How carbon markets done right help stop deforestation

To have the desired effect, carbon markets need to provide incentives for governments to transform land use governance and tackle the fundamental drivers of deforestation. They need to respect countries’ sovereign right to decide how this should be done. And they must do so in a way that provides assurance to companies considering investments in forest credits. Such credits must represent real results in terms of emissions reductions.

Ever since the idea of payment for reduced emissions from deforestation, “REDD+”, appeared 15 years ago, two parallel worlds have co-existed. One is efforts by forest countries to develop and implement national strategies to reduce deforestation, so-called “jurisdictional REDD+. This builds on a decision by all nations in the UN climate negotiations in 2010, and reflected in the Paris Agreement, to measure emission reductions from REDD+ at the national level, or at a sub-national level as an interim measure. For a decade and a half, countries have made strides preparing for such incentives.

In “the other world”, there is the voluntary and unregulated market of “REDD+ projects”, which has unfortunately so far largely been detached from national efforts.

A recent series of articles in The Guardian[1] point to critical shortcomings of many stand-alone REDD+ projects. This merits attention. But the articles have missed a key dimension of the story – the relationship to jurisdictional-scale crediting, which is what NICFI has been supporting from the outset. The debate following the Guardian expose has focused on how to improve the methodologies in the market. Clearly, there are carbon projects with good carbon accounting and projects with bad carbon accounting, and both types can have good development impacts and otherwise merit support. But it is time to take a step back: Fixing the project methodologies won’t be enough to fix the deforestation problem.

 A “jurisdictional” approach to REDD+ is essential for carbon markets to deliver large reductions in deforestation. Such an approach pays for verified emission reductions for an entire country or state. This is a major reason why NICFI has supported the development of a voluntary carbon market for high-integrity jurisdictional REDD+ over the last years.

 Here are the main reasons why:

1. Reducing deforestation requires government action

Governments have the power and authority to put in place long-term policies and measures to turn drivers of deforestation around. Frances Seymour at World Resources Institute has summarized it well:

Where forest loss is due to illegal activity, only governments can enforce the law. Where deforestation results from unclear land tenure, only governments can recognize rights to resources. Where forest conversion or degradation is due to licensing of concessions on state-owned land, only governments can suspend or better regulate such licenses. Where deforestation is happening on private land, governments can regulate land use and provide incentives and disincentives through fiscal policies such as access to credit and tax relief. Brazil’s success in dramatically reducing deforestation in the Amazon in the decade starting in 2004 provides an illustration of the effectiveness of concerted government action. Recent reversals in the trajectory of forest loss in Brazil similarly are linked to rollbacks in national government policy.

One could add other examples. Indonesia’s almost 90% reduction in deforestation from 2015-21 was not due to the sum of individual carbon projects, but largely due to the Indonesian government’s key reforms to counteract the drivers of deforestation. The current REDD+ project market does not finance public policy interventions. When president Lula says Brazil will end deforestation in the Amazon – an area twice the size of Western Europe – that will require a colossal effort deploying a range of public policy tools over an extended period of time. International financial incentives should be targeted to support those efforts at federal, state and municipal level, and if Brazil wants, to projects structured as part of their efforts.

2. Proper carbon accounting and risk management

 A crucial element of a jurisdictional approach is that the overall carbon accounting covers all forest areas within a jurisdiction. This ensures that everything that happens with the forest, including all deforestation, is also reflected in the carbon inventory.

The Guardian points to the long-known problem of inflated project baselines of stand-alone REDD+ projects. Methodologies that give too much flexibility in setting baselines of hypothetical scenarios of what would have happened to the forest without a project give incentives to overestimate the results for a particular project, but with no linkage to the overall baseline for the forest country. This represents a risk to buyers in terms of demonstrating additionality of the forest carbon credits that they invest in. In contrast, jurisdictional REDD+ requires a real reduction in forest emissions across the territory.

