Ecosystem Marketplace, Marketplace Mitigation Mail

January 13, 2012

From the Editors

The Ecosystem Marketplace's Forest Carbon News
Tracking Terrestrial Carbon

As 2012 ushers in a new chapter for the forest carbon market, the Forest Carbon news brief is taking a look back at last year’s top stories – ranked by you, our loyal readers, who shared your take on 2011 and what you think 2012 has in store for forest carbon.

Last year, the ascendant REDD+ commanded the attention of project developers, buyers, and policy makers – and our readers. Ecosystem Marketplace’sState of the Forest Carbon Markets 2011found that REDD+ supplied 67% of the volume of tonnes contracted in the primary market in 2010, revealing the expanding role of forest carbon credits in the voluntary market.

A number of stories also saw forests growing on compliance market decision-makers. New Zealand currently stands alone as the only active marketplace crediting forestry activities (albeit, only domestically generated credits).CaliforniaandAustraliacrept in, though, with the passage of forest-friendly legislation last year.

In Australia, the newCarbon Farming Initiativewill allow land-owners to generate land-based carbon credits from project types like conservation and afforestation/reforestation. Aussies regulations also establish a cap-and-trade program by 2015, bringing around 500 of Australia’s largest emitters under compliance and providing new opportunities for domestic and international project developers.

California’s Air Resources Board overcame aseries of legal obstaclesthroughout 2011 to launch its GHG compliance program in 2012 – with the cap-and-trade component formally beginning in 2013. Although the program will initially only credit U.S.-based emissions reduction projects, including forestry, its framework allows for international offsets in the future – particularly REDD+ credits, given the Golden State’s key role in theGovernors’ Climate and Forests Task Force.

TheEKO Green Carbon Fund (GCF) was launchedat the beginning of this year, investing in improved forest management projects across the U.S. that are being designed with eligibility under California’s cap-and-trade program in mind. Although credits have yet to be issued and California’s program has yet to begin, the fund inspired some market confidence,acquiring BP Alternative Energy as an investor.

ERA Ecosystem Restoration Associateswas also busy developing a North American forest carbon project, theDarkwoods Carbon pilot projectin Canada. Partnering with the Nature Conservancy of Canada, the project sold a first round of 700,000 credits to thePacific Carbon Trustand ERA.

The UNFCCC talks again showed themselves to be a frustrating experience, although some significant movement occurred. Taking place in Durban, South Africa, the impasses that had reared their heads in 2010's climate negotiations, andthroughout the year in 2011, were on show at COP 17. AlthoughREDD+ made some progress,the finance question was left to be resolved during discussions in the new year. At the same time, new life was breathed into Kyoto, albeit with some big players sitting out this round.

While 2010 saw the Verified Carbon Standard developing a number of REDD methodologies, the dividends came in 2011, when project developer Wildlife Works garnered the first Voluntary Carbon Units (VCUs) issued by VCS. VCS CEODavid Antonioli was certainly excited, saying “This is a watershed moment for REDD projects everywhere because it demonstrates they can attract private investment to this critical work.”

Indonesia featured in our news briefs throughout the year – sometimes with good news, like when the country’s president signed a moratorium banning concessions on forested land and peat swamps. Other times the “bad” outweighed any progress, like when the Rimba Riya project area was halved to grant aconcession to a palm oil company. Despite disappointments and setbacks, money continues to flow into Indonesian REDD, with investment bank theMacquarie Group partnering with Flora and Fauna International, to the tune of $25 million, to develop projects in Indonesia.

And while ERA wasn’t queasy aboutlaunching a projectin a country known for political instability, theOverseas Private Investment Corporationsigned a deal withTerra Global Capitalto provide “political risk insurance” covering Terra Global’s investment in REDD projects in Asia. The first insurance contract was signed in November, providing $900,000 in political risk insurance for a REDD project in Cambodia.

