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Seeing the Forest for the Trees: Shaping Financing to Prevent Deforestation

The Waxman-Markey bill signals Washington’s intentions to pony up to fund deforestation prevention as part of overall climate legislation. But will climate scientists, C-15 negotiators, developing countries and environmental groups agree on an international forest protection program that everyone, including the trees, can live with?

Scientists and climate policy makers now agree that saving forests is one of the most important things we can do to fight climate change. But that has not always been the case.

When the Kyoto Protocol was formulated, only reforestation and afforestation – not deforestation prevention – were deemed eligible carbon offsets. By stripping forest conservation of any functional value, a perverse incentive structure emerged: Cutting and replanting trees provided non-Annex 1 countries an optional revenue stream, but keeping living trees standing did not.

As the next round of negotiations approaches, new scientific findings are challenging the beliefs and motivations that led to the earlier exclusion of forest conservation.

First, a study released last September challenged the assumption that old growth forests cease sequestering carbon from the atmosphere once they reach a certain age.

Second, land use, land use change and the forestry sector now constitute one-fifth of the world’s emissions. Because trees emit carbon once they are felled, an increase in deforestation would mean even greater emissions.

Despite consensus on the importance of deforestation prevention, though, there is little accord on how to achieve it.

The REDD initiative – Reducing Emissions from Deforestation and Degradation – seeks to provide developing countries with a monetary incentive for preventing deforestation. Since 2005, when it was first proposed by the governments of Papua New Guinea and Costa Rica, REDD has become a key element of the UN Framework Convention on Climate Change discussions.

“There is broad consensus now that the post-2012 agreement will include some sort of incentives for tropical countries to reduce their deforestation,” said Steve Schwartzman, Environmental Defense Fund co-director. Already, the UN-REDD policy board has approved $18 million to support pilot programs.

However, considerable controversy still surrounds REDD, with the latest debate centered on the best financing mechanisms.

The U.S. climate legislation proposed by Reps. Henry Waxman and Ed Markey would make REDD a key piece of its offsetting strategy. It would do this through three major sources of funding: offsets, a supplemental pollution reduction program, and strategic reserve auctions.

The bill also contains measures aimed at protecting groups who may become vulnerable from deforestation prevention, namely by being expelled from their land, and increasing awareness about the consequences of deforestation in countries where it is the most rampant.

Despite the bill’s ambitious approach, not everyone is convinced that is the best way forward. Critics in environmental groups, as well as EU leaders, have expressed doubts about creating a market for tradable forest preservation credits.

In a report released in Bonn during the recent climate talks, Greenpeace argued that market mechanisms would drive the cost of carbon down 75%. That could pose a problem by encouraging more lucrative alternative land uses, such as palm oil production, that would compromise both emissions reductions and deforestation prevention strategies.

Timing is key, says Kim Carstensen, leader of the World Wildlife Foundation’s global climate initiative, who told AP, “[t]he initial stages need to be funded by public mechanisms, not tradable credits.”

The European Commission, which has learned the hard way the difficulties in implementing a successful carbon market, has said that funding forest conservation by market mechanisms should not commence until 2020. Doing so before then, the EC said in a 2008 report, would create “serious imbalances between supply and demand.”

In economics, one way to prevent an over supply of a good that drives its price down is by issuing a quota. The Waxman-Markey draft legislation aims to do just that (and prevent the U.S. from buying its way entirely out of emissions reductions) by setting an annual offset ceiling of 2 billion tons. The bill also calls for half of carbon reductions to come from domestic projects.

While no one knows with certainty what the future holds for Waxman-Markey, REDD and international climate negotiations, investors are already positioning themselves to benefit from monetized forest conservation.

Merrill Lynch led the way last December, investing $9 million in a deforestation prevention project in Sumatra. The U.S. bank hopes its head start will yield high returns if and when regulated carbon markets emerge.

In March, members from the financial industry and environmental conservation community, held a first-ever forest financing-focused conference, co-sponsored by the Financial Alliance for Sustainable Trade, the World Bank, Global Forest & Trade Network (GFTN) of the WWF, the IFC and Citi Foundation. The summit’s objective was to understand “risks and opportunities of environmentally and socially responsible finance in relation to small-scale production of forest and other ‘soft commodity’ products.”

With so much focus on preventing deforestation, let’s just hope key decision makers can see the forest for the trees.

 

Author

Elizabeth Balkan

Elizabeth Balkan is a China-focused consultant who has studied, worked and lived in the region for twelve years. Now based in New York, Balkan advises private and public stakeholders on energy and climate policy, and cleantech investment strategies in China. She is the founder of New Energy and Environment Digest (needigest.com). Balkan earned a B.S. in Foreign Service from Georgetown University School of Foreign Service (SFS) and an M.A. in International Economic Policy from Columbia University School for International and Public Affairs (SIPA), and is fluent in written and spoken Mandarin.

Areas of Focus:
Trade Policy; Environment; Energy

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