Climate Change Series Until two years ago, the only businesspeople regularly found in tropical forests were those wanting to clear them to plant crops or rear livestock or the occasional eco-tourism entrepreneur.
Then came the groundbreaking Stern Review on the economic impact of climate change and a series of reports by the Intergovernmental Panel on Climate Change, a United Nations body of scientists, that highlighted the large and critical contribution deforestation and land use change make to climate change.
The world’s forests do the vitally important job of regulating the level of carbon dioxide in the atmosphere. Yet an area the size of 36 football pitches is cut down every minute, and deforestation accounts for up to 25 per cent of all greenhouse gas emissions.
Many forest nations argue that unless credits can be obtained for not cutting down forests, it would be virtually impossible to contain climate change.
Governments agreed at a UN meeting in Bali last December that an initiative known as Reducing Emissions from Deforestation and Degradation (Redd) should be included in the successor to the Kyoto Protocol. Since then, private sector involvement has increased dramatically.
Redd provides payments in the form of carbon credits to encourage forests to be saved.
Eric Bettelheim, chairman of Sustainable Forestry Management, a company that conserves and manages forests, says the attractions are simple. “It’s at the middle-to-low end of the cost curve, so investors can generate returns and do good from relatively low-hanging fruit,” he says.
Macquarie Group and Merrill Lynch are two of the highest-profile financial services companies starting trial Redd projects. They are hoping their decision to jump in early will pay off if, as expected, the successor to the Kyoto Protocol includes Redd.
“The problem for forests is they have not been valued other than for wood,” says Oliver Yates, head of renewable energy and climate change for Macquarie Capital Advisers. “Carbon and the value forests provide in the storage and reprocessing of carbon is the start of that valuation process.”
Jeff Hayward, climate change manager of the US-based Rainforest Alliance, says he is already inundated with land use change inquiries compared with even a year ago. But even these might be considered a trickle if Redd is included in Kyoto’s successor.
“The level of certainty is not there yet,” he says. “The big money is not going to come in until there’s more clarity over the rules and framework for the compliance market.”
Land ownership is a key issue, particularly in South America where smallholders control about 30 per cent of the Amazon forest but do not always have the right to make money from it. “Redd without major regulatory change is not going to make forest-based economies viable,” says Christiane Ehringhaus of the Centre for International Forestry Research in Brazil.
Public awareness of Redd is extremely limited, adding to potential investors’ challenges. And rewards for forest projects are not as great as in other sectors. In the voluntary market, Redd carbon credits earn about $5-$10 a tonne, one-third of what’s possible in the compliance market for, for example, power projects.
A lot of money will be needed. The Eliasch Report, which was published in October by the UK government as a follow-up to the Stern Review, estimates that it will cost up to $33bn a year to halve emissions from forests by 2030, but that the long-term benefits would be $3,7000bn. The report predicted the value of forest carbon credits could be about $7bn in 2020.
Some governments are not waiting for Kyoto’s successor. The Australian state of New South Wales included forests and land use credits in its emissions trading scheme and hopes to attract greater private sector involvement as a result.
What the voluntary sector does pay a premium for, however, is what Mr Hayward calls “gourmet” or “boutique” carbon. This is where forest projects deliver additional benefits for communities, such as improved water resources and enhanced biodiversity.
This has triggered a greater interest in payments for environmental services, where companies such as water utilities pay communities to conserve their local environment.
Earlier this year, Canopy Capital, a London-based investment company, took this a step further when it signed a deal with the Iwokrama International Centre for Rainforest Conservation and Development in Guyana to holistically manage 370,000 hectares of the Guiana Shield by means of a $100m bond. Investors make returns on the bond when the services in the protected area are sold.
Andrea Babon, who is researching a doctoral thesis on Redd, puts it simply: “The link to climate change has put forests back on the business agenda. I wouldn’t have got funding without Redd in the proposal.”
