Forest Finance:
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Forest carbon projects often deal with accusations that their emissions reductions aren’t credible. But the field has responded with a set of robust tools and norms to manage project-level and external risks.

In the early days of the voluntary carbon markets, most project developers set their own internal metrics to measure and create their own offsets. This led to wide variation around offset quality and also allowed for unscrupulous individuals (the so-called “carbon cowboys”) to market projects that had no real positive impact. In a highly publicized case, an Australian real estate developer attempted to swindle isolated Peruvian indigenous communities into signing away the rights to their land under the guise of developing carbon offsets, with the true intention of logging the land and planting a palm oil plantation.

The voluntary markets responded with standards that require carbon projects to demonstrate that their emissions are real, verified by a neutral third party, measurable, and additional (e.g., GHG reductions wouldn’t have been achieved without that offset.

In 2017 and in 2018, more than 99% of projects tracked by Ecosystem Marketplace said that they were certified by a third-party standard.

Standards developed for the carbon markets have gotten the nod of approval from regulators as well: compliance carbon trading programs in California, Australia, Colombia, and South Africa have all recognized voluntary methodologies as compliance-grade.

The risk of paying for a “bad” offset is very low so long as a buyer does their homework, and chooses an offset verified by a credible standard that has good practices and safeguards in place.

Here’s how the field has evolved to address key risks:

Accurately quantifying emissions reductions

Forest carbon projects need to be able to prove that 1) they are resulting in measurable GHG reductions and 2) that those reductions wouldn’t have occurred without the project (this concept is known as “additionality”).

Steve, do we have any text we can drop in here on tech/approaches to measuring carbon storage/avoided emissions?

Credible carbon standards include additionality tests. A project must show, for instance, that it is not already required by law and is not financially viable without income from carbon crediting, or common practice. Forest carbon projects usually perform better on additionality than other carbon project types (such as renewable energy).

Steve, worth it to go into avoided deforestation baselines and nesting wrt additionality? Or we could just link to some resources on that topic and keep this snappy.

Ensuring reductions are permanent

The risk exists that forest carbon projects’ emissions reductions could be reversed at some point in the future.  This could happen through unexpected events such as a wildfire, flood, or insect damage, or intentional reversals, such as a new landowner discontinuing the project.

Standards have long used buffer or reserve pools of credits to manage reversal risks. Insurance products are also increasingly available. Reversal risk is also mitigated through good management, frequent and long-term monitoring, and regular reporting (which standards usually require).

Generally the credit seller is legally required to “make whole” the atmosphere in the case of reversal, not the buyer. Buffer/reserve contributions can be linked to a project’s risk rating, which gives the seller an incentive to mitigate risks. Still, buyers and their investors should evaluate their exposure to reversal risk, especially to system-level disruptions that are hard to manage at the project level (like natural disasters).

Making sure emissions aren’t simply displaced elsewhere (aka “leakage”)

Leakage is not a risk unique to forest carbon projects: almost every mitigation activity carries with it a chance of leakage.

But the deforestation drivers that REDD projects target are often very mobile – for example, soy production – and so leakage risk must be taken seriously. Leakage can be addressed either at the project level or at the jurisdictional level.

Project level: It is standard practice among credible forest carbon project to create a plan for preventing leakage in the project design stage, and to measure any leakage that does occur after prevention actions. This leakage is then deducted from overall emission reductions once the project is up and running.

Jurisdictional REDD is another way to deal w

National or jurisdictional REDD+ programs, in contrast to REDD+ projects, have less concern about leakage due to the sheer size and scope of the programs.

The bottom line: …

This article points to specific “safe” project types. Do we agree w this and want to include as a kind of conclusion? Or stay neutral?

“While stand-alone avoided deforestation projects are prone to baseline inflation, robust carbon credits could be expected to come from nested REDD+ projects – where private-sector led projects are embedded into a conservative jurisdictional program. Forest management projects and tree planting projects are also good options to deliver credible carbon credits. Jurisdictional programs could also deliver robust carbon credits – if (and this is an important ‘if’) – a set of adjustments are made; such as to guarantee necessary corrections for unavoidable leakage or estimation errors.” https://www.ecosystemmarketplace.com/articles/shades-of-reddshould-forest-carbon-credits-be-eligible-for-corsia/

Offset buyers have commonly been criticized for “buying their way out of the problem” instead of undertaking direct emissions reductions.

