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Should REDD be financed by forest carbon markets?

Should REDD be funded by forest carbon markets?

The discussions on financing REDD that will take place over the next two weeks at COP18 in Doha are crucial for the future of REDD. In the run up to Doha, Rainforest Foundation UK and UN-REDD Asia-Pacific go head-to-head over forest carbon markets.

In September 2012, Rainforest Foundation UK produced a briefing arguing against the creation of a market for forest carbon as a way of financing REDD.

On its website, Rainforest Foundation UK argues that,

Funding forest protection through the creation of a forest carbon market would be costly and potentially counterproductive – and loopholes may mean that deforestation and emissions could actually rise under this system.

Earlier this month, in its “Go-REDD+” newsletter, the UN-REDD programme team for Asia-Pacific wrote a response accusing the Rainforest Foundation of failing to distinguish between “the voluntary market and the compliance arrangements that will govern REDD+”.

Yesterday, Rainforest Foundation UK produced a reply that notes that the UN-REDD response accepts many of Rainforest Foundation UK’s points, but misrepresents the argument.

UN-REDD Asia Pacific’s newsletter is posted below, followed by Rainforest Foundation UK’s response. REDD-Monitor looks forward to further discussion in the comments.

UN-REDD Asia Pacific

REDD+ and Markets: Any lessons to be learned from Voluntary Carbon Markets?

The idea of linking sustainable forest management to the market economy for addressing climate change was first introduced in the 1990s. It promised to raise substantial additional finance for protecting critical forests and to change the way forests are managed and linked to the wider economy. The Voluntary Carbon Market (VCM) has been part of the international forestry dialogue for well over a decade now. What lessons can we learn from it that could be relevant for REDD+?

The recent briefing note by the Rainforest Foundation, explores potential risks and issues associated with an international forest briefing note by the Rainforest Foundationcarbon market. They draw on the lessons from the forestry VCM and extrapolate how these lessons may pose risks for a REDD+ mechanism that relies on market transactions.

As highlighted by the briefing note, the forestry VCM has been affected by the current global financial instability because it relies on a similar trading infrastructure as commodities markets, for which lack of regulation has been so damaging. Investment has dipped, along with prices, and actors in the VCM have become aware of the risk of holding carbon credits that no one wants to buy. Demand has grown for VCM projects accredited to robust standards. Transactions in a REDD+ mechanism, however, will be tightly regulated from the start, due to the Measurement, Reporting and Verification (MRV) requirements that are a central part of the ongoing negotiations under the UNFCCC.

By now, it is clear that climate change mitigation through the forest sector is not a cheap option, as many originally thought. It involves many costs that are often overlooked by investors and carbon traders, who see forest carbon projects from the perspective of market opportunity as in, for example, the greenhouse gas abatement cost curves by McKinsey and Company. Countries can learn from this experience as they develop REDD+ strategies, by injecting realism into the calculations on how much impact a certain amount of REDD+ finance may have on forest area and condition. Finance will be more predictable than in the VCM, relying on Annex 1 countries’ commitments under an international climate agreement rather than on investor confidence alone, but it may still be volatile, depending on the financial architecture agreed in negotiations. Countries must therefore focus on the cost effectiveness of their REDD+ strategies.

The experience from the Clean Development Mechanism (CDM) and voluntary carbon activities shows that without effective coordination and a harmonized approach, ideally at country level, a large proportion of finance is taken up by transaction costs, and the costs of technical advisors and intermediaries in the value chain. These problems are accentuated by the fact that VCM and CDM are based on individual projects. REDD+ is, however, a national-level mechanism, which will substantially reduce transaction costs.

A shortage of clear information about VCM, REDD+ and forest carbon finance is a challenge in most countries. Stakeholders in many countries focus on the perceived need to generate tradable assets through VCM projects. This may undermine some REDD+ Readiness efforts to promote outcomes that are also beneficial for biodiversity and forest-dependent people. To alleviate this problem, a reliable source of finance is required for actions that countries implement before an international REDD+ mechanism is in place. Both Brazil and Indonesia now have access to such funds.

A lack of clarity of land tenure and carbon rights combined with the fact that carbon credits are intangible assets, making trading virtual, has made some VCM projects susceptible to fraud. Under the UNFCCC, this will not be possible because of the stringent MRV requirements for transparency and comparability of results. Annex 1 parties to the UNFCCC will not invest in REDD+ unless they are confident that the mechanism guarantees that they actually get what they pay for.

The Rainforest Foundation briefing note highlights many of the real issues that have affected the VCM, and extrapolate them forward into a future REDD+ mechanism. However, they do not distinguish between the voluntary market and the compliance arrangements that will govern REDD+. Some conclusions, therefore, may not be relevant for the international mechanism. The Rainforest Foundation suggests some alternative solutions for raising finance for REDD+, including carbon taxes, levies on international aviation and maritime fuels and financial transaction taxes. These are all viable sources for an international REDD+ fund. However, transactions from such a fund would still need to operate under a transparent system to ensure that disbursements are based on transparent performance, according to the principles of MRV.

The VCM does hold lessons for REDD+, but it is quite a different system. We need to avoid confusion between the VCM and REDD+ before drawing long-term conclusions. And there is certainly still a lot of confusion around.

