Althelia Raises $80 Million For REDD And Ecosystem Services

11 June 2013 | If Christian del Valle is right, the Althelia Climate Fund will make money over the next eight years for the Church of Sweden, the European Investment Bank, the Finnish Fund for Industrial Cooperation (Finnfund), and the Dutch Development Bank (FMO, Financierings-Maatschappij voor Ontwikkelingslanden). It will do this by investing in certified commodities, sustainable agricultural produce, carbon credits, and other ecosystem-service projects across Latin America, Africa, and Asia – spawning in the process imitators who will funnel billions into sustainable land-use projects around the world.

“We will provide funding to projects that are early-stage in nature or pilots in need of scaling up,” says del Valle, who is Managing Partner and Chief Investment Officer of Althelia Ecosphere, the Fund’s management Company. “These investments are often overlooked or perceived as being too complex (or risky) for conventional sources of capital.”

Launched in late 2011 with the aim of raising €150 million ($200 million) to €200 million ($266 million) over three years, the Fund today closed its first financing round with €60 million ($80 million), and del Valle says it is on track to achieve its funding goals.

“The Fund’s first close demonstrates investors’ emerging confidence that financing a transition towards sustainable land use can deliver competitive financial returns alongside positive environmental and social impacts’ says Sylvain Goupille, Althelia Ecosphere’s Managing Partner and Chief Executive. “This is good news for investors seeking new growth strategies, but also for governments now focussed on addressing dilemmas like food security, Natural Capital preservation and decarbonisation of the global economy.”

Of the first-round investors, FMO has the highest amount of private-sector ownership, with 49% of its shares in the hands of commercial banks, trade unions and other private-sector representatives. As the Fund scales up, it hopes to attract more private-sector investors into projects selected in cooperation with the nonprofit Conservation International, which helped the fund get started with bridge financing in 2011 and has provided technical support ever since.

Althelia has worked with investors and NGO partners to design a proprietary Environmental, Social and Governance (ESG) policy and management system, incorporating the International Finance Corporation’s Performance Standards on Environmental and Social Sustainability (2012) and the EIB Statement of Environmental and Social Principles and Standards (2009). Forest-based emissions reductions financed by the Fund will also be validated and verified to both the Verified Carbon Standard and the gold level of the Climate Community and Biodiversity (CCB) Standard for projects delivering smallholder/community-led equitable benefits and exceptional biodiversity benefits, as appropriate. The Fund will also work to ensure that its investments are developed in such a way as to be eligible for recognition within jurisdictional (subnational and national) REDD+ programmes that are under development, including VCS Jurisdictional and Nested REDD (JNR) as well as the REDD+ mechanism developing internationally under the UNFCCC process, and where appropriate, in regional frameworks such as California and other states and provinces participating in Governors’ Climate & Forest taskforce (GCF).

 

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Habitat Banking In Spain: Moving Towards The Future

Spain has a shortage of public funds for nature and an overabundance of environmentally valuable land in private hands. It could, therefore, benefit greatly from conservation banking if the legal landscape can be adapted to recognize it. Here’s a look at the landscape and its pitfalls.

18 June 2013 | High Biological Value sites are regions where a wide variety of ecosystems concentrate, and Spain may have more of them in private hands than any other European country.

Most of the money dedicated to the conservation of natural areas in Spain, however, comes from public funding sources, and these sources are dwindling rapidly. It is, therefore, necessary to explore new ways of funding the land management activities that owners develop in rural areas and encourage them towards the conservation of nature. Habitat banking is one logical alternative.

Habitat Banking

The concept of Habitat Banking, as recently used in Spain, is a mechanism that can bring many new features to the Spanish environmental landscape, as it has done in other countries. However, understanding of the concept is limited, not only among the general population, but also in those specific sectors that are involved in its development.

Confounding this is a general confounding of habitat banking with more standard Command and Control models.

In addition, the lack of an agreed-on name for such mechanisms also helps to create confusion regarding the habitat banking concept. Even here, we will use different terms for different iterations of the same concept: mitigation banking and conservation banking, or even, as shown later in this article-biodiversity banking.

The Origin of the Concept of Habitat Banking in Spain

We must have a look back over the last few years to find some reference about habitat banking in Spain. This concept appeared in Spain as a result of the transposition of an EU environmental liability directive in 2007. The new regulatory framework provided the possibility of new instruments for the compensation of environmental damages signaling significant changes. The new framework established for the first time a mechanism that quantified damages requiring full reparation of environmental damage in ecological terms, leaving compensation in economic terms only for a little number of cases, in which ecological restoration is not possible.

At the same time, the European Commission entrusted a full study to examine the feasibility of introducing habitat banking existing in the European environment, according to both legal and environmental objectives and its compliance. Meanwhile, simultaneously, in Europe, market-based policies directed at the conservation of the natural environment are beginning to be promoted, such as the development of the European trade emission allowances (European Trading Systems , EU ETS).

The introduction of these changes showed up in references to habitat banking in Spain. The new legal framework aims to introduce this concept under the regulatory implementation of the new legislation as a mechanism to allow the repair of environmental claims. In early 2008, one of the provisions included in the draft read as follows: “…may be used to realize the compensation for the damage caused to the environment, market mechanisms previously made of natural resources. In this sense, Habitats Banking will be established.”

For various reasons, habitat banking lost the chance to appear in Spanish legislation. However, looking at it from a much more hopeful point of view, the door to debate over the preservation of our natural areas has been opened. This debate continues today, and also has been reinforced by the interest of the administration in order to protect habitat banking in a Spanish legal framework.

Interest in New Mechanisms Begins

The need for a larger debate on market-based mechanisms for conservation-like payments for environmental services-as well as on habitat banking was revealed at the 10th National Environmental Congress in Spain in November, 2010. At this meeting, possibly the most relevant forum in Spain related to the environment, the Forestry, environmental services and market mechanisms working group was formed. This working group brought together many of the top professionals in Spain to reach agreements and draw conclusions on the matter, awakening interest in these mechanisms.

Almost simultaneously, the first publication in Spain dedicated exclusively to innovative financial mechanisms saw the light. This publication, edited by EUROPARC-Spain, showed several alternative market-based mechanisms for conservation, protection and improvement of the environment, including habitat or conservation banking.

Subsequently, forums between stakeholders in development, land stewardship entities, professionals from different areas (finance, insurance, securities, legal …) and the Spanish government were held to launch a development proposal. This included events organized by the Engineers College, held in June 2011, regarding the prospects of habitat banking in Spain.

These developments culminated with two important events. First, in November 2011, the International Conference of Territorial Governance and Adaptive Management of Global Change brought together the main stakeholders along with international experts from the United States, the Netherlands and Germany to discuss the most crucial aspects in developing habitat model banks. This meeting generated rich discussions and diverse opinions. This allowed for the formation of a working group to develop needed tools.

The second milestone was the conclusion in the last and latest edition of the National Congress of Environment (CONAMA 2012), highlighting the technical session named Land Stewardship and Financing Mechanisms for Nature Conservation: Habitat Banking. This session analyzed the implementation phase of habitat banking, adding a new aspect to the debate: new sources of additional demand damage compensation, because of the economic adjustment that is taking place in Spain nowadays. The concept of biodiversity banking arises from this.

Furthermore, in the mentioned session, the Spanish Ministry of Agriculture, Food and Environment presented a proposal to include habitat banking in Spanish legal framework. Moreover, a Spanish region proposed the inclusion of habitat banking in its regional policy, under the concept of biodiversity banking. It’s also likely that later this year, the concept “conservation banking” will come to the fore in a modification of the Environmental Impact Assessment National Act. That’s what we are working for.

Some companies have examined developing habitat banking in the Spanish scenario. According to the tool, Mercados de Medio Ambiente (Environmental Markets), some publications, such as Bancos de hí¡bitat: Una solucií³n de future, ( Habitat Banking: a solution for the future) have been launched according to specific habitat banks.

The Situation Today

Everyone knows about the economic dififculties in Spain today. Despite signs of recovery in the coming years, progress will be slow, especially when it comes to the growth of habitat banking. Natural demand of habitat banking is mainly determined by the need to offset impacts and damages from infrastructure and new urban development. These needs have been reduced almost completely making it necessary to find a new scenario that will promote new conservation strategies.

It is also necessary to develop the appropriate valuation tools in order to ensure the ecological and economical worth of the environment into the future. These tools will be necessary in creating a regulatory framework that covers habitat banking.

Practice Will Guide You…

Meanwhile, the stage is perfect for developing the methodology and operations required.

Governments are putting in their two cents as well. At Ecoacsa, we are trying to implement pilot experiences that make the model viable. Ecoacsa acquires knowledge and experience from models developed in other countries allowing them to learn from mistakes and develop an agile, effective, coherent and constructive model.

… and Help us to Move Into the Future

Habitat banking faces many challenges. Disclosure of these mechanisms is critical and necessary to generate a social agreement that will support a commitment to new conservation tools. We need a change in the current paradigm that allows everyone to quantify environmental impacts in ecological terms and not in economic terms but with little ecological effectiveness. In Europe, some countries have already laid the foundations with recognized experiences mostly led by governments. However, most countries still don’t have a regulatory framework.

But the right settings to present biodiversity legislation needs to be in place. Habitat banking will be, without a doubt, an essential aid to comply with the requirements imposed by the new European initiative in the field of “net biodiversity loss”, as envisaged for 2015 in the Europe 2020 strategy.

We are now at a turning point for the evolution of this mechanism in Spain. We will continue discussing the advances that occur, which helps to improve Spain’s conservation models.

David ílvarez Garcí­a and Isabel Gonzalez Alcalde are Executive Director and Director of business development of Ecoacsa Reserva de Biodiversidad and promoter of the initiative in Spain “Mercados de Medio Ambiente”

Should Israel Embrace Biodiversity Financing Programs?

Israel’s biodiversity is under threat from a list of sources that include urbanization, water scarcity and habitat loss. To beat this threat, a group of scientists, government officials, market experts and others are examining biodiversity financing programs from around the world to implement in Israel that will improve conservation.

This article has been adapted from “Financial Conservation in Israel”, a Financial Innovations Lab ® Report published last week by the Milken Institute and available for download here.

30 July 2012 Urbanization, industrialization, and climate change are taking a greater toll on the planet by the day. Human activity is having a profound effect on the ecosystems that surround us. As populations increase and once open land is developed, species and habitats disappear. This destruction affects water quality, soil erosion, and agricultural productivity.

A Downward Trend

These trends are starkly apparent in densely populated Israel, where water is scarce and competition over land use is fierce. Located at the nexus of three continents, it has always been home to an exceptional diversity of flora, fauna, and complex ecosystems. For a nation of such small land area, it boasts a disproportionate percentage of global biodiversity.

