Policymakers, conservationists and investors are contemplating the power of markets to save the world’s forests. But local forest communities could be left behind
Policymakers, conservationists and investors are contemplating the power of markets to save the world’s forests. But local forest communities could be left behind
Deep in the Amazon, scientists are hard at work. They’re not busy cataloguing fungi subspecies or analysing the healing properties of tropical flora, and their findings are more likely to be published in Business Week than National Geographic.
Occupying their attentions is how to turn tropical forests into money. More precisely, how to place a value on trees that makes them worth more standing than felled for timber.
In the Juma reserve, in Brazil’s Amazonas state, business-minded conservationists have struck on what they think is a solution. The idea: calculate how many trees are in danger of being deforested, determine the value of the forest as timber or agricultural land, and develop a financial instrument to match or exceed that value.
In the case of the Juma Reserve, the numbers make impressive reading. The Amazonas Sustainable Foundation (ASF), which manages the reserve, estimates that two-thirds of the area’s 590,000 hectares of virgin rainforest face the axe. Logging, both legal and illegal, plus agricultural expansion are the main culprits.
The cash to offset not chopping down the reserve comes from three sources. The non-profit ASF has put up an initial, undisclosed sum. ASF controls a total fund of 40m (Brazilian) reais (£12m), courtesy of donations from the provincial government and Bradesco Bank, Brazil’s largest private bank. The fund is divided between 33 similar conservation units.
Secondly, Marriott International has contributed 2m reais (£625,000). At the end of 2008, the multinational hotel chain also began offering its guests the opportunity to offset their emissions for 4 reais (about £1.25) a night. Those donations go directly towards the Juma reserve.
The third pillar of the initiative’s financing model is more ambitious. It lies in conserving the carbon stored in the Amazonas-based reserve, an estimated 3.6m tonnes of carbon dioxide emissions over the next eight years. By 2050, that number is expected to increase to about 190m tonnes.
Borrowing from existing carbon trading models, ASF intends to offer carbon credits for the CO2 emissions avoided by not deforesting the reserve. The strategy is far from secure. As yet, carbon credits generated by avoided deforestation cannot be bought or sold on the formal carbon market.
ASF and its partners are betting on that changing. The United Nations has already validated a methodology for one market-based mechanism for avoided deforestation, called Redd, or the Reduction of Emissions from Deforestation and Degradation. It is a step that Prof Virgilio Viana, ASF’s general director, describes as “decisive” in integrating forest carbon into climate change mitigation.
Policymakers at December’s UN-sponsored climate change talks in Poznan, Poland, expressed their hope that the measure would pass at the next UN conference, scheduled for December this year in Copenhagen. If that happens, Redd could be integrated into the next phase of the Kyoto protocol after 2012.
The Juma project is one of dozens of schemes currently being developed in line with Redd. The UN-backed proposal does not enjoy a monopoly on market-based forest conservation, however. Market-based schemes to save the world’s trees are proliferating. Under the UN’s existing Clean Development Mechanism, for example, carbon credits can be made available for afforestation and reforestation projects.
The list of voluntary initiatives is also a long one. Sustainable forest certification initiatives, such as those developed by sustainable agriculture and forestry bodies such as the Rainforest Alliance and the Forest Stewardship Council, have a long heritage of bringing value to well-managed forests. Eco-tourism is another means of achieving the same end.
Now market advocates are enthusing about a new approach: so-called “ecosystem services”. Again, the logic is straightforward. Forests provide a series of public environmental goods, from climate regulation and carbon capture to biodiversity maintenance and water resource preservation. Those goods merit a utility value. Financial instruments can deliver such a value, be they traded credits, forest-backed bonds, green loans or any of the many other ideas being toyed with.
“It’s inevitable that in five to 10 years, if not sooner, we will have payments for ecosystem services. Forests are the most obvious place to start,” says Hylton Murray-Philipson, managing director at the London boutique financier Canopy Capital.
Canopy Capital has already attracted six-figure investments from 10 high-net-worth individuals to back an ecosystem services scheme in Guyana. The company is currently experimenting with a variety of ideas to monetise the services of the 371,000-hectare Iwokrama Forest Reserve in the South American country.
In Mexico, Murray-Philipson’s prediction is already becoming a reality. Under the ProArbol scheme, the federal government pays landowners to conserve existing forests based on their water management services. Participants receive up to $40 per hectare of forest per year. The scheme currently covers about 2m hectares.
In Borneo, meanwhile, Sydney-based investment firm New Forests has established a “wildlife conservation banking scheme” to protect the 34,000-hectare Malua forest reserve. The company expects to receive a return of 15% to 25% by selling “biodiversity credits” on the voluntary market.
“We can start on Monday morning. All it takes is political will,” says Murray-Philipson, referring to a rollout of market-based forest preservation schemes.