Those were the biggest stories of 2011, according to our reader poll. Some of you also chimed in with predictions for 2012. Will California lead the way in North American carbon markets utilizing forest carbon credits? Will 2012 would be the year for the launch of a sub-national jurisdictional REDD program? Read on for more reflections and predictions from those in the know.

—The Ecosystem Marketplace Team

If you have comments or would like to submit news stories, write to us at general@forestcarbonportal.com.


News

Reader Retrospective 2011

A reader-ranked summary of the year’s top stories impacting the forest carbon market

10. Carbon lurking in Canada's Darkwoods:ERA Ecosystem Restoration Associates and the Nature Conservancy of Canada partnered to develop theDarkwoods Carbon pilot project, a 55,000 hectare project area that will deliver 700,000 tonnes. The sale of those credits will fund the conservation of the Darkwoods Forest. Already, $4 million of credits have been sold to the Pacific Carbon Trust and ERA.

9. Funding forests in America's back yard:With the defeat ofProposition 23 in California, theEKO Green Carbon Fund (GCF)was launched, as the first US carbon fund focused on greenhouse gas emissions reductions through improved land use. The GCF’s first project isexpected to produce credits that will qualifyunder California’s AB-32 cap-and-trade program.


8. No need to Macquarie, funds are on the way:A partnership between theMacquarie GroupandFauna and Flora Internationalhas have teamed up to start the BioCarbon Group Pte Ltd, which will identify and fund REDD projects around the world. The for-profit and non-profit cooperation will invest in projects that are both commercially viable and grounded in community support, an arrangement that leverages each organization’s strength.


7. Is the moratorium half-empty or half-full?: In May of 2011, the Indonesian presidentsigned a two-year moratoriumon issuing new permits for use of primary natural forest and peatland. The effectiveness of the decree is limited, however, by its weak definition of key terms and the omission of the exemption of community forestry permits, amongst other elements.


6. A new ERA for the Congo: ERA signed aForest Conservation Concession Contractwith the government of the DRC for the 299,640 hectare Mai Ndombe property, making way for the first large scale REDD project in the country. The project is expected to produce 1.5 to 3.0 million tonnes of emissions reductions per year, and will begin issuing credits in 2012.


5. Some REDD+ doldrums in Durban:REDD+ made progress at Durban, but perhaps not in the areas that project developers and buyers had hoped. There was guidance on rules defining procedures to establish reference levels and emission reductions measurement. On the other hand, weak decisions on social and environmental safeguards, as well as lack of clarity in a financing mechanism, continued to hold REDD+ back.


4. Political risk insurance, just to be on the safe side: The Overseas Private Investment Corporation (OPIC) isproviding political risk insurance to Terra Global Capital, a U.S.-based carbon development and investment company, for a REDD project protecting forests in Cambodia. This is the first political risk insurance contract to be executed for a REDD+ project.


3. Carbon markets from a land down under: Australia’s has established a national programto allow farmers and investors togenerate offsets from farming- and forestry-related activities. Credits generated by theCarbon Farming Initiative can be traded domestically and overseas, and should find a large market after Australia begins a cap-and-trade program–set to come into effect in 2015 –that wassigned into law this year.

2. REDD credits are on the loose:Wildlife Works Carbon, the US-based project developer, became the world’sfirst to issue REDD+ Voluntary Carbon Units (VCUs)under the Verified Carbon Standard (VCS) for its Kasigau Corridor project in Kenya. The Kasigau Corridor project protects over 500,000 acres of forest in Rukinga, Kenya.


1. Manifest carbon destiny: Court rulings have given the Air Resources Boardthe go-ahead to implement AB 32, the state-wide cap-and-trade scheme in California – turning the tide on a Superior Court ruling back in March, which ruled that other alternatives had not been considered seriously enough. AB 32 has the potential to include offsets from REDD+, and is scheduled to be enforced in 2013.


