By Daan Wensing
Chief Executive Officer, Chair of the Executive Board, IDH
Ten years after it dropped off the sustainability radar, forest-based carbon trading is finally poised to get off the ground for real.
The international market for climate finance is projected to reach $640 billion this year, according to NatWest Markets, and companies such as Walmart, Amazon, Nestlé, Alibaba and Mahindra Group are pledging to slash emissions and invest in nature as a carbon sink. Demand for forest carbon offsets could outstrip supply by 2025, carbon prices could quadruple by 2030 and offset values could be worth $125 billion to $150 billion a year by 2050.
Voluntary carbon trading is about to go mainstream, and we believe it can have a key role in safeguarding the future of our planet.
First, carbon finance can pay for nature conservation and forest protection. Thriving tropical forests benefit all of us. Carbon markets and the financing they provide will help ensure that we can continue to rely on tropical forests by pitching in on the costs of monitoring, control and policing of nature reserves and national parks.
Second, addressing climate change and the biodiversity crisis will require big changes from the agriculture and forestry sector. We know greener farming systems can be profitable but we also know banks and investors are risk-averse. If the carbon trading market can de-risk investments in more sustainable models — such as agroforestry, no-till agriculture, intercropping, agriculture intensification, social forestry and landscape approaches — this can give the sustainable agriculture and forestry sector a fighting chance to scale up.
Third, and most important, carbon trading can provide income to the farmers and communities living in and near forests and peatlands. Drivers of deforestation and nature degeneration globally include agricultural expansion, illegal mining, timber and fuelwood harvesting, wildfires, infrastructure development and smallholder farming. These activities are closely linked to local economies. No climate solution can be considered sustainable unless it protects peoples’ rights and access to a secure livelihood. Carbon finance can offer forest-dwelling and rural communities diverse sources of income and help close the living income gap. But to achieve all this, carbon trading schemes such as the European Union Emissions Trading System, the Northeastern U.S. states’ Regional Greenhouse Gas Initiative and forest-based emissions reduction initiatives such as REDD+ will have to overcome some major hurdles.
“As we revisit the options for climate finance, many will ask, "Haven’t we been here before? How are things going to be different this time around?"
In its simplest terms, carbon trading allows businesses to buy or exchange carbon credits, which finance the removal of greenhouse gases from the atmosphere. Companies that cut their emissions or remove carbon from the atmosphere, for example through tree planting or funding smokeless cooking fuel, may sell or trade unused credits. Each credit typically represents one metric tonne of CO2 equivalent.
When the practice of carbon trading was first introduced, it drew its fair share of criticism, with claims that these processes lack transparency and regulatory enforcement, and lead to broken promises and double-counting of credits. Some even claimed that rather than providing social benefits, carbon trading actually did forest communities more harm than good.
Governments of countries such as Indonesia and Brazil have been part of discussions about reducing emissions from deforestation and forest degradation (REDD+) since the mid-2000s. One frustration in early phases of the development of carbon markets was that it was all based on pay for performance. This meant that money was available, and climate-positive projects were developed, but the money failed to reach the project developers as soon as they had hoped.
Only now, 15 years later, are the first government-to-government payments from the REDD+ program coming through. Some nations, which we see as the stewards of our tropical forests, find this delay unacceptable. As we revisit the options for climate finance, many will ask, "Haven’t we been here before? How are things going to be different this time around?"
What was missing during early REDD+ initiatives were the channels to deliver climate finance to the governments and communities in agricultural areas, who were managing forests and taking responsibility for nature reserves. The international community is better prepared for this, with networks and models fit for purpose. One such innovation is our own SourceUp model, which has an online platform that links local sustainability coalitions in sourcing areas with international markets.
Another major hurdle is around land ownership and land rights. It is naïve to think that all current global emissions can simply be offset through sustainable forestry, conservation and sustainable agriculture. It is important that businesses don’t see carbon trading as an easy option. First, they should prevent and reduce all possible emissions and only turn to offsetting as a last resort. Even then, if the carbon market is to meet the projected demand, this will need a lot of land. This land currently has owners and users with their own vision for what to do with it. These owners and users, whether governments, private owners or traditional communities, need to take the lead in designing these projects. Achieving this needs more than just financial investment, but also innovation in fair and inclusive governance. Finally, the most challenging hurdle is the process of changing behaviour and our systems of production and consumption. Livestock farming cannot sustainably continue to take up land at the rate that it currently does, and farms cannot irrigate with groundwater or encroach on forests forever.
But transitioning to sustainable agricultural production requires innovation and training in farm-level practices such as crop cultivation, irrigation, reduction in agrochemical inputs or crop circulation methods. There is no one solution to this, and the global sustainability movement is working together to change and built trust in new, greener production systems. Livestock intensification programs in the southwest Mau Forest, Kenya, and Mato Grosso, Brazil, have shown that increasing the number of cattle grazed per hectare can relieve pressure on adjacent forests. Community-owned irrigation ponds in Vietnam have provided coffee farmers with the water they need, without exploiting groundwater. In Foya, Liberia, farmers are producing rice on lowland areas to replace the traditional shifting cultivation that has destroyed most of the forest in the district.
“If the carbon market is to meet the projected demand, this will need a lot of land. This land currently has owners and users with their own vision for what to do with it”.
But those of us working in the intersection between public and private for global sustainability know that one of the most effective ways to drive change towards sustainability is through incentives and offering win-win alternatives.
One alternative is in-setting, where companies add carbon-removing initiatives into their supply chains — for example, a coffee producer moving to agroforestry and planting more trees. As well as capturing more carbon, the extra crops create more shade and reduce the amount of water the plantation needs. Another way to achieve this intersection is through specialized financing and investment funds, such as AGRI3, our own FarmFit fund or the Land Degradation Neutrality (LDN) Fund. The LDN Fund finances a coffee co-operative in Peru, which cannot otherwise access credit easily. Café Selva Norte coffee is using this funding to adapt the farms to climate change and help prevent further deforestation. However, as this example shows, a lot of such funding is often earmarked for farms and plantations. Much less — and it's logical because it's private money — is for projects on public and community land, where it’s difficult for the private sector to get so involved.
Some new ways of doing this are emerging. In the Padan Tikar forest village in the Kuba Raya district of Indonesia, a government scheme handed forest management over to local villagers. It helped the villagers diversify into beekeeping and crab farming in order to alleviate their reliance on harvesting wood from mangrove forests to make charcoal.
These examples show tried-and-tested alternatives that are ready to scale up with the support of climate finance.
Carbon trading will play a key role in de-risking investments in sustainable practices. It is up to all of us working towards the United Nations Sustainable Development Goals to ensure that we wield this market’s potential for the benefit of people and the planet.
First published in Greenbiz, January 26, 2021