However, the data tells a different story. Analysis of thousands of companies disclosing on climate change shows that offset buyers are more engaged in direct emissions reductions activities than companies that don’t offset. The data indicates that:

• 88% of voluntary offset buyers reporting to the CDP have formally adopted emissions reductions targets.
• Companies that included offsetting in their carbon management strategy typically spent about 10 times more on emissions reductions activities than the typical company that didn’t offset.
• Offset buyers are also more likely to have an absolute emissions reductions target in place (meaning they aim to cut emissions by a certain percentage under a baseline year) rather than an intensity target (meaning they aim to cut emissions per a certain unit of output, such as electricity generated or products produced).
• Offset buyers were nearly five times more likely than companies that didn’t purchase offsets to use an internal price on carbon to drive investment in emissions reductions. With an internal carbon price, a company charges itself for every tonne of carbon it produces and can use that income to purchase offsets. The idea is that incorporating carbon into the company’s bottom line will focus attention on emissions and accelerate reductions.

Climate change is a wicked problem because its principal cause – anthropogenic greenhouse gas emissions – is so ingrained in the day-to-day operations of most businesses, from retailers to airlines to utilities. Even more wicked is the fact that the majority of companies’ emissions fall outside of Scope 1, or the emissions under their direct control, instead appearing in Scope 2 (indirect emissions associated with energy use) or Scope 3 (indirect emissions associated with the use of sold products or transportation, for instance).

Companies’ options for addressing their indirect emissions are often on a longer time horizon, since reducing Scope 3 emissions may involve working with suppliers to change raw material sourcing practices, doing life-cycle analyses of products, and even working towards transforming the energy grid so customers are drawing power from cleaner sources.

An individual wanting to take a flight will be hard pressed to find a plane running on anything cleaner than jet fuel. Similarly, a company trying to reduce upstream emissions from their suppliers may only have so much sway over third-party practices and investments.

In the short-term, offsets are a way to address Scope 3 and “hard-to-abate” emissions in the near term. They can “flatten the curve” of the cost of transitioning to a low-carbon economy. Offsets can also help manage risks during the transition, and help companies practice for regulation that’s forthcoming by functioning as a de facto internal carbon tax that disincentivizes activities with significant emissions.

The bottom line: Offsetting must be part of an overall carbon reduction strategy – not a replacement for one. And in practice, this is how the majority of companies are using offsets. Corporate carbon management strategies should also align with science-based targets, and only use offsets to address hard-to-abate emissions (such as employee air travel) that they can’t eliminate internally right now. And of course, companies should do due diligence to check for offset credibility and environmental/social safeguards.

add fig 10?

forthcoming

Decision point: Corresponding adjustments

One key decision point in completing the architecture for forest carbon finance is how to account for voluntary offsets that cross borders. Specifically, whether and if a company in one country can claim to have offset its emissions by purchasing instruments generated by reducing emissions in a different country.

The issue arises because the Paris Climate Agreement requires all countries to account for their emissions, and it stipulates that emission reductions transferred internationally under the Paris Agreement (dubbed “Internationally Transferred Mitigation Outcomes,” or ITMOs) must involve a “corresponding adjustment” to the national inventories of both the exporting and importing countries. The agreement is mute on the international transfer of voluntary offsets, however. A key item on the climate negotiations agenda is deciding how to treat them.

Option A: Require that internationally-transferred “offsets” trigger a corresponding adjustment to the national accounts of both countries involved. For example, if a company from Germany purchases offsets from a project in Peru, then Peru relinquishes the right to enter the emissions reduction in its national account. This corresponding adjustment ensures that the emission reduction is only counted once.

Option B: Permit both the German private-sector buyer and the Peruvian government to claim the same emission reduction, as long as the German government doesn’t also claim it.