But as population density has grown steadily over the past decade, there has been a sharp increase in commercial and residential development in once-pristine areas that supported a rich variety of animal and plant life.

Vultures, multiple bat species, and Eurasian otters (lutras) are just a few of the many creatures whose numbers have dwindled to critical levels. The Hula painted frog, which was thought to be extinct, has been spotted again, but it remains on the brink.

Scientists have warned that up to one-third of the plant life along Israel’s coast may be in jeopardy. And disappearing sand dunes threaten the survival of unique desert creatures.

There is an urgent need for improved conservation. But previous efforts to protect the country’s environmental assets have largely relied on regulatory policies alone, with a focus on designating protected areas through a national park system and statutory land-use master plans. This has proven ineffective in stopping habitat fragmentation and degradation as a result of agricultural, residential, commercial, and industrial development.

An Upgraded Conservation Plan

Biodiversity, as a public good and as a pool of environmental assets, is currently undervalued and at risk. There has been no incentive to change market behaviors toward land use. Public budgetary expenditures for conservation of open areas, for the national parks authority, and for sustainable local development have been inadequate.  

In recent years, however, financial mechanisms have been created around the world to create new incentives and new momentum for conservation efforts. Payments for ecosystem services, land auctions, and other compensation programs have been utilized in multiple countries.

Biodiversity banking, for example, creates opportunities for developers to trade the offsets of potential destruction while earning revenues on increasing land values.

The time has come for Israel to join the ranks of both developed and emerging nations around the world that have adopted biodiversity financing programs. The programs now in place include watershed and wetland protection, water services, soil conservation, wildlife protection and carbon sequestration, land management agreements, recreation, and initiatives to clear invasive alien plants and restore the beauty of the natural landscape.

Is It Viable?

Could these ideas work in Israel? The Milken Institute, in conjunction with Israel’s Ministry of Environmental Protection, convened a Financial Innovations Lab ® to evaluate potential incentive programs and other financial mechanisms that could be used to appropriately value the nation’s biodiversity.

The session brought together a diverse group of scientists, capital market experts, governmental officials, foundation executives, architects, and land developers to design potential models and localize the best international solutions to fit the Israeli context.
Participants discussed how to achieve the optimal level of conservation while maintaining cost efficiency. Following presentations on specific programs in countries like the United States and Australia, participants debated which models could be most applicable to Israel. There was a focus on identifying and overcoming potential barriers to the adoption of these models. Participants then suggested examining case studies to further test the feasibility of financial mechanisms to align environmental protection with economic growth in Israel.
 
 

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What Australia’s Link and Scrap
Could Mean for Domestic Carbon Farming

 A group of land industry organizations are claiming the new ecosystem service based forest planning rule is in violation of several pieces of land management legislation. Because of what they believe to be a governmental overreach, they have filed a lawsuit against the US Forest Service.

29 August 2012 When the US Forest Service updated its Forest Planning Rule in March, it claimed the new rule reached ecological as well as economic sustainability through a framework based on collaboration and science.

“This new rule provides the framework we need to restore and manage our forests and watersheds while getting work done on the ground and providing jobs,” said Agriculture Secretary Tom Vilsack.

But those potential benefits were called into question this month, when organizations within the livestock industry filed a lawsuit arguing the rule is in violation of several statutes.

The rule hadn’t been updated in 30 years prior to this attempt and many conservation groups say it is desperately needed. The Nature Conservancy estimates 120 million acres of forests are in immediate need of restoration.

The rule includes requirements of restoring and maintaining forests, grasslands and watersheds and also providing habitat for species conservation. Other provisions of the plan include outreach to underrepresented communities.

Regarding the litigation, the Forest Service released a statement saying, “We listened to thousands of stakeholders in crafting the new planning rule and in reflex the full spectrum of voices and perspectives of those who value our national forests and grasslands. We are confident in the rule as it is the result of an unprecedented collaborative process.”
The livestock industry’s lawsuit is led by the Public Land Council and the National Cattlemen’s Beef Association but includes several other organizations. They argue the new rule violates the National Forest Management Act, (NFMA) the Multiple-Use, Sustained Yield Act, (MUSYA) and the Administrative Procedures Act.

“What we focus on in the lawsuit is the emphasis on preservation and ecosystem services and sustainability over what is required by statute,” says Executive Director of the PLC and Director of Land of Federal Lands at the NCBA, Dustin Van Liew. Van Liew says the law requires the planning rule to focus on managing for multiple use purposes such as range, timber and mineral development. Wildlife preservation is one part of the rule and not the central component.

Besides that, the industry doesn’t like the idea of grouping productive functions of national forests that provide for local economies with recreational forest uses under the term, ‘ecosystem services.’

A term like, “viable population,” which requires the USFS to maintain a viable population of species of concern within an area in the revised planning rule, forces standards that were previously guidelines to be mandatory. The laws mentioned above provide that individual forests simply follow the direction set by the planning rule.

Ranchers and farmers say they operate under the multiple use management approaches in cooperation with Congress working to maintain wildlife habitat while also providing the foundation of the US west’s rural economy.

The US Department of Agriculture Forest Service says the new planning rule does support these rural economies while enhancing protection for forests, water and wildlife.

“We are ready to start a new era of planning that takes less time, costs less money, and provides stronger protections for our lands and water”, said U.S. Forest Service Chief Tom Tidwell.

As mentioned earlier, the revisions are heavily focused on ecosystem services and new forest plans will be required to use scientific data as well as public involvement when developing individual plans.

 

What Australia’s Link and Scrap Could Mean for Domestic Carbon Farming

 A group of land industry organizations are claiming the new ecosystem service based forest planning rule is in violation of several pieces of land management legislation. Because of what they believe to be a governmental overreach, they have filed a lawsuit against the US Forest Service.

29 August 2012 When the US Forest Service updated its Forest Planning Rule in March, it claimed the new rule reached ecological as well as economic sustainability through a framework based on collaboration and science.

“This new rule provides the framework we need to restore and manage our forests and watersheds while getting work done on the ground and providing jobs,” said Agriculture Secretary Tom Vilsack.

But those potential benefits were called into question this month, when organizations within the livestock industry filed a lawsuit arguing the rule is in violation of several statutes.

The rule hadn’t been updated in 30 years prior to this attempt and many conservation groups say it is desperately needed. The Nature Conservancy estimates 120 million acres of forests are in immediate need of restoration.

The rule includes requirements of restoring and maintaining forests, grasslands and watersheds and also providing habitat for species conservation. Other provisions of the plan include outreach to underrepresented communities.

Regarding the litigation, the Forest Service released a statement saying, “We listened to thousands of stakeholders in crafting the new planning rule and in reflex the full spectrum of voices and perspectives of those who value our national forests and grasslands. We are confident in the rule as it is the result of an unprecedented collaborative process.”
The livestock industry’s lawsuit is led by the Public Land Council and the National Cattlemen’s Beef Association but includes several other organizations. They argue the new rule violates the National Forest Management Act, (NFMA) the Multiple-Use, Sustained Yield Act, (MUSYA) and the Administrative Procedures Act.

“What we focus on in the lawsuit is the emphasis on preservation and ecosystem services and sustainability over what is required by statute,” says Executive Director of the PLC and Director of Land of Federal Lands at the NCBA, Dustin Van Liew. Van Liew says the law requires the planning rule to focus on managing for multiple use purposes such as range, timber and mineral development. Wildlife preservation is one part of the rule and not the central component.

Besides that, the industry doesn’t like the idea of grouping productive functions of national forests that provide for local economies with recreational forest uses under the term, ‘ecosystem services.’

A term like, “viable population,” which requires the USFS to maintain a viable population of species of concern within an area in the revised planning rule, forces standards that were previously guidelines to be mandatory. The laws mentioned above provide that individual forests simply follow the direction set by the planning rule.

Ranchers and farmers say they operate under the multiple use management approaches in cooperation with Congress working to maintain wildlife habitat while also providing the foundation of the US west’s rural economy.

The US Department of Agriculture Forest Service says the new planning rule does support these rural economies while enhancing protection for forests, water and wildlife.

“We are ready to start a new era of planning that takes less time, costs less money, and provides stronger protections for our lands and water”, said U.S. Forest Service Chief Tom Tidwell.

As mentioned earlier, the revisions are heavily focused on ecosystem services and new forest plans will be required to use scientific data as well as public involvement when developing individual plans.

 

On the Blog:
ACR Goes to Europe

Note: This article appeard first on the EKO-ECO  Blog. Find the original post here

July 21 | Today, the American Carbon Registry (ACR) and the International Carbon Reduction and Offset Alliance (ICROA) announced that carbon offsets adhering to ACR standard are now recognized for use by ICROA members.

ICROA members – all of them offset retailers – adhere to a Code of Best Practice, agreeing to only sell credits from recognized standards: the Verified Carbon Standard (VCS), Gold Standard, the Climate Action Reserve (CAR), CarbonFix and Clean Development Mechanism/Joint Implementation (CDM/JI).

Now add to the acronym list ACR and you have most of the top-grossing standards by market share. Most. Those third-party offset standards that haven’t made the list are either under review or just too new to the voluntary carbon marketplace. And as ICROA Board chair (and ClimateCare CEO) Edward Hanrahan points out, it ain’t easy being green enough for ICROA.

Hanrahan explains that standards must apply for ICROA consideration and then go to great lengths to demonstrate that they meet ICROA’s technical and commercial criteria. ACR spent the better part of a year making its case. “We’ve been talking to ACR, as we talk to other standards, for some time,” Hanrahan says. “We’ve worked through a fairly rigorous process with ACR to get to this stage.”

In the press release, Hanrahan also referenced “ACR’s innovative methodologies in sectors such as agriculture and forestry,” which most recently include ACR’s first international methodology for projects that reduce emissions from deforestation and forest degradation (REDD).


An American in Paris?

So what does this mean for ACR – and the market generally?

As Hanrahan points out, it gives ICROA members access to another “domestic” US-based standard to sell in the US market, “because previously we’ve only been able to sell CRTs in the US market, of course.” (That’s Climate Reserve Tonnes – referenced fondly by some as “carrots” – generated under the Climate Action Reserve).

While some market observers are speculating that this might also open up a second operations base for selling ACR credits to European buyers, as well – perhaps not.

Some time ago, ICROA recognized CAR as eligible for use under its Code of Best Practice, but our State of the Voluntary Carbon Markets 2011 report found that only 2 percent of CRTs were sold to EU buyers. The rest? Almost entirely made and stayed in the good ole’ US of A. One could easily expect that ACR supply/demand patterns will follow suit.

What it does for ACR is open the door to the ICROA retail market, which – if ICROA suppliers choose to use ACR credits – could mean higher prices for the credits overall and another outlet for ACR project developers to reach a brand new pool of buyers.

