The US Agency for International Development (USAID) made a big splash in the carbon markets last week with the announcement that it will partially guarantee investments made by the Althelia Climate Fund for up to $133.8 million. But as agency officials made clear at the Carbon Expo conference in Germany, it’s no newcomer to the REDD space, having actively supported the development of projects in Colombia for years.
3 June, 2014 | In the shadow of political uncertainty and Congressional inaction, US President Barack Obama has not been shy about his using his executive authority to support projects that reduce emissions from deforestation and forest degradation (REDD+). His administration has pledged $1 billion to REDD+ efforts in recognition of the fact that as much as 80% of greenhouse gas (GHG) emissions come from the land use sector in some developing countries.
The US Agency for International Development (USAID) kicked these efforts up a notch with last week’s announcement that it will offer a new-risk sharing loan guarantee to enable the Althelia Climate Fund to lend up to $133.8 million in commercial financing for forest conservation and sustainable land use projects in developing countries. The Althelia guarantee is the first of what the agency hopes will be similar transactions with other partners.
But the Obama administration, through USAID, had already invested time and resources in supporting REDD+ projects. The agency previously developed the BioREDD+ program in Colombia, which started in 2011 and will run through 2014. Through the program, $27.8 million will be invested in biodiversity, REDD, and climate change adaptation, with eight REDD+ projects totaling more than 700,000 hectares being developed in the Colombian Pacific Coast to be validated under the Verified Carbon Standard and the Climate, Community and Biodiversity Alliance.
These REDD+ projects have emission reduction potential of more than two million metric tonnes of carbon dioxide per year from avoided deforestation and degradation, as well as regeneration of forests, according to USAID. They also offer biodiversity benefits via protection of the Chocó Biogeographic Region – one of the world's 10 “biodiversity hotspots.” The region is home to 9,000 species of vascular plants, 200 mammals, 600 birds, 100 reptiles, and 120 amphibians – many of which are endemic to Colombia – and the REDD+ investments will support the protection of species listed by the International Union for Conservation of Nature as endangered.
Clearing the path
USAID works on these REDD+ projects with about 20 Afro-Colombian and indigenous community councils that cover 8,000 families in the region. These elected community councils have the power to make critical decisions, such as how to invest the carbon revenues and which social benefits of these projects should be prioritized.
“They are given the land by constitution so they have very clear land tenure over those territories that are mostly forested areas,” said Daniel Lopez, Senior Environment Officer, Office of Environment for USAID in Bogotá, Colombia. This is an enormous advantage when compared to other countries in the region and the world, according to USAID.
The agency is supporting the drafting of the project documents, with the expectation of completing validation by October 2014 and securing the first verified carbon units by December 2015. Selling the offsets will generate revenues that would alleviate the pressure to make a living by other activities, such as increased timber extraction and conversion of forest to less sustainable land uses.
“When offered different opportunities, people will definitely take them,” Lopez said.
The projects also aim to improve livelihoods via investments in non-traditional economic activities such as the development of value chains for agroforestry crops – including acai, cacao, annatto and coconut – artisanal fishing, and particularly ecotourism.
“It’s a very beautiful landscape we have there so there are opportunities for ecotourism as an income-generating activity that is really connected to conservation,” he said.
“We have all the pieces together now and we hope that (these projects) produce very good results in terms of forest conservation, community development and improved biodiversity conservation,” Lopez added.
Making new friends
Having multiple revenue streams and multiple partners working together are critical to securing financing for these projects, said Stephen Matzie, Investment Officer for the Development Credit Authority (DCA), a USAID department that uses partial credit guarantees to mobilize local financing in developing countries.
Aside from the Afro-Colombian and indigenous communities, other USAID partners in the BioREDD+ program include Althelia and Fondo Acción, which facilitates project negotiations between local communities, donors, investors and other stakeholders, as well as manages the World Bank’s Forest Carbon Partnership Facility financing dedicated toward developing REDD+ policy in the country. USAID’s Global Development Alliance local office already had a memorandum of understanding in place with Althelia. So the DCA started researching how the REDD marketplace works, with Althelia participating in the transaction, although other organizations can be substituted into these transactions, he said.
To insert itself as a guarantor, DCA needs a borrower on one side of the transaction and an investor on the other, Matzie said. The borrower must be reliable and that creates some challenges for these REDD+ projects because they are community-based projects involving thousands of people, he observed. Ensuring that these projects have good governance and financial management capacity, as well as the technical management capacity, is something that Fondo Acción can help with, he said.
Some of these REDD+ projects could be funded by Althelia while others are financed by additional investors or donors and other mechanisms such as green bonds in the capital markets or commercial bank financing, he said. A “landmark event” would occur if the project partners could ever convince a Colombian bank to participate in a transaction financing a local REDD+ project, Matzie said.
But the DCA’s partial guarantee might not be enough to secure such financing, so other types of mechanisms such as public resources could be needed, he said. The DCA just had discussions with the World Bank’s BioCarbon Fund to explore whether it could backstop purchases of carbon offsets, Matzie said.
“That might not be enough still because you’re looking at the risk profile of one project or even a couple of projects, and REDD is risky,” he said. “We know that.”
One solution could be pooling various projects together that have different revenue streams and risk dynamics into one transaction that could be marketed to the capital markets in a more robust way, Matzie said. For instance, REDD+ projects could be grouped with clean energy and mass transit projects. Another approach would be to develop a framework that focuses on the sustainable agriculture aspects of the projects and looks at the carbon assets as add-on benefits.
“These are additional enhancements that would be critical if you’re trying to approach a bank in Colombia that is fundamentally much more conservative,” he said.