Responsible Investment

Bond finance can help finance developments that halt deforestation

January 9, 2013
Image courtesy of Ingrid Ramaan

Tropical forests are a huge store of carbon and contain more than half of all terrestrial life on earth. The biodiversity and ecosystem services these forests support are economically valued in the order of trillions of dollars annually and underpin climate, food, energy, water, health and livelihood security for millions of people across the globe. Yet the rate of forest loss “is still alarmingly high”. Research [1] shows that the combined contribution of deforestation, forest degradation and peatland emissions accounts for about 15% of greenhouse gas emissions, about the same as the transportation sector. The U.S. Commission on Climate and Tropical Forests estimates that to up to $30 billion per year has to be found just to halve deforestation.

Unlocking Forest Bonds

Over the past 10 years “forest bonds” have been discussed as a potential financing instrument; but there is not yet serious issuance. The challenge remains getting solid cash flows in place to support a bond. One effort that has made progress in the past several years is the mechanism REDD+, Reducing Emissions from Deforestation and Forest Degradation, which essentially puts a price on carbon sequestered in forests and allows forest custodians to sell carbon credits in participating carbon markets. But consistent and substantial revenue levels will be required to ensure forest protection and an agreement on REDD+ has not been reached at the recent UN Climate Change Conference. The report “Unlocking Forest Bonds” from the Climate Bonds Initiative, WWF and the Global Canopy Project, argues for regional development bonds as an instrument to save forests. This can be a key part of a global emissions reduction plan.

A variety of strategies

Another report, “Leveraging the Landscape- State of the Forest Carbon Markets 2012”, which aggregates data from 451 individual forest carbon projects historically, was published in November 2012 by Forest Trends' Ecosystem Marketplace, a world-leading provider of news, data and analytics on environmental markets and investments in conservation. The report examines a variety of strategies for injecting financial resources into projects that save or plant forests that capture carbon. Carbon offsets from these projects averaged $9.2 per tonne of sequestered carbon in 2011, up from $4.6 per tonne in 2010.

Companies seeking to offset emissions continue to be the dominant source of demand. At the same time, governments around the globe are stepping up to include forests in their regulatory emissions-reduction strategies. Transactions of credits developed under the United Nation’s Clean Development Mechanism soared in 2011. Additionally, governments in locations like California, Australia, and Canada included forests in national or regional emissions reductions programs.

"Last year, market value was buoyed by a diverse landscape of actors, funding sources and projects – mostly in sectors where an emerging price on carbon is writ large," says Molly Peters-Stanley, Ecosystem Marketplace Carbon Program Manager. "Our findings demonstrate that continued growth requires both price signals and a wide array of actors innovating and financing forest carbon solutions."

The report found 18 million hectares impacted by carbon finance in 40 countries. The majority of projects were on private land but increasingly involved communities and smallholder landholders. "To address the drivers of deforestation, we need to establish innovative ways of enabling forest conservation," says Katherine Hamilton, Ecosystem Marketplace Director. "As this type of investment gains increasing attention, transparency and access to information are critical for empowering the range of stakeholders and facilitating effective investments in reducing greenhouse gases."

References

  1. Werf, G. R. van der, D. C. Morton, R. S. DeFries, J. G. J. Olivier, P. S. Kasibhatla, R. B. Jackson, G. J. Collatz, and J. T. Randerson. “CO2 Emissions from Forest Loss.” Nature Geoscience 2, no. 11 (2009): 737.

This article may be reproduced according to our terms of use with attribution (and link, if online) to www.tias.edu. To be cited as: “Bond finance can help finance developments that halt deforestation”, Ingrid Ramaan, www.tias.edu, January 9, 2013.

Read more

Report: Leveraging the Landscape
Report:Unlocking Forest Bonds

Author(s)

Ingrid Ramaan
Administrative Editor FSinsight

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