Guest Post: Financing to Protect Forests: Will Carbon Markets Deliver?

Carbon markets, once touted as a golden ticket for funding efforts to reduce deforestation, have yet to deliver on their promise. In this guest post, Brian Murray, research professor of environmental economics at Duke University’s Nicholas School of the Environment, explains why and proposes alternative financing options. For more on global efforts to reduce emissions from deforestation, see the report from CFR’s recent workshop on the subject, at which Dr. Murray was a speaker.

Carbon markets, long seen as a promising vehicle for monetizing the environmental value of intact forests, have so far failed to deliver on that promise. Though there has been progress toward including forests in an agreement at the UN’s climate summit in Paris later this year, the use of carbon markets to pay for their protection faces substantial hurdles.

The problem is a serious one.  Deforestation alone accounts for roughly 10-15 percent of global emissions, just a bit less than emissions from transportation. In addition to its effect on the climate system, deforestation harms biodiversity, watersheds, air quality and soils. It also reduces the availability of timber, fuelwood and non-timber forest products such as nuts, rubber, and bushmeat.

Governmental efforts to fight deforestation have typically fallen into three categories: (1) land use restrictions, (2) economic incentives to reward or punish particular behaviors, and (3) direct management by the government.  In North America and Europe, where pressure on forests from agriculture and industry is relatively minor, these policies have worked fairly well to stabilize land use, forest area, and carbon stocks. In other regions, most notably the tropical forests of Central and South America, Southeast Asia and central Africa, pressure from agricultural development and logging continues to deplete forests at alarming rates.  Targeted regulation, trade restrictions on illegal logging and the establishment of protected areas have not been sufficient to forestall the clearing of about 13 million hectares (about 50,000 square miles) of forests worldwide each year, which emits more than 3 billion metric tons of CO₂ - equivalent to the emissions of more than 600 million automobiles.   Even more CO₂ is lost when forest degradation is factored in.

The critical factor is that forested land is often more economically valuable to the landholder when cleared.  Population growth and rising incomes raise demand for food and fiber, both for local consumption and for global commodity markets. It is easy to understand the economic incentive for those who clear their land to achieve a better return. It also underscores what is necessary to stem the loss of forests: raising the economic return from keeping forests in place. This is where carbon markets could come in.

From 2006-09, there was much momentum around the idea of a large global carbon market that would cap the emissions of developed countries. Developing countries could reduce emissions from deforestation and forest degradation through a broad suite of approaches known as REDD+, and sell those reductions as offset credits, which developed countries could buy to help them comply with their emissions caps. These credit sales into the carbon market were expected to generate tens of billions of dollars per year in revenue for countries that reduced deforestation. This was seen by many as a substantial breakthrough in efforts to sustain forests, but complexities surfaced.

First, the much anticipated 2009 global climate summit in Copenhagen failed to create a successor to the Kyoto Protocol or a global carbon market. Likewise, the United States’ plans for a national cap-and-trade program collapsed in 2010, including with it a very ambitious program for REDD+ credits for compliance use in the U.S. market. Since then, several countries, including many developing countries with the potential to sell REDD+ credits, have rebelled against the idea that these credits should be sold into markets where they would be used for compliance by developed countries in lieu of emission reductions they would otherwise have to make on their own. Moreover, concerns were expressed that market-based schemes would violate localized indigenous rights, would not ensure the equitable distribution of benefits, and otherwise lead to the commodification of nature. Many of those concerns would apply to any financial mechanism that paid for REDD+, but much of the antipathy was aimed at the carbon market.

Diplomats have worked hard to reach agreement on those controversial governance issues, and an agreement has been reached in principle that forests will be included in some form in the Paris agreement. But regardless of the details hammered out in and after Paris, a unified global carbon market including REDD+ does not appear to be in the works. Any agreement in Paris is likely to be built “bottom up,” through national emissions reductions pledges (rather than “top down,” through a global set of targets). Many of the largest emitting countries will choose carbon markets to implement those actions. The EU is expected to continue its use of an emissions trading system. China has recently announced its plans to develop a national cap-and-trade program, and U.S. regulation of its largest emissions source (electric power plants) are slated to follow a “trading ready” approach at the discretion of the states. But each domestic system will individually decide whether REDD+ credits will tie in. So far, none of these systems have specified the use of REDD+ offsets. California’s cap-and-trade program has indicated its willingness to accept REDD+ credits under some circumstances, but this approach has not yet been formally adopted.  So while the possibility of large carbon market demand for REDD+ cannot be ruled out completely, the fragmented nature of emerging carbon markets and the lack of attention to REDD+ could spell weak demand for market-driven REDD+ for the immediate future.

Despite this discouraging outlook for carbon markets in the UN talks, however, projects to preserve forests and reduce emissions from deforestation can be advanced through other means. Developing countries can seek official development assistance, loans, bonds and innovative “pay for performance” options where the financial return is determined by how much emissions are actually reduced.  The United States and other developed countries can help finance and guide these efforts as part of their own climate commitments. These approaches can also be joined with private sector initiatives such as supply chain requirements that prohibit the purchase of commodities from illegally deforested land, which have been utilized with some success in palm oil (Southeast Asia) and soybeans (South America).  And public or private investment in agricultural productivity can raise living standards for farmers and reduce pressure for forest clearing. So, while the future of REDD+ in carbon markets may be uncertain, the future of forests can nonetheless be improved.

Thanks to Justine Huetteman of Duke, who provided research assistance, and Jonah Busch of the Center for Global Development, who provided comments on an earlier draft.