“When ICROA first started, we were a large part of the voluntary market – now we’ve very much grown our share of the market,” Hanrahan points out. “So what that means is that now that very large portion of the market can be accessed by project developers.”


The Battle of the Bests

ACR’s long-awaited (and hard-won) acceptance under ICROA highlights the importance of third-party quality assurance to the voluntary carbon market. Hanrahan says this was part of the reason for the closure of another quality assurance program earlier this year – the UK Department of Energy and Climate Change’s Quality Assurance Scheme (DECC QAS) for Carbon Offsetting.

“Essentially, they recognized that ICROA is now is in the market,” he says, “and that the vast majority of the market is adhering to this independently verified code.”

In May 2011, the Head of DECC’s Low Carbon Economy Unit said in a letter to its Advisory Board members – including ICROA, “The carbon market has moved on substantially since the introduction of the QAS and we now believe it is for the market to set best practice for carbon offsetting.”

That organizations like ICROA have taken up the Best Practice torch was one of a few reasons why the QAS suffered – others including its “disappointingly low take-up” by UK businesses, lack of public exposure, small pool of member suppliers and even smaller pool of standards for suppliers to choose from (ie only CDM/JI and EU ETS allowances).

The government’s retreat from winner-picking hasn’t stopped the four former member suppliers from carrying on with the UK-specific QAS. Members Carbon Footprint, Carbon Retirement, Clear and Pure recently launched QAS part deux.

While the scheme’s new website is still under development, a press release from the group states that they will “keep flying the flag for high quality offsets despite the closure of the Government scheme that supported them.”

So as quality assurance alphabet soup goes, you can add ACR, keep QAS and follow ICROA as it integrates with IETA – including a planned fall 2011 launch of the organization(s)’ new voluntary carbon working group, seeking members soon.

UK to Pilot Biodiversity Banking in 2012

In an effort to promote more efficient and effective conservation, the UK will start piloting mitigation banks in 2012.   The idea is to start small and voluntary, letting people learn the system and letting the system learn from them before kicking into a compliance regime in 2014. This comes after several attempts to quantify the economic value of UK biodiversity.

21 June 2011 | The United Kingdom’s Department for Environment, Food, and Rural Affairs (Defra) two weeks ago outlined a new approach to environmental issues, with ecosystem services front and center and is insistent on paring down or streamlining government regulation while achieving ambitious conservation goals. Their plan to launch a biodiversity offset program looks to be a good way to achieve both.

The initial program will begin in 2012 as a two-year trial phase in a number of pilot areas around the country. It will begin as a voluntary program, with counties stepping forward to be designated as pilot areas and developers choosing to use the offset system or work with current regulation. After the two-year trial is over, a review will implement changes and – if all goes according to plan – make the program standard across England.

The UK began exploring the idea of biodiversity offsets seriously when shadow environment secretary Nick Herbert outlined proposals for a nationally-implemented, mandatory offsetting mechanism in 2009. The approach never gained the necessary traction under the Labour government, ?but the Liberal Democrat-Conservative coalition government, elected in 2010, has vigorously promoted the idea of ecosystem services as the driving motivation for conservation and has included biodiversity offsets as part of its environmental policy.

In July, 2010, Defra released what it called “An Invitation to Shape the Nature of England”, encouraging comments and suggestions for the Natural Environment White Paper. Many of the respondents encouraged the exploration and implementation of biodiversity offsets and other PES mechanisms. In light of those responses, and the understanding that biodiversity offsets could fit within the government’s mandate of reducing the size of national government and putting more power in the hands of local governments, Defra published its “Business Plan 2011 – 2015,” at the end of 2010, which stated that they would “assess the scope for actions to offset the impact of development on biodiversity.”  

In the meantime, an independent report investigating the value of the UKs ecosystem services concluded that the UK was consistently undervaluing its ecosystem services. The report, known as the UK National Ecosystem Assessment, can be thought of as a UK-specific TEEB report, and makes a strong case for the coupling of economic development and the maintenance and improvement of ecosystem services. And it seems as though any remaining unbelievers at Defra have been won over – the department’s newly released white paper has the full title of “The Natural Choice: Securing the Value of Nature.”

And while Defra is waiting for local authorities to step forward to participate in the trial phase, they have likely kept their eyes on two projects that have a bit of a head start. Developed by the Environment Bank in collaboration with UK’s Environment Agency, these projects on the Suffolk and Essex coasts will generate conservation credits which developers will be able to purchase in order to offset any development impact they have in the area.

Defra’s proposed program, in keeping with the government’s “small government” mandate, is voluntary and will be administered largely by local governments (although Natural England will provide support to pilot areas).   But so far the government in London has provided little support in terms of funding or technical capacity, and local authorities are strapped for resources as it is. David Hill, of the Environment Bank, says that they and NGOs will likely be called upon to fill the capacity gap that currently exists.

But while Defra currently has the support of those NGOs, it is unclear whether they have successfully courted the private sector – the sector that needs to be involved for a voluntary offset program to work. Claire Lewis of Defra, however, is confident that the developers will see the benefit of using biodiversity offsets. Although planning policy currently calls for compensation when impacts to biodiversity can’t be avoided, the case-by-case nature leads to an expensive, time-consuming process for both developers and planning authorities. A voluntary biodiversity offset program will simplify and streamline the process by laying out a framework for developers and local governments.

Reducing the cost and length of the compensation process is certainly a plus, but Lewis also points out that a more effective and coherent conservation strategy will be a byproduct, as offset providers are better able to coordinate, pooling funds and other resources and hopefully leading to the kind of conserved landscapes that ecologists dream about. Hill is a bit more skeptical, noting that voluntary efforts in the past haven’t succeeded, largely because they’ve been unable to achieve the necessary scale that a functioning biodiversity offset program needs.

But he does see promise in the white paper, saying it shows a comprehensive commitment “across government and across treasury” because it “puts the environment at the heart of government and the heart of the economy.”

 

Additional resources

On the Blog:ACR Goes to Europe

Note: This article appeard first on the EKO-ECO  Blog. Find the original post here

July 21 | Today, the American Carbon Registry (ACR) and the International Carbon Reduction and Offset Alliance (ICROA) announced that carbon offsets adhering to ACR standard are now recognized for use by ICROA members.

ICROA members – all of them offset retailers – adhere to a Code of Best Practice, agreeing to only sell credits from recognized standards: the Verified Carbon Standard (VCS), Gold Standard, the Climate Action Reserve (CAR), CarbonFix and Clean Development Mechanism/Joint Implementation (CDM/JI).

Now add to the acronym list ACR and you have most of the top-grossing standards by market share. Most. Those third-party offset standards that haven’t made the list are either under review or just too new to the voluntary carbon marketplace. And as ICROA Board chair (and ClimateCare CEO) Edward Hanrahan points out, it ain’t easy being green enough for ICROA.

Hanrahan explains that standards must apply for ICROA consideration and then go to great lengths to demonstrate that they meet ICROA’s technical and commercial criteria. ACR spent the better part of a year making its case. “We’ve been talking to ACR, as we talk to other standards, for some time,” Hanrahan says. “We’ve worked through a fairly rigorous process with ACR to get to this stage.”

In the press release, Hanrahan also referenced “ACR’s innovative methodologies in sectors such as agriculture and forestry,” which most recently include ACR’s first international methodology for projects that reduce emissions from deforestation and forest degradation (REDD).


An American in Paris?

So what does this mean for ACR – and the market generally?

As Hanrahan points out, it gives ICROA members access to another “domestic” US-based standard to sell in the US market, “because previously we’ve only been able to sell CRTs in the US market, of course.” (That’s Climate Reserve Tonnes – referenced fondly by some as “carrots” – generated under the Climate Action Reserve).

While some market observers are speculating that this might also open up a second operations base for selling ACR credits to European buyers, as well – perhaps not.

Some time ago, ICROA recognized CAR as eligible for use under its Code of Best Practice, but our State of the Voluntary Carbon Markets 2011 report found that only 2 percent of CRTs were sold to EU buyers. The rest? Almost entirely made and stayed in the good ole’ US of A. One could easily expect that ACR supply/demand patterns will follow suit.

What it does for ACR is open the door to the ICROA retail market, which – if ICROA suppliers choose to use ACR credits – could mean higher prices for the credits overall and another outlet for ACR project developers to reach a brand new pool of buyers.

“When ICROA first started, we were a large part of the voluntary market – now we’ve very much grown our share of the market,” Hanrahan points out. “So what that means is that now that very large portion of the market can be accessed by project developers.”


The Battle of the Bests

ACR’s long-awaited (and hard-won) acceptance under ICROA highlights the importance of third-party quality assurance to the voluntary carbon market. Hanrahan says this was part of the reason for the closure of another quality assurance program earlier this year – the UK Department of Energy and Climate Change’s Quality Assurance Scheme (DECC QAS) for Carbon Offsetting.

“Essentially, they recognized that ICROA is now is in the market,” he says, “and that the vast majority of the market is adhering to this independently verified code.”

In May 2011, the Head of DECC’s Low Carbon Economy Unit said in a letter to its Advisory Board members – including ICROA, “The carbon market has moved on substantially since the introduction of the QAS and we now believe it is for the market to set best practice for carbon offsetting.”

That organizations like ICROA have taken up the Best Practice torch was one of a few reasons why the QAS suffered – others including its “disappointingly low take-up” by UK businesses, lack of public exposure, small pool of member suppliers and even smaller pool of standards for suppliers to choose from (ie only CDM/JI and EU ETS allowances).

The government’s retreat from winner-picking hasn’t stopped the four former member suppliers from carrying on with the UK-specific QAS. Members Carbon Footprint, Carbon Retirement, Clear and Pure recently launched QAS part deux.

While the scheme’s new website is still under development, a press release from the group states that they will “keep flying the flag for high quality offsets despite the closure of the Government scheme that supported them.”

So as quality assurance alphabet soup goes, you can add ACR, keep QAS and follow ICROA as it integrates with IETA – including a planned fall 2011 launch of the organization(s)’ new voluntary carbon working group, seeking members soon.

Proposed EU Biodiversity Strategy Supports Species Banking

4 May 2011 | The European Commission on Tuesday approved a new strategy for reversing biodiversity loss by 2020, in part by recognizing the economic value of nature’s services.   The new strategy lays the groundwork for species banking across the European Union, but must first be approved by the European Council.

“Incentives will be provided to attract private sector investment in green infrastructure, and the potential of biodiversity offsets will be looked into as a way of achieving a ‘no net loss’ approach,” the text says.

“No net loss” is a cornerstone of biodiversity banking.   It means that any new development that disrupts certain habitat or wetlands must offset that damage by restoring or rescuing similar systems nearby, resulting no net loss of biodiversity or wetlands.

