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Monthly Archives: July 2014

Challenges in Reducing Emissions from Deforestation and Degradation

Here is a piece I recently wrote for another publication:
The Challenges of REDD+ in the private sector: Perspectives from a field practitioner

As I work for a company that is working hard to promote REDD+ projects worldwide, as well as the active development of REDD+ jurisdictional programmes, and national policies, it may seem slightly strange that I am saying that REDD+ has some challenges. However, practically speaking, I think we have a real opportunity with REDD+ to create transformational impact on the ground. If we are going to do that, we need to address some key aspects of how REDD+ is implemented, that are currently creating challenges. With a combination of innovative approaches, dialogue, pragmatism and cooperation, I believe that these challenges can be overcome.

Creating an enabling environment to attract the private sector

There is a lot of talk about getting the private sector involved in REDD+ activities, an element that I believe is essential to the entire sector’s future. I think the private sector’s engagement is not limited simply to the carbon side of the REDD+, but in landscape management, supply chain sustainability practices, agricultural practices and reforms, and premium financing options. These are all avenues where the private sector can be potentially transformational for REDD+ on a grand scale. One avenue, which I will focus on here, is that the private sector stands to be very effective in both the supply side of carbon emissions reductions (creating meaningful carbon offset projects, and innovation from early REDD+ activities) and the demand side (driving market demand for those offsets because of their positive benefits). However, there are some intrinsic challenges that we all must resolve if there is going to be full-scale engagement.

There are several reasons for this limited engagement. Currently, one of the major avenues for private sector involvement revolves around creating emissions reductions at the project level, and selling them on a voluntary market, where a willing buyer and willing seller exchange for the “credits”. The voluntary market is a fairly limited landscape at this point in time, and may, on its own, not be enough to make REDD+ succeed on the scale which we need it to. The solution is obviously to create scalable, national level interventions, but those national level processes take time. I think a very real, and very achievable solution can exist when the private sector, with its flexibility, speed of implementation and desire for tangible results, can team up directly with both governments and other donors institutions which provide policy support, tenure clarity, and financial stability. For example, I believe that this opportunity exists in the form of the larger, multilateral funds such as the FCPF, GIZ’s REDD+ Early Movers, and funds from the Government of Norway. The idea of many of these funds is to create a pool of investment for emissions reduction programmes in the global South, and also to provide a market for the emission reductions that are generated from the global South. Currently, there is progress towards making this linkage, although we still have some way to go as some of these funds are being under-utilized and under-accessed. I think the private sector, donor institutions and governments, want to see these funds utilized but there is room for improvement in the efficacy of their utilization in order to make that happen.

An example of a possible area for improving utilization of the funds will be to create a more streamlined approach to linking REDD+ activities in a given landscape to stabilizing funding sources. Currently, many finance streams either require or strongly prefer that REDD+ activities to be conducted through a central government programme in order to be eligible to be financed. As I said, this is not always a requirement necessarily but often a preferred route. This approach also has some inherent benefits, particularly where governments can assist with policy support, lending confidence to investors etc., but the approach also some drawbacks.. Many of these national programmes are still in their formative stages and require substantive, important national dialogues in order to achieve the elements required for a national emission reduction programme to be successful. Although this is an incredibly important step for REDD+ at a national level, the national process has sometimes had very little linkage to REDD+ activities that are already being implemented successfully on that on the ground, despite the scale and efficacy of many of those activities. If financing of REDD+ interventions is tied to national processes, the obvious drawback for the private sector is that often developers, financiers and shareholders cannot afford a long delay at the national level. Often projects at the ground level have a fairly limited lifespan in which they need to break even, if they are going to continue to deliver on the inherent benefits of REDD+.
There are some encouraging efforts to address this challenge and we are seeing that progress with the FCPF, through its partnerships with program partners. Similarly, some donor institutions such as USAID, are using vehicles like the Althelia Climate Fund to address those drawbacks and expedite financing to scalable projects level activities which are having verifiable positive impacts. However, I think that much more can be done and it is likely to take movement on both sides to make this happen. This is certainly a challenge that we can collectively overcome, especially if we are continually cognizant of the impacts of not addressing it, namely, losing the support of, and appeal to, the private sector actors.

The Market

A second major area of challenge, which overlaps substantially with the first, is the market for emissions reductions itself. The market is being created, almost from scratch and was always going to face challenges. However, the fact that the challenges are coming from within are remarkable. I remember when I was a child, growing up in rural Kenya. There used to be a vibrant textile industry in Kenya with plenty of locally generated textiles, and thus a value chain. I am not about to criticize free markets, as Kenya’s was not under the Moi-regime, but one of the consequences of the opening of free markets, was the near -complete collapse of the Kenyan textile market, replaced by cheaper, used clothing markets, commonly known as mitumba. With REDD+ we are currently experiencing something similar.