Option C: Peru counts the emissions reduction in its national account, and the German company is formally recognized for helping Peru’s emission reductions, but not for achieving carbon neutrality for itself.

EXPERT INSIGHTS

“The question is:  Which scenario results in more emission reductions?

“On one hand, a strict interpretation of double counting could lead to higher ambition and more emission reductions if countries take their Nationally Determined Contributions (NDCs) seriously—both in setting their own targets and achieving results. However, it could also have unintended consequences, including incentivizing weak country targets (to leave headroom to sell carbon credits).

“Or, it could stifle investments and finance for emission reductions—including and especially for forests, which currently run outside many compliance-based schemes—if companies are told they can only use offsets with the NDC adjustment.”

Read more: https://www.ecosystemmarketplace.com/articles/shades-of-redd-can-oil-and-aviation-fuel-a-marshall-plan-for-forests/

Progress update: “Nesting” Projects into National or Jurisdictional

Countries need to account for their emissions as signatories to the Paris Agreement, why is why corresponding adjustments issue is on the negotiating table.

But countries that want to access results-based finance from entities like the Green Climate Fund, or the Forest Carbon Partnership Facility’s Carbon Fund, also need to account for their emissions reductions to donors. These donors don’t want to pay a second time for an emissions reduction that a company already paid for.

To guarantee this, forest countries and jurisdictions are creating accounting frameworks that “nest” project-level activities into jurisdictional programs. These frameworks also need to create consistency in the way emissions reductions are measured across project-level and jurisdiction-level efforts, and make sure everyone involved is getting paid fairly for their mitigation contribution.

For example, Cambodia is creating a system to enable both project-level and national carbon crediting, recognizing that reversing deforestation requires both national policies and local actions. In Guatemala, the government is formulating regulations on how to “nest” early stand-alone REDD+ projects in a national REDD+ strategy, and has created a national benefit-sharing plan for REDD+.

Another strategy is to create standards for jurisdictional offsets, so that governments don’t need to design systems to account for project-level emissions reductions.

Learn more: https://www.ecosystemmarketplace.com/articles/shades-of-reddnesting-a-good-or-bad-piece-of-swiss-cheese/

In order to be eligible to receive these so-called results-based payments, forest countries must be able to monitor their emissions from forestry, establish emissions baselines, consult stakeholders affected by any future REDD+ programs, clarify land and carbon ownership right, identify new and current threats to forests, enforce forest protections, among other tasks.

Yet for many forest-rich countries, a major impediment in reversing patterns of deforestation has been weak institutions that have weak rule of law. Strong environmental laws and regulations are only a partial solution: Half of tropical deforestation actually takes place illegally, in violation of local laws.

Thus a key focus of REDD+ has been governance: ensuring that weak governance does not undermine REDD+, and that REDD+ does not undermine governance. However, governance reform is a slow, complex, and often politically fraught process.

Key areas of focus:

Securing land and carbon ownership rights for communities

An ever-growing body of evidence shows that secure land rights are key to successful conservation efforts. But by official counts, there’s a huge gap between who holds the land and who owns the land: indigenous and traditional communities claim customary rights to as much as two-thirds of land area worldwide, but governments recognize only 10 percent of land as formally belonging to them.

Weakening the rights of communities – particularly indigenous groups – to occupy their ancestral homes jeopardizes the local ecosystems they protect. It also puts at risk the success of programs like REDD+ for which land rights are a prerequisite.

See Card #8, “Design a system that benefits the rural and indigenous communities that manage forests,” for further discussion.

Improving transparency on REDD+ Readiness funding

At last count, US$7.3 billion had been pledged to support REDD+ “readiness” through capacity building on the ground in tropical forest countries. Despite such high levels of multilateral and bilateral financial commitments, information remains limited on how much of this money is actually flowing to countries at the national level, which types of REDD+ activities are being supported, and which organizations are managing and implementing these activities. Better tracking of financial flows associated with REDD+ financing would help the international community better assess gaps and needs against national REDD+ strategies.

