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The Munden Project: “Investing in communities is the most effective way of reducing deforestation”

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In March 2011, a consulting firm called The Munden Project put out a report about forest carbon markets. The report concluded that carbon trading is “unworkable as currently constructed”.

In October 2011, Lou Munden of The Munden Project (TMP) spoke at an event organised by the Rights and Resources Initiative, the Forest Peoples Programme and Forest Trends in London. Frances Seymour, the head of the Centre for International Forestry Research (CIFOR) was facilitating. She introduced Munden in her inimitable style:

“I’ve gotta tell you Lou, you’ve broken the hearts of forestry researchers around the world. They’ve been killing themselves to develop methods for establishing baselines and measuring carbon stocks and flows and you’re basically saying it’s not good enough. So is it really that hopeless, and if so what’s the alternative?”

“Certainly for that model as it’s currently constructed it’s hopeless, yes,” Munden replied, but added that the broader picture is significantly more hopeful. Watch Lou Munden’s presentation here:

Predictably, the Carbon Markets and Investors Association (CMIA) wasn’t very happy with The Munden Project’s report. In August 2011, CMIA produced a four-page “Response to the Munden report” (pdf file, 146.9 kB). CMIA argues that The Munden Project report fails to examine existing carbon markets and this “fundamental error” leads to three further errors:

1) They assume that emission reductions based on credited projects will never be suitable for the commodity markets.
 
2) They miss the concept that the primary and secondary markets for carbon credits can and do happily co-exist and in fact both are necessary to be able to help project developers hedge their carbon exposure and raise project finance.
 
3) They overlook the rapid pace with which carbon credit contract structures evolved to greatly reduce any market asymmetries and perceived inequity between buyers and sellers.

Last week, The Munden Project released “A Response to CMIA: Towards a broader approach to achieving REDD” (pdf file 165.1 kB). TMP’s response to CMIA,

begins by burying the curious and incorrect notion that the problem with REDD is a lack of liquidity, instead focusing on the real problem of the lack of alignment between the market structure for REDD’s development and forest conservation objectives.
 
We then explain why we do not believe that a comparison with carbon markets is either technically accurate or flattering, then respond directly to the three aforementioned errors CMIA believes our report contained.
 
Finally, we open a discussion about the urgent need for alternative financial solutions to REDD, and the need for experienced market actors such as CMIA to engage in this discussion.

What follows is a summary of TMP’s response, under three headings: Liquidity, Carbon markets and REDD finance. But The Munden Project’s response to CMIA is well worth reading in full.

Liquidity

The Munden Project notes that CMIA presumes that generating transactions – liquidity – is the main challenge facing REDD. As TMP points out, the 2008 sub-prime mortgage crisis reminds us that “markets should never be judged purely on their capacity to generate transactions”. The same is true with REDD. Generating transactions in forest carbon is not the same as achieving REDD’s objectives.

CMIA assumes that more liquidity in forest carbon trading will encourage improved quality standards and therefore increased liquidity will result in improved forest protection. TMP argues that “liquidity tends to reinforce, not modify, existing market structures”.

Once market participants allocate large sums of money within a substantially dysfunctional system, they develop a vested interest in defending that dysfunction, to the point where regulators fear removing the dysfunction out of concern about collapsing the entire market.

Carbon markets

TMP acknowledges that its March 2011 report does not examine existing markets. This was deliberate because according to The Munden Project’s analysis, other carbon markets (such as CDM) are considerably different from REDD, for the following reasons:

  • REDD projects are more sensitive to carbon prices.
  • REDD investors must address land tenure issues.
  • REDD projects often operate in an unstable political and economic context.

TMP points out CDM’s poor environmental and developmental track record and CDM’s failure to reduce emissions. An analogy with CDM “does more damage than good to the credibility of REDD,” TMP argues.

TMP’s response then moves on to the “three key errors” that CMIA raises. TMP does not assume that emissions reductions based on credited projects will never be suitable for the commodity markets. Instead, TMP argues that the “variability in the science that underpins the generation of forest carbon credits makes it unsuited to a commodities-style trading framework.”

On CMIA’s second point, about primary and secondary markets, TMP invites readers to re-read The Munden Project’s March 2011 report. TMP does not argue that primary and secondary markets cannot co-exist, but asks whether they would work for forest carbon:

The question is not, therefore, whether this type of market structure works in the abstract. It is whether this type of structure is appropriate for REDD. We believe that it is not only unsuitable operationally – in that it implies significantly higher costs for projects – but furthermore, that is highly likely to work at cross purposes with REDD’s stated objectives.

