projects is a valid point. But rather than increasing liquidity through speculative capital (and thereby reducing emission-control incentives eslewhere) what would surely be better would be, for example, for REDD ‘start-up’ funds to be provided out of improved capture of, and increases in, forest sector taxes, which would have the triple-positive effect of reducing forest sector illegalities and corruption, as well as reducing demand for forest products, all of which would make REDD much more viable in the long term.

    So, whilst ex-ante REDD credits would no doubt enable carbon traders to get their hands on plenty of trading commission loot before anything whatsoever has actually happened to protect forests, they look like a desperately inefficient financial tool in comparison to other options.


  5. re RW ‘s point on climactic effects…The CO2 sequestered in a forest has positive climate effects in year one( the nature of greenhouse gas induced warming). That continues more or less indefinetly until the forest dies, is cut, or is burned. Speculative activity that results in higher carbon prices incentivizes protection of the forest. Much more than a taxing system can do,a high forest asset value protects the forest from a panoply of diverse threats…poaching, conversion to agriculture or bio- fuels, fire etc.
    Seems like a win-win situation to me. I would agree with the taxes idea if it were really practicable. Taxes just shift power to the taxing authority. Any mechanism that would be able to establish the true (high) value of our forests is worth looking at…So far, a market that pays for carbon dioxide sequestration seems the most efficatious to me.

  6. @Rochard
    Sadly, new research is showing that REDD is unlikely to be efficient in preventing at least one of the causes of deforestation that you cite above:

    “REDD won’t save forests from palm oil: Study. Using carbon markets to prevent deforestation in developing countries is unlikely to provide a high enough economic incentive to save tropical forests, a study has found. The European Commission’s Science for Environment Policy unit quotes a study published in the journal Environmental Science and Technology, which compares the returns from clearing tropical forest for palm oil plantations with the likely carbon costs if such emissions were priced.”

  7. @R
    I read the piece, thanks…Yes, palm oil plantations represent one of the higher opportunity cost challenges for avoiding deforestation, but…It is still just a matter of price points.
    At current compliance market carbon prices of say, $15 tonne CO2e a well endowed tropical forest would be worth at least $7500 per hectare in offset credits.Not bad! In a well funtioning cap and trade system, that value could be made much higher. Add in some pricing for other ecosystem benefits from that forest and I think your land-owner will do a little figuring and go for the credits.
    Also consider that palm- oil be endure boycotts from time to time.

  8. @richard wineberg – there’s a problem with the argument that you are putting forward that a high enough price of carbon will make the forests worth more than could be gained from oil palm plantations on the land. One problem is that there is no way of guaranteeing that the harvesting carbon is going to give better returns than harvesting palm oil – over the next one hundred years or so. It is simply impossible to make this assumption.

    The second problem (as demonstrated by recent research published in Environmental Science and Technology), is that a higher carbon price will increase the price of fossil fuels. It will therefore increase the demand for biofuels (as an alternative to expensive fossil fuels). This in turn increases both the price of biofuels and the likelihood that forests are converted to oil palm plantations.

    This is discussed in more detail in this post: “Why a price on carbon will not stop deforestation”. The post includes a link to the paper in Environmental Science and Technology.

  9. Verified Emission Reductions from REDD projects certified under the VCS REDD methodologies currently under review will be permanent, or at least as permanent as any other reductions under CDM. Under VCS, projects will only get credit for what they have already accomplished. If you reduce the rate of deforestation one year and then the same rate of deforestation resumes in year 2, the savings accomplished in year 1 are permanent unless the deforestation rate increases in the future. The possibility of future increases in the deforestation rate post verification are covered for by a risk assessment and depositing a certain portion of verified credits into a non-permance buffer account. Discounts for risk will make many questionable projects ineligible for certification under VCS. VCS needs to do some marketing though to inform potential buyers about the risk of purchasing unverified credits.