New Report: Finance for Forest Carbon Doubled since 2016, but Still Far from Meeting its Potential as a Natural Climate Solution

A new report from Ecosystem Marketplace released today shows that funding to conserve and increase carbon stored in forests around the world has more than doubled between 2016 and 2019. But authors say forest carbon finance still falls far short of what’s needed to counter global forest loss and support increased climate ambition.  

Unless tropical forest loss is addressed in the next decade, the Paris Agreement goals are likely not achievable, according to the Intergovernmental Panel on Climate Change. The new report reviews a variety of forest carbon finance mechanisms that channel funds to forest protection and restoration. Research shows that forests and other natural climate solutions (NCS) are capable of cost-effectively providing up to one-third of climate mitigation needed by 2030, yet NCS currently receive less than 3% of climate mitigation funding. 

The report, State of Forest Carbon Finance 2021, provides a comprehensive overview of the current scale and outlook for three main mechanisms for forest carbon finance: compliance and voluntary carbon markets, and REDD+. In compliance carbon markets, parties buy and sell carbon offsets to meet regulatory obligations from governments. Voluntary markets also exist for actors who want to buy offsets to voluntarily to reduce their carbon footprint. REDD+, which stands for “Reducing Emissions from Deforestation and Forest Degradation,” is a framework created by the United Nations Framework Convention on Climate Change to channel funding and support to developing countries to protect their forests. 

Key findings 

• Funding for forests as of the end of 2020, channeled through carbon markets and results-based payments for REDD+, has more than doubled since Ecosystem Marketplace last reported in 2017. At least $5.9 billion flowed to forest carbon offset projects around the world, with an additional $1.3 billion disbursed or contracted for “REDD+ readiness” to support developing countries in protecting their forests. 
• Compliance-driven forest carbon markets, such as New Zealand’s emissions trading system and the California-Québec cap-and-trade program, have driven more than $3.9 billion to forests and sustainable land use through the end of 2019.  
• Over the three years 2017-2019, almost $400 million was generated in global voluntary carbon market transactions trading 105 million metric tons of carbon credits (MtCO2e) from Forestry and Land Use, also referred to as NCS. Voluntary carbon markets have generated nearly $1.4 billion to date in demand for NCS offsets, which dominates other offsets categories (such as Renewable Energy) in terms of overall transaction value.  
• Voluntary carbon markets (VCM) are expected to soar over the coming years. The Taskforce on Scaling Voluntary Carbon Markets has estimated the VCM need to grow 15-fold by 2030 and 100-fold by 2050 in order to meet Paris Agreement ambition. Forest carbon finance from compliance-driven carbon markets is expected to reach even greater heights in the coming years, driven by new compliance mechanisms including the international aviation industry’s new carbon market, known as CORSIA, and international markets still under negotiation under Article 6 of the Paris agreement.  
• Despite the clear link between deforestation and climate change, and the financial risk posed by these issues, just 6% of companies researched by Ecosystem Marketplace of Supply Change data, its counterpart Forest Trends initiative, have integrated emissions reduction strategies with their deforestation commitments. 

Forest carbon finance outlook 

• A stronger price signal is required to drive new development. The report shows that current prices range from $3 to $4 per ton for REDD+ credits in voluntary markets, $5 per ton via some compliance or REDD+ mechanisms, and up to a $10 floor price offered by the new LEAF Coalition. But authors say that prices will need to increase materially to drive the supply needed to meet expected demand. 
• In the years ahead, REDD+ funding is poised to increase, with $3.5B in committed funding yet to be disbursed and an additional $1 billion pledged by the LEAF Coalition. The majority of these funds are dedicated for results-based payments, not readiness. New jurisdictional REDD+ offers potential for greater scale than traditional project-based approaches. But authors say that more needs to be done to ensure that jurisdictional mechanisms provide benefits for indigenous and local communities. 
• The potential of forests within Nationally Determined Contributions (NDCs) to meet Paris Agreement targets remains largely untapped. Analysis shows that integrating climate cooperation through carbon markets into Article 6 and including REDD+ could almost double emissions reductions for the same total cost as a non-cooperative scenario for NDCs.  
• Some in the environmental and business communities are concerned that a private-sector emphasis on removals (e.g., afforestation and reforestation projects) over reductions (e.g., avoided emissions via forest protections) could discourage a focus on stopping tropical deforestation. The report authors say that the environmental community needs to do more to address conflicting advice regarding the legitimacy of reduction-based credits to support private sector investment in REDD+.  

“Forest carbon finance is poised for tremendous growth in this decade, and yet in many ways the marketplace and investment opportunities remain opaque, complex, and characterized by too much misinformation,” said Stephen Donofrio, Director of Ecosystem Marketplace. “This is the report to have on your desk to make sense of where this space stands currently, and where it’s moving.” 

“Carbon offsets are not a panacea,” says Patrick Maguire, Senior Manager of Ecosystem Marketplace. Companies and countries are certainly not going to offset their way out of the climate crisis. But they are a tool we can’t afford to underinvest in, especially if we’re going to meet interim 2030 targets. We know more public and private finance for forest carbon is urgently needed. This report shows it’s beginning to pick up, but also that we are still leaving a lot of potential on the table.” 

Download the report here: https://www.ecosystemmarketplace.com/publications/state-of-forest-carbon-finance-2021/  

##### 

Ecosystem Marketplace is an initiative of the non-profit organization Forest Trends, and a leading global source of information on environmental finance, markets, and payments for ecosystem services. As a web-based service, Ecosystem Marketplace publishes newsletters, breaking news, original feature articles, and annual reports about market-based approaches to valuing and financing ecosystem services. We believe that transparency is a hallmark of robust markets and that by providing accessible and trustworthy information on prices, regulation, science, and other market-relevant issues, we can contribute to market growth, catalyze new thinking, and spur the development of new markets and the policies and infrastructure needed to support them. Ecosystem Marketplace is financially supported by a diverse set of organizations including multilateral and bilateral government agencies, private foundations, and corporations involved in banking, investment, and various ecosystem services.