Special report: Money could grow on trees, depending on carbon price

Giving trees a value is one solution for halting deforestation, but deciding how much a forest is worth is proving challenging, reports Sara Schonhardt

Jakarta, October 3 - Reducing emissions from deforestation and forest degradation, otherwise known as REDD, offers vast potential for companies, developing nations and native forests. But its viability is threatened by the absence of a liquid market and a clear signal by policymakers on how REDD would be funded.

For now, REDD credits are not included on Europe’s emissions trading scheme, the world’s largest carbon-trading system. And while several REDD projects are getting closer to selling their credits on the voluntary market, those hoping to benefit from the scheme say most investors are not willing to bear the risks just yet.

“We’ve found some buyers that have been willing to pre-pay for credits,” said Todd Lemons, the CEO and chairman of for-profit conservation company Infinite Earth. But despite interest from investment funds that he says have earmarked “billions” specifically for REDD, none have invested in the company’s Indonesia project.

Hong Kong-based Infinite Earth is part of the EnVision group, which develops natural resource projects for profit. The company was created in 2008 to develop the Rimba Raya Reserve, a 90,000-hectare peat swamp forest in Central Kalimantan.

Lemons said the reserve will serve as a buffer against palm oil plantations encroaching on the neighboring national forest, home to rare flora and fauna, such as Bornean orangutans. An Indonesian company is listed as the project owner.

Since its start, Infinite Earth has pooled more than $3.5 million from international private investors, such as Shell Canada and the Clinton Foundation, to fund the project’s development. They received the first signal that their investment was making headway in August, when Infinite Earth’s method for calculating carbon credits from forestry projects was approved under the Voluntary Carbon Standard.

Few methodologies have lined up to undergo VCS’s approval process, which requires double validation from two separate auditors.

Infinite Earth’s was the first international REDD methodology the VCS fully approved, and on September 22 a reforestation project in Tanzania became the first forestry investment to earn carbon offsets after credits were issued and placed in the VCS registry.

The news is drawing attention from investors reluctant to make the foray into forest-carbon trading. Forestry projects have already been operating on other registries, such as California’s Climate Action Registry, but project experts say VCS is the most credible standard. Once a forestry project begins trading there, it could open the door for REDD to be included in the UN-based compliance market.

If that happens, it could unleash billions of dollars toward climate change mitigation efforts.

The Rimba Raya project alone could create around 75 million credits, or offsets, by avoiding the release of carbon that results when peat swamp forests are converted for agriculture (this is based on the idea that one metric tonne of CO2 equals one credit). Given today’s average UN-certified carbon price at between 10 to 15 Euros per credit, those credits could add up 1.1 billion Euros million in potential revenues.

For now, however, Infinite Earth has pre-sold only 10 percent of its credits, and at a price well below the US$10 a tonne needed to guarantee returns to investors.

And while Infinite Earth has bid its time through the verification process, unclear regulations and the months or even years companies must wait before they can issue offsets have dampened enthusiasm.

Most prefer to wait until the market gains some certainty. Without a formal exchange to publish information about buying and selling, few buyers can determine the true value of an offset, and there is no way to ensure credits are not being sold more than once.

Setting standards

To enter the market, projects need to meet rigorous standards set out by one of several carbon-offset schemes. The premier standard is the Clean Development Mechanism, or CDM, which is governed by the United Nations Framework Convention on Climate Change.

Demand for CDM credits, also known as Certified Emissions Reductions (CERs), comes from industrialized nations that have signed onto the Kyoto Protocol and can only buy such CERs to meet their targets, such as Japan, the European Union and Australia. The CDM does not include REDD, however, so Infinite Earth went with the Voluntary Carbon Standard.

Some standards allow for “dubious” credits since they do not require environmental impact analyses or public consultation with communities affected by the project, said Yuvaraj Dinesh Babu, chief executive of carbon finance advisor Idea Carbon in Singapore.

Most companies still try to address those issues, he said. Infinite Earth’s project, for example, has been certified by the VCS as well as the Climate Community and Biodiversity Alliance (CCBA), a group of environmentally focused NGOs that has developed voluntary standards for land management.

The standards, which were launched in May 2005, must work to minimize climate change, support local communities and conserve biodiversity, while also creating returns for investors and project developers.

Each country also sets its own sustainable development criteria for REDD. Indonesia’s regulations stipulate that a portion of the revenue a project earns from selling credits must be set aside in a fund for the community.

The idea is to address the underlying causes of deforestation, which is community need, said Lemons. Although the Rimba Raya project aims to implement social programmes linked to the UN’s Millennium Development Goals, some projects have been criticized for not providing sufficient economic opportunities for the communities that depend on the land for their livelihoods.

Others set criteria for community assistance too low, causing concerns among development organizations that for-profit conservation projects are incapable of returning benefits to the biggest stakeholders.

REDD operates under the principle that industrialized nations should pay for developing countries to reduce their carbon emissions. Companies that produce high volumes of greenhouse gases can buy credits from those that are helping reduce carbon in the atmosphere, such as Infinite Earth. The money from the sale of those credits then goes toward conservation efforts.

To help fund the project, Infinite Earth pre-sold around 2 percent of its expected offsets to Gazprom Marketing and Trading, an arm of the world’s largest natural-gas producer.

Additional funding came from Shell, which paid Winrock International, a non-profit resource management organization, to write the methodology for Infinite Earth. The Clinton Foundation helped fund the audit of the method used to calculate the credits, which was done by Rainforest Alliance and Bureau Veritas.

The third and final independent audit by California-based Scientific Certification Systems remains ongoing, but the lead verifier, Todd Frank, said determining the amount of carbon is just one criterion among many.

And at a cost of half a million dollars just for the writing and approval process, verification does not come cheap.

While Infinite Earth’s methodology is already paving the way for other REDD projects, it was designed for conservation projects that avoid planned land-use conversion in tropical peat swamp forests in Southeast Asia.

“Companies can make these methodologies as broad or as narrow as they want,” said Frank. But Infinite Earth’s methodology needed to be site-specific to account for the special characteristics of tropical peat swamps, so it does little good to rainforests in the Amazon. Frank said the broader methodologies that people are waiting for are still in the approval stage.

Without them, the market will likely remain limited. And as long as the credits are selling at a discount, companies are unlikely to see value in conservation.

“There’s a certain price on carbon that makes it worthwhile to undertake this,” said Frank. And if the price is too low, there is little incentive to keep people from cutting down trees or converting the land to palm oil.

Some countries are setting up domestic schemes; promoting renewables, energy efficiency and all other clean technologies. That could work to create liquidity in the market, but again, Fitrian Ardiansyah, an advisor for the World Wildlife Foundation, said what matters is how the market is organized and regulated.

“The WWF believes carbon offsetting and carbon markets are neither inherently good nor bad, but a means toward an end,” he told Eco-Business. “And it doesn’t matter how the world gets there as long as the concerns and pitfalls are adequately addressed”.

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