REDD Demand Significantly Trailing Supply, New Incentives Needed to Finance Decreased Deforestation

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By Allie Goldstein

31 January 2014 | Demand for REDD+ emissions reductions for avoided deforestation could be as low as 3% of the available supply between 2015 and 2020, according to a new report from the Interim Forest Finance Project – a collaboration of the Global Canopy Programme, the Amazon Environmental Research Institute, Fauna & Flora International, and UNEP Finance Initiative.

Cutting global deforestation in half by 2020 could produce between 3.3 and 9.9 billion tonnes of emissions reductions (tCO2e), but global demand in the same period stands at only 253 million tCO2e, the report finds.

The report points to a disconnect between the urgency of reducing deforestation in order to meet the United Nations Framework Convention on Climate Change (UNFCCC)’s goal of keeping average global temperature increases under 2 degrees Celsius – the climate change that scientists have determined a ‘safe zone’ for survival of people and ecosystems – and the fact that an international compliance carbon market is still a long ways off.

“Reducing emissions from deforestation and degradation between 2015 and 2020 should be a strategic priority for governments, given that emissions from this sector, according to the recent IPCC report, are the second largest,” said Nick Oakes, Finance Programme Manager of the Global Canopy Programme. “However, large-scale demand for REDD+ emission reductions is expected to materialize only after a global compliance market comes into existence, under the auspices of the UNFCCC, in the year 2020.”

The group finds that $15-48 billion would be needed to fill the gap, but calls on international financing on the order of $12 billion, since not all emissions reductions must be paid for through REDD+ transactions. (They estimated carbon prices at $5/tCO2e.)

Currently, the sources of potential demand for REDD+ credits include the Forest Carbon Partnership Facility (FCPF) Carbon Fund, the BioCarbon Fund, the KfW REDD+ Early Movers Programme, California’s Emissions Trading Scheme (maybe, according to Ecosystem Marketplace’s coverage), and the voluntary market, which demanded 28 million tCO2e in 2012.

The current level of financing is not nearly enough to change the incentives around deforestation, the Interim Forest Finance Project says. Their ‘strategic intervention’ suggests ways to scale up demand before 2020, including laying out financial infrastructure such as Emissions Reduction Purchase Agreements (similar to a financial forward contract), options contracts, and price floors.

Examples from other sectors, such as healthcare, could provide some inspiration, according to the report. For instance, a public-private partnership created under the Global Alliance for Vaccination Immunization has galvanized $7.9 billion for the vaccination of 370 million children since 2000. Keys to the success of this program were matching funding from the public sector and foundations, such as the Gates Foundation; an international finance facility that uses long-term, legally-binding pledges; and, an Advance Market Commitment mechanism that locks buyers into funding a given volume of vaccines for a set price. Some of these strategies could be adopted for carbon markets.

“Payment on delivery of emission reductions is not the only way of incentivizing an increase in demand,” the report finds. “Contracts might also involve prepayment of a portion of the final contract value, for example, or minimum prices for emission reductions.”

Ecosystem Marketplace’s 2013 State of the Forest Carbon Markets report, which surveys forest project developers across the world, also found a potential gap between supply and demand: Project developers reported that they could bring 1.3 billion REDD credits worth approximately $9 billion (if prices remain around 2012 levels) to market over the next five years. That’s a big number – but it’s far less than the Interim Forest Finance Project’s figure, which is based on ambition (the goal of reducing global deforestation by 50%) rather than on what project developers actually have in their pipelines.

But the message is the same: these potential emissions reductions won’t occur unless they’re paid for.