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PES, Present, and Future: the Year in Environmental Finance

Steve Zwick

2009 opened with the formation of a new Office of Ecosystem Services and Markets and closed with a disappointing Copenhagen Accord that nonetheless included provisions for reducing greenhouse gas emissions from deforestation and forest degradation.  EM takes a brief look back on the year in PES and the decade it capped off.

Forestry Carbon Report

On January 12, Ecosystem Marketplace will release its first annual State of the Forest Carbon Markets fact sheet. The following numbers are preliminary findings from the report.

Ecosystem Marketplace sought to measure the output of all project developers and intermediaries selling carbon offset credits from 1990 through mid 2009.   We succeeded in collecting data from nearly 100 developers who sold credits from a total of 230 forestry projects in this period.

Suppliers reported transactions of at least 33.6 million metric tons of forest based carbon credits (MtCO2).   About 2/3 of credits transacted, 20.8 MtCO2, were reported as retired.

Carbon finance has impacted more than two million hectares of forests.

In 2008, respondents reported 5.2 MtCO2 forestry credits transacted and in 2009 and in the first half of 2009 reported 3.7 MtCO2. Most of these credits, 2.5 MtCO2   were transacted by project developers in the voluntary carbon markets.

Latin America has historically led the world in the production of forestry credits (with 17 MtCO2 since record-keeping began), followed by North America (7.2 MtCO2) and then Africa (2 MtCO2).   In 2008 and early 2009, however, the number of African credits rose and the number of credits originating in Latin America declined.   In 2008, North America lead with 1.9 MtCO2 , followed by Africa (1.1 MtCO2), and then Latin America (385,000).

The majority of these offset credits were transacted in the voluntary carbon markets, with project developers transacting more than 26.3 MtCO2 transacted in the Over the Counter (OTC) voluntary carbon markets and 2.6 MtCO2 transacted on the Chicago Climate Exchange (CCX).

Roughly 3 MtCO2 of forestry based credits have been transacted in the compliance markets.   The majority of these credits, 1.8 MtCO2 were transacted in the New South Wales GHG Abatement Scheme.

Prices in the OTC voluntary carbon for forest carbon market have ranged from $0.15 to $50, with an overall volume weighted average of $4.32. In 2008 the average price was $7.12. Prices of CCX forestry credits have averaged $3.03 and in 2008 averaged $3.69.

Over time, with the rise of third party standards, credits quality has become increasingly standardized. By 2008 and 2009 the majority of credits sold in the OTC voluntary carbon markets were verified to a third party standard.

This research was made possible by sponsorships from Biological Capital, Ecosystem Restoration Associates, and Baker McKenzie, as well as funding from the United States Agency for International Development (USAID), the World Bank, the Packard Foundation, the UK Department for International Development (DFID) and SURDA Foundation.

 

2009 opened with the formation of a new Office of Ecosystem Services and Markets and closed with a disappointing Copenhagen Accord that nonetheless included provisions for reducing greenhouse gas emissions from deforestation and forest degradation.   EM takes a brief look back on the year in PES and the decade it capped off.

5 January 2009 | As we rolled into the current century just over a decade ago, most of us took stock not just of 1999, but of the entire 20th Century.   Ten years later, the New Year’s retrospectives have focused not just on the most recent year, but on the entire first decade of this new century – apropos for Ecosystem Marketplace, since 2009 marked the tenth anniversary of EM publisher Forest Trends, the environmental non-profit organization that has also spawned the Katoomba Group, the Business and Biodiversity Offsets Program (BBOP), SpeciesBanking.com, ForestCarbonPortal.com, the Chesapeake Fund, as well as numerous “incubator” projects around the world designed to preserve nature by quantifying the economic value of living ecosystems and developing payments for ecosystem services (PES) to keep them going.

PES schemes were hatched throughout this past decade, with the most successful being schemes that have been around since the 1970s and 1980s: namely, species banking and wetland mitigation banking, which are built on the Endangered Species Act and the Clean Water Act in the United States.  

These are the granddaddys of the ecosystem marketplace, but they have been overshadowed in the collective mind of the general public by the global carbon markets, many of which incorporate PES components built around the premise that you can promote sustainable land-use practices by paying for the sequestration of carbon in trees.   Although the only true PES carrot to make it into the Kyoto Protocol was a provision for generating carbon offsets by planting trees, support grew throughout 2009 for schemes that save existing trees – and reduce greenhouse gas emissions from deforestation and forest degradation (REDD).

