The historic UN “Paris Agreement” achieved by climate change negotiators highlighted the importance of conserving forests and laid the groundwork for future global carbon markets to finance emissions reductions from tropical forest countries. But a full-fledged carbon market-based mechanism to protect forests and reduce rampant deforestation is still years down the road. In the meantime, reducing emissions from deforestation will continue to depend on a medley of public and private financing approaches: sovereign-to-sovereign performance payments, voluntary initiatives by private companies as part of their corporate social responsibility programs, philanthropic donations and public-private multi-lateral partnerships.
At First, Forests In Limbo
During the two weeks of negotiations in Paris, it was not clear whether forests or REDD+ (the performance-based financing mechanism to protect forests) would even get a mention in the final agreement at all. It mattered because stopping deforestation can reduce as much as 19% of current global greenhouse gas (GHG) emissions, and regrowing forests that have been cut down can actually suck out of the atmosphere up to another 10% of current global GHG emissions.
But In the End, Strong Support for Forests and REDD+
In the end, the final agreement does include strong and clear (by the standards of such texts) language “recognizing the importance of the conservation and enhancement … of sinks and reservoirs of greenhouse gases, including forests” and encouraging REDD+, the results-based financing mechanism that enables public and private funders to pay to reduce emissions from deforestation. As CGD’s Frances Seymour said in a recent blog, the agreement is “good for the climate, good for development and good for forests.” (The actual text is “Parties are encouraged to take action to implement and support, including through results-based payments, … policy approaches and positive incentives for activities relating to reducing emissions from deforestation and forest degradation, and the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries [REDD+]….”). Thus forests and REDD+ were underscored as key components of a global mitigation strategy, as CGD President Nancy Birdsall and former Peruvian Prime Minister Pedro Pablo Kuczynski urged in a recent Guardian op-ed.
What Does It Mean for Carbon Markets?
REDD+ was originally conceived as a simple market mechanism for compliance carbon markets (cap-and-trade programs) in which companies subject to emissions limits (caps) could buy emissions reductions both from other capped companies who could reduce emissions more cheaply, or from non-capped sources that could also reduce emissions, like tropical forests. (The advantages of carbon trading are clearly explained by CGD’s Jonah Busch in a recent blog.) But when negotiators failed to agree on global emissions limits in Copenhagen, demand for emissions reductions from compliance markets didn’t scale up as expected, and was limited to the few cap-and-trade programs that went ahead anyway, like the EU Emissions Trading Scheme and California’s cap-and-trade program, AB32. The legislation that established California’s program allows for companies to buy emissions reductions from the forest sector, and within California this is already happening. The legislation also lays the groundwork for companies to buy emissions reductions from avoided deforestation tropical forest countries, but the implementing rules have not been finalized. However the other large cap-and-trade program, the EU ETS, doesn’t allow companies to buy emissions reductions from reduced tropical deforestation.
So what difference will the Paris Agreement make when the 45,000 or so people who came to Paris for the climate conference return to their desks and begin to implement the agreement? First, the Paris Agreement clearly endorses the idea of international trading in emissions reductions. It allows countries to “engage on a voluntary basis in cooperative approaches that involve the use of internationally transferred mitigation outcomes” (ITMOs will be the hot new acronym) to meet their own emission reduction targets. This means that as global carbon markets begin to scale up, they would be allowed under the Agreement to buy emissions reductions from reduced deforestation in tropical forest countries.
California is the nearest to actually buying emissions reduction credits from tropical forests. In Paris, Mary Nichols, the head of California’s cap-and-trade program, said that she thought that the rule-making for California’s international forest program would be concluded within the next year or so and initial purchases of emissions reductions could begin in 2017 or early 2018. This is good news, as Jonah Busch explained in a recent blog; California’s cap-and-trade program is already linked with Quebec’s and discussions are underway to explore potential linkage with Ontario and Manitoba. This means that, if their rules are fully aligned, this could ramp up demand for international forest emissions reductions (so-called offsets). In addition, the International Civil Aviation Organization (ICAO) has adopted voluntary targets to reduce emissions from aviation (2% of the global total) and is developing a market-based mechanism that also could include international forest offsets. In Paris several experts indicated that new cap-and-trade programs are being developed in regions across the US in response to President Obama’s Clean Power Program. These could begin to trade with one another in future and eventually lead to a bottom-up national U.S. cap-and-trade market. China and Korea have launched cap-and-trade programs that already include domestic forest offsets. Perhaps they could be encouraged to expand to include international forest offsets. And maybe even the EU will revisit its policies for the ETS to include international forest offsets. So the potential for carbon markets to mobilize finance to conserve tropical forests is promising, if not imminent.
But Until Compliance Carbon Markets Kick In…
In the meantime, the bulk of REDD+ financing will continue to come from sovereign-to-sovereign performance payments. Through 2014 about 90% of funding for REDD+ came from public funders. In Paris, Norway, Germany and the UK pledged an additional $5 billion to reduce tropical deforestation between now and 2020, reaching $1 billion per year by 2020. This is double the average of $550 million per year from these three countries since 2010. But as Frances Seymour noted in her blog, leadership on forest finance is one area where the United States and other funders are missing in action. And a recent CGD working group report, Look to the Forests, notes that until recently the bulk of REDD+ funding financed capacity building and small pilots rather than paying for actual results.
Private companies have also supported reduced deforestation through voluntary purchase of carbon credits to help meet their internal greenhouse gas reduction targets. These voluntary carbon markets payments support local projects to protect tropical countries. Through end-2014 private carbon market funding amounted to about 10% of total funding for REDD+. Private companies are now working with states and other sub-national (“jurisdictional”) governments to embed (“nest”) their projects into larger, geography-wide programs.
There are initiatives underway to attract impact investors, institutional investors and private companies to invest in emissions reductions credits in anticipation of compliance carbon markets by buying so-called pre-compliance credits. The idea is to bolster carbon markets until full-fledged compliance markets, like California’s and ICAO’a, are up and running.
The Green Climate Fund is authorized to fund results-based payments for REDD+. But it has yet to finalize the instrument or commit payments for performance in reducing deforestation. This should be high on their priority list. Bill Savedoff and I argue that the GCF has a unique opportunity to make its grants and loans highly effective by paying for results in reducing deforestation, focusing its pay-for-results agreements in relatively few countries; and linking payments to independently verified emission reductions.
The recognition of forests and explicit encouragement of “internationally transferred mitigation outcomes – carbon trading – in the Paris Agreement is good news. But there are miles to go before this leads to large funding flows to conserve forests. In the foreseeable future, reducing tropical deforestation will continue to rely on an assortment of funding sources and instruments while waiting for compliance carbon market-based mechanisms to slowly expand. The challenge is to increase funding from these other sources, particularly from non-usual suspect government sources, while waiting for carbon markets to take off.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.