Carbon Crystal Ball 2012

What voluntary carbon market movers and shakers are saying about 2012

David Rokoss, Director of Business Development ERA Ecosystem Restoration Associates, Inc.
"The continued progress of REDD...where additional project validations/verifications will demonstrate REDD as viable and robust. Additionally, the continued maturation of the North American forest carbon market under California/Quebec/WCI..."
Mike Vitt, Managing Director
"I think the biggest theme in the space in 2012 will be California leadership into creating a compliance market for NA forest projects, which will break critical ground for WCI (i.e. BC, ON, QC action) and set clear demand and pricing. It will also be very interesting to see if or how CA ARB affects the market, pricing, and development of CAR, VCS, CCBA and other voluntary projects in NA. Other interesting questions/themes: Does BC continue to move forward or delay action toward cap and trade and WCI? They were the next big compliance forestry market, but may delay, which might put the emphasis on Quebec and/or Ontario as the next leader (and the keys to launching WCI, if BC delays). Does the global voluntary market for forestry credits grow demand or get flooded with REDD project credits?"

Steve Ruddell, President
"Agricultural Roundtable Standards will be used to take deforestation out of supply chains for corporate agricultural commodity buyers, while providing additional revenue for producers from carbon credits. The first sub-national VCS jurisdictional REDD program will be announced. Full implementation of California's emissions trading market could be delayed again due to legal challenges."

Jonathan Shopley,Managing Director and External Affairs
"First sales of RMUs Impact of first verified REDD+ credits on price and demand in VCM -- whether fears in the market that REDD+ will flood and kill prices comes true?"

Mary Grady,Chief Technical Officer
"Based on 2011 announcements of Norfolk Southern's investment in offsets from ACR-registered GreenTrees project and Chevrolet's investment in the ACR-registered National Forest Foundation San Juan National Forest project, we expect to see a marked increase of registered U.S. and international afforestation / reforestation (A/R) projects as well as an upswing in market interest in supporting this important project class through forward contracts for offset purchase and retirement."

Ian Hamilton, Shawn Burns, Mike Packer
"While the forest carbon market will remain difficult against the backdrop international economic and financial weakness in 2012, the development of national and regional compliance schemes will see growing demand for forest carbon assets, particularly in Australia and, dependent on further rule-making, California and Quebec. The gathering US economic recovery should provide impetus to voluntary market activity with project investment, credit trade and retirement to quietly but significantly pick up. The increasing appetite for ecosystem services will underpin steady development of forest carbon markets as more sustainability-minded institutional investors and financial institutions enter the “natural capital” marketplace."

Nick Oaks,Environmental Economist
"The voluntary carbon markets are likely to keep growing in 2012, mostly thanks to growing interest in REDD, which will also have an increasing proportion within the voluntary carbon markets. With a global compliance market that accepts REDD credits looking unlikely before 2020, all eyes will be on bilateral frontrunners like California, which will increasingly gather momentum outside the UN process."

Gena Gammie, Program Associate
"As the first REDD VCUs enter the market, and as many more big projects are expected to be verified in 2013, the market's response to a big influx in supply will be in the news. It may well mean that the finances for some REDD+ projects in the pipeline won't withstand further feasibility assessments. Additionally, further development of the Governors' Climate and Forests Taskforce will highlight the practical progress that subnational governments are making in this space. Finally, I think we'll see a push toward more landscape-level approaches to forest/land-use based carbon projects. While development banks, donor countries, and policy/project advocates have lamented "silo-ization" in the carbon + LULUCF spaces for years, it's my guess that we'll see really innovative and practical mechanisms (and possibly methodologies) for integrating (climate-smart) agriculture, agroforestry, and forestry in carbon projects. It probably won't be something we see in the mainstream voluntary carbon markets (i.e., VCS) next year, but projects with creative and ambitious supporters may well brave that frontier on their own."

Anonymous "Who will buy? There is more clarity on the role of markets to curb deforestation...but who will buy future credits if national emission reduction goals are so weak?"

Jobs

Tetra Tech ARD are looking for REDD+ and low-carbon development specialists. See those jobs and more atForest Carbon Portal's job board


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