Can a compliance market include tropical forest offsets?
To date, tropical forestry and land-use projects have faired considerably better in voluntary markets than they have in compliance markets. In 2007, forestry and land use accounted for less than 1% of the global compliance market, while the figure for was closer to 15% in voluntary markets. The lack of liquidity in compliance markets for forest carbon makes price difficult to track accurately, but as an indication, the BioCarbon Fund sets a target acquisition price of between USD3 and USD4 for temporary Certified Emissions Reductions. By contrast, the average price in the voluntary market ranges from USD4.8 for avoided deforestation to USD8.2 for afforestation projects. Interestingly, about 29% of those who bought voluntary carbon credits in 2007 did so in anticipation of being able to sell them for compliance purposes at a later stage.
Up to 50% of voluntary market transactions are currently verified to a third party standard. One of the most significant recent developments in the voluntary carbon market has been the emergence of new standards, providing carbon credit buyers and project investors with independent assurance of the quality and value of different offset options. Forestry projects have faced particularly strong media and NGO scrutiny regarding the environmental integrity of forestry credits as well as the overall impact that projects have at the local level. In November 2007, the Voluntary Carbon Standard, which sets out a minimum standard for voluntary credits, released a comprehensive guidance document for agriculture, forestry and other land use covering Reducing Emissions from Deforestation and Degradation (REDD), afforestation and reforestation, agricultural land management and improved forest management to counter such criticisms.
The biggest challenge that prospective developers face, along with their investors and customers, is how to manage the considerable risks associated with these projects. While potential rewards are clearly high, developers face uncertain demand and production levels, unclear or conflicting claims of forest ownership or use rights, poor governance and patchy law enforcement.
Major carbon credit buyers and investors are able to reduce their own exposure by favoring projects undertaken by powerful, well capitalized and well known developers. Unfortunately, it is already known that a high proportion of ‘in country’ economic benefits that tropical forests generate flows through small and medium-sized forest enterprises. Taken together, the activity of these groups has a profound impact on forests worldwide.
For forest carbon markets to be equitable and efficient, they should be widely accessible. Achieving this requires new approaches to risk management and financing that bridge the gap between the long term benefits of sustainable management and the inability of developers at the smaller end of the spectrum to take on high levels of risk.
Debates over methodologies and policy will certainly continue in the run up to the UN Framework Convention on Climate Change 15th Conference of the Parties (COP-15) in Copenhagen. Despite current risks and political concerns surrounding the involvement of forests in a future climate change accord, many tropical countries are taking early action to reduce carbon offsets and generate carbon credits that could potentially be used in compliance or voluntary markets. As you will see from the articles contained in this special issue on carbon markets and forests, some countries have already demonstrated their interest and ability to participate in a voluntary and compliance market while others are less prepared to participate. As the policy debates emerge over the next year and a half on the contribution of forest activities to a future 2012-regime, ITTO looks forward to working with producer countries to build on their experiences with sustainable forest management and helping them prepare to adapt to and mitigate the potential effects of climate change.