Regarding CMIA’s third point about the way carbon credit contract structures evolved rapidly to reduce market asymmetries, TMP refers to the Rimba Raya project in Indonesia. The project was the first to receive a triple-gold rating under the Climate Community and Biodiversity Alliance (CCBA) but a Reuters report in August 2011, “exposed it as failing its investors, communities and the environment alike”, TMP writes. The Rimba Raya project also illustrates how intermediaries receive a large proportion of REDD profits. In this case Gazprom would pocket “approximately 56% of the credit’s first pricing in the secondary market”. By the time the project’s investors have taken their cut, “a very small share would be left for Rimba Raya’s community, defeating the broader development of REDD projects”, TMP notes.

TMP then addresses the difficulties of regulating forest carbon trading and notes that the US Commodity Futures Trading Commission sets standards that forest carbon currently could not reach.

REDD finance

According to TMP, “forest carbon markets, as currently envisioned cannot achieve REDD’s environmental and development objectives”. The Munden Project is currently working with a small group of interested parties on a paper, due to be completed in January 2012, describing an alternative to carbon markets. TMP’s view is that the following four points are key:

  • Shift away from carbon towards broader performance objectives
  • Create an operating track record that shows how money leads to results
  • Produce a portfolio of best practices that shows how money is most effectively spent
  • Develop community-driven approaches to achieving REDD’s objectives

TMP concludes that CMIA and The Munden Project are asking very different questions. While CMIA’s starting point is the development of carbon markets, TMP is aiming to meet the twin objectives of forest conservation and economic development. A big difference between CMIA’s approach and TMP’s is that TMP talks about communities and forest peoples’ rights as a basis for REDD.

The Munden Project cites a paper published by the World Bank as support for their belief that “investing in communities is the most effective way of reducing deforestation”.

By letting forest peoples drive the solutions to deforestation, they are empowered and incentivised to identify and tackle the root causes of deforestation much more efficiently than external contractors, as is currently the case. In addition to being the most just and effective approach, community driven approaches are also more time and cost efficient than alternative approaches.

 


UPDATE – 16 December 2011: Amended the use of the word “Munden” to clarify whether it refers to Lou Munden (the person) or to The Munden Project (TMP – the consulting firm).
 

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Leave a Reply

  1. Dear Chris,
    Thank you for this very interesting article.
    With all your expertise on REDD and carbone finance, what are your thoughts about this Munden criticism/proposition?
    I certainly don’t have sufficient knowledge of systems development but it seems that Munden has a point: forest carbon trading requires very solid sourcing, pricing, clearing and settlement procedures in place, like any other financial asset (equities, bonds, commodities) and currently, well, this is not the case…
    The CMIA or CFU, instead of issuing non-constructive “counter-reports” to the “Munden Project” reports, should read carefully the upcoming 2012 Munden report that will certainly give crucial orientations and alternatives to build a sound and sustainable trading model for forest carbon. The idea of a performance-based platform, directly aligned with the communities’ interests, is certainly worth examining.
    For once, the “market-approach” criticism is not coming from the NGO world (Amis de la Terre, Greenpeace, Sandbag, etc.) but from a private consulting firm specialized in software systems for complex markets. For once, the conclusions of trading-technicians should be aligned with the NGO’s community and rights-based approach.
    Everybody should seize this “once-in-the-short-lifetime-of-REDD” opportunity to reshape and thus improve the system.
    Best
    É

  2. @Étienne (#1) – Thanks for this comment. I think that The Munden Project’s analysis of forest carbon trading is very interesting and raises a lot of concerns that I agree with. I like the way that TMP keeps focussed on the aims – supporting local communities and protecting forests. It seems unlikely that a forest carbon market (at least as it is currently set up) can meet those goals. And I would question whether any carbon market would be the best way (or even could) address those goals.

    I think another goal should be that REDD doesn’t help lock in polluting technology (by creating large numbers of cheap carbon credits, thus making it cheaper for industry to buy REDD credits rather than restructuring to create less greenhouse pollution).

    I’m very much looking forward to reading TMP’s proposals for REDD in their paper due to come out next year. I’ll comment when I’ve read it.

  3. In simple words: which percentage of the money that goes to REDD is beneficial to local communities and how, and which percentage is only beneficial to the financial market itself, in present and future value?