Can carbon finance protect forests and prevent climate change?

Some of our clients will remember that The CarbonNeutral Company started business in 1997 trading as Future Forests, and will know that our services have always recognised the central role played by ecosystems in maintaining a stable climate. Planting and protecting forests makes perfect sense because “trees suck up carbon dioxide and turn it into wood and oxygen”. However, 15 to 20 per cent of global carbon emissions still arise from deforestation. So let’s look at the important issues of what is carbon finance’s ability to protect and enhance forest ecosystems, and what would make it more successful.

Climate benefits undervalued

Carbon finance has not made an impact on forest ecosystem protection because forests have been given a bit-part in the market mechanisms of the UN’s Kyoto Protocol (KP). That is unfortunate because forest ecosystem destruction deals a double blow to climate stability – the carbon dioxide emissions from forest destruction (specifically, when burned); and, the loss of their ability to soak up CO2 from the atmosphere on an ongoing basis (their sequestration potential). Conversely, when new forests are established CO2 concentrations in the atmosphere are reduced as carbon is sequestered, and when established forests are protected the sequestration capacity of forest ecosystems increases.

Climate regulation too weak

The largest regulated carbon market, created under the KP, contains a mechanism for accounting for carbon sequestered through land use, land use change and forestry (LULUCF) activities, such as reforestation, in developed countries with reduction targets under the KP.

However, the mechanism is voluntary, and it’s complicated: faced with this combination, it seems member countries have largely chosen to ignore it. Developed countries with specific KP targets may elect whether or not to measure their LULUCF reductions, but if they do so, it must be over the full commitment period under the KP. As the first KP commitment period comes to an end in December 2012, only a few developed countries with positive LULUCF balances are logging their forest carbon reductions against their Kyoto targets.

The KP is now extended until 2020, but has lost two of the most heavily forested signatories along the way – Canada and Russia. So, very little capital will find its way to protecting and extending forests in developed economies because the regulatory drivers for doing so are weak and weakening.

CDM throttles carbon finance

What of forest ecosystem protection in the developing economies that have signed up to the KP but which do not have reduction targets? The KP’s Clean Development Mechanism (CDM) enables developing economies without targets to host reduction projects and sell Certified Emission Reduction (CERs) to entities and countries with targets. Carbon credits traded in this way generate capital funding for the developing country’s reduction projects, and allows the purchasers of the credits to offset any emission shortfall with respect to their KP targets.

However, the difficulty in assuring the permanence of forestry projects led to CDM rules that issue temporary carbon credits (tCERs) to forestry projects. These tCERs have to be confirmed at the end of the KP commitment periods, or replaced. The risks and transaction costs associated with this tortuous approach has stifled interest and investment in CDM forestry projects. Consequently, forest carbon is the ‘bonsai’ of the KP market, accounting for less than 1 per cent of the primary market in carbon credits.

Voluntary Carbon Market standards crack the toughest problems

The Ecosystem Marketplace’s State of the Forest Carbon Markets 2011 reported record investments in forestry and land-use projects in the Voluntary Carbon Market (VCM) in 2010. Its figures show that historically forest carbon finance in the VCM is five times greater than across regulated markets, and growing. This is because the VCM has tackled two thorny issues when it comes to forestry: permanence and land ownership rights.

In the VCM, the Verified Carbon Standard (VCS) introduced its Agriculture, Forestry and Land Use (AFOLU) methodology for generating carbon credits in 2006. Under this approach, the permanence of AFOLU Verified Carbon Units (VCUs) is secured through a buffer pool of credits created, maintained and used to replace credits in projects if and when their carbon gains are reversed. While too early to say definitively, this is looking like a sound fix for the permanence issue.

The second thorny issue that plagues carbon finance in the forestry and land-use sectors is the fact that, unlike technology projects (think of a renewable energy project, say a solar installation), it can be difficult to determine & respect land and carbon ownership rights — particularly in virgin rainforests and communal lands in developing countries, which are the very regions where carbon finance has the most relevance. Although this issue is not fully solved, work by the Climate, Community and Biodiversity Alliance (CCBA) to set standards for the non-carbon aspects of carbon projects is being applied and improved as land-based carbon projects grow in the VCM.

What is needed to unleash the potential?

Relying entirely on the VCM to generate carbon finance anywhere near the level required to make a dent on emissions from deforestation just ain’t going to happen. The VCM is simply too small to generate the $ billions required. However, the progress made in the VCM can and should be scaled-up. More importantly, it should now be used in the building blocks for forest and land-use carbon finance in the successor agreement to the Kyoto Protocol. That way, the phenomenal progress in the VCM can be used to deploy carbon finance sufficient to make a positive impact on global climate stability.

Jonathan Shopley is managing director of UK-based The CarbonNeutral Company. Read more CarbonNeutral blogs here.