Linking REDD+ to the bigger picture of governance reform

In forest countries with a history of armed conflict, REDD+ could even help reinforce peace processes. REDD+ offers a plausible alternative to industries that have contributed to conflict, such as industrial forestry or plantation agriculture, and could help underwrite the work of governance reform.

Bottom line: Lots of experience and knowledge to benefit from, and many benefits of governance reform really makes this a no-regrets strategy, but it’s not a quick fix and needs more resources.

Because it operates at regional and national scales, only jurisdictional REDD+ has the potential to deliver a supply of credits over the next two decades on the order of billions of tons.

But jurisdictional REDD+ faces a “chicken-and-egg” problem: a large supply of jurisdictional REDD+ credits will not materialize in the absence of massively increased levels of visible demand.

Forest countries must exceed their Nationally Determined Contributions targets under the Paris agreement in order to generate surplus REDD+ credits that could be sold to private and public buyers. Meeting NDCs will not be cheap: a recent study suggests the median cost of implementing cost-effective natural climate solutions is equivalent to 5.5% of national GDP for tropical countries. International co-funding will be critical to accelerating implementation.

At the same time, on the demand side, many potential providers of REDD+ results-based finance may be unwilling to make large-scale funding commitments in the absence of visible supply, and with insufficient consensus on high integrity accounting methodologies.

EXPERT INSIGHT

“Jurisdictional REDD+ demand and supply must demonstrate the ability to scale from current levels. Unlocking the first 1 billion tons of supply is the crucial step. It is possible to envisage that efforts by a broader range of donor governments to overcome the initial chicken-and-egg demand and supply problem could unleash a veritable “wall of money” for REDD+.”

Rupert Edwards

Forest Trends has called for a “Gigaton REDD+ Bid,” wherein a coalition of donor governments secures co-funding from a range of private actors for a total commitment of US$10 billion, to unlock supply of jurisdictional REDD+ credits.

Sufficient, visible, and predictable funding for jurisdictional REDD+ credits at a sufficiently high price would unlock a number of positive outcomes. It would incentivize a broader range of donor governments to provide additional readiness and implementation funding (e.g., stages 1 and 2 of REDD+), help forest countries clarify land tenure and implement policies and measures on the ground, and secure adoption of accounting methodologies with environmental integrity. It would accelerate cooperation and clarification of the rules and functional relationship around Articles 5 and 6.2 of the Paris Agreement. Finally, a serious funding commitment from public and private sector actors would also enable the development of financing instruments to address upfront costs.

Learn more: A Gigaton REDD+ Bid Strategy

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REDD+ has been designed to focus on forests at risk. Finance is directed to forests and communities that can bend their current trajectory away forest conversion and degradation, a criterion known as “additionality.”  

Regions with historically low rates of forest loss find it very difficult to demonstrate additionality, and thus are usually unable to access REDD+ finance. This is a significant challenge for indigenous territories in the Amazon, where the deforestation rate in indigenous territories lower even that that of protected areas and significantly lower than that of the Amazon as a whole. [1] 

But there is a need to acknowledge and support these Territories with Minimal or No Deforestation, which encompass millions of hectares and contain tons of stored carbon dioxide. Failing to do so will contribute to the cycle of threats and deforestation drivers they are facing. Indigenous people are on the frontlines of deforestation, often risk their lives to defend their homelands, and have scant resources to continue protecting their forests. The frontier of deforestation is always shifting, and having low deforestation rates in the past does not necessarily mean a territory is safe from deforestation in the future. 

This issue is at the center of a recent paper launched by Forest Trends’ Communities and Territorial Governance Initiative. Author Chris van Dam argues that REDD+ is inequitable and that in the long run, this will prevent it from achieving its central goal: mitigating climate change. His proposed solution is to focus on supporting territorial governance, livelihoods, and cultural patrimony on indigenous lands. 

 Read the white paper, “The Economics of Climate Change Mitigation in Indigenous Territories,” in English, Spanish, or Portuguese: https://www.forest-trends.org/blog/territories-with-minimal-or-no-deforestation/