Last month, Ecosystem Marketplace published a report on the state of the forest carbon market. The report, “State of the Forest Carbon Markets 2009: Taking Root & Branching Out“, provides a fascinating glimpse into the upside-down world of carbon trading.
According to the report, the Bali Action Plan included REDD not because the Coalition for Rainforest Nations introduced the idea of REDD in Montreal in 2005, but because “the role of forests in mitigating climate change has increasingly gained credence.” This “credence” came about “thanks largely to the resolution of scientific disputes over how to measure and monitor the amount of carbon captured in trees.” If we can measure it, we can sell it, in other words.
According to the report, the Copenhagen Accord is great, because it “explicitly stated the need to develop mechanisms that would reward sustainable land-use practices that capture carbon in trees.” The proposed US climate legislation is great because “The regulatory developments have the potential to stimulate tremendous demand for land-based carbon credits.”
There is plenty of useful information in the report, based on surveys of 61 project developers and 34 intermediaries, representing 226 projects in 40 countries. Not surprisingly, given the hype about REDD in recent years, the transaction volume in the forest carbon markets is increasing. Historically the vast majority of forest carbon deals (73 per cent) are “over the counter” deals (deals which take place between two parties outside of any stock exchanges are part of the over the counter markets). The Chicago Climate Exchange (CCX) accounts for 12.5 per cent, the New South Wales Greenhouse Gas Reduction Scheme (NSW GGAS) for 8.7 per cent and Kyoto Protocol markets account for only 6.25 per cent.
While the amount of money involved is increasing, the amounts remain small. The total value of forest carbon traded between 1990 and mid-2009 is US$149.2 million. Of this, US$137.6 million was in the voluntary market and US$11.6 million in the compliance markets.
In total, the 226 projects that Ecosystem Marketplace looked out covered an area of 2.1 million hectares. In 2008, afforestation and reforestation was the main source of “forest” credits with 53 per cent. A combination of REDD, afforestation and deforestation and improved forest management accounted for 24 per cent of projects.
Throughout the report are small gems of information about how the carbon markets work (or don’t). For example, Silvia Gomez Caviglia of Uruguay’s Greenoxx Global Environmental Program explains why her company sells carbon credits on the CCX:
“We were first developing projects under the CDM, but found it was very costly and bureaucratic. So, like most people working on forestry, we ended up looking towards the voluntary market.”
The authors are hedging their bets on the future of forest carbon markets. “At the end of 2009,” the authors write, “the market for forest carbon stands in an uncertain position on the verge of potentially enormous growth.” Given the uncertainty it would be just as reasonable to write that the forest carbon market stands on the verge of collapsing. Later on in the report, Ecosystem Marketplace acknowledges that the future is “uncertain”:
“With three years to go before the end of the first Kyoto Protocol commitment period, the future of forests in a post-2012 marketplace remains uncertain. The fate of REDD and LULUCF are largely still to be determined in UNFCCC negotiations. Currently, it seems many investors are waiting for greater clarity on regulations to move forward.”
The carbon cowboys in Papua New Guinea get no mention in the report. Neither does carousel fraud, nor phishing fraud that has seen millions of euros go missing from the carbon markets in Europe. And of course there is no mention of the warnings coming from Peter Younger of Interpol:
“Alarm bells are ringing. It is simply too big to monitor. The potential for criminality is vast and has not been taken into account by the people who set it up. . . . Organised crime syndicates are eyeing the nascent forest carbon market. . . . Fraud could include claiming credits for forests that do not exist or were not protected or by land grabs. It starts with bribery or intimidation of officials, then there’s threats and violence against those people. There’s forged documents too. Carbon trading transcends borders. I do not see any input from any law enforcement agency in planning Redd.”
The scale of the problem is illustrated in Ecosystem Marketplace’s report when they attempt to find out how many carbon credits sold over the counter had been “retired”. As Ecosystem Marketplace explains, retirement of carbon credits is kind of important:
“A carbon credit in the voluntary market does not fulfill its life’s goal of offsetting another GHG emission until it is ‘retired’ by a supplier or final buyer. When an entity purchases carbon credits to offset its emissions, the carbon credit must be retired and cannot be sold again. Retirement is critical in the voluntary markets because it represents the market impact from an environmental perspective and relates to the fundamental demand in the market for offsetting GHG emissions.”
Ecosystem Marketplace accounted for 6.1 million tonnes that had been retired, out of a total of 15.3 million tonnes from 78 projects. “This number should be considered especially conservative since many suppliers do not know the fate of the sold credits.” So does anyone know how many credits have actually been retired?
One area that fascinates me about the forest carbon market is the sale of “ex-ante credits”. Ecosystem Marketplace explains that these are “credits sold prospectively, before they are created”. Sales of such credits are included in Ecosystem Marketplace’s survey of the forest carbon market (although the report doesn’t clarify how many credits belong to this category). But what would happen if the credits were never created? What mechanism would be used to recall these fictitious credits, that didn’t exist when they were sold and will in fact never exist? What happens if they are packaged together with “real” credits in innovative financial instruments? Is it possible to track individual forest carbon credits, from the forest to the retirement home? One thing is sure: The greenhouse gas emissions that magically became “carbon neutral” as a result of the non-existent carbon credits, will remain in the atmosphere.