The new strategy marks a shift from earlier EU commitments, as it now focuses on ecosystem services as well as biodiversity and refers to positive restoration, and not just to halting loss.   It also goes beyond traditional conservation actions to embrace biodiversity outside of protected areas.

It is structured around six targets, the first two of which focus directly on biodiversity objectives for 2020.   The first target aims to maintain and restore ecosystem services within protected areas, while the second target aims to do the same outside of protected areas by “establishing green infrastructure and restoring at least 15 % of degraded ecosystems”, in accordance with the so-called Aichii Targets that were agreed to at the 10th Conference of the Parties (COP 10) to the United Nations Convention on Biological Diversity (CBD) in Nagoya, Japan.

The Aichii Targets represent one of two mandates that the new strategy is designed to fulfill.   The other is the biodiversity target adopted by EU heads of state in March, 2010.   It calls for “Halting the loss of biodiversity and the degradation of ecosystem services in the EU by 2020, and restoring them in so far as feasible, while stepping up the EU contribution to averting global biodiversity loss.”

Concrete Actions

The strategy also outlines three concrete actions to be taken in support of target two:

Improve knowledge of ecosystems and their services in the EU

  • Member States, with the assistance of the Commission, will map and assess the state of ecosystems and their services in their national territory by 2014, assess the economic value of such services, and promote the integration of these values into accounting and reporting systems at EU and national level by 2020.

Set priorities to restore and promote the use of green infrastructure

  • By 2014, Member States, with the assistance of the Commission, will develop a strategic framework to set priorities for ecosystem restoration at sub-national, national and EU level.
  • The Commission will develop a Green Infrastructure Strategy by 2012 to promote the deployment of green infrastructure in the EU in urban and rural areas, including through incentives to encourage up-front investments in green infrastructure projects and the maintenance of ecosystem services, for example through better targeted use of EU funding streams and Public Private Partnerships.

Ensure no net loss of biodiversity and ecosystem services

  • In collaboration with the Member States, the Commission will develop a methodology for assessing the impact of EU funded projects, plans and programmes on biodiversity by 2014.
  • The Commission will carry out further work with a view to proposing by 2015 an initiative to ensure there is no net loss of ecosystems and their services (e.g. through compensation or offsetting schemes).

The Precedent

The new strategy builds on the first draft of the atlas of ecosystem services, which the Commission’s Joint Research Centre published in March, as well as the European Environment Agency’s (EEA) June, 2010, baseline for European biodiversity, which concluded that most of the Continent’s living ecosystems no longer provided ecosystem services such as the filtering of water, the pollination of crops, and flood control.

 

Additional resources

Carbon Crooks Arrested in Romania?

29 January 2011 | Law enforcement agencies have prevented cyberthieves who hacked into European carbon registries from making off with more than $30 million they extracted from the market, the Wall Street Journal reports, citing unnamed officials.   The paper says the hackers were based in Romania, and that arrests will be announced within days.

You can find their coverage here (subscription required).   Below is our coverage from last week:

Cyberthieves who hacked the Czech carbon registry on Tuesday had intimate knowledge of different registries.   They acted just days before a key security upgrade would have made the heist impossible, then sold the credits immediately – keeping the cash and letting the credits bounce around the system.   Participants are now bracing for a fight over who will bear the loss.

20 January 2011 | A competent thief dumps his loot long before the rightful owner knows its gone – and the cybercriminals who hacked the Czech Republic’s carbon-credit registry on Tuesday are nothing if not competent.

Nikos Tornikidis can attest to that.   He works for Czech environmental asset management group Blackstone Global Ventures, which was the first company to notify others that the state   registry had been breached earlier this week.

Registries are, in a sense, the central banks of environmental markets.     They make sure that every credit represents an environmental benefit, and they do that in part by assigning serial numbers that buyers can use to see where the credits came from.   Different regimes recognize different types of credits, even within the European Union, and that makes it nearly impossible to forge a carbon credit, or to sell one outside the system.

It doesn’t, however, prevent the kind of breach banks have been guarding against for centuries.

Fragmented System

Each country in the European Union Emissions Trading System (EU ETS)   has its own registry under an ungainly – and controversial – arrangement that eventually required the creation of 27 different registries by 27 different development teams in a complex, fragmented system responsible for making sure that credits aren’t double-counted or lost.  

“We were checking our inventory around 8am Wednesday morning,” says Tornikidis.   “That’s when we found that our account was empty and the details of our account had been changed.”

More than 450,000 credits valued at € 7 million euros ($9.4 million) were gone, so Tornikidis contacted the national registry to make sure the stolen credits weren’t being passed around the system.   In the case of the Czech Republic,   the registry was administered by government-owned state energy-trading platform OTE.

“I didn’t realize it until I read it on Bloomberg, but OTE has to trawl through their whole book by hand to get the serial numbers,” he says.   “We didn’t get the numbers until the end of the day, and we posted them on our web site as soon as we could, but by then it was too late.”

The credits, it turns out, had already been passed on to an account in the Estonian registry, and from there may have passed to Poland, Germany, and Lichtenstein as well.  

“They had been passed on and sold around mid-day on Tuesday,” says Tornikidis.   “It was right around the time of the bomb scare.”

The Execution

The bomb scare had been the talk of downtown Prague.   It was phoned into the building that houses OTE shortly before 11am on Tuesday.

Police speculate that the bomb scare provided a diversion so that employees wouldn’t see phantom cursors moving across unattended screens or other telltale signs of a breach.

While waiting for the serial numbers, Tornikidis and his brokers sent a notice to all participants they knew letting them know that the registry had been breached.

OTE began looking into its books and realized that Blackstone wasn’t alone — more than two million credits worth roughly €28 million ($37.7 million)1 were missing from the accounts of several companies, all with account numbers ending in “121” — the designation given to brokers and other non-industrial entities.

Although earlier reports claimed accounts were hacked at five separate registries, sources tell Ecosystem Marketplace that the suspect credits passed through five separate registries, possibly via dummy accounts.   Many of those registries are also in the process of upgrading their security systems.

What the Hackers Knew

To pull off the heist, the hackers had to know their target well.   They certainly knew their way around OTE, which was in the process of installing a security system that would have required all traders enter a second password that is generated randomly and delivered to their mobile phones.   That system was set to be installed this week — indicating that the hackers knew their target intimately, and timed their heist accordingly.  

The timing also worked on the market front: the next surrendering of allowances doesn’t happen until April, so companies with offsets on deposit with OTE might be lax about checking their inventories right about now.

Formerly known as Operí¡tor trhu s elektinou (“the Electricity Market Operator”), OTE is a small operation with net assets of just 1.6 billion Czech krona ($88 million) at the end of 2009, according to its most recent annual report.   What’s more, it operates the registry as a separate, unregulated – and even smaller – entity, with “tangible assets” of just SK 27,390,000 ($1,518,760).

“This all raises some huge issues,” says one local broker.   “For one, you have this small entity being responsible for huge assets, and now you can expect this big fight over who pays.   Second, you have the question of how these criminals got access to the carbon markets.”

He suspects someone somewhere violated basic “know your client” (KYC) rules, which is a major regulatory no-no.
 
“We quite often have people applying for accounts, and we’re like, ‘You’re kidding me, there is no way you are a real trader,’” he says.   “KYC is basic due diligence – we’re not allowed to open accounts if we have the slightest suspicion that something funny is going on – and someone dropped the ball.”

Unappreciated Value

The fragmented scheme is on its way out, thanks to the so-called “Registry Regulation” (available for download, right), which the European Commission issued last October.   Among other things, the Directive called for a more consolidated Union Registry System by the start of 2012.

It also called for the immediate implementation of simple security measures that European Commission spokeswoman Maria Kokkonen says would have cost less than $10,000 per country to implement, but would have saved tens of millions of dollars – unless the money stolen on Tuesday is recovered.  

Because of its size, OTE was one of 14 EU registries (out of 27 total) that hadn’t yet implemented the upgrades.

“All of this highlights   the fact that we’ve created carbon credits with monetary value,” says one local broker.   “Carbon credits are like bearer bonds in many ways, or like trading gold.”

But while bearer bonds were designed to ensure economic value, carbon credits were designed to ensure environmental value.

“Environmental value is the hard part,” he says.   “Now they just have to get the easy part – they have to make sure they give them to somebody who has more security than a master lock.”

 

Additional resources

European Commission Halts Emissions Trading After Registry Breach

 19 January 2011 |  The European Commission suspended trading on the European Union Emission Trading Scheme (EU ETS) at the close of trading today, and will not re-open until next Wednesday at the earliest after cybercriminals were able to hack into several registries and steal credits worth millions of dollars, according to a notice posted on the Commission’s web site.

Among the countries whose registries were hacked are Austria, Greece, the Czech Republic, Plland, and Estonia, according to the New York Times, which pegs the value of credits stolen from the Czech registry at €7 million, or $9.4 million.

The Commission is working with national authorities to determine how the breaches took place, and will announce next week when trading will resume.

“This transitional measure is taken in view of recurring security breaches in national registries over the last two months,” the notice said. “Following a first such security breach in early 2010, the Commission has worked closely with national authorities responsible for registries to ensure that adequate security measures are put in place in all registries. The incidents over the last weeks have underlined the urgent need for all registries to ensure that these measures are speedily implemented.”

Dutch Government Invests in African Carbon Fund

NOTE:   This is a breaking story.   It will be expanded into a full feature within the next two weeks.

3 November 2010 | THE HAGUE | Netherlands | Dutch minister for Agriculture and Foreign Trade Henk Bleker has signed a financial commitment with the investment fund Food 4 All. This fund specializes in smaller companies and cooperation’s in East and West Africa. It is the second deal that has been signed at the Investment Fair, which is taking place on the sidelines of the International Conference on Agriculture, Food safety and Climate Change in The Hague, The Netherlands.

The fund helps small companies set up or improve their business. Lack of management skills and lack of marketing abilities are the biggest reasons small companies in East and West Africa go bankrupt. In addition, obtaining the right financing is difficult for these companies-even if they have a high-quality plan.

Food 4 All is the the organization that offers financial and practical aid for companies in the agro food sector. In this way, entrepreneurship is rewarded and sustainable agriculture sector is further developed.

Can This British Ecologist Save the English Countryside by Putting a Price on Nature?

The English countryside may be lovely this time of year, but those autumn leaves hide an alarming loss of biodiversity.   David Hill puts the blame in part on well-intentioned laws that promote piecemeal protection without regard to ecosystems or economic drivers.   Policymakers are listening – but can they act?

18 October 2010 | David Hill was sitting at his computer on a frigid March day back in 2009 and shot off yet another email.   This time it was to Nick Herbert, the United Kingdom conservative party member who is now the minister for police and justice.  