A solution to the project conundrum is to integrate or “nest “REDD+ projects within a common jurisdictional baseline, so that they are aligned with the overall carbon accounting. The need to nest REDD+ projects, has been known by REDD+ project market players for years, but is yet to happen. When jurisdictions have to account for projects that overestimate their carbon results they have less left to sell. As a result it becomes more difficult for governments to drive more effective and inclusive efforts to reduce deforestation, even if they may not have had any role in approving the same projects in the first place. At the moment, this is a critical barrier for many jurisdictions seeking to issue carbon credits, to the benefit of all actors within that jurisdictions – from the government to local communities and indigenous peoples. As such, well-meaning projects to support certain communities can be a hindrance for other communities’ opportunities to benefit from the carbon market. It should be up to tropical forest governments to make the sovereign decision in dialogue with its stakeholder on how to structure their efforts to reduce deforestation – including the role of projects.

Even if baseline methodologies were to be improved, stand-alone projects suffer from carbon leakage. Leakage means that while deforestation is reduced in one place, it may well increase in a different place. The World Economic Forum has summarized how a jurisdictional approach reduces this risk and several other risks such as “permanence” and proper safeguards for indigenous peoples and local communities. The Guardian has also highlighted the widespread problem of “carbon cowboys” that take advantage of indigenous peoples and local communities in pursuit of carbon profits. Surely, ensuring proper consultations, participation and equity for indigenous peoples and local communities is a challenge for jurisdictional REDD-programs too. But these allow communities to raise concerns in the open and to argue for policies that benefit them (beyond revenues), and are less subject to the abuses we have seen in the current project-based REDD+ market.

The way forward

We will not meet our climate goals without urgently addressing deforestation. Voluntary carbon markets offer the most promising opportunity to quickly unlock unprecedented levels of private finance in support of forest countries efforts to reduce emissions from deforestation. To do that, the market must finance the actions that reduce emissions at scale, without leakage and double counting, and with manageable transaction costs.

It is understandable that private investors have been impatient while jurisdictional REDD programs have taken time to emerge, with a lack of supply of standardised credits to buy. But this has recently changed. Various jurisdictional options exist. The Architecture for REDD+ Transactions (ART) certifies the conformance of jurisdictional REDD+ programs to its rigorous TREES standard, and have recently issued its first credits. ART allows for carbon projects – they can either be ‘nested’ into the jurisdictional crediting baseline or deducted from the sum total issued to and available for sale by the jurisdiction. There are now 16 countries and states in the ART pipeline preparing to issue jurisdictional REDD+ credits, available to both public and private sector buyers. Companies may not be used to buying from sovereign entities, and there is a need to match hundreds or thousands of corporate buyers with a smaller number of sellers. The LEAF Coalition offers an opportunity to match corporate demand for forest carbon credits with jurisdictional REDD supply, certified by ART.

The debate following the Guardian articles has shown that, despite carbon accounting issues many projects are otherwise good interventions that merit support. Carbon projects have channeled significant resources into significant forest protection efforts. But improved methodologies or technological quick-fixes won’t address the root causes of deforestation. According to the IPCC we need to preserve nearly all tropical forests, followed by massive restoration. Covering the entire forest area with different projects with different methodologies, measurement and baselines, will not add up to national performance in the time frame we need. That is why the many of the largest environmental groups (who themselves have supported the development of many of the REDD projects) have come together in a consensus statement to promote jurisdictional REDD+.

What is needed, therefore, is a global effort from countries and REDD+ investors alike to promote jurisdictional REDD+, where carbon credit payments are channelled to jurisdictions that demonstrably reduce deforestation across their territory, with inclusive and economy-wide strategies and benefit sharing. REDD+ projects can be incorporated as an important part of a country’s strategy to reduce deforestation, if integrated in the jurisdictional strategy and carbon accounting.

The Guardian debate is a useful contribution for ambitious companies that consider how to invest in good tropical forest carbon credits in addition to ambitious cuts in its value chain as part of a net zero strategy. Those companies need to ensure that their investments can stand the test in terms of accuracy, quality – real emission reduction – and integrity. NICFI will continue to work with partners to support a carbon market that can work for all – for indigenous peoples, communities, governments and the private sector. And that delivers the scale we need – this decade.

[1] Full disclosure: NICFI offered financing to some of the research referred to in the Guardian articles