Markets & Financing
LAST UPDATED on March 2, 2012
Forest carbon activities have involved two general types of financing: 1) Readiness or Preparation Finance, and 2) Carbon Finance. The two types of financing are not always clearly differentiated. The same sources may provide both types of finance and carbon finance may be used to fund readiness and support activities as well.
Refers to financial support to initiate and set up the projects and national/state programs for implementing forestry activities that deliver real, measureable and verifiable net carbon gains. Preparation especially for national/state level programs involves a suite of actions such as stakeholder consultations, national policy and institutional development, setting up monitoring systems and undertaking pilot activities. Sources of readiness finance can be divided into two categories: a) Overseas Development Assistance and b) Other Sources.
Overseas Development Assistance (ODA)
These are payments from foreign governments in the form of:
- Bilateral development projects, grants and loans – Key bilateral donors include Norway, Germany, Australia and Japan. Norway has made large pledges and agreements to fund forest conservation efforts in Brazil, Indonesia, Guyana, Tanzania, Mexico and recently Vietnam. Germany supports REDD+ development in many countries including Indonesia, Peru, Brazil, Vietnam, Columbia and Laos.
- Multilateral funds – Major multilateral funds for forest carbon activities include the Forest Carbon Partnership Facility (FCPF), the United Nations Collaborative Programme on REDD (UNREDD), the World Bank’s Forest Investment Programme (FIP), the Global Environment Facility (GEF), the Congo Basin Forest Fund, and the Partnership for Market Readiness (PMR) among others.
- Domestic government budgets,
- Foreign sub-national governments (such as the California Government to other States that are part of the Governors’ Climate and Forests Task Force),
- NGOs (such as WWF, WCS, TNC, Fauna and Flora International),
- Private corporations and firms, and
- Philanthropic organisations (such as Clinton Foundation and Packard Foundation)
Recipient national and sub-national funds may be set up to receive and disburse the moneys from different sources. ODA and larger donations tend to come with high-level agreements setting out the terms and conditions to be fulfilled for disbursement and the timelines. Example: Letter of Intent (LOI) tied to the one billion dollar pledge from Norway to Indonesia for Cooperation on REDD, May 2010.
Payments/rewards for net carbon gains as compared to identified baselines or reference levels as a result of successful project or program implementation. How these payments are received, how and to whom they are distributed are not standardized and vary from scheme to scheme, country to country, and project to project. Two types of strategies have been proposed and used for performance-based payments for forestry emissions reductions and removals: a) market and b) fund-based approaches.
Buyers purchase forest carbon credits to offset (compensate for) their greenhouse gas emissions, either on a voluntary basis (called the voluntary market) or to meet their mandated emission reduction targets under some state or international cap and trade program (compliance market). See Global Policies and Standards and Verification for further details on compliance and voluntary markets for forestry offsets.
Compliance and voluntary market credits may be bought through:
- direct over-the-counter agreements between end buyers and project developers,
- intermediaries such as brokers, retailers and wholesalers,
- exchanges, registries, trading platforms (such as Markit and Green Exchange), and
- buyers’ funds (such as the BioCarbon and Prototype Carbon Funds which are multilateral government buyers’ funds for carbon credits from less-developed countries).
Most purchases involve some form of Emission Reduction Purchase Agreement (ERPA) setting out the terms and conditions of purchase including the time, price and delivery details.
Recipient Funds have been and are being set up to receive payments for verified emission reductions. Some examples are the Amazon Fund (for reduced deforestation over the Amazon region in Brazil), the Suruí Fund (for REDD in indigenous Suruí territory, Brazil), the Guyana REDD+ Investment Fund, new funds for rainforest protection under development in Indonesia, and the Congo Basin Forest Fund.
Under the Amazon Fund, donors make voluntary payments into the fund for verified emissions reductions achieved. The payments are pure donations and the donors do not receive credits that they can trade in a carbon market or use for offsetting their own greenhouse gas emissions.
Readiness finance and Direct Carbon Finance (through funds)
In the Climate Change Talks in Copenhagen in December 2009, developed countries pledged to provide about $30 billion to developing countries for mitigation actions (including forestry or REDD+), adaptation to climate change, and technology transfer for low-carbon development in the period 2010 to 2012. It is not clear whether this “fast-start financing” from governments is primarily for readiness activities or also for results-based activities (carbon finance), and how much is for forest-related activities. The REDD+ partnership, an alliance of countries forged to speed up and scale up REDD actions, reported US$ 4 billion worth of commitment to REDD at the time of its formation in May 2010.
Calls have been made to clarify such fast-start financing – where it comes from, to whom, for what, and how it is delivered. See Fast Start Finance and the voluntary REDDplus database for some details on financing. The databases are incomplete and cover a wide range of activity types. As per the REDDplus database, Australia’s reported REDD-related commitments equal about US$ 140 million, Germany’s US$ 278 million, and Norway’s US$ 1.78 billion. The BASIC group of countries (Brazil, South Africa, India and China) indicated that they would not seek access to fast-start finance in order to ensure sufficient resources for the most vulnerable countries.
Market-based Carbon Finance
Ecosystem Marketplace reported a cumulative market for forest carbon offsets of US$ 149.2 million up to mid-2009, with a total of 20.8 million tonnes of carbon dioxide (CO2) being traded. Bulk of the transactions occurred since 2007 when compliance markets such as the NZ Emissions Trading Scheme and Kyoto Protocol became active. New Zealand credits commanded the highest average prices of $14 per tCO2. CDM AR credits averaged $4.76 and the voluntary over-the-counter market $8.44 per tCO2. The market for forest carbon offsets (5.3 MtCO2 and US$ 37.1 million in 2008) was a very small fraction of the total carbon offset market (4.8 BtCO2 and US$ 135 billion in 2008 as reported by the World Bank). This is partly because only certain forest carbon activities were included in the Kyoto Protocol and forestry credits were excluded from the EU ETS, the biggest market for Kyoto credits. The voluntary markets have been the dominant market for forest carbon credits.
Market Motivations & Expectations
The 2010 Forest Carbon Offsetting Report by Ecosecurities and others indicates a growing positive attitude to forestry offsets. A sharp rise was particularly noted in Europe. Most buyers were motivated by a voluntary desire to offset their emissions or were driven by current or anticipated compliance regimes. Very few had philanthropic motivations.
The study lists the key factors influencing purchase of forestry offsets: certification to a quality standard, project location, project type, community and biodiversity co-benefits, and reputation of the implementer. VCS and CCBS were popular standards. Developing country projects were favoured, though North American and Australian buyers preferred domestic projects. Reforestation with native species and avoided deforestation were preferred to commercial plantations. Buyers across the globe were willing to pay a price between US$5-10 per tonne of CO2.
The voluntary markets for forest carbon are rising, but also seem strongly linked to and anticipative of future compliance regimes emerging across the world. In the last year, bilateral and multilateral commitments from Norway and other developed countries to fund forest carbon schemes in developing countries have risen significantly and appear poised to overshadow the small voluntary offests market. These early commitments are linked in part to the anticipated emergence of the UN REDD+ scheme. California’s emerging emissions reduction scheme and the New Zealand ETS appear to be the other main compliance markets for forest carbon offsets at present.
The UN Climate talks in Cancun in December 2010 concluded with a decision to establish a Green Climate Fund to fund forestry, adaptation and green technologies in developing countries. Developed countries agreed to mobilize jointly about US$100 billion per year by 2020 for long-term financing for developing countries. Whether financing for REDD+ will be mainly through ODA and fund-based approaches or will also involve market approaches remains to be seen.