Hill, 52, an Oxford-trained-ecologist, had been blasting out emails and writing articles since 2007, pushing for meetings and prodding the UK government to consider mitigation banking as a market-based solution to his nation’s massive biodiversity loss.   And he had gotten nowhere.

But this time, instead of getting ignored, Hill received an email back – within minutes — and not from a low-level assistant.   Herbert himself had written back to say that the incoming cabinet was looking for new ideas.   Could Hill come down to the parliament building and present his?

Ever since, Hill says, “we were pushing at an open door.”

Hill has participated in six workshops with government officials since then, including representatives from non-governmental organizations and industry heads.   David Cameron, now the Tory prime minister, gave a speech hailing conservation banking shortly before coming to power in May.

Watership Down (for the Count)

Development and intensive farming methods in the United Kingdom have decimated the flora and fauna of England’s scenic countryside.   The population of everything from song birds to butterflies – and much of the biodiversity in between – have plummeted, often by more than 80 percent, within Hill’s lifetime.  

Fed up with legislation that failed to stop the slide, Hill plans to jump start a market-based solution modeled after wetland mitigation banking and biodiversity banking in the United States. He is building the first-ever ecosystem-exchange platform in the United Kingdom, Environment Bank. Embracing an “if you build it, they will come” mantra, he is not waiting for the UK government to enact regulations or provide structure or oversight.

Some praise his gumption.   “You don’t place a bet where it’s evident; you place a bet where you think the market’s going to be,” says Michael van Patten, a New York-based ecosystem markets specialist who is consulting with Hill on creating a mitigation-market structure.

But others, while supporting Hill’s concept, question the timing and lack of oversight.   Facing a massive deficit, the UK’s Ministry of the Environment is considering cutting its budget by 25-percent budget.   It is unlikely that this reduced budget would include funding for evaluating, regulating or enforcing new environmental protection schemes, says Rob McInnes, director of the Society of Wetland Scientists and Bioscan Ltd., a company that provides ecological advice throughout the United Kingdom

“There could be a lot of mileage in this if it were well managed, regulated and financed,” McInnes says.   “But if we do it without government regulation we’d have a free-for-all and quality assurance would go out the window.”

An analysis of Hill’s initiative underscores the issues and potential for a possible new era of environmental protection in the United Kingdom that, if successful, could spread across the European continent.

Mitigation Banking Crosses the Atlantic

Hill, speaking from his home in the Yorkshire dales, talks about the wetland and biodiversity mitigation banking he tracked and admired in the United States.   This environmental banking initiative that began in the mid-1990s and is regulated by the US Army Corps of Engineers and Environmental Protection Agency prompts developers destroying wetlands and biodiversity to purchase credits or shares in land restored nearby.

Hill’s mitigation plan does not involve endangered species that already receive robust protection in the United Kingdom, according to the recent biodiversity study, Making Space for Nature, released in September by Professor Sir John Lawton. Instead, Hill’s plan revolves around valuable but less unique examples of biodiversity that receive such ineffective protection that McInnes describes the system as “creaking at its knees.”

The Problem With the Current System

Under the existing system, the government asks developers to leave undeveloped a portion of their property, often up to fifty percent, to allow the survival of wildlife and wetlands.   This set-aside of valuable development land proves expensive for developers, slows the planning and approval process and, at times requires developers to purchase and build on additional land.

Moreover, this system of piecemeal protection frequently fails. Developers in the business of tearing down trees to build homes, businesses and parking lots typically have neither the interest nor the expertise to establish protected sites.   Meanwhile, insufficient enforcement takes place to ensure their survival, studies show.   Further, these sites function like planets in a solar system, separate, fragmented and unable to promote one another’s mutual survival.

The outcome from their failure is frightening.   Ninety-seven percent of the tree sparrows Hill admired during his childhood have disappeared, along with 85% of the turtle doves, 93% of the butterflies, 50% of the ancient woodlands and 97% of the semi-natural grasslands, according to Lawton’s study.   Clearly, relying solely on government regulations to protect the environment has not worked.  

It’s time, Hill says, for another approach.

“Some people say nobody should make a profit on conservation,” Hill says. “I think that’s one reason we failed to protect it.”

Brokering Biodiversity

Hill and his partner, Rob Gillespie, a town planner, founded Environment Bank as a brokerage firm to facilitate transactions between developers destroying wildlife habitats and nearby landowners who create biodiversity mitigation banks, sites enhanced, restored or created where threatened wildlife and wetlands can thrive.   Hill says Environment Bank will act as the middleman between developers and mitigation bankers.  

To test whether their plan works, they partnered with three local wildlife-trust organizations and in June unleashed a pilot program, the Thames Headwater Project. It   covers roughly 1000 square miles in the west of England, an area nearly 50-percent larger than the city of London.   Here developers whose work impacts biodiversity on their properties will be encouraged to purchase credits from nearby farmers and other landowners who restore or enhance wetlands and wildlife. Hill plans to help weave together what he calls a “living landscape” that promotes nearby and adjacent mitigation sites that could multiply the likelihood of   biodiversity preservation. So far, they have started a database for landowners who want to put their land into the scheme to receive conservation credits.

Hill and Gillespie are also pulling together a small team to set up the market infrastructure to measure and convert mitigation credits.   They are now seeking a third-party investor to provide capital required to set up habitat banks with landowners, farmers and conservation land-management companies.

The next task, Hill says, is to identify developments within the pilot region, determine their mitigation requirements and encourage local authorities to test out their credit mechanism.

“We have the environmental credibility and need the financial expertise,” Hill says.   “Then we’ll have a bomb-proof model.”

Two out of Three

The Thames Headwaters pilot project will run under Hill and his associate’s own steam, Hill says. It has no government funding and is supported by no regulations that would prompt developers to purchase mitigation offset credits.  

But nearly everyone agrees that for mitigation banking to thrive it needs a combination of regulatory drivers, consumer demand and the recognition that something has to be done.

Ground-floor opportunity

Van Patten, who just unleashed his own ecosystem exchange platform in the United States, Mission Markets Earth, says absence of a regulatory driver does not pose a significant hurdle.

“If you show policy makers you already have landowners who want to do this on a voluntary basis they’ll start a regulatory market,” he says from his home office in Greenwich, Ct.

And that’s exactly what Hills says he hopes to do. He has two things, he says, in his favor.   First, existing legislation usually refers to “appropriately mitigating biodiversity” which is what he plans to do. And second, the UK Government has been pushing for pilot projects to test out biodiversity mitigation.   Environment Bank, then, could broker voluntary transactions and be ready if and when legislation passes that requires offsite mitigation.

That makes this a great opportunities for developers, says Van Patten.   ”They have a chance to get involved in a pre-compliance market that’s obviously a lot cheaper than a compliance market.   That’s an incentive if you’re smart.”

Moving in a Regulatory Vacuum

Others disagree.   Without planning guidance and case law, developers and landowners would be acting in a regulatory vacuum, says McInnes, speaking from his hotel room in Tampa, Florida, before giving a speech to wetland scientists.   Why would developers purchase offset credits if current regulations might still require them to set aside a portion of their own land to protect biodiversity, he asks.   And why would a landowner invest in restoring biodiversity on his own land if no regulations exist to prompt developers to purchase credits there?

“I’ve tried to push developers in the past,” McInnes says.   “The standard answer is ‘if we don’t legally have to do this, the answer is no.’   Even for the most altruistic developer, if nothing forces him to do it, it’s highly unlikely he will.”

Chicken and Egg

It’s a chicken-and-egg situation.   Which comes first, a pilot project that creates credibility for a whole new way of approaching environmental conservation in the UK?   Or government regulations establishing an approach yet unproved within the UK?

Someone had to act.   And it was Hill.   He says he is convinced that the market for mitigation credits “will be massive.” Moreover, he adds, as the father of a 15-year-old son and two daughters, ages 13 and 9, something has to be done – now.

“I remember, as a boy, collecting wildflower seeds from the fields to feed the birds in the garden,” he says.   “Now all those seeds are gone because of insecticides.   The skylarks that ate those seeds have disappeared.   It’s a sacrilege to our children that they can’t hear skylarks singing in the field.”

Additional resources

On the Blog: Share Your Thoughts on the European Carbon Debacle

BlueNext and NordPool halted trading in Certified Emission Reduction certificates (CERs) after “recycled” CERs found their way into the European Union Emissions Trading Scheme.   It’s a bit off the EM path of voluntary and forest carbon, but it does impact the whole sector.   We’d like to find out what you think this means for the carbon markets, and have an active discussion going on the Eko-Eco Blog.

On the Blog: Share Your Thoughts on the European Carbon Debacle

BlueNext and NordPool halted trading in Certified Emission Reduction certificates (CERs) after “recycled” CERs found their way into the European Union Emissions Trading Scheme.   It’s a bit off the EM path of voluntary and forest carbon, but it does impact the whole sector.   We’d like to find out what you think this means for the carbon markets, and have an active discussion going on the Eko-Eco Blog.

The Buzz on Biodiversity Banking in Europe

Note: This originally appeared as a blog entry on the Eko-Eco Blog.  

1 July 2010 | Europe is looking to be the biggest new thing in biodiversity offsetting.   First, a little scene-setting… most of the TEEB report researchers/writers are based out of Europe, so there’s been general hubbub about the value of ecosystems and biodiversity building during this year.   Add to that two recent feasibility studies on biodiversity offsetting – one conducted for the European Commission and one conducted for the UK’s Department for Environment, Food and Rural Affairs (DEFRA).   The momentum builds as UK politics steer towards offsetting and an entrepreneur opens the UK’s first bank selling ‘conservation credits.’
 
With all this buzz building, Peter Carter of the European Investment Bank drops this bombshell quote at a recent European ‘Green Week’ Conference: biodiversity offsetting could be “as big as the carbon market,” and he pointed to the US wetland mitigation market as an example.
 
Reality check: the total carbon market worldwide is upwards of $100 billion annually vs. total US wetland mitigation market is around $1-2 billion annually. Others in the know pop the optimism with a dose of reality:

“With the carbon market we know what we are trading and how to tackle them. We can set a cap and use the price to drive them down. We have a baseline for biodiversity in Europe now, but it is not one figure – it is four pages of different elements of biodiversity,” says Karl Falkenberg, European Commission director general for environment. (Ecologist.com)

Some of the more realistic optimism for biodiversity offsets in Europe recognizes that development will continue to occur, and offsets could be a useful policy tool provided that there is additionality.   But Pavan Sukdev, the PI on the TEEB study, counters “societies needed to cease putting “private wealth above public wealth” to tackle the problem effectively.”(NYT)
 
In related news, the EU Habitats and Birds Directive had a task force working on biodiversity offsets that has recently released a position paper.   The position of the BHDTF (Birds and Habitats Directive Task Force) is one of cautious approval for biodiversity offsets for habitats and species of European Importance outside Natura 2000 sites.   The task force emphasizes that the “current stringent offset system prescribed in… the Habitats Directive must be maintained and its implementation strengthened.”   As well, the position paper lays out principles that an offset system should include, referencing Ecosystem Marketplace’s sister initiative, the Business and Biodiversity Offset Programme (BBOP).
 

