Could California Make or Break REDD?

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Corporate buyers looking for attractive ways to meet their internal emissions reduction goals have been drawn to individual projects that reduce emissions from deforestation and forest degradation (REDD). But REDD is not happening at the scale necessary to bring tropical deforestation to an end, in large part because demand for REDD offsets is currently restricted to the voluntary markets. If the US state of California was to take the bold and risky step of welcoming REDD offsets into its cap-and-trade program, that would provide the clear signal on REDD that the rest of the world is waiting for.

No other term in the forest carbon market generates both excitement and controversy quite like REDD (Reducing Emissions from Deforestation and forest Degradation). These projects have developed in voluntary carbon market circles as a way to place a value on the carbon sequestration provided by tropical forests and allow this value to be monetized in a way that ensures dollars flow down to local governments and community groups to encourage them to conserve forests.

“There’s been great progress, at least in the voluntary space,” said Toby Janson-Smith, Director for the Verified Carbon Standard’s Agriculture, Forestry & Other Land Use program, speaking at the Climate Action Reserve’s (CAR) Navigating the American Carbon World (NACW) conference in San Francisco last month. “We’ve seen over the last five years or so, REDD has really matured in terms of high-quality project development, high-quality carbon accounting frameworks and standards and just good implementation.”

Forest Trends’ Ecosystem Marketplace tracked 8.6 million tonnes of REDD offsets transacted in 2012 in its State of the Forest Carbon Markets 2013 report. But while REDD holds a large slice of the voluntary market for forest carbon projects – $70 million out of the $216 million market value – it is a relatively small sum of money and nowhere near what is needed to truly tackle tropical deforestation, Janson-Smith said.

Enter California. The potential inclusion of REDD+ at the jurisdictional level in the US state’s cap-and-trade program for greenhouse gases has game-changing potential.

“The world is watching California to see if California is going to implement REDD or not,” said Daniel Nepstad, Senior Scientist and Executive Director of the Earth Innovation Institute.

In a positive sign, California regulators publicly expressed their commitment to consider sector-based REDD offsets – those coming from reduced deforestation at the larger scale of jurisdictions rather than individual projects – although they refused to commit to a timeline for the possible incorporation of these offsets into their compliance market.

“If California can continue to be bold and put that jurisdictional emission reduction program forward, it’s going to be risky, there’s going to be shots fired, there’s going to be mistakes, but it’s where we need to go in the absence of federal leadership,” said John O’ Niles, Director of Climate and Forests for World Wildlife Fund US.

California: The great REDD hope

Given the uncertainty over how the international climate negotiations will play out, REDD proponents are looking for some jurisdiction to bravely take the first step in welcoming REDD offsets. They see an opening in California. Louis Blumberg, Director of the California Climate Change Initiative for The Nature Conservancy, is encouraged by the signals the state has already set regarding its commitment to forest conservation projects, with its issuance of more than 2.2 million offsets under the US forestry protocol to date.

“The challenge is to next bring in jurisdictional REDD from international jurisdictions,” he said. “We haven’t seen as much progress in California as quickly as we’d hoped, but there are good signs.”

Major doubts have been seeping into the carbon markets about REDD ever seeing the light of day in California. But the California Air Resources Board (ARB), the agency charged with overseeing the cap-and-trade program, seemingly attempted to squash those doubts by clearly stating it will continue considering international offsets – despite strong political opposition – in a proposed update to the scoping plan governing implementation of the state’s greenhouse gas reduction law.

The agency also cited the safeguards recommended by the REDD Offsets Working (ROW) Group, which limit accepted offsets to those from jurisdictional REDD+ programs. ROW released its technical and policy recommendations to California and Acre, Brazil and Chiapas, Mexico, the US state’s partners in a memorandum of understanding, in July 2013. The scoping plan document also referred to the Governors’ Climate and Forests Task Force, a coalition of 22 subnational jurisdictions contemplating programs and policies such as REDD.

California understands the need to address climate change, which includes addressing tropical deforestation, said Jason Gray, ARB’s staff counsel. That is why REDD is specifically called out in its regulation and why the proposed update to the scoping plan reiterates the state’s commitment to evaluate how REDD could eventually enter its system, he explained to eager listeners at the NACW conference.

Sending the right signals

California would not provide a complete solution to the demand challenge in the REDD market. Even if the state moves forward with REDD, the program restricts the use of international offsets to 2% of a regulated entity’s compliance obligation in the second compliance period (2015 – 2017) and 4% in the third compliance period (2018 – 2020). Although Acre could consume that demand entirely on its own, reaching an agreement with Acre and Chiapas would not be trivial, O’ Niles said. 

