In November 2011, the US Government’s Overseas Private Investment Corporation (OPIC) provided the world’s first political risk insurance policy for a carbon offset project. A recent report by Pacific Environment, FERN and Focus on the Global South questions who stands to benefit from this insurance.
The report, “Precedent-Setting Insurance for REDD Project in Cambodia Raises Concerns”, is available below.
The project involved is the Oddar Meanchey Community Forestry REDD project, which was set up in 2008 and is run by the Cambodian branch of a Washington DC-based NGO called PACT and Cambodia’s Forestry Administration. The project aims to protect 13 community forests managed by 58 villages. The community forests range in size from 400 hectares to over 18,000 hectares, and cover a total of 64,318 hectares.
Pacific Environment, FERN, and Focus on the Global South point out that the forests are threatened by mining projects, agro-industrial crop plantations, illegal logging and military settlements (Oddar Meanchey is on the border with Thailand):
Oddar Meanchey suffers from one of the highest rates of deforestation of any province in the country and addressing the drivers of deforestation is crucial for environmental sustainability as well as local livelihood security.
In 2009, Pact Cambodia and Cambodia’s Forest Administration produced a video about the community forestry aspect of the project (and more videos about the project are available here):
On 9 November 2011, the US Government’s development finance agency, the Overseas Private Investment Corporation (OPIC), announced a US$900,000 political risk insurance for Terra Global Capital, the private investor of the Oddar Meanchey project. Terra Global Capital is now offering carbon credits generated by the project for sale on global carbon markets. UNDP reports Amanda Bradley of Pact Cambodia, as saying that if the verification process goes well, “we can be ready to sell (carbon credits) by August.”
In OPIC’s press release about the insurance, Leslie Durschinger, Founder and Managing Director of Terra Global Capital, explains that,
“Given the long-term nature of our investment, we believe it is prudent to reduce our exposure to future changes in national and local governments and laws by executing this insurance policy.”
On 27 October 2011, a few days before the political risk insurance was issued, OPIC announced that it was investing US$40 million in Terra Bella, a private equity fund managed by Terra Global Capital. Terra Bella is aiming for US$100 million to invest in REDD projects and other land use projects that generate carbon credits.
In their paper, Pacific Environment, FERN and Focus on the Global South argue that the insurance,
protects foreign investors against the potential for Cambodia to rightfully fulfill international climate change commitments… this, when combined with inherent weaknesses in the REDD model, may lead to perverse results in which the project’s stated beneficiaries may not benefit – and some may even become entities that trigger the political risk insurance.
One of the political risks covered by the OPIC insurance is the risk that Cambodia implements national REDD regulations, such as “nesting regulations”. On it’s website, OPIC explains that,
One particular concern among investors in REDD projects is the possibility that additional regulations, known as “nesting regulations,” will be imposed on the future, changing the way that REDD targets are measured and preventing existing projects from earning carbon credits.
In their report, Pacific Environment, FERN and Focus on the Global South point out that under the UNFCCC countries may be required to regulate REDD projects in order to participate in compliance carbon markets. Depending on the regulation implemented this could affect Terra Global Capital’s ability to profit from the sale of carbon credits on the voluntary market.
The report questions the due diligence that OPIC carries out, and argues that the project have been designated Category A rather than Category B. The report also notes that OPIC has declined to disclose the Development Impact Profile for the Oddar Meanchey project.
The report concludes that,
OPIC’s support for the Oddar Meanchey REDD project in Cambodia sets a global precedent—including the first ever political risk insurance policy for a REDD project. OPIC and the project developers claim that the Oddar Meanchey REDD project will have significant climate, and local environmental and development benefits. But the viability of REDD projects rests largely on carbon markets, which are not reliable, thereby creating the risk that OPIC-supported REDD projects will fail to provide the revenue stream needed to deliver the promised benefits to implementing partners and local communities, and the high returns to investors.
Full disclosure: REDD-Monitor has received funding from FERN and I have taken part in two workshops organised by Focus on the Global South in Bangkok (where transport costs, accommodation and a small per diem were paid). Click here for all of REDD-Monitor’s funding sources.
PHOTO Credit: UNDP/Chansok Lay.