RI's REDD+ Series Part 1: A vital part of the international effort to address climate change
The troubled initiative could be set for a revival – representing an investor opportunity
Many of the world’s mythologies and religions give trees a deep and sacred meaning. And for millennia, trees have been storing vast quantities of carbon, representing a vital asset to tackling the climate change crisis.
Recognising trees’ value in reducing carbon emissions, the United Nations has a cache of policies known collectively as Reducing Emissions from Deforestation and Degradation (REDD+). Broadly, REDD+ provides a financial incentive to increase and protect forest cover.
Initial high expectations for REDD+, which launched around ten years ago, haven’t come to fruition. But, there are signs it could be set for a revival, presenting an opportunity for investors. REDD+ is the only global climate mitigation framework mentioned in the Paris Agreement. It has had recent interest from oil major Shell and the International Civil Aviation Organisation as a way of meeting carbon reduction targets. And the UN Green Climate Fund agreed on a $500m pilot for results-based payments for REDD+ last year.
The potential for forests in the battle against climate change is significant. There is 40% more carbon stored in forested lands than in known fossil fuel deposits worldwide, according to a recent report by Forest Climate Analytics. But, when trees and forests are cut down, this stored carbon has the potential to release back into the atmosphere. In 2013, the Intergovernmental Panel on Climate Change estimated that deforestation contributed to up to 10% of the carbon dioxide emissions caused by human activity.
A paper by the Woods Hole Research Centre finds that by stopping deforestation and allowing young secondary forests to grow back, the cumulative “forest sink” (that store carbon) could grow by over 100 billion metric tons of carbon by 2100, about ten times the current rate of annual global fossil fuel emissions.
The REDD+ framework tries to reflect that harvesting forests is often a matter of survival for many living in poor and developing countries. With no other way of making money, many communities in rural areas cut down trees for wood to build or cook with or for land to plant crops on.
So REDD+ offers a financial incentive for communities to not cut down trees. REDD+ works by issuing a carbon credit, or offset, for every tonne of greenhouse gas emissions reduced by saving an area from deforestation. The current REDD+ market framework names them Verified Emission Reductions (VERs) with one VER equalling one tonne of carbon dioxide prevented from being released into the atmosphere.
To successfully earn VERs it must be proved that the forest in a REDD+ project area is at risk of deforestation, with evidence of an area close by where trees have been cut down. Then there is a monitoring process of ensuring the trees in that project area remain, on a regular basis. This is independently audited and upon successful verification a REDD+ project is issued VERs that can be sold on the open carbon market.Separate to ‘project level’ REDD+, there is the UN-REDD framework that works with countries on national plans to stop deforestation and generate emissions reductions to sell to other countries. There are now moves to integrate the two levels of REDD+ through a process known as “nesting”.
BNP Paribas buys REDD+ carbon credits to meet commitments around carbon reduction. Since 2012, the French bank BNP Paribas has implemented an active policy to reduce its direct impact on the environment linked to business activities including the reduction of direct CO2 emissions, low-carbon electricity solutions and partnerships to counteract CO2 emissions that cannot be reduced.
One of these partnerships is with REDD+ developer Wildlife Works. BNP Paribas buys Verified Emission Reductions (VERs) generated by its Kasigau REDD+ Project in Kenya. In order to offset residual emissions, VERs are bought and then deleted from the registry, meaning they can no longer be traded.
The voluntary carbon market, of which REDD+ is a part, was worth $191.3m in 2016, according to report State of the Voluntary Carbon Markets 2017. The report says it is a buyers market as many offsets remain unsold. REDD+ can be more expensive than other types of offsets, but François Carré, carbon portfolio manager at BNP Paribas, says this reflects its quality: “What we call the carbon market today can be divided into compliance markets, such as Europe’s Emissions Trading Scheme (ETS) where companies are subject to regulation and the rest which in the absence of specific regulation is deemed to constitute the voluntary market. The voluntary market is a very stratified market, made of different type of emission reduction projects which use different type of methodologies.”
