The increasing importance of the ‘patchwork’ approach for REDD

Last month, the second edition of State of the Forest Carbon Markets,was released. All in all, the report painted a positive picture for the forest carbon markets: the volumes, transaction value and average prices in 2010 were all up on the previous year at, respectively, 30.1MtCO₂e, $178 million and $5.50/tCO₂e.

Notably, REDD based transactions dominated the total volume contracted in the primary market – 67% of the 29MtCO₂e primary market, due to the methodologies developed for the voluntary market – whilst afforestation/reforestation projects declined in transactions across every primary and secondary market.

Moving away from multilateralism

Latin America contracted more than half of all projects in 2010, with the EU as the largest source of demand. Of interest, however, is the increase in localised demand: outside of Europe, most of the demand for a region’s credits was from within that region. In North America, for example, demand nearly equalled supply from the region.

This to be expected, if considered in the context of the wider move towards a patchwork approach to climate policy. The patchwork approach is the increasing preference to enact a patchwork of policies to tackle climate change on a sub-national, national and regional level. These efforts are, arguably, being prioritised over the global, multilateral efforts to address climate change by many countries. It seems that forest carbon is no exception; indeed this approach is becoming increasingly important for REDD.

A patchwork of supply

The report finishes by projecting a growth in supply to 373.1Mt over the period 2011-15, of which REDD projects will supply 335.3Mt, stating that the emerging picture is “fundamentally about a small—but growing—cadre of forward-looking buyers and investors making big bets on the future of the forest carbon markets.”

This is true; the bets are certainly “big”. However, with many countries moving towards a patchwork approach to climate policy, the international compliance market-mechanisms look increasingly unlikely to create significant demand – and in turn supply – for REDD, any time soon. In the Panama climate talks, for example, the focus of discussion still appeared to be on the how market-based mechanisms for REDD are to be included, if at all; demonstrating the absence of globally coordinated efforts to source REDD finance and the gap in financial mechanisms.

It’s possible, then, that “bets” are being made on the growth in REDD supply coming almost entirely from the voluntary markets and a patchwork of non-UNFCCC led unilateral or bilateral compliance mechanisms. The voluntary market is already seeing some significant movement in this area, as the report above demonstrates. In the case of unilateral or bilateral compliance mechanisms, however, the growth is more difficult to envision, precisely because it is a patchwork of mechanisms providing supply, but also because their existence is dependent on the need to offset emissions, i.e. the presence of an emissions cap.

The Governors’ Climate and Forests Taskforce (GCF) is attempting to create such a mechanism. The purpose of the GCF is to create compliance grade REDD credits, such that the entity complying with a cap will buy those emissions reductions in the future. This type of mechanism, whereby the sub-national or national entity that intends to cap emissions helps create methodologies for REDD project types, will become increasingly important for REDD over the coming years. This is because the GCF should, hopefully, demonstrate how REDD can work for projects in the compliance markets, but most importantly, it does so in the context of the emerging patchwork approach.

From the perspective of international climate policy, it may look ungainly, and be more difficult to quantify the emissions reductions on a global scale, but if national and sub-national entities with emissions caps and offsetting rules begin to create similar bilateral mechanisms to that being attempted by the GCF, the REDD market will develop far beyond that offered by voluntary markets alone, bridge some of the finance/supply gap left by the absence of a multilateral mechanism, and do so in the context of the bottom-up, patchwork growth in the REDD space.