In the case of Guyana, that political will already exists. The country’s president, Bharrat Jagdeo, has proposed placing almost Guayana’s entire rainforest under long-term protection. There’s just one condition. The right market-based incentives must be in place. “Right” in the case of Guyana translates to about $580m a year – equivalent to the projected value of its rainforest should the trees be cut down and the land used for agricultural development.
Multilateral donors are also getting on board. Last June, for example, the World Bank launched a multimillion-dollar fund to help developing countries prepare national strategies for reducing deforestation and degradation. One project envisaged under the bank’s forest carbon partnership facility is the expansion of an experiment in “debt-for-nature swaps” in Panama. These would allow the country to restructure or reduce its external debt obligations, using a percentage of the proceeds in local currency to fund domestic environmental projects.
Another idea is the development of tradable deforestation permits in Bolivia. Under such a scheme, participants would be awarded permits to cut down forests, but would have an incentive to avoid deforestation because they could sell unused permits into the market – much like existing cap-and-trade schemes for greenhouse gas emissions.
Barking up the wrong tree?
Investors might be warming to the idea of market-based forest conservation, but turning theory into reality is not easy.
Critics are quick to point out the methodological hurdles, for example. Under Redd, how do you determine which trees are in danger of being cut down? Having determined that, how can an accurate figure for the averted carbon emissions be arrived at? Environmentalists also object to credits being issued for monoculture commercial tree plantations (eligible under CDM), which, they argue, destroy local biodiversity.
Politics and principles also play their part. Many biodiversity-rich countries worry that forestry credit schemes will result in them losing their land sovereignty to international carbon traders in New York, Frankfurt or London. Other opponents object that countries with high deforestation rates will be effectively rewarded for curbing their bad habits, while those that have invested in preserving their forests remain ineligible for credits under Redd.
Presuming all these issues can be overcome, the question of turning a profit remains.
Simon Counsell, director of the non-profit group Rainforest Foundation UK, admits that there is scope for “better mobilisation” of private investment into forest protection, but is sceptical that the raft of present initiatives can deliver.
The main problem, he says, is business risk. The Rainforest Foundation recently mapped the 21 countries with the highest tropical forest density against 10 standard risk indicators. The result was not positive. Most came well down the global ranking.
“In theory these mechanisms are great, but when it comes down to it, is anybody going to want to invest in these countries? In the short-term, probably not,” Counsell says.
Along with macro-governance issues such as institutional stability, political freedom, creditworthiness and the rule of law, market-based forestry projects are plagued by community-related problems.
Land tenure is one that community-based organisations frequently repeat. Only about 5% of those living in the Amazon rainforest have titles to their land, for example. Will they ever see the profits from conservation schemes on their ancestral lands? Or will the governments who claim to represent them pocket it for themselves?
Ricardo Carrere, international coordinator for the Uruguayan non-profit group World Rainforest Network, is pessimistic about the answers to such questions. “If the proposed market mechanisms go ahead, indigenous forest peoples will almost certainly see their rights diminish and control over their lands disappear. In most cases they will be evicted to make way for companies and large conservation NGOs to own the forests and receive the money that will be generated,” he warns.
A market for forest conservation could increase conflicts over land, experts fear. In its review of Redd proposals, published in November 2008, the Forests and the European Union Resource Network says: “If Redd funding leads to the carbon stored in the forest increasing the value of the land, this may lead to land speculation, land grabbing and land conflicts, resulting in the further marginalisation of local communities and indigenous peoples, and the resultant pressures and instability will undermine successful policy implementation.”
Discussions at Poznan, where only a handful of forest peoples were represented, certainly bode ill for indigenous groups. The US, New Zealand, Canada and Australia all pushed for references to the UN Declaration on the Rights of Indigenous Peoples to be omitted from the Poznan conclusions. Worryingly, these countries are among the keenest to see forests included in a future climate agreement.
Anticipating the possible marginalisation of forest peoples, 26 civil society groups signed an accord in the run-up to the Poznan meeting. The Accra Caucus Statement insists that local communities be the “primary and direct beneficiaries” of forest financing mechanisms and that future projects include “minimum standards for benefit-sharing mechanisms”.
As an additional safeguard, Carrere calls for governments and project developers to negotiate directly with forest peoples on a community-by-community basis. Even then, he fears that a sudden influx of cash could easily disrupt traditional forest communities.
He reserves his chief concerns for violent conflict. The examples of resource-rich, conflict-stricken countries such as Nigeria and the Republic of Congo are uppermost in his mind. “If there are billions of dollars at stake, then there’s going to be interest in getting that money,” he says.
Felling the critics
Understandably, project developers argue that such risks are exaggerated. Once the ground rules are established, they maintain, market-based forestry conservation should represent a win-win for investors, local communities and the environment.