Sources:

New York Times 6/6/2010
The Ecologist.com 6/9/2010
BirdLife website 6/2010

Additional resources

Ghost Forest Sells the Sizzle of REDD

Visit Ghost Forest

The Ghost Forest will be settled in Oxford from this coming July 9 to July 31, 2011.

Markets are supposed to be about cold, hard logic; but any salesman can tell you they are more often about scent, texture, heart, and soul. A traveling exhibition of dead trees from the Ghanaian rainforest, on their way this month to Oxford, England, is helping people understand the majesty of these threatened giants – and, in the process, drumming up support for schemes that reduce greenhouse gas emissions by saving trees.

1 July 2010 | Just outside the Parliament building in Copenhagen, children scrambled through the massive, maze-like roots of ten trees taken from the rainforest in Western Ghana. Women touched the mottled bark as men inhaled the forest scent.

It is hard to imagine that dead tree stumps could inspire such awe. Yet people walked away shaking their heads, somehow transformed, at least for the moment, witnesses to the haunting beauty of these felled gladiators.

This is the Ghost Forest, brainchild of Angela Palmer, an English exhibition artist who decided against all practical logic to transport these 300-plus-square-foot Goliaths out of the Suhuma forest reserve, across the Atlantic and through Europe.

Even dead, these roots from the Denya, the Danta, the Dahoma and the seven other rainforest trees still hold power as they stand sentinel outside the parliament building. Some credit this exhibition for helping resurrect the United Nations Climate Change Summit that took place inside the Parliament building last December from one that could be otherwise characterized as a total failure. Although the 11,000 delegates representing 192 nations debating inside could agree on almost nothing else, they jointly acknowledged for the first time that climate change can be conquered only if forest preservation plays a part. To make this happen, the nations pledged to make a significant financial and political commitment to REDD+, the United Nation’s Reducing Emissions from Deforestation and Forest Degradation (REDD) program that commits wealthy countries to pay for forest preservation in developing nations.

How the roots came to Copenhagen, where they go next and what this assortment of dead tree stumps could mean to climate negotiations is a chronicle of creativity, of whimsy and of downright determination.

Concocting the Plan

Their story starts with a chance conversation at a dinner party in Oxford, England between Ms. Palmer and Andrew Mitchell, a leading authority on the effect that rainforests have on climate change.

Mitchell, Palmer recalled, spoke long and convincingly. He regaled her with images, telling her how these skyscrapers of the rainforest, some standing 20 stories tall, provide home to 40 percent of the all species in the world. They are the source for 25-percent of all plants used for medicines including cancer-fighting drugs. And scientists confirmed that deforestation, particularly in rainforests, allows the carbon that trees would otherwise inhale and store to instead be released into the atmosphere, causing 20 percent of the world’s greenhouse gas emissions.

But for now, the world seems to value only their wood, he told her. One and one-half acres of rainforests are felled each second, wiping out an area the size of England in a single year.

“And when they are gone, they are gone,” Angela summarized. “Simple as that.”

Palmer said she heard enough. By the end of the evening, she began concocting a plan. Since she could not bring her European neighbors to rainforests to convince them of their value, she would somehow would bring rainforests to her neighbors.

Out-of-the Box

An artist, a mother of three and an award-winning journalist, Palmer is the prototype of the out-of-the-box thinker. With bright blue eyes and a blond bob, she has a history of coming up with wild ideas that unite environmental causes with art and jolt the public into viewing issues in a new way. Last year, for example, she brought the effects of pollution home by wearing identical white outfits first in a Chinese coal mining town considered the most polluted on Earth, and then in Cape Grim, a town on the coast of western Australia said to have the cleanest air. Next, she convinced London’s Royal College of Art to display the results.

So her goal of conveying rainforest trunks out of Africa and into Europe did not worry her nearly as much as, perhaps, it should have.

First, she had to jump diplomatic hurdles. She convinced the government of Ghana that she would make clear that although it lost 90-percent of its rainforest since 1960, in recent years it has actively tried to protect the rainforest. Unlike the majority of trees torn from rainforests, most of the ten tree stumps Palmer chose had fallen naturally during storms; the others had been subject to selective logging. Ghana outlawed the export of raw logs in 1994, although illegal logging remains a challenge. Ghana’s efforts at rainforest protection have been recognized by the World Bank that rewards countries with carbon credits from the West in return for preserving their forest cover, a precursor to REDD, and selected Ghana to receive these funds.

An Unusual Journey

She also had to conquer ridiculous logistics. Videos of the trees’ journey show Angela, five foot-six inches tall, dwarfed by these mighty roots. She watches as workmen meticulously scrape and dust them to remove every drop of dirt to comply with export restrictions. They haul the cleaned roots on to individual low-loader trucks. And, like moose that clumsily turn their antlers to avoid forest brush, the trucks with their two-car-lane-wide possessions slowly make their way out of the forest. By the time they reach the docks, they have already dragged down over head cables and bashed into a taxi. All this before their ship ride across the Atlantic and before their trek along European highways where drivers in Fords and Toyotas drop their jaws in surprise.

English Heroes

Mitchell was waiting at Trafalgar Square in London, considered by many the epicenter of industrialization, when these dinosaurs of the forest finally arrived. As rain poured down, huge cranes lifted the gigantic tree stumps on to enormous pedestals. The wet sidewalks, he said, acted as a reflecting mirror that multiplied their number.

Above them stood Nelson’s Column, a 169-foot column – shorter than many of the trees before they were felled – that commemorates Admiral Horatio Nelson who died defending his nation at the decisive Battle of Trafalgar at the end of the Napoleonic Wars.

“As I looked at Nelson standing atop his column, the hero who saved our country from terrible destruction,” Mitchell says in his British accent tinged with irony, “I wondered as we were going next to Copenhagen – (with the tree stumps for the UN Climate Summit) – who would be our heroes now.”

Dreary Denmark

Michael Jenkins, founding president of Forest Trends and publisher of Ecosystem Marketplace, said he wondered the same thing. He was in the Danish capital for two weeks last December to observe the long-awaited UN Climate Conference negotiations – and the tree stumps.

As the world now knows, participants at the long-anticipated conference failed to agree on even the minimum expectation of the meeting: to set a deadline to negotiate a binding international climate change treaty.

Everything about the meeting was gloomy, Jenkins recalls.

“There was rain, sleet, cold, grey and only four hours of sunlight in late December,” he said. “Thirty-thousand people were running around, depressed.”

The dreariness lifted, he said, when he walked outside and saw the trees. The shape, the scent and the feel of the trunks, he said, “brought me back in a clear way to what the negotiations were all about. They changed my whole outlook.”

Green Light for REDD

Most participants credit long and effective negotiations for the Copenhagen Accord’s single achievement, the immediate establishment of a REDD-plus mechanism that includes a $3.5 billion short-term financial commitment to fund the effort from Australia, Britain. France, Japan, Norway and the United States. Many credit the tree installation for helping drive the momentum.

Driving the Market

This momentum, however, still needs a push. The Accord mentions no specific timeline or target. Since Copenhagen, fast-paced negotiations have begun to bring interim finances to invest in forests to reduce carbon emissions. In the meantime, rainforest preservation continues to be left largely to voluntary efforts and markets. To offset the carbon expelled by her travel to Ghana, for example, Palmer purchased credits from ClimateCare, a voluntary climate-offset provider based in Palmer’s hometown of Oxford. The credits paid to produce and distribute fuel-efficient cook stoves to Ghanaian families to replace the charcoal pots that require massive amounts of wood and contribute to rainforest destruction.

Year of the Forests (Living or Dead)

Meanwhile, the massive tree stumps forming Palmer’s Ghost Forest continue their odd yet impressive trek across Europe. Not to be outdone by the curiosity of appearing at Trafalgar Square and before the Copenhagen parliament, Palmer plans to next exhibit in July an installation at Oxford University in front of some of the greatest minds of the world. They will be installed, she said, on the lawn of the university’s Museum of Natural History and the Pitt Rivers Museum as part of the celebration of the Museum’s 150th anniversary and the UN’s International Year of Biodiversity.

Where she will go next with her traveling embassy, her ambassadors of the rainforest, she said she has not yet been decided. Although the year 2011 is the UN’s International Year of Forests, she said that “Ghost Forest raises awareness that if we do not take action, it – dead tree stumps – is the only forest we will have.”


Alice Kenny is a prize-winning science writer and a regular contributor to Ecosystem Marketplace. She may be reached at alicekenny1@gmail.com.

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Green Resources Is First to Achieve Validation for Tree-Planting under VCS

Norwegian forestry and carbon offset group Green Resources last week became the first carbon offset project developer to register a reforestation project under the Voluntary Carbon Standard’s guidelines for reducing greenhouse gas emissions from agriculture, forestry, and land use. This week, a second project was also verified – and plenty of others are sure to follow.

22 July 2009 | On Friday, July 17, German carbon offset project verifier TÃœV Sí¼d wrapped up a two-year audit and gave its stamp of approval to the first-ever carbon offset project recognized under the Voluntary Carbon Standard‘s (VCS) guidelines for agriculture, forestry, and land use (AFOLU), which were finalized in 2007.

The project, which covers two locations (Uchindile and Mapanda) in the Southern Highlands of Tanzania, was launched in 1997 by Green Resources, a Norwegian company focused on carbon offsets and forest products. It will reforest 10,814 hectares of degraded land and conserve 7,565 hectares for local biodiversity.

On a broader level, the project offers an opportunity to test the market’s acceptance of forestry credits that aim to achieve credibility by applying the VCS’s “buffer” approach – essentially allowing for the potential loss of forest by planting more trees than they sell credits for, and basing that set-aside on the perceived risk of damage.

“This is the first forestry-sector project to be validated under the VCS, and thus marks a tremendous milestone,” says VCS Association CEO David Antonioli. “Kudos to Green Resources for helping to demonstrate that by using the VCS one can generate permanent removals from the forestry sector that are perfectly fungible with other emission reductions.”

Long-Time Coming

The project was initially launched to fund reforestation by generating carbon credits under the Kyoto Protocol’s Clean Development Mechanism. When the protocol was finalized in 1997, however, the only afforestation and reforestation projects it recognized were those that began after 2000.

