Creating global consensus on REDD+

Options Market and Risk-Reduction Tools for REDD+

We are now in a critical window of time for developing carbon markets and building consensus on a new global climate regime - and rapid action on REDD+ is essential for its success.

REDD+ has great potential to prevent irreversible forest loss and mitigate dangerous climate change risks in a cost-effective manner. Reducing emissions from tropical deforestation and agriculture - accounting for roughly 25% of global anthropogenic emissions - is an essential and time sensitive opportunity to turn the corner towards climate safety. Though deforestation rates have decreased in recent years, potential policy changes and rising agricultural commodity prices indicate that they could spike once again, with profound effects on the climate. Recent scientific analyses suggest that once deforestation in the Brazilian Amazon reaches a certain level, major rainfall reductions in the region could be triggered, leading to additional forest die-off and carbon releases, which could have devastating consequences for indigenous and other forest-based communities. In the worst-case scenario, we could be only a few years away from this damaging feedback loop. Thus, there is no time to waste in creating the necessary incentives for REDD+. The project seeks to ensure that deforestation rates in Brazil and other countries continue to decline, reaching zero net deforestation emissions. To achieve this goal as demand for agricultural products rises, it is crucial to maximize agricultural productivity on already deforested lands and enhance the economic value of standing forests through a system of positive incentives.

While discussions on REDD+ have advanced in the UNFCCC negotiations and readiness efforts are progressing with public financing, private investment is still lacking for REDD+ and other climate mitigation efforts. Given the continued stalemate on carbon policy in the U.S. and the slow progress of international climate negotiations, regulatory uncertainty makes it reasonable (from a business perspective) for companies to delay costly R&D and investments in low-carbon technologies. This policy uncertainty, combined with a lack of clarity on REDD+ standards and whether regulators will allow REDD+ credits to be used for compliance purposes in emerging and future carbon markets, contribute to the perception that investing in REDD+ is a speculative business.

On the demand side, low private demand for REDD+ due to policy uncertainties provides low incentives for suppliers to develop large supplies of compliance-grade credits. On the other hand, demand for these credits is partly undermined because most potential buyers, as well as policy-makers and regulators, lack confidence in whether tropical jurisdictions can produce supplies at the required quality level. With estimated opportunity costs in the range of $19–$28 billion, which is required annually to cut global deforestation in half, investment in REDD+ is just a minor sliver on the scale of private capital markets and with respect to the magnitude of the problem (Kindermann et al., 2008). Nevertheless, market demand remains volatile and the private sums are still paltry relative to the scale of effort that is needed to solve the problem. In addition, while voluntary markets have provided important lessons, most private investment has been for project-scale approaches that are not part of the jurisdictional-scale accounting frameworks that are more suited to the requirements of compliance markets, including the frameworks for REDD+ that are being proposed in California as well as in the context of the UNFCCC. On the supply side, governments and other actors in REDD+ countries face risks that include: (a) the possibility that these supply-side actors will not be able to recover investments depending on policy outcomes, as well as possible underperformance/reversals; (b) that they will miss out on more profitable economic opportunities from agriculture or other investments in the future by investing in REDD+ in the near term; and (c) that they could sell credits to those willing to buy them in today’s policy environment and miss out on greater rewards from carbon markets and other climate programs in the future.

The flip side of inaction on climate change by both private and public actors is that potentially regulated companies are exposed to a carbon liability and carbon price risk - i.e., the risk that regulation could come when relatively low-cost and time-limited opportunities such as REDD+ are no longer available (because the most severe forest destruction would already have occurred) and the technology to make reductions affordable has not yet been developed for other sectors.

Related to the REDD+ issue MCC organized and hosted a workshop on "Reconceiving Forest Governance: The Example of the German Forest" on October 21, 2013.