“The communities themselves are the ones who will be implementing conservation mechanisms developed by their countries. So they will be the ones directly benefiting from these activities,” says Consuelo Espinosa, senior forest and climate change officer at the environmental non-profit network International Union for Conservation of Nature.
While conceding that initiatives such as Redd “won’t be perfect” initially, she argues that improved forest governance and widespread stakeholder consultation will reduce the risk of local communities being negatively affected.
The centrality of good governance is a point that Abyd Karmali, global head of carbon emissions at Merrill Lynch, also picks up.
Last February, Karmali’s US-based bank announced an innovative deal to generate carbon credits from the 1.9m-acre Ulu Masen forest in Indonesia’s Aceh province. Merrill Lynch predicts that if successfully managed the initiative could generate 100m tonnes of carbon offsets over 30 years.
“From our perspective, we would only be involved in a forestry-related project if appropriate safeguards are in place,” Karmali stresses.
Those safeguards include not only clear project guidelines, national baselines and incentives for private sector investment, but also mechanisms for full stakeholder involvement. One of Merrill Lynch’s partners on the project, Fauna & Flora International, is working with the government of Aceh to establish a local implementation board. The board will include representatives from Ulu Masen’s local communities.
The US bank has taken other steps too. Before investing a single dollar in the Aceh projects, for example, it engaged in an “extremely thorough and detailed” risk analysis. A second precondition for investment was that the project be validated to the Climate, Community and Biodiversity Alliance standard.
A cross-sector partnership organisation, CCBA, deploys a set of voluntary standards that acts as a “code of conduct” for investors in forestry project. The criteria include a range of community and human rights issues. Validated projects, for example, must prove that areas of cultural, economic or religious significance will not be negatively impacted.
As a final measure, the bank interviewed representatives from Fauna & Flora International to confirm the group’s suitability for the role as local implementation partner. With considerable experience working in Aceh, Fauna & Flora International is now responsible for developing local benefit-sharing plans.
Even with extensive risk mitigation procedures in place, Karmali admits that market-based forestry projects remain “much more risky” than other carbon-related investments. Aside from the obvious policy, political and project risks, there’s also the threat of rogue speculators that all new businesses opportunities attract.
“Inevitably there’s always going to be a cowboy element. Unfortunately, that’s just the nature of the capital markets,” he says. Given that forestry carbon credits are not yet a liquid asset class, unethical practices by unscrupulous operators could jeopardise the reputation of the market before it has even really begun.
Forest carbon and other market-based proposals will incite debate for some time. For the moment, though, the main actors at play are merging towards at least one shared consensus: the success of any scheme depends on local communities obtaining substantive benefits.
As the market’s opening phase, most proposed projects promise forest peoples a slice of future profits. Canopy Capital, for example, has earmarked 90% of any profit for the people of Guyana.
“We have to generate a return, otherwise we would fail in the fundamental mission to engage capital on the side of conservation,” says Murray-Philipson. “But it’s not a case of making out like bandits, which anyway wouldn’t be sustainable. It would just blow up in our face.”
Devising how to invest such unprecedented income raises the question of local capacity. About $4bn would have to be spent over five years to prepare authorities in tropical countries to efficiently manage a forest carbon trade, according to an independent review commissioned by the UK government in October last year, Climate Change: Financing Global Forests, by Johan Eliasch with the support of the Office of Climate Change.
Much can be learned from existing, more traditional approaches to sustainable forest management. The Rainforest Alliance, for instance, operates a specific programme geared towards improving productivity and market opportunities for local communities operating verified forestry projects. The $4m Trees programme provides technical assistance in areas such as processing and production efficiencies, as well as value-added products and business planning. More than 80 communities have so far benefited through the scheme, with income levels having increased by an average of 40%.
The example of Flora & Fauna’s work among indigenous communities of the O’Som forests in south-west Cambodia is also instructive. Working alongside the national forest administration, the organisation helped local communities draw up land use plans. The government has since approved the community’s tenure. In addition, the traditional trade in wild cardamoms (forest-based herbs used as spices) has restarted and a system of indigenous wardens now patrols the forest to prevent illegal logging.
Such examples demonstrate how effective forest conservation can be integrated into broader poverty alleviation, says Martyn Collins, chief executive of the non-profit project developer ProNatura International.
“Under the normal cycle of events, poverty has led to a reduction in biodiversity as forests are cleared, which leads to adverse climate change. [Forest] carbon provides a way for driving that negative cycle into a virtuous, positive cycle,” Collins says.
Sap for investors?
But will for-profit investors buy into it? Not all, for sure. Even those with a high-risk threshold are waiting to see when and if a fungible carbon instrument will eventually emerge.
The same is true for benefit-sharing mechanisms. Given the complexity and diversity of current project proposals, a one-size-fits-all solution is impractical. As yet, no guidelines exist for a flexible system to ensure profits feed back into sustainable community development.
