Under a REDD mechanism, forests are valued primarily as stores of carbon. REDD aims to save the forests by trading the carbon stored in the forests, making the trees worth more standing than cleared. For REDD to save the forests, we have to create a market for forest carbon.
Even on its own terms, REDD is not working. The market for forest carbon is tiny and the price has collapsed. And that’s ignoring the inconvenient truth that carbon trading doesn’t reduce emissions, locks in polluting technology and provides a dangerous distraction for the immediate task of reducing greenhouse gas emissions from burning fossil fuels.
A recent report by WWF, titled “Stimulating interim REDD+ demand – the Forest Finance Facility”, puts forward a fascinating analysis of where we currently stand with REDD. Over the past five years, “dozens of conferences, hundreds of papers and billions of dollars have been devoted to accelerating REDD+”, but these efforts, “are not currently delivering what is required”. This post on REDD-Monitor considers WWF’s analysis of the problem. A second post will look at WWF’s proposed “solution”, the Forest Finance Facility.
WWF’s analysis of the problems that REDD is running into is clear. The money is not being delivered. Northern countries are not handing over the money because the Southern countries are not REDD-ready. Southern countries are not very interested in jumping through the endless REDD-readiness hoops, because there is no guarantee that they will ever make any money from REDD. The private sector has no interest in financing REDD-readiness for similar reasons and there are plenty of other potential activities that they can finance (like mining, infrastructure, plantations, hydropower etc.) where they have a much better chance of making a profit on their investment.
WWF uses Johan Eliasch’s target of reducing deforestation by 50% by 2020 and suggests a target of 25% by 2015 as an interim goal. Based on Ecosystem Marketplace’s estimates of REDD activities up to 2015, WWF states that we would need, “an immediate increase of over 16 times the current REDD+ activities to get back ‘on track’”. As the report points out, the delays in setting up REDD projects make that just about impossible to achieve.
Meanwhile, Northern governments have not promised enough money for “REDD+ fast start funding”. And the vast majority of the money that has been promised has not been delivered. WWF gives four examples of the percentage of disbursed to pledged funds:
- FCPF Readiness Fund: 5%
- Forest Investment Fund: 1%
- UN-REDD: 33%
- Guyana REDD+ Investment Fund: >1%
WWF could have included Brazil’s Amazon Fund (24%), the Congo Basin Forest Fund (7%) and the Indonesia-Norway US$1 billion REDD deal (0.3%). In December 2011, the Telegraph described as “incompetence on an appalling scale”, the fact that although the FIP was yet to spend any money on reducing the rate of deforestation, it had run up a bill of US$15 million on its own administration costs.
WWF’s analysis of the problem is succinct and comes with a diagram:
“[T]the essence of the REDD+ mechanism is to provide financial incentives to developing countries to reduce emissions, avoid emissions or enhance their carbon stocks. The REDD+ ‘elephant in the room’ is that there is currently no such short to medium term incentive for forest countries and there is no credible financial mechanism which will pay for medium or long term results at scale.”
There’s a fascinating comment on the issues of permanence and leakage:
Those who doubt the ability of REDD+ to generate large scale, permanent emissions abatement often cite issues such as permanence and leakage as reasons for the exclusion of forest carbon from future large scale market mechanisms. These allegations are hard to refute as no large scale REDD+ demonstration programmes are operating where a forest country- or part thereof- has committed to REDD+ ‘permanence’ at scale. The reason for this is that there is simply no means by which anyone producing verified emissions reductions at scale over multiple years can be assured of payment.
WWF notes that REDD projects in many cases rely entirely on carbon finance. This is in contrast to CDM projects such as hydropower dams, wind farms or biomass projects for example produce income through electricity generation. Carbon finance accounts for 5-20% of project revenue.
Yet it is far from clear where the carbon finance is going to come from. In a footnote, WWF provides an analysis of financing under the World Bank’s FCPF Carbon Fund:
The Forest Carbon Partnership Facility Carbon Fund is an example. We are using rough numbers based on the following assumptions. The FCPF Carbon Fund will be fully capitalized at USD 220 million. Assuming no transaction costs, and an equal split between the 5 eligible countries (although contracts will be signed at a jurisdictional level), that equates to a USD 44 million allocation per country. We can use the State of Acre in Brasil to put these numbers in context. Acre expects to produce about 10-12 million tons of verified emissions reductions each year through its low carbon development plan. If we assume only half of the emissions reductions have to be paid for (the other half of emissions reductions could come from policy interventions like improved governance, more efficient land use planning, removal of perverse incentives etc.) then roughly 5 million tons of carbon will have to be paid for annually using the lower bound of the estimates. At $5/t, this would cost USD 25 million/year ($5/t * 5 million tons) and at $10/t would cost USD 50 million/annum. Based on a USD 44 million allocation per country, this means that a sub-national scheme would draw down the entire allocation for the country in under 2 years at $5/t and would last less than a year at $10/t.
WWF sums up the problem of financing REDD projects as follows, “What is currently being asked of forest nations is to ignore lucrative alternatives to conserving the forests, and to engage in what might be a 30 year activity where the rewards beyond year 2 or 3 are completely unknown.”