“California is obviously not going to buy all of Brazil’s credits, but putting a signal that says there is a compliance carbon market out there that accepts this and here’s what the rules look like would be enormously powerful,” said Steve Schwartzman, Director of Tropical Forest Policy at Environmental Defense Fund.

Brazil slashed deforestation rates six years in a row before relapsing in 2013 – an achievement that meant 3.5 billion fewer tons of carbon dioxide escaping into the atmosphere. But those gains are inherently fragile because positive incentives have not materialized for governments and local producers and there has been substantial pushback from Brazil’s agricultural sector, he said.

Brazilian states such as Acre and Mato Grosso have undertaken serious monitoring and measuring work to pave the way for their REDD offsets to be accepted into the California market. Mexico is starting to build a national REDD framework that nested projects can link to, with the CAR once again taking on the voluntary market’s traditional role of laying down the groundwork for the compliance markets with its Mexico forest protocol, adopted by the CAR board in October 2013.

“We’re in a world in which any sign, any positive recognition, to these states and to Brazil or Indonesia or Peru or Mexico will have tremendous magnifier effects,” Nepstad said. “They’ve built the systems and the market is not there. The last hope in many ways in the near-term future is California.”

Lingering doubts

Political opposition has been one of the major factors driving the growing reservations that REDD would ever be allowed into California’s program. In February 2013, State Senator Ricardo Lara introduced Senate Bill 605, a proposal that would have limited offsets to the US and possibly within the Western Climate Initiative, which includes two provinces in Canada but no other international jurisdictions. The bill did not pass the California Assembly before the end of last year’s legislative session, but could be reconsidered in its new form this year.

Part of that vocal opposition is driven by urban groups that believe emissions reduction projects should occur in the low-income communities in California where the pollution is most heavily felt. There has also been pushback against REDD by some local and indigenous communities in countries that could be partners with California and uncertainty over whether the state could implement the necessary social and environmental safeguards before REDD gets into the program.

“The issue of REDD has elevated the voice of indigenous and local people massively,” O’ Niles said. “You can argue whether we’ve done enough or whether we could still do more, but 10 years ago, we were not having conversations about how you’re going to involve indigenous people. We can always improve. It’s great to have multiple voices because we need to be challenged on this. If communities are not going to be on board, the permanence is not going to be there and the emission reduction is not going to be there.”

While the ARB understands there may be concerns about REDD, the progress it has seen through the GCF is impressive and helps with the agency’s outreach to policymakers, Gray said. “We want to make sure that if we bring something into the compliance market, that the protections are in place so we’re not incentivizing any negative impacts,” he said.

But some market players still have major doubts that California will ever take on REDD. Andre Templeman, managing director and founder of Alpha Inception, cited the difficulty in developing a program that could ensure rigorous verification of emission reductions in forests in other countries, as well as the challenges and sometimes the abandoned pursuits the ARB has experienced in approving offset protocols such as one for pneumatic valves in its own backyard.

“REDD has a zero percent chance of ever getting into California within my kids’ lifetimes,” he said. “REDD is just very, very politically difficult. It would be nice to have, but it’s just not going to happen.”

If not California, then who?

Many jurisdictions around the world have invested tremendous time, effort and resources in developing REDD programs, with support from the public sector and donors, but finding compliance markets that could serve as potential sources of sustained financing for these offsets is essential to REDD’s success, experts say.

However, there are not many candidates outside of California, they note. The European Union Emissions Trading Scheme (EU ETS) has been the largest carbon trading market for years, but the EU ETS is imposing more restrictions on offsets, not less.

International mechanisms such as the Green Climate Fund – a United Nations Framework Convention (UNFCCC) on Climate Change framework to eventually transfer $100 billion per year in climate finance from the developed to the developing world – could potentially be tapped to finance REDD development, but the fund’s future is uncertain given the state of the international climate negotiations.

The World Bank is an interesting player because many donors have parked their money in the bank’s Forest Carbon Partnership Facility and Forest Investment Program in light of the uncertainty in the UNFCCC negotiations, O’ Niles said. These programs could potentially make large subnational investments in countries that meet key criteria such as setting reference levels and establishing social safeguards, but the checks have yet to be written.

The path forward

California’s regulations mandate that the ARB engage in another rulemaking process before REDD offsets are allowed into the program, a process that would require the ARB to have a good answer on how it will ensure that the system requires rigorous monitoring and reporting, Gray said. The ARB would also have to secure an independent finding from California’s governor that the inclusion of REDD offsets meets specific statutory requirements, as the agency did before finalizing the linkage with Quebec’s cap-and-trade program, he said.

“Just the discussion alone is important and helps to keep the debate of REDD alive in California,” said John Nickerson, CAR’s Director of Forestry. “A complete rejection of REDD would be devastating.”