Carré says REDD+ projects also have a number of additional co-benefits which significantly contribute to UN Sustainable Development Goals (SDGs). “The UN developed methodology requires the project to be validated, with stakeholder consultation being part of the process. Every year you have monitoring done at the project level. And this monitoring is verified by an external auditor which certifies the project has been conducted in accordance with the methodology, only then the emission reduction can be issued. The whole process is standardised and open. In terms of recognition of the performance, it is important that the standard and methodology used is of very high quality.”
Along with being an offsetting tool, there are other reasons that REDD+ should matter to the finance community, according to Mike Korchinsky, founder of REDD+ developer Wildlife Works that conserves wildlife and supports rural communities in East Kenya.
Korchinsky founded Wildlife Works in 1997 based on the idea that market-based mechanisms were the best way to conserve wildlife and help rural communities live side-by-side (see separate Q&A with Korchinsky here).
He says there are increasing opportunities for direct investment in REDD+, “because it is a proven model which needs to scale up very quickly. We have 7 billion tonnes a year of emissions coming from the loss of forests and according to the UN Environment Program (UNEP) we need to reduce at least a billion and a half of those by 2030. There is no chance of meeting the two degree goal for climate if we don’t reduce at least a billion and a half tonnes of emissions from the forestry sector by 2030. So there is going to be an enormous opportunity to scale this model up.”
Wildlife Works direct investors includes German insurance giant Allianz and the Kering Group (owner of luxury brands like Gucci). In 2016, the International Finance Corporation (IFC) also issued a $152m Forest Bond in support of Wildlife Works’ REDD+ project in Kenya.
In a first of its kind, the bond was originally sized at $75m, but increased after high demand. Buyers included US pension giant CalSTRS and Australian insurers QBE.
The five-year bond allows investors to have the interest coupon, of 1.546%, paid in cash, REDD+ carbon offsets, or a combination of the two. Investors receiving REDD+ offsets can retire them to offset their carbon footprint or sell them on the voluntary offset market. Mining giant BHP Billiton provided $12m in a ‘price support mechanism’ to make sure the project gets an assured minimum revenue over the next five years if the bond investors choose cash over REDD+ credits.
Korchinsky says that the IFC is working “pretty aggressively” to replicate the bond and would like to do six more.
REDD+ should also be of interest to investors due to what it means for their portfolio companies trying to contribute to the UN’s two degrees target says Korchinsky. “A large company with a large carbon footprint that is part of the current economy may have constraints on how quickly they can move to a low-carbon future. Whether those constraints are technical, financial or social, there are many reasons why we can’t drop everything we are doing today and pick up low carbon options tomorrow, so companies are left with unavoidable emissions today.“So there will be a transition and big companies will have to manage that transition and they have the opportunity to increase their influence over climate beyond reducing their source emissions, by offsetting their unavoidable emissions. Doing so by purchasing REDD+ emission reductions helps stop the destruction of forests around the world, protects biodiversity and creates sustainable development for forest communities, highly desirable outcomes which are impossible to achieve purely by focusing on source reductions in the mainstream economy.”
In a speech this March, Ben van Beurden, CEO of Shell, spoke of how it invests in Wildlife Works’ REDD+ project in the Kasigau Corridor, East Kenya. He told the audience: “What does Shell do about emissions that are hard to stop? Some sectors cannot reduce their emissions to zero yet. As I mentioned earlier, it is still impossible at this moment to make steel or cement without traditional fuels. So, the world needs a solution that approaches the problem from a different angle. This solution exists. This requires us to think of a future that is low carbon, when carbon free is not possible yet. And it requires catching the CO2 we emit or removing it from the air. This can be done by investments in nature. This is why we offer our business clients in the Netherlands the option of offsetting the CO2 impact of their fuel for a couple of cents per litre. Shell invests this money, for example, in the Kasigau Corridor project in Kenya. It is used to protect more than two hundred thousand acres of threatened forest. It has been used to plant more than fifty thousand new trees in the area. Before the end of this year, Shell wants to extend this possibility to all of our clients in the Netherlands.”
And in April, Shell joined the REDD+ Business Initiative (RBI). Established by a group of companies in 2017, the RBI is designed to help corporates integrate the conservation of tropical forests into their strategy to tackle climate change.
“There is no plan B for climate change without forests,” Prince Charles has warned, who calls REDD+ a vital part of the international effort to address climate change.