As I mentioned earlier, a chief challenge to the expansion of private sector REDD+ is the limited market/access to purchasers of ERs. This problem is compounded by the surge in ER projects coming to market as well, which creates large volumes of credits, and collectively drives the price point downwards. This again creates a disincentive to private sector suppliers as many of these competing projects have access to donor funds. These project developers are largely well-meaning large NGOs, and other large-scale credit producers. However, the results of using donor money to develop projects that deliver emission reductions means that they will gladly accept any price they are offered, as they do not have capital repayment obligations.

In order to address this challenge, currently financiers of new projects are working to provide up front finance combined with an ‘offtake’ agreements after the project begins producing ERs, attempting to guarantee an onward sale of ERs. This is a good step in the right direction and one being considered by larger funds as well.
I think that there are two other key things that need to happen. Cognizant of the fact that many donors do not want to be in a situation where they provide both the upfront finance for the project, whilst also being sought to provide a guaranteed market for the ERs, I believe that there is a very real role for governments to play, offering tax incentives to developers for a time, in order to help stimulate a market. This applies both to the supply and demand of ERs and companies interested in offsetting could also benefit from a tax relief, or other incentive structure.

Secondly, I think there is a very real need to set up a universal definition of “REDD+ credits” delineating ERs based on the performance criteria of the project from which they are being issued. The market may be at risk of having a glut of ERs, which sold in huge volumes, could collectively drive prices down. Some projects may benefit from being able to deliver better, higher-quality credits. Although the current standards attempt to address this, a more comprehensive and widely accepted definition could be helpful. One criterion that could be emphasized is a performance rating for long-term financial sustainability (as opposed to donor dependence) – a criterion which may help self-funded projects sell ERs at a higher premium. Again, if this same incentive is given to purchasers of ERs, through a government supported tax incentive program, it could have real tangible results for stabilizing the market prices.

The Standards

Standards for REDD+ projects, and jurisdictional programmes etc. are critically important. As we are seeing now one of the key aspects of creating a new Green Bonds will be to draft reputable, verifiable standards for the industry. For REDD+ we have had several standards for some time. These standards offer investors confidence, they offer purchasers peace of mind, they offer developers the chance to set their product apart from lesser products. They are incredibly important.

However, in many cases, practical experience shows that certain standards such as the VCS, which have become the default in the industry, have become so prescriptive that meeting their ever-changing rigor creates disincentives to private sector involvement. Not only is the rigor more stringent than most other natural resource sectors, but rather, that constantly changing benchmarks creating volatility and unnecessary risk. The emphasis on rigor, while important, has overshadowed the emphasis on changing behavior in regards to deforestation, a key point in the creation of REDD+. Constantly tightening rules around MRV, carbon stock calculation and deforestation rates, are overshadowing the generation of co-benefits. With each of these changes, undoubtedly methodological revisions must be made. This places an incredible financial burden on the developer, and, combined with the other challenges identified above, may be conversely contributing to a lack of confidence in the sector. These challenges can and have been overcome by a few developers, but I find that because the standards are constantly being revised, and that cost is passed on to the project developer, the process becomes incredibly complex and expensive. In some cases it is actually retarding market growth.

Furthermore, market surveys among those purchasing credits have consistently shown that purchasers of ERs are more concerned with the co-benefits to the emissions reductions projects, than the ERs themselves. This is not saying that the emissions reductions are non-important, but rather, as with many products, consumers are equally concerned that the product is creating a net positive impact. The suggestion here is not that standards such as the VCS be relaxed, but that standards that are focused on the co-benefit generation should be emphasized and made more prominent, and perhaps reflected by premium definitions, pricing and incentives as mentioned above. The idea is obviously that to bring more accountability to the social and biodiversity indicators of project success, which if heeded, can have de facto positive impacts on emissions reductions. This idea has been promoted elsewhere. If REDD+ is a pay-for performance system, the emphasis should be readily placed on the performance of the developers in relation to the agents of deforestation, and the interaction with them, rather than the emissions reductions themselves. This may mean focusing on bundling carbon cycling services with other environmental and social services in REDD+.

In conclusion, the purpose of this essay is to draw attention to three interconnected areas that must be addressed fro REDD+ implementation to flourish. These interconnected areas are the role of the private sector, the market for emissions reductions, and the application of standards. I have attempted to handle these three issues in way that not only shows how they are connected, but also how they are challenges that can be overcome. I have also tried to emphasize some areas which can create discourse, with a view towards creating a more enabling environment for REDD+.

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Posted by on July 14, 2014 in Uncategorized