Forest conservation markets slowly turn to REDD – Point Carbon

By Valerie Volcovici, Point Carbon News

WASHINGTON, -As U.N. talks keep failing to agree  how to raise money to protect forests, private investors are  testing a trade in credits to slow the deforestation that emits  as much carbon as all the world’s cars, ships, trucks and  planes.
French bank BNP Paribas is one of a handful of  financial institutions and investment funds entering the risky  but potentially lucrative market for REDD “credits” – units  representing one tonne of carbon dioxide not emitted because a  forest was left standing.
Last September, BNP’s commodities derivatives arm provided  $50 million to Wildlife Works, a conservation project developer  designing a portfolio of projects to reduce deforestation and  degradation (REDD) in Africa.

The Kasigau corridor
The Kasigau corridor

In that deal, BNP also acquired the rights to buy up to 1.25  million carbon credits over the next five years from Wildlife  Works’ flagship project in Kenya’s Kasigau corridor.
This scheme aims to protect over 500,000 acres (202,400  hectares) of forest, secure a wildlife migration corridor  between two national parks and bring sustainable benefits to  local communities through education, jobs for rangers, and an  “ecofactory” to produce organic cotton clothing.
But such carbon credits have only found demand in a small,  thinly traded voluntary carbon market, as countries struggle to  agree new, binding emissions cuts under U.N. climate talks where  acrimony lingers after the failed Copenhagen summit in 2009.
“There is growing impatience with the multilateral process,  not only from practitioners such as myself, but more  importantly, from many forest countries themselves,” said  Christian del Valle, environmental markets and forestry director  at BNP Paribas.
“Thus far the multilateral process has not delivered  meaningful on-the-ground results, and forests continue to be  lost because the only accessible price signal today indicates  they are worth more cut down than standing,” added London-based  del Valle, who is driving the bank’s investment in forest  protection in Africa and Latin America.
A full U.N. climate deal could create a market through which  rich polluting countries can buy carbon credits, paying for  forest protection in the process, just as they pay for clean  energy projects now under the Kyoto Protocol’s existing carbon  offset market, the Clean Development Mechanism (CDM).
So far the only demand for forest carbon credits has been in  the voluntary carbon market, worth $424 million last year, which  lacks the binding rules that underpin the CDM.
Governments, such as Norway, Germany, Britain and the United  States have pledged roughly $6.5 billion to help poorer  countries develop systems to reduce emissions from  deforestation, but that is seen only as a halfway house.
Private sector involvement will be essential.
Recent studies suggest that between $17 billion and $33  billion per year is needed to achieve a United Nations  Environment Programme recommendation to halve global emissions  from deforestation by 2030.
“We are not going to get the scale of what we need without  participation by the private sector,” said Donna Lee, who served  as the lead U.N. negotiator on REDD for the United States and is  now a consultant for advisory group Climate Focus.       “There is a disconnect between the understanding by  countries and (UN) negotiators and the private sector of what  the private sector needs in order to participate in REDD,” she  said.
Lee said the U.N.’s climate change secretariat is not  institutionally equipped for private sector participation or  input.
Some negotiators view project developers and private  investors as “carbon cowboys” responsible for the design of  dubious carbon offset projects in developing countries under the  present Clean Development Mechanism (CDM), she added.
One alternative to the so far futile attempts by the United  Nations to achieve multilateral agreement among all its members  may be bilateral or national action between two individual  countries involving the private sector.
“It would be beautiful if everything could be done under the  U.N. (climate change framework) but it is not. The success of  the U.N. will likely be to ready REDD host countries to  participate in emerging REDD market mechanisms  but not to get  global commitments out of developed countries,” said Leslie  Durschinger, founder of Terra Global, which runs a private  equity fund that raises project finance for REDD.

POCKETS OF DEMAND
She and other investors see pockets of demand emerging from  national and regional carbon markets sprouting up across the  globe.
Countries like Japan and Australia may allow their emitters  to use REDD credits to comply with their proposed emissions  trading schemes. And regulators in the state of California have  said they may allow REDD credits from certain rainforest states  and provinces abroad in their future carbon market from 2015.
“When you look beneath that surface layer you see the pieces  that are there that will ultimately build the market for REDD.  Slowly but surely you will see increased demand and successful  and well-designed projects on the ground securing private  capital,” Durschinger said.
Besides BNP, other early investors in these emerging markets  include South Africa’s Nedbank Group , which provided an  early multimillion dollar investment in the first phase of  Wildlife Works’ Kenya project, to help meet the bank’s goal to  become carbon neutral.
Australia’s Macquarie Bank announced this month it has  raised $25 million to invest in forest carbon projects with the  International Finance Corp. and a U.S. forest management firm.
Banking giant Bank of America Merrill Lynch is not yet  directly investing in REDD but is partnering with a number of  environmental non-governmental organisations (NGOs) developing  REDD projects in China, Brazil, Indonesia and elsewhere.
Abyd Karmali, head of carbon markets at Bank of America  Merrill Lynch , said his bank was merely “testing the  waters” in its investment in REDD. He said reservations about  investing in REDD boil down to a simple economic issue.
“Secure demand is all it would take to motivate more private  sector interest,” he said.
To drive that demand it may be necessary to be more  imaginative about how to sell forest conservation in private  sector markets, moving beyond carbon credits to other, perhaps  less tradable assets such as brands.
REDD offset deals that are taking place in the voluntary  carbon market represent just a fraction of the private sector’s  investment potential, said Benoit Bosquet, a lead carbon finance  specialist at the World Bank.
“Right now what we understand is a sort of CDM-like offset  system because we know the private sector has been involved in  the CDM,” said Bosquet, who coordinates the bank’s fund that  supports developing countries’ REDD readiness efforts.
“It would be very sad if private sector investments in REDD  would be limited to the purchase of carbon offset credits.”
Companies in agriculture, energy, transport, tourism and  mining — all of which may have a forest footprint — can  identify opportunities at different stages of their production  chains that investors can participate in. An example could be an  agricultural company raising crops on already degraded land  rather than clearing more forests.
“This full range of opportunities is nowhere near fully  understood,” said Bosquet. “I think you are going to see  different investors move into different segments of this range  of opportunities – some that are quite keen to invest in REDD   regardless of the carbon offset opportunities.”

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