Response to UN-REDD statement on Rainforest Foundation UK’s briefing on forest carbon offset markets – 22 November 2012.

The UN-REDD Programme has released a one-page critique[1] of Rainforest Foundation UK’s briefing, Rainforest Roulette?,[2] published in September, which argued that creating a forest carbon offset market might be costly and counterproductive to the goal of reducing deforestation and greenhouse gas emissions. Governments have committed to deciding on a funding mechanism for REDD (reducing emissions from deforestation and degradation) at the UN climate talks in Doha starting at the end of the month.

Rainforest Foundation UK is pleased to note that UN-REDD agree that our briefing highlights important issues, that the focus on securing forest carbon as a tradable asset might undermine benefits for biodiversity and forest-dependent peoples, that ownership of land tenure and carbon rights should be clarified and the need for tight regulation of REDD+ in order to guard against potential fraud. We are also pleased to note that UN-REDD agree that other sources of funding identified in RFUK’s report are viable, and we agree that transparency will be essential regardless of the financing approach. Unfortunately, the UN-REDD statement misrepresents the RFUK briefing and makes a number of questionable criticisms.

Three problems with UN-REDD’s analysis

First, the UN-REDD response states that RFUK’s briefing focuses solely issues related to the Voluntary Carbon Market (VCM) and then “extrapolate them forward into a future REDD+ mechanism”, and that we “need to avoid confusion” between VCM and REDD+, which is expected to operate in a compliance market. In fact, the compliance market is the main focus of RFUK’s briefing which looks at national ‘readiness’ preparations, lessons from the Clean Development Mechanism (CDM), the European Union Emissions Trading Scheme (EU-ETS) and the latest UN climate negotiations, and only mentions voluntary REDD+ projects briefly. One of the main arguments of RFUK’s briefing is that a forest carbon market might lead to increased greenhouse gas emissions because it is proposed to operate in a compliance market and hence allow developed countries to offset their emissions reductions. Hence, we believe that the central critique of the UN-REDD statement is unfounded.

Second, a number of criticisms made in the statement demonstrate the authors’ lack of information about recent international agreements on REDD at the UN Framework Convention on Climate Change (UNFCCC). The statement says that REDD is “a national-level mechanism” which hence leads to lower transaction costs. However, as stated in our briefing, the current UNFCCC text leaves the door open for “subnational forest reference emission levels” for an indeterminate “interim period”. UN-REDD’s statement also says that REDD will deliver real emissions reductions due to, “stringent MRV [monitoring, reporting and verification] requirements” which will ensure that a market would be “tightly regulated from the start”. Certainly, the aim of MRV is to ensure that a future REDD system works effectively, but agreed text at the UNFCCC shows a strong pushback to ‘reporting’ (especially on social and environmental safeguards) and outright opposition by many countries to ‘verification’. So, our fear is that we might end up with M(R), rather than rigorousMRV. Arguably, MRV systems in the CDM have not managed to stem concerns about loopholes and lack of additionally in that compliance market. UN-REDD fail to address RFUK’s analysis that inflated ‘deforestation baselines’ coupled with a forest carbon market could lead to paper reductions of greenhouse gases but increases in deforestation and emissions in the real world.

Third, the UN-REDD response presents only the first half of RFUK’s argument related to the costs of REDD (that they are likely to be higher than originally estimated, which is acknowledged), but not the crucial second half, that large and additional costs come with the creation of the ‘trading infrastructure’ required to support a forest carbon market. In particular, we argue, that the increased accuracy of carbon monitoring necessary to support a robust trading system and private sector profit will cause significant ‘transaction costs’ which will be lost to actual attempts to prevent deforestation. One analysis, set out in the Eliasch Review, estimates that such losses could account for up to 55% of REDD funding under a market-based system. RFUK is not arguing that forest-based emissions-reductions projects are too expensive per se, but that a forest carbon market approach might actually increase the cost of tackling climate change instead of reducing it.

Conclusion

A serious debate on whether a REDD mechanism should be funded by a forest carbon market is still necessary given the imminent deadline for a decision on REDD financing at the Doha climate talks starting on 26th November. A decision either way will likely have significant and lasting implications for forest peoples, forests and the climate. RFUK has argued that alternative funding sources and approaches are on the table and should be explored further, and that a forest carbon market is likely to be an expensive, risky option that could distract attention from the real issues, help entrench highly-polluting industries and may not lead to real reductions in deforestation or greenhouse gas emissions.

The UN-REDD response to our briefing, Rainforest Roulette?, concludes by saying that “there is certainly still a lot of confusion around”. We hope that this response has helped to reduce confusion and look forward to further discussion with all stakeholders on a forest and climate change funding mechanism fit for purpose.


[1] ^^ UN-REDD (November 2012), “REDD+ and Markets: Any lessons to be learned from Voluntary Carbon Markets?”, GO-REDD+ Newsletter, Issue No. 7. The UNREDD Programme is collaborative initiative of the Food and Agriculture Organization of the United Nations (FAO), the United Nations Development Programme (UNDP) and the United Nations Environment Programme (UNEP).

[2] ^^ RFUK (September 2012), “Rainforest Roulette? Why creating a forest carbon offset market is a risky bet for REDD”, Climate and Forests
Policy Brief, Rainforest Foundation UK.


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