Putting a price on forest carbon: How much will the World Bank’s Carbon Fund pay for REDD carbon credits?

There’s an interesting discussion taking place in the World Bank’s Forest Carbon Partnership Facility about the price of carbon: How much will the Carbon Fund pay for REDD carbon credits?

Putting aside (for a moment) the long list of problems with REDD offsets, this discussion is crucial. Perhaps predictably though, much of the pricing discussion is taking place behind closed doors. This is the World Bank, after all.

Put simply, the countries selling REDD credits want to be able to negotiate a high price to make standing forests worth more than, say, converting them to oil palm plantations. Meanwhile the countries that will be buying REDD credits want plentiful, cheap credits to cover up the failure to reduce their own emissions from burning fossil fuel. The countries hoping for these cheap credits are the same countries that are financing the Carbon Fund.

The pricing issue was on the agenda when the Carbon Fund met in Brussels in April 2014. The chair’s summary of the meeting notes that there are two options: a uniform predetermined price; or a negotiated price for each Emission Reductions Payment Agreement (ERPA). The chair’s summary notes that,

Private sector observers advised that a clear price signal should be sent quickly and that a simple approach (as for example provided through a fixed price) may be the best way to accelerate the discussion on pricing.

(Two private sector observers were present at the meeting: one from PwC; and one from the Climate Markets & Investment Association.)

One of the problems for countries hoping to sell REDD credits is that they don’t know how much it will cost to produce REDD credits, particularly given the highly paid consultants that are needed to produce the long and complex reports necessary to prove that the carbon stored in forests can indeed be traded as a commodity:

Some REDD Country Participants and Observers pointed to the transaction and production costs of REDD+ and their desire to factor these costs to some degree into the price for forest carbon, yet noted challenges in accurately quantifying these costs.

At the ninth meeting of the Carbon Fund, the Facility Management Team of the FCPF noted that a “cost assessment tool” is under development. No doubt the development of this tool is currently helping to relieve the poverty of a handful of World Bank staff and consultants.

The pricing issue was also on the agenda of the tenth meeting of the Carbon Fund, that took place in Bonn last month. The FCPF has not yet released the chair’s summary of that meeting, but before the meeting Mexico, the Democratic Republic of Congo, Ghana, and Nepal produced a statement opposing the establishment of a uniform carbon price.

Costa Rica also sent a letter addressed to Stephanie Tam, Carbon Finance Specialist at the World Bank just before the meeting started.

In September 2013, Costa Rica signed a Letter of Intent to sell not more than 12 million REDD credits to the World Bank for a maximum of US$63 million. The price of each REDD credit is to be based on the “Pricing Approach for the Carbon Fund of the FCPF at the time that the Parties conclude negotiations of the ERPA”.

Costa Rica’s letter points out that,

Costa Rica considers that the price per ton should be based on the cost thereof, the value of $5 is a reference and not a value accepted by the country.

The obvious drawback of a fixed price (particularly one as low as US$5) is that it will not cover the costs of developing REDD projects. It runs the risk of creating a race to the bottom, with REDD countries competing against each other to produce the cheapest possible credits.

This would hardly be the best way of “ensuring equitable benefit sharing and promoting future large-scale positive incentives for REDD+”. Neither would it be the best way “to sustain or enhance livelihoods of local communities and to conserve biodiversity”. Both of which, the FCPF claims are its strategic objectives.

Below is the statement from Mexico, DRC, Ghana, and Nepal. Costa Rica’s letter (in Spanish) can be downloaded here.

Statement for the Carbon Fund

We’d like to make this statement on behalf of Mexico, the Democratic Republic of Congo (DRC), Ghana, and Nepal.
In the Carbon Fund ninth meeting of April, in Brussels, the participants of the Carbon Fund continued discussions about the pricing approach for the Carbon Fund. Since that meeting, some issues regarding the establishment of a uniform carbon price for all the ER-Programs have come to our attention.
We’d like to give our input as REDD+ countries’ representatives, highlighting some of the issues we have identified in this pricing approach.
We understand that the Carbon Fund was created to help countries move from phase 1 towards phase 3 of REDD+. In other words, the activities to be undertaken through the ER-Programs as well as the piloting of payments for results are results-based demonstration activities. According to the objectives (b) and (d)[1] of the charter as well as the principles (b) and (c)[2], the approach of a uniform price for the Carbon Fund implementation is inconsistent with the mandate and spirit of the FCPF.
To pilot the performance-based payment for results demonstration activities, we consider that having different approaches and price proposals would give a higher learning value. The different experiences of the countries in the carbon fund will be crucial to share best practices and inform other international processes.
The pricing approach should consider information from different countries. Setting individual prices for ER-Programs would show the diversity of REDD+ country circumstances and program design. If the carbon price considers information and circumstances in each country, it will give time for REDD+ countries to advance in the information we need to have a better sense of the price range at the national and subnational level.
If a uniform carbon price is established at this meeting, it will prevent countries from advancing in their estimations of price and cost analysis to be realistically negotiated when signing the ERPA.
On the other hand, if the price is negotiated when the ER-Program is put forward or during the signing of the ERPA, REDD+ countries as well as donors will have more information that will help establish a price that is based on information, national context and the approach taken for the emission reductions.
The cost analysis and financial viability needed to estimate price can be done during the preparation on the ER-Program by REDD+ countries. At the last meeting of the Carbon Fund, there was an agreement from the World Bank to share the cost analytical tool to help REDD+ countries to do this analysis and estimate the price.
It is also important to note that a uniform price for every ER-Program may have an impact on the quality of the emission reductions. A lower price will mean higher amount of emission reductions. However, we want to bring to your attention that a higher volume does not always mean that there is environmental integrity, and this aspect is crucial for the activities undertaken with the Carbon Fund.
Finally, establishing a price for all ER-Programs is not consistent with the Methodological Framework which states in the pricing element 3 of informed negotiation:
“The ERPA price should be determined by negotiations between the CF Participants, as buyer, and the ER Program entity, as seller, based on their respective willingness to pay or to receive payment. This negotiation process should be informed by relevant information such as market surveys or transaction benchmarks”.
For all the previous reasons, we suggest that the best approach is establishing the price individually, at a discussion with each country when negotiating the signature of the ERPA.
There are rules and processes to guide the operation of the Carbon Fund. These rules and processes were created by Carbon Fund participants. In the perspective of the REDD+ countries, the Carbon Fund should not disregard previous rules as well as the guidance established in the Methodological Framework, as this can bring lack of transparency to the process.
Thank you co-chair

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[1] (b) To pilot a performance-based payment system for Emission Reductions generated from REDD activities, with a view to ensuring equitable benefit sharing and promoting future large scale positive incentives for REDD; (d) To disseminate broadly the knowledge gained in the development of the Facility and implementation of Readiness Preparation Proposals and Emission Reductions Programs.
[2] (b) Recognizing the pilot nature of the Facility, follow a “learning by doing” approach; (c) Seek to ensure consistency with the UNFCCC Guidance on REDD;