Including forests in global carbon markets could save tropical regions, providing local people are on board

The idea that markets can save the planet remains a controversial one. But support for market-based mechanisms that put a price on harming the environment, and so create value for protecting it, is rightly growing worldwide.

This logic underpins the carbon markets. One of the most exciting developments in this area is the move to unlock the value of rainforests. If done properly, this could create huge value for tropical regions, while meeting climate targets for governments and companies all over the world (see special report, p20).

Turning tropical forests into money depends on making trees worth more left standing than chopped down. In the fight against global warming, rainforests have a clear environmental value. Deforestation accounts for around 20% of global greenhouse gas emissions – more than the transport sector.

The challenge for market-minded conservationists is translating this environmental good into a commercial value. This can be done by creating financial instruments that provide income for owners of forests that match or exceed the income generated by logging or agriculture. Funds are already being set up to generate forestry carbon credits, which can be traded on the voluntary carbon market. Such schemes look likely to be incorporated into the formal carbon market agreed under a post-Kyoto climate deal, which will give an added boost.

Spreading the wealth

Other financial instruments such as forest-backed bonds and green loans are being explored as ways to develop the market for “eco-system services” – the environmental goods that rainforests, and other natural features such as watersheds, provide for the planet. Such a market has the potential to richly reward farmers who own land in developing countries – but only if disputes over land ownership in these places can be resolved.

For such schemes to work, the benefits of including forests in carbon markets must be shared fairly on the ground. Governments own most of the world’s rainforests, although land rights are in many places disputed. Rising land prices for forests under a thriving carbon market could exacerbate existing or dormant land conflicts. Loggers, farmers and indigenous people could lose out unless governments equitably distribute carbon market funds and help maintain rural jobs.

The risk for investors is that governments in tropical regions – which have mixed reputations for governance – may mismanage the transition to a market for conservation. If governments fail, investors whose returns depend on forests staying standing could lose out, as loggers and farmers continue to chop down the forest as before. As soon as even one tree falls, the value of their investments would drop.

Investors should not be put off, however. Merrill Lynch’s bold step of investing in forestry projects in Indonesia shows that some feel the potential rewards justify the risks of uncertain operating environments. The bank, now part of Bank of America, has signed a deal to conserve the 1.9m-acre Ulu Masen forest in the Aceh province. It hopes this will generate 100m carbon credits – equivalent to the right to emit 100m tonnes of carbon dioxide – that it can sell to the market.

The success of forestry projects largely depends on the situation in countries where the idea of a market for conservation is being mooted, such as south and central America, and south-east Asia. Financial institutions interested in these schemes should look at the human rights risks of managing forestry projects: governments already employ so-called green armies to patrol national parks. Serious incidents have been reported in Brazil, Argentina, India, Cambodia, the Philippines, India and Sri Lanka. Such incidents could increase if the value of forests was to rise even further through their link to international carbon markets. How long before buyers of carbon offsets in London are accused of being complicit in human rights abuses on the other side of the world?

As well as working with governments, it is essential for financial institutions looking at forestry projects to build strong relationships with non-governmental organisations on the ground. These groups will be able to help win local buy-in for projects and help create alternative sources of income for people who might otherwise lose out because of conservation plans.

Should markets for forest conservation take off, companies with supply chains in tropical regions could also benefit. Coffee companies, for example, could encourage farmers to plant shade-grown coffee, then sell forestry offsets on the carbon markets. This would give farmers an additional source of income, and an extra reason to stay on their land – helping to secure supply for the coffee companies. Starbucks is already doing this in Mexico. Cadbury is exploring a similar scheme for cocoa growers in Ghana.

Making forestry projects work is fraught with challenges, not least those over land rights. But the opportunities for financial institutions and others are huge, provided they invest wisely and carefully.

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