Matthew Owen Cornwall College ECG Bulletin July 2008
Cool Earth is a UK based charity launched in 2007 to fund the conservation of rainforests as a means of tackling climate change. Cool Earth currently has 20,000 members, who have funded the conservation of over 9 million tonnes of carbon dioxide stored in endangered tropical rainforests. Matthew Owen from Cornwall College outlines the significance of tropical rainforests in balancing the global carbon budget.
Why conserve tropical rainforests?
The atmospheric CO2 concentration is currently growing at a rate 1.9 ppm/yr . This increase is primarily through fossil fuel use and land-use change, roughly 80% and 20% respectively, with tropical deforestation and degradation accounting for 96% of land-use emissions .
The role of tropical forest is nonetheless understated. If left undisturbed, tropical forests are estimated to sequester 4.4 Gt CO2e/yr (15% of all anthropogenic emissions) . Reducing deforestation and degradation therefore not only decreases the release of CO2 emissions but also moderates the effects of emissions by preserving a sink.
Pristine tropical forests also provide many other varied services at the local to global scales. Rainfall generated from the Amazon supplies the Rio Plata basin, which generates 70% of the GDP of southern South America. Deforestation of the Congo basin has been linked to reduced precipitation by 5-15% less in the US Great Lakes and 25% less in the region north of the Black Sea . Once rainforests are removed, replanting may not restore these complex global weather patterns.
The variety of tropical forests means they occupy different positions on the marginal cost abatement curve, with estimates varying by location and land-use from under $1 to $2000 /tCO2 . We nonetheless estimate that at least half of deforestation emissions could be prevented through investments equivalent to less than $5 per tonnes of CO2e.
Rainforests and carbon trading The UNFCCC/Kyoto agreement established a partial global carbon market infrastructure, but explicitly barred trade in abatement through reduced deforestation. As a result, forest carbon in developing countries is not currently priced. This makes global mitigation unnecessarily expensive, and discriminates against developing countries, who are not able to realise the global market value of their natural carbon assets. But developed (Annex I) countries are allowed to set off their carbon targets against their domestic forest sinks. This disparity is unethical, economically inefficient, and environmentally dangerous.
Only the carbon market can deliver the required scale of abatement through reduced deforestation. In a perfect market each unit of carbon – sunk, emitted or avoided – would be accounted for globally and floated to achieve a global market-clearing carbon price equilibrium.
However, carbon price stability is crucial during the transition period to a low carbon global economy. Jon Lovett has described the Reduced Emissions from Deforestation in Developing Countries (REDD) scheme, which promotes carbon trading as a means to reduce deforestation (see accompanying article). Compensation under the REDD scheme could perhaps be further exploited to decrease the global emissions cap to a level needed for a 2 °C stabilisation. In this way the cost of global mitigation can be reduced, while maintaining the stable carbon price essential to drive technological transformation.
The earliest that barriers to global trade in deforestation carbon abatement can be dismantled is 2012. A hiatus in significant abatement of deforestation until then is untenable. Urgent action is required by the UK and like-minded partners to guarantee the future redeemability of forward investments. This will unlock the potential for rapid growth in finance flows for cost effective abatement through reduced deforestation in developing countries.
How can tropical rainforests be protected? Cool Earth has achieved much through public support for targeted conservation of endangered forest. To scale-up the efforts of the NGO community, national level governance and leadership is critical.
Forest protection considerations need to be fully integrated into national poverty reduction and growth plans. A range of schemes to support this are being established, such as the World Bank’s Forest Carbon Partnership Facility (FCPF) – which will help countries prepare to take advantage of future REDD benefits and provide a limited fund which will purchase credits from successful emissions reductions programmes. The Congo Basin Forest Initiative and GEF will also offer assistance to developing nations.
The specificities of forest types, communities and opportunities means that forest protection will ultimately be secured through projects – ideally, but not necessarily, fitting into a coherent national programme. From the wealth of experience and lessons available, certain principles for successful projects are clear:
Finance mechanisms are needed that promote new forest business models that will provide local and global ecosystem services, and support communities who depend on forests for their livelihoods.
Forests can be fenced. Protected area programmes can work, but they need to integrate poverty reduction and alternative livelihoods elements and address tenure/rights issues.
Sustainable Forest Management, developed with and for communities, will often be the best way to prevent deforestation and at the same time contribute to poverty reduction objectives. Forest communities know best how to protect their forests assets. Carbon finance will often work best as a supplement to other forest-derived income streams.
Successful projects need to employ sophisticated monitoring and verification techniques to ensure the market credibility of their carbon assets.
In order to obtain sufficient finance (particularly from the private sector) for the establishment of large-scale forest protection schemes, successful projects need to generate desirable and credible forest assets. These assets are likely to incorporate carbon and non-carbon elements and should be capable of being integrated into the future carbon market.
What financing mechanisms are appropriate? There are various options for attracting institutional investment to the protection of rainforests. These range from the securitisation of mixed incomes generated from pooled projects, to taking equity control over forest-derived carbon assets. But the success of any of these financial tools depends upon establishing a fundable carbon credit scheme.
Capital markets have little experience of investing in forest product derivatives. The international timber trade is dominated by Swiss, Chinese and Lichtenstein registered producers. Domestic trades are similarly opaque and account for up to 80% of demand in nations such as Brazil.
As such, it is doubtful that the potential volatility in carbon pricing could be accommodated in a fixed income instrument. This leaves an equity mechanism as the more likely way of securing funding.
The Kyoto Protocol’s Joint Implementation mechanism offers the best chance of success since it would allow forest-derived credits without affecting price stability. However, in order to attract the scale of investment needed, some level of precedent-setting investment by a developed nation would be required, ideally for a duration greater than 15 years.
Cool Earth is working to develop a better understanding of these opportunities on the part of capital markets. Ultimately, a global carbon price will stabilise around the lowest cost of emission mitigation. Avoided deforestation is the most likely supplier of such mitigation and it will have to play a central role in future negotiations concerning the post-2012 carbon market.
IPCC (2007). ‘Summary for Policymakers’, In: Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K.B. Averyt, M.Tignor and H.L. Miller (Eds.)]. Cambridge University Press, Cambridge, UK.
Houghton, R.A. (2003). Revised estimates of the annual net flux of carbon to the atmosphere from changes in land use and land management 1850–2000, Tellus, 55B, 378-390. Pdf available at http://www.blackwell-synergy.com/toc/teb/55/2
MATTHEW OWEN, Cornwall College, Pool, Redruth, Cornwall
This article is based partly on a presentation by Matthew Owen at the ECG’s 2008 Distinguished Guest Lecture and Symposium ‘The Science of Carbon Trading’, and also on Matthew’s involvement with the charity ‘Cool Earth’. Matthew Owen is head of research at the Cornwall Business School (CBS), part of Cornwall College, where his research interests include carbon finance and environmental resource trading. He is also directing the Eliasch review into Financing Mechanisms for Avoided Deforestation and Clean Energy commissioned by the Prime Minister in September 2007. Matthew is Acting Director of Cool Earth, a UK-based organisation that is pioneering avoided deforestation as a credible means of tackling climate change. Cool Earth Action is a registered charity, launched in June 2007 with the backing of Sir David Attenborough and Sir Nicholas Stern. It has 14,000 members in 14 countries and has secured over twelve million tonnes of CO2 in 36,000 individually sponsored acres of endangered rainforest. Prior to joining Cornwall College, Matthew was a director with Morgan Stanley.