With imagination, none of these issues is insurmountable. And imagination is one attribute that the proponents of market-based solutions have in abundance.
No one yet knows which market-based forest conservation schemes might work and which will not, admits John Nash, a climate change expert with the World Bank. What’s important, he stresses, is that non-profit and for-profit project developers are seeking to take advantage of the market opportunities out there.
“It’s best to let a thousand flowers bloom,” he says, “even if not all of them grow.”
Like everyone else, the residents of the Juma reserve are awaiting a clear answer. It had better not be too long in coming. Trucks are already plying along the AM-174 highway that runs alongside their forest area. The longer the uncertainty lasts, the closer the loggers encroach.
There has been varied reaction to proposals for mobilising private capital to conserve forests.
“A market-based approach will mostly benefit investors, brokers and private corporations, and not indigenous people and forest dependent communities.”
Accra Caucus Statement, issued by 26 civil society organisations, December 2008
“Forest carbon projects have great potential to generate new and improved livelihoods for many of the world’s poorer people … However, there are also significant threats to the rights of the poorest and most vulnerable communities from these markets.”
Charles Ehrhart, head of the Climate Change Programme at Care International
“All the negotiators have a vested interest in pursuing this [market-based] option. But those that are impacted don’t really have a say. It’s very skewed … Companies are jumping in feet first in terms of buying forests that they think are going to make them money from carbon credits in the future.”
Ronnie Hall, coordinator, Global Forest Coalition
“We must include forests in our strategies to deal with climate change. If we do not, we could face a nightmare scenario, a positive feedback loop, in which emissions from deforestation and degradation feed global warming, which in turn accelerates forest loss.”
Frances Seymour, director-general, Centre for International Forestry Research
“If trees are worth more dead than alive, economically rational decision makers in countries with rainforests will find it hard to resist harvesting timber and converting the land to other productive use.”
Bharrat Jagdeo, president of Guyana
Forests and climate change
- Trees store carbon dioxide, taking it out of the atmosphere as they convert light energy to chemical energy. Deforestation is the third largest source of carbon emissions after fossil fuel use and industrial operations.
- The total carbon content of forest ecosystems is more than the amount of carbon in the atmosphere today.
- Tropical forests store on average about 50% more carbon per unit area than forests outside the tropics.
- Global deforestation was estimated at 13m hectares a year for 1990-2005.
- Deforestation accounts for 20% of global greenhouse gas emissions – more than the transport sector.
- The global cost of halving deforestation is in the range of $18bn to $26bn a year by 2020, according to the Eliasch Review.
Source: UN, FAO, IPCC
In Mexico, Conservation International is working with coffee giant Starbucks on a five-year programme to protect standing forests. The initiative, which includes a $7.5m investment over the first three years, will include training for coffee farmers to conserve the forests and other biodiversity around their land. CI hopes that the project will ultimately generate additional revenue through access to the CDM or Redd mechanisms.
As early as 1996, Costa Rica passed a forest law that recognised the ecosystem services of forests and provided the legal basis for the owners of forest lands to sell these services. Landowners receive grants from the National Fund for Forest Financing based on the hydrological services and watershed protection that their forests offer. The projects are also eligible for new financing through the CDM for afforestation and reforestation activities.
UK-based carbon dealer Plan Vivo has developed a carbon financing mechanism for a pilot agroforestry project involving about 300 small coffee farmers in Mexico. Under criteria assessed by environmental verifier Rainforest Alliance, the farmers agree a reforestation management plan for their plots. The proven, aggregated carbon reductions generated through the scheme are then sold to buyers with offset targets and the income returned to the farmers through individual trust accounts. “There’s a recognition that carbon in some of these projects is a surrogate for a number of other benefits that are coming by conserving forests as part of a carbon forestry project,” says Jeffrey Hayward, senior services manager at the Rainforest Alliance.
Brazil’s Agency for Sustainable Rural Development is proposing to pay residents of the Amazon region money and credits for helping preserve the rainforest. Under the pilot scheme, up to 4,000 farmers, ranchers and small-scale woodsmen will be rewarded with public funds, special credits and a guaranteed market for environmentally sustainable products.
Inspired by the United Nations, the Reducing Emissions from Deforestation and Degradation system is a market-based mechanism for avoiding deforestation. It was first introduced into the agenda for the eleventh conference of parties (COP) of the UN’s Framework Convention on Climate Change (UNFCCC) in December 2005.
Delegates at the latest COP meeting in December 2008 in Poznan, Poland, pushed forward discussions about Redd to the next UNFCCC meeting at the end of 2009. If approved, a Redd mechanism will be included in the next phase of the Kyoto protocol after 2012. It is being pushed primarily by three UN Agencies: UNEP, UNDP and the FAO. In June 2008, they created a multidonor trust that allows donors to pool resources and provide funding for country-level Redd projects.