Green Resources then turned to the voluntary market, but found their efforts to sell offsets from the Tanzanian project hampered by the lack of standards. In 2008, the project was certified under the Forest Stewardship Council’s (FSC) standard for sustainable forest management, but still lacked the kind of pedigree that companies interested in voluntarily offsetting their greenhouse gas emissions look for.

As standards evolved, it became clear that only the VCS could offer that kind of assurance.

“One of the great things about VCS is that it has provisions for early start,” says Jenny Henman, Carbon Offset Certification Manager for Green Resources. “You basically have to prove that carbon income was considered from the beginning and that you had an independent review prior to 2002.”

Buffering for Long-Term Credits

In negotiations leading up to the Kyoto Protocol, critics of forestry offsets argued that any credits generated by capturing carbon in trees should only be given temporary status because of forests’ susceptibility to fires, pests, and illegal logging. Offset buyers, however, have been lukewarm to-called tCERs (temporary Certified Emission Reduction certificates), preferring instead permanent offsets that don’t expire.

The VCS has chosen to deal with the permanence issue by recognizing forestry credits as permanent if project developers meet certain criteria and then agree to plant a buffer of more trees than they sell credits for.

The Tanzanian project will generate permanent Voluntary Emission Reductions (VERs) over a period of 99 years, with a reserve buffer of 40%.

“This is the first time the risk buffer has been applied,” says Henman. “It’s an interesting process, and the final buffer is linked to things like the certainty of land tenure, measures that you have in place to deal with things like fire and pest control, your relationship with the local community, and the political stability in the country.”

The Pipeline

Green Resources submitted its project for validation almost as soon as the VCS guidelines for AFOLU were released in 2007. It’s not clear how many others did the same, but those that did will be coming to light over the next few months.

TÃœV Sí¼d has already validated a second reforestation project, and Sebastian Hetsch, the TÃœV Sí¼d auditor who validated the Tanzanian project, says others are in the works.

“This shows that the voluntary market is attractive for project developers, and that it works,” he says – adding that it’s still more profitable for reforestation and afforestation projects to go the CDM route if they can.

“There are six affforestation/reforestation (A/R) projects registered under CDM right now, and around 50 have started the validation process,” he says. “I wouldn’t be surprised to see 15 CDM A/R projects registered by year-end, but only expect another four or five to be registered under VCS.”

Henman agrees.

“We have other forestry projects, but they started after 2000, so we are going for CDM,” she says. “We would, however, definitely look to VCS for other categories of forest project type – like REDD (Reduced Emissions from Deforestation and forest Degradation) or Improved Forest Management, which allows for enrichment-planting and forest restoration.”

The second reforestation project to be verified under VCS is in Pucallpa, Peru, and was developed by Sustainable Forestry Management (SFM Ltd), which owns the emission reduction rights and manages the carbon, along with SFM-BAM, a joint venture between SFM and a local Peruvian company that owns the land and is in charge of implementing the project, together with local non-governmental organization Asociacií³n para la Investigacií³n y Desarrollo Integral (AIDER), which provides technical support.

Both projects have applied for additional validation under the Climate, Community, and Biodiversity Standards, which ensure that projects not only sequester carbon but provide support to local communities and promote biodiversity.



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

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Forest Footprint aims to Reward Companies that Save Trees

22 June 2009 | Andrew Mitchell finds inspiration in Mad Cow Disease – or, more accurately, in part of our response to it.

“We showed you could track a piece of beef from a farm in the country, through a slaughterhouse, to a butcher,” he says. “It’s not hard to do once people are properly motivated.”

Mitchell, who heads the Global Canopy Programme, also chairs the steering committee for a new endeavor called the Forest Footprint Disclosure Project (FFDP). He hopes the FFDP will make it possible to label the deforestation impact of beef that comes from tropical areas – as well as for four other “forest risk” commodities (timber, soya, palm oil and biofuels). The FFDP takes a cue from the nearly ten-year-old Carbon Disclosure Project (CDP), which has built the world’s largest database of corporate climate-change information by asking companies to come clean about their greenhouse gas emissions. The FFDP hopes to build a database of deforestation impacts by asking companies to come clean about where they get their raw materials, with the goal of identifying which companies have the most exposure to “deforestation risk” and which have the lowest.

To entice companies into participating, investors worth £1.3 trillion have signed a letter urging FTSE 100 companies to fill out the disclosure documents FFDP will be sending them between now and the middle of July. “By demonstrating their sustainable business model, the intention is that they will attract more confidence and – eventually – more investment from the financial community,” says project manager Steven Ripley.

The Benefits of Transparency

Companies will have until October to respond, and FFDP will announce the names of companies that are signed up to the project early next year. The goal is eventually to divide companies into three categories: those that are best in class, those that have adopted innovative policy and practice, and those that ignored the survey. Abyd Karmali, who is Global Head of Carbon Markets for Bank of America Merrill Lynch and a member of the FFDP steering committee, believes the mere act of doing a forest carbon inventory will motivate some companies to reduce their forest carbon footprint. “We’ve seen what sort of a transformation the CDP has been able to have on reporting of risks by listed companies,” says Abyd Karmali, who is Global Head of Carbon Markets for Bank of America Merrill Lynch and a member of the FFDP steering committee. “It’s also improved engagement with investors and raised awareness about what kind of climate risks and opportunities exist for companies going forward.” In some cases, he says, it’s resulted in emission reductions that wouldn’t have happened otherwise because companies realized they could slash emissions, win public support, and in some cases even cut costs.

Financial Instruments

Before merging with Bank of America, Merrill-Lynch was a lead global sponsor for the CDP, but it has not yet invested in the FFDP. Karmali says that’s partly because the merger has taken the bulk of their attention, but also because they’re waiting to see if the team develops number-crunching methodology that yields trustworthy numbers. “We’re at a very early stage of understanding about just what kinds of impacts participation in the forestry commodity area has on rates of deforestation,” he says. “Companies that are involved across the value chain in timber, palm oil, soya, beef, and biofuels know very little overall about the links between their activities and deforestation.” If the project brings those links into the light of day, the next step would be to create financial instruments like those based on the CDP’s Carbon Disclosure Leadership Index (CDLI) or Merrill Lynch’s Carbon Leaders Europe Index, both of which aim to channel investment funds into low-emitting companies by highlighting their carbon risk. “With the CDP, we have launched financial products that try to distinguish between companies that we expect to be winners and those we expect to be losers in terms of their differing carbon risks and responses to those carbon risks,” he says. “It’s too early to know whether we’ll be able to develop similar products for distinguishing among companies’ forestry-related risk.” Data from the FFDP would likely be a key input into such a product, but the challenge of creating reliable indexes based on forest carbon is significantly more complex than developing an index based just on carbon alone. “Activities in the forestry value chain include impacts on carbon emissions, biodiversity, indigenous peoples, and rural income,” says Karmali. “There is also the challenge of understanding the links to land use planning and the degree to which options selected now preserve or close off other choices for utilizing land.” The scheme is being funded by the UK Department for International Development, The Prince’s Rainforest Project, and other non-profit organizations. Steve Zwick is Managing Editor of Ecosystem Marketplace. He can be reached at SZwick (at) ecosystemmarketplace.com. Please see our Reprint Guidelines for details on republishing our articles.

Methodologies Tame Forest Carbon Jungle

As forests convert carbon dioxide in the air to carbon stored in woods, leaves and roots, a range of organizations are, in turn, working to convert forests into carbon offsets. The ‘exchange rate’ of this conversion is determined by specific standards’ methodologies — technical, but critical, tools shaping the rules of the game.

18 August 2009 | Richard Wineberg is rhapsodizing about trees. His firm, Terra Firma Carbon, owns several hundred acres of timberland in Indiana and North Carolina in hopes of managing it as a healthy forest. Browsing the bookshelf in his Chicago office, crammed with classics on silviculture, Wineberg describes teaching himself forestry over the last few decades.

“It’s more art than science,” he says. “Forestry comes from looking over your woods very carefully. You can see the forces at work in the woods when you look at it.”

Keeping Track

It can be daunting keeping up with all the latest developments in carbon methodologies and standards – forest-based or otherwise. That’s why Ecosystem Marketplace’s Forest Carbon Portal has launched the Methodology Watch and Standards Update to help you keep score.

 

Yet Wineberg’s world is getting a hefty dose of science – and rules. Forest carbon methodologies – sets of guidelines governing how projects are designed, managed and monitored – are emerging to catalyze demand for offsets generated by growing trees and crops.

From reforestation and afforestation (A/R) to reduced emissions from deforestation and degradation (REDD), more land-use methodologies have been submitted to voluntary standards in the last twelve months than were approved under the Kyoto Protocol’s Clean Development Mechanism (CDM) since the CDM Executive Board was formed in 2003, based on a review of standards’ websites. At least nine have been approved under the CDM since 2005, but more than a dozen are taking shape under voluntary standards such as the Voluntary Carbon Standard, Climate Action Reserve (CAR – formerly CCAR, the California Climate Action Registry) and others vying to become the standard for a new generation of voluntary carbon projects.

Wineberg, 57, plans to be an early adapter. After decades preaching and practicing sustainable forest management, he’s negotiating his first avoided deforestation project in Brazil. While optimistic that he can apply the new methodologies, he’s concerned forest management will not conform to rigid protocols.

“There’s no simple answer to anything in forestry,” says Wineberg who seems as likely to consult a walk in the woods as a yield table for decisions about forestry. “Every piece of land is different. You don’t want to make the perfect the enemy of the good in this business.”

Forest Carbon Methodologies

For now, business remains uncertain. The majority of forest carbon credits have been transacted in the voluntary carbon markets. As the primary source of demand for forest-related sequestration credits (and the only one for REDD), voluntary markets have had an historical affinity for charismatic projects like A/R – still the single largest category of biological carbon sequestration projects.

The market for voluntary offsets is expanding at an unprecedented rate: global voluntary markets more than tripled between 2006 and 2007 reaching a value of $331 million in 2007, according the 2008 State of the Voluntary Carbon Markets report. Yet the relative number of forest carbon credits that were traded last year declined from the year before. Representing 36% of over-the-counter transactions in 2006, forestry credits, which maintaining transaction volumes, dropped to 18% of such trades in 2007. Why? The reason may in part be due to skittishness about evolving rules of the game and long-term demand.

That may soon change. The pending US climate bill, known informally as Waxman-Markey, currently includes land based offsets. New Zealand and Australia are considering them, and even the EU has softened its stance on REDD. The worry, it seems, is that the credits must be real and fungible with the rest of the carbon market to win global acceptance.

At the same time, New project methodologies are arriving to guide the conversion of stored carbon to credits.

