The troubled initiative could be set for a revival – representing an investor opportunity
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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).
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