United Nations rallies private sector for forestry protection investment
Merrill Lynch chief says REDD scheme investors face risks equivalent to "emerging markets squared"
The United Nations has stepped up its campaign to encourage businesses to deliver the billions of dollars of investment required to stop the destruction of rainforests and protect forest ecosystems.
The UN Environment Program Finance Initiative (UNEP FI) released the first of a two-part report today designed to identify and tackle barriers to investment in forest-related projects, such as the UN-backed Reducing Emissions from Deforestation and forest Degradation (REDD) scheme.
Speaking to reporters in London today, Abyd Karmali, managing director and global head of carbon markets at Bank of America Merrill Lynch, said that the success of REDD will depend on attracting private sector capital because, despite some progress, governments are unlikely to provide the massive investments required.
UNEP predicts that $40bn (£24.36bn) annually will be needed to halve global deforestation by 2030 and increase reforestation and afforestation by 140 per cent by 2050 relative to businesses-as-usual.
Karmali described the risk of investing in REDD projects as equivalent to "emerging markets squared", because of the double challenge of working in high risk countries and embryonic forest-based carbon markets.
However, he maintained that such risks can be overcome if forestry-related financial products are well structured.
"There is no question that there's an amplification of risk compared to investing in a traditional Clean Development Mechanism [CDM] project or doing a transaction within a European Emission Trading programme," he said.
"But, despite that, you can structure projects in such a way to mitigate those risks. So, as an example, a rainforest bond would not be the equivalent of a junk bond. It would be issued by a triple-A rated issuer and it would be principle protected."
Today's report is designed to whet the appetite of businesses and investors by detailing some of the opportunities and benefits associated with the REDD scheme. But it also highlights the barriers which need to be addressed by policy makers to mobilise private investment.
UNEP acknowledged that the lack of a global deal on climate change is a major barrier to boosting carbon trading.
The body also noted that the generation of carbon credits from reforestation and afforestation are not competitive with other types of CDM projects, resulting in a lower price for forest-related credits and lower demand on international carbon markets.
Forestry credits are labelled 'temporary' under the CDM because any carbon sequestered by new forests is not captured permanently. This is because trees will at some point die, releasing their carbon back into the atmosphere.
The forestry market is also hampered by the fact that its credits are banned from the EU ETS and some other national carbon trading schemes. The report said the ban was guilty of alienating reforestation and afforestation projects from the main sources of global demand for CDM-derived offsets.
The document released today is also aimed at tackling the lack of understanding by potential investors of the forestry markets.
The second part of the report targeting policy makers will be released during the UN Framework Convention on Climate Change meeting in Bonn, Germany in June. It will contain specific recommendations to boost investment.