A Slow Start for the for Carbon Credit Market

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.

BNP Paribas is one of a handful of financial institutions and investment funds entering the risky but potentially lucrative market for “credits” in the Reducing Emissions from Deforestation and Forest Degradation program, or REDD. A credit represents one ton 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 ventures to reduce deforestation and degradation in Africa.

BNP also acquired the rights to buy as many as 1.25 million carbon credits over the next five years from Wildlife Works’ flagship project in the Kasigau corridor in Kenya. The program aims to protect more than 202,000 hectares, or 500,000 acres, 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” producing organic cotton clothing.

But such carbon credits have found demand only in a small, thinly traded voluntary carbon market, as countries struggle to agree on new, binding emissions cuts under U.N. climate talks.

“There is growing impatience with the multilateral process, not only from practitioners such as myself, but more importantly, from many forest countries,” said Christian del Valle, environmental markets and forestry director at BNP Paribas in London.

“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,” he said.

A full U.N. climate deal could create a market through which rich, polluting countries could 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.

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 of the Clean Development Mechanism.

Governments like those of Norway, Germany, Britain and the United States have pledged $6.5 billion to help poorer countries develop systems to reduce emissions from deforestation, but that is seen as only a halfway measure. Private-sector involvement will be essential.

Recent studies suggest that between $17 billion and $33 billion per year is needed to achieve a U.N. Environment Program 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 was the lead U.N. negotiator on REDD for the United States and is now a consultant for the advisory group Climate Focus.

“There is a disconnect between the understanding by countries and negotiators and the private sector of what the private sector needs in order to participate in REDD,” she said.

Ms. Lee said the United Nations’ 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 Clean Development Mechanism, she added.

One alternative to the so-far futile attempts by the United Nations to achieve a multilateral agreement among all of its members may be bilateral or national action between two individual countries involving the private sector.

Leslie L. Durschinger, founder of Terra Global Capital, which runs a private equity fund that raises project finance for REDD, said, “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.”

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 programs. And regulators in 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,” Ms. Durschinger said.

Besides BNP, other early investors in these emerging markets include Nedbank Group of South Africa, which provided an early multimillion-dollar investment in the first phase of Wildlife Works’ Kenya project.

Macquarie Bank of Australia announced this month that it had raised $25 million to invest in forest carbon projects with the International Finance Corp. and a U.S. forest management firm.

Bank of America Merrill Lynch is not yet directly investing in REDD but is working with a number of nongovernmental environmental organizations developing REDD projects in Brazil, China, Indonesia and elsewhere.

Abyd Karmali, head of carbon markets at Bank of America Merrill Lynch, said his bank was just “testing the waters” in its investment in REDD. He said reservations about investing in REDD boiled down to a simple economic issue: “Secure demand is all it would take to motivate more private sector interest.”

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, like brands.

REDD offset deals in the voluntary carbon market represent just a fraction of the private sector’s investment potential, said Benoît Bosquet, a lead carbon finance specialist at the World Bank who coordinates the bank’s fund that supports developing countries’ REDD readiness efforts.

“Right now what we understand is a sort of C.D.M.-like offset system because we know the private sector has been involved in the C.D.M.,” said Mr. Bosquet, referring to the Clean Development Mechanism. “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, transportation, tourism and mining 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 Mr. 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.”

Valerie Volcovici is a Reuters correspondent.