Payment for Forest Carbon: How Would REDD Market Work

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Payment for Forest CarbonHow Would REDD Market
Work?

• Dr. Joe Leitmann
• Environment Coordinator
• World Bank/Indonesia

Michael Dutschke Director biocarbon consult /
Germany
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Structure of Talk

• Who will invest in REDD?
• How would the market work?
• What determines the price?
• How will benefits be distributed?
• Features of current REDD market

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Potential Investors

• Direct investment in REDD projects
• Forest Investment Program
• ODA
• Private investors
• Corporate Social Responsibility
• Purchasing REDD credits
• Forest Carbon Partnership Facility
• CSR
• Carbon traders
• Banks and other investors

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Opportunity Costs of REDD (1)

• McKinsey, 2007 40/t CO2e in Asia

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Opportunity Costs of REDD (2) Strassburg et al.,
2007 80 lt 5/t CO2e
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Real-world Pricing (2006)
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REDD Value Chain

CO2
1
2
3
4
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Baseline
Strategy
Monitoring
Market
Distribution
Reduce deforestation
Governance
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How the buyer evaluates REDD quality

• Good forest governance
• Broad stakeholder agreement is achieved
• Long-term strategy is in place or likely to be
  implemented
• Clear Reference Scenario established
• Transparent verification reporting of Emission
  Reductions
• No disputes regarding the ownership of carbon
• Revenues go where they are needed (transparent
  system)

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Potential credit revenue streams
Buyers
Government
Policies Measures
Land tenure
Parks
Educatn.
Indigen.
Instit.
PES
s/n activity X
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The Nested Approach

• Before country is REDD ready
• Direct payment buyer s/n activity
• Government approves
• Mitigation credits certified by 3rd party
• Credits transferred to buyer

• On occurrence of the following triggers
• gtX of forests under s/n REDD
• gtY years passed after first REDD project

Country declares national REDD commitment
C revenues from private s/n activities are
substracted from national accounting
Private s/n activities are nationalized (investor
paid off)
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Issues to consider for REDD governance

• Determine a national REDD focal point
• Rules for subnational REDD
• Clarify legal nature of REDD credits
• Clarify credit ownership
• Select target areas for REDD
• Select eligible activities for s/n activities
• Select eligible stakeholders

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Issues to consider for REDD governance

• Determine a national REDD focal point
• Ministry of environment / natural resources
• Same as UNFCCC focal point
• Same as DNA for CDM
• New administrative unit
• Rules for subnational REDD
• Clarify legal nature of REDD credits
• Clarify credit ownership
• Select target areas for REDD
• Select eligible activities for s/n activities
• Select eligible stakeholders

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Issues to consider for REDD governance

• Determine a national REDD focal point
• Rules for subnational REDD
• Coordinated by REDD focal point
• Individually authorized by REDD focal point
• Clarify legal nature of REDD credits
• Clarify credit ownership
• Select target areas for REDD
• Select eligible activities for s/n activities
• Select eligible stakeholders

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Issues to consider for REDD governance

• Determine a national REDD focal point
• Rules for subnational REDD
• Clarify legal nature of REDD credits
• Product or service?
• Subject to national taxation?
• National asset or fungible with international
  credits?
• Clarify credit ownership
• Select target areas for REDD
• Select eligible activities for s/n activities
• Select eligible stakeholders

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Issues to consider for REDD governance

• Determine a national REDD focal point
• Rules for subnational REDD
• Clarify legal nature of REDD credits
• Clarify credit ownership
• Government-to-Government credit trading
• National emissions trading system
• C integrated into PES system
• Private ownership with deductible for government
  (credit-sharing tax)
• Select target areas for REDD
• Select eligible activities for s/n activities
• Select eligible stakeholders

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Issues to consider for REDD governance

• Determine a national REDD focal point
• Rules for subnational REDD
• Clarify legal nature of REDD credits
• Clarify credit ownership
• Select target areas for REDD
• White list of priority areas
• Black list of non-intervention areas
• Left to discretion of project developers
• Select eligible activities for s/n activities
• Select eligible stakeholders

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Issues to consider for REDD governance

• Determine a national REDD focal point
• Rules for subnational REDD
• Clarify legal nature of REDD credits
• Clarify credit ownership
• Select target areas for REDD
• Select eligible activities for s/n activities
• Determine/clarify national forest definition
• Avoided deforestation
• Sustainable forest management
• Non-CDM elegible A/R activities or pools
• Select eligible stakeholders

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Issues to consider for REDD governance

• Determine a national REDD focal point
• Rules for subnational REDD
• Clarify legal nature of REDD credits
• Clarify credit ownership
• Select target areas for REDD
• Select eligible activities for s/n activities
• Select eligible stakeholders
• Provincial / local administration units
• National NGOs, national private sector
• Foreign investors

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Features of Current REDD Market

• Few transactions
• Project-level avoided deforestation
• Small volumes
• Different carbon assets
• Different standards and methodologies
• Different permanence approaches
• But a market may be appearing
• Indonesia Aceh / Merrill Lynch
• Guyana Iwokrama / Canopy Capital
• Brazil Amazonas
• Voluntary
• Carbon footprint, feel-good
• Pre-compliance (sub-national and international)
• Not transparent
• Sales are not just about carbon
• Timber yields, etc.

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A Differentiated Market
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Towards a New Forest Carbon Landscape