2009: the Regulatory Fronts

To casual observers, REDD seemed to come out of nowhere in the lead-up to the year-end Climate-Change Conference in Copenhagen, and it became one of the few bright spots in an otherwise dismal Copenhagen Accord.   That non-binding agreement called for the development of a mechanism for promoting “REDD-plus”, which is REDD plus “enhancement of carbon stocks” (reforestation), “conservation” (recognition of efforts to protect forests that are not immediately in danger) and “sustainable forest management” (harvesting mature trees and other practices).   It failed, however, to create a framework within which that mechanism can function.

Meanwhile, REDD and REDD-plus are featured in all proposed climate-change legislation working through the US Congress, as well as in the evolving blueprints for post-Kyoto carbon trading in the European Union and Australia.   An upcoming EM report (see “Forest Carbon Report”, right) will show that markets for forest carbon have grown in both scope and sophistication without a compliance driver — but not enough to incentivize the kind of change needed to save the rainforests and slow global warming.

On the broader PES front, the US Department of Agriculture opened the Office of Ecosystem Services and Markets (OESM) to provide a framework within which schemes can achieve their true potential – even as a survey showed that local offices of the Army Corps of Engineers were unevenly enforcing new rules implemented a year earlier for offsetting wetland loss, which falls under their jurisdiction and that of the EPA.

These fledgling markets gained further credibility in the middle of the year, when financial services information provider Markit   bought   TZ1, one of three registries helping to keep track of carbon credits under the Voluntary Carbon Standard.   The new Markit Environmental Registry has been working with mitigation bankers to develop next-generation instruments and infrastructure to help project developers and potential buyers keep track of existing offsets and create a secondary market, which will make future trading easier.

Meanwhile, water quality trading took a leap into the present with the launch of the Chesapeake Fund, a massive pilot project spearheaded by Forest Trends and designed to serve as a template – or at least a learning experience – for compliance schemes across the world.

Katoomba Meetings Take it Global

Two Global Katoomba Meetings helped put REDD and REDD-plus on the trajectory to Copenhagen and seed next-generation markets around the world.

First, the Spring meeting in Cuiaba, Brazil, drew thousands and led to the adoption of the Cuiaba Declaration – one of many points of agreement among Amazon stakeholders that led Brazil’s federal government into the REDD fold.   This meeting also helped spread awareness and understanding of environmental finance in general.

Later, in Accra, businessmen, academics, and government representatives examined the unique economic forces converging on West Africa’s equally unique ecology as oil development impacts mangroves and other coastal ecosystems.   The launch of the West Africa Katoomba Incubator means the creation of new pilot projects in the region.   These will harvest the experience of incubators in Latin America and add to that growing body of knowledge for future projects around the world.

Finally, the Forest Trends Communities and Markets Program commissioned a legal analysis that determined that Brazil’s indigenous people own the rights to carbon sequestered on protected lands – offering them another tool for protecting their heritage while tapping into the global economy.

Impending Challenges

The year 2010 offers scores of new questions and challenges – chief among them being how to deal with climate change.  

As REDD-plus takes hold, more and more participants are calling for the creation of new means of measuring the degree to which rainforest custodians should be rewarded for their actions.   McKinsie & Company has proposed abandoning the current method of establishing reference levels for REDD projects – which essentially involves examining current rates of deforestation and giving credit for improving that – and instead suggests more subjective methods that take into account the opportunity cost presented by alternate land uses.

Indeed, the larger issue of additionality is coming under scrutiny as environmental finance comes into competition with other land-use income streams.   As the year closed out, the debate over how to reward practices that promote or preserve multiple environmental benefits is moving front and center – and promises to remain a hot-button issue for years to come.

Globally, 2010 is the International Year of Biodiversity – yet no one expects anyone to meet their 2010 targets when the Conference of the Parties to the Convention on Biological Diversity convenes in Japan in October.

Environmental finance will not solve any of these problems alone, but it can help draw attention to the economic value of nature’s vanishing services.   That, as they say, is not a sharp stick in the eye – but neither is it a panacea.

Steve Zwick is Managing Editor of the Ecosystem Marketplace. He can be reached at SZwick@ecosystemmarketplace.com.

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