Standards such as the US Regional Greenhouse Gas Initiative (RGGI), the Environmental Protection Agency’s Climate Leaders, CAR, Chicago Climate Exchange (CCX), the Government of Alberta, American Carbon Registry, the Voluntary Carbon Standard, and CarbonFix, among others, have published forest-carbon methodologies (also called protocols), with revisions on the way. The number of projects is on the rise as well. Although the CDM has only registered 6 forestry projects out of 1,750 registered projects – mostly reforestation – at least 52 projects are registered or in the pipeline in the voluntary markets according to the Forest Carbon Portal.

The world, it seems, is finally awakening to Wineberg’s vision of managing forests for ecosystem services, especially the carbon in its biomass – so long as it can be measured, monitored and verified. When the UNFCC convenes it’s the next Conference of Parties in Copenhagen this December, REDD and other forms of terrestrial carbon credits will be a central element of the international climate agenda. Negotiators are set on curbing some of the 18% of the world’s greenhouse gasses (GHG) emitted by land use change and tropical deforestation each year. It is almost certain that whatever mechanism emerges, in some way it will rely on rigorous, science-based carbon methodologies to finance forest carbon credits.

What’s So Great about Methodologies?

Methodologies, like roadmaps, give project developers specific routes to achieve creditable emission reductions. Some are tied to specific scenarios such as reforestation of species in the tropical pasturelands. Almost all of them share measures to ensure the environmental integrity of emission reductions through the use of baselines, additionality, permanence, monitoring, verification and transparent accounting. These principles guide rules articulated in the methodologies’ detailed equations and procedures.

Yet methodologies do more than serve as technical blueprints. They underlie trust in markets for forest carbon offsets, says Derik Broekhoff, policy director at CAR, which is busy developing its own GHG reduction project protocols in the United States, including forestry.

“They’re important primarily because anytime you’re talking about carbon offsets, an intangible commodity, it’s really hard for buyers to know what they’re getting if you don’t have a methodology,” says Broekhoff.

Standards organizations like CAR ensure the quality of their credits, but methodologies theoretically guarantee the level of standardization so buyers and sellers know they are exchanging a real asset: additional, verifiable, and permanent GHG offsets. Without this, buyers would be forced to research the quality of every credit, and poor quality projects would blend in with credible one.

This rigor comes at a price.

A major complaint voiced by project developers is a tendency to favor perfectionism over practicality. Even authors of the methodologies agree. In the early days of the CDM, says Lucio Pedroni of Carbon Decisions, who has co-authored CDM-approved methodologies for AR projects, “a lot of effort was spent to capture minimal changes in carbon stocks, just to give the impression that we are perfect in a world that is never perfect.” This led to methodologies where, as CDM rules dictate, almost every carbon source was considered – from gasoline use to fence posts.

“Projects have to be perfect beyond what is needed for a credible market,” he argues. While this was feasible in industrial projects, this approach simply doesn’t work in forestry.

To simplify the methodologies, Pedroni has joined a recent effort to draft ‘modular methodologies’ for REDD under the VCS. If validated (posted for review here), the modules will represent a new approach: simplified, modular methodologies that can be rearranged or modified if projects differ slightly from one another. In the past, forest carbon methodologies (costing upwards of $100,000 to create) were so specific that applied to only a handful of potential projects, and developers were unable to restrict and license the use of their methodologies to recoup their investment. This hardly provided incentives for standardized and ongoing innovation.

By contrast, the REDD modules are split into the essential components of a viable forest carbon project – baseline, additionality, measuring and monitoring and other categories – that can be amended without revalidating the entire methodology.

“In the end,” claims Pedroni, “simpler methodologies are better for the climate. It’s better to have 1200 projects and ten that are not additional, than to have two that are perfectly additional.”

Financing the Future

Paying for these methodologies is still a challenge. While firms are poised to pour millions into the promise of the new market, large investors have traditionally steered away from forestry offset projects (only two of the 50 projects publically listed by EcoSecurities are in the sector). Yet a recent study by EcoSecurities found that forestry offsets purchased in the last ten years are comparable to volumes transacted in 2008 alone, and that projected demand is igniting a global search for credible projects, as well as close scrutiny of the potential of methodologies.

Eron Bloomgarden, president of environmental markets at Equator, a firm investing in timberlands and environmental assets, says the market has taken a wait-and-see approach to investing in forest carbon credits.

“The goal posts are still moving with many of the forest protocols,” he says. “It’s important these protocols need to be rigorous, yes, but they need to be workable and flexible to incentivize action.”

Bloomgarden’s reading of CAR’s recently-revised protocols highlights issues like permanence, which could extend monitoring liability for up to 100 years, as promising but potentially problematic.

“Overall, they’re pretty good protocols,” he says. “But I’m not sure how workable they are for large volumes of credits. The practicality of the protocols remains to be seen. The jury is still out.”

There will soon be no lack of choices. Various protocols address the same major issues, but in different ways, and offer project-specific frameworks. The CDM, for example, which approved its first A/R additionality and baseline methodology in 2005, now lists nine forest carbon methodologies and 13 ‘tools,’ or guidelines for specific project tasks, as well as two ‘consolidated methodologies’ combining all of it into a streamlined package.

Of the voluntary standards, RGGI has approved carbon sequestration through afforestation activities following its own “Model Rule”. The EPA’s Climate Leaders Program released its A/R methodology in 2008; the CCX has a “rulebook” governing afforestation, long-lived wood products, and sustainably managed forests; and the Voluntary Carbon Standard has at least one methodology approved, as well as eight undergoing validation, not to mention acceptance of CAR and CDM methodologies making it one of the most comprehensive sets of methodologies available.

Picking a Winner

So, how to choose? Voluntary market developers will find their choice of methodologies dictated by standards that certify certain activities. The CDM is limited to A/R in developing countries, while the VCS credits four categories – Afforestation, Reforestation and Revegetation (ARR), Agricultural Land Management (ALM), Improved Forest Management (IFM) and REDD – under its land-use methodologies. After clearing the eligibility hurdle, methodologies (and the standards that certify them) must be marketable. A 2008 survey of project developers found that public credibility and the permanence of CO2 storage were most important issues for forest carbon project, followed by the practicality of carbon accounting and transparency.

Which methodologies, and standard, will win out is not clear. Competition and market demand are driving the latest round of innovation, and project proponents are advancing new methodologies around the world. A few innovative ideas are taking root: more default values are being considered to streamline accounting; permanence measures like risk discounting and buffer pools are replacing unpopular temporary credits used by the CDM; performance standards that set a target for an industrial process are gaining favor under standards like the VCS; and the modular approach to methodologies promises to make modifications easier and less expensive. There’s even momentum toward crediting based on sectoral benchmarks or performance (CDM and VCS) under UNFCCC negotiations.

What works depends on their performance over the next few years and decades.

“We still have a lot to learn,” says Alexia Kelly in the World Resources Institute’s (WRI) Climate and Energy Program who is following the development of the US climate bill’s treatment of offsets. “In my mind, that’s the one thing that is missing: 20 years of project data to know the actual emission reductions that will occur [from methodologies]. That’s what we really need to really judge the effectiveness of a given protocol. We’re still groping in the dark.”

In the meantime, the voluntary market continues to push innovation as international negotiators advocate for methodologies to ensure the integrity of their crediting scheme. But Pedroni, who has seen this process before at the CDM, warns against sacrificing needs of the market for the comfort of strict but unworkable methodologies. Entering the UN climate negotiations in Copenhagen this December, the world has yet to make decisions about the tradeoff between certainty and pragmatism.

“What’s the right balance?” he asks. “We have not found that yet.”


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UN Aims to Streamline Cost of Developing Forestry Offset Projects

It’s expensive to develop carbon offset projects that reduce emissions by capturing carbon in trees, and one reason is that every project has to develop its own methodologies for measuring results. The UNFCCC is asking for help in streamlining that process.

30 July 2009 | The United Nations Framework Convention on Climate Change (UNFCCC) has released a technical paper on the cost of implementing methodologies and monitoring systems related to estimates on greenhouse gas emissions from deforestation and forest degradation – as well as the assessment of carbon stocks and greenhouse gas emissions from changes in forest cover and the enhancement of forest-carbon stocks.

The technical paper is available from the following link: UNFCCC Quick Guide to REDD.

The UNFCCC REDD Web Platform requests comments and information sharing from Parties at the country level, organizations and other stakeholders to share relevant information regarding their experiences, lessons learned, cost estimates, case studies and other resources such as step-by-step guides to establishing national monitoring systems in different developing country contexts.

The UNFCCC REDD Web Platform has created a space where this information will be posted. Please submit information to the following e-mail address: redd_webplatform@unfccc.int.

Technical Paper: The Summary

The technical paper provides the following:

• An overview of the possible steps and requirements needed to develop and implement a monitoring system for estimating emissions from deforestation and forest degradation, assessing carbon stocks and greenhouse gas (GHG) emissions from changes in forest cover, and assessing the enhancement of forest carbon stocks.

• Information on the indicative costs associated with the possible steps and requirements of a national monitoring system.

• Elements that developing countries may need to take into account when developing a national monitoring system.

• A means of facilitating the better understanding of the associated costs of the implementation of methodologies and monitoring systems related to estimates of emissions from deforestation and forest degradation, the assessment of carbon stocks and GHG emissions from changes in forest cover, and the enhancement of forest carbon stocks.
 

For further details, visit the Forest Carbon Portal‘s Methodology Watch and Standards Update.

EM Cheat Sheet: The Additionality Debate

If you want to sell carbon offsets in exchange for action that reduces greenhouse gas emissions, you first have to prove that the money you’re earning is what makes the action you’re taking possible. That, in a nutshell, is “additionality” – a simple concept, but one that’s proving difficult to put into practice.

13 July 2009 | Additionality is a cornerstone of environmental finance – and one of the sector’s most contentious issues.

Without it, carbon offset projects have no credibility, and thus no value. Billions of dollars in carbon revenue thus hinge on the definition of additionality and the debate over how to establish methodologies for determining whether additionality has been achieved.

To date, the most common methodology for measuring additionality has been the project-by-project or “bottom up” approach, but a growing number of practitioners complain this approach is inconsistent and ultimately unworkable. They advocate a “top-down” approach using industry-wide benchmarks.

Project-by-Project Approach

Whether or not a carbon offset project is additional can be measured in a few different ways using a project-by-project approach:

Financial/Investment: Would the carbon offset project have been possible without the use of carbon finance? In other words, is the return-on-investment from the project too low, or would the project owner have been unable to provide upfront financing for the project without carbon financing? If yes, then the project can be considered additional.

Legal and Regulatory: Does the carbon offset project go beyond compliance requirements? If yes, is it also occurring in addition to other practices that might have occurred anyway? For instance, if the project is beyond ordinary compliance but is part of a cost-cutting exercise, then it cannot be considered additional. If the project is occurring outside of obligatory compliance and would not have been considered for other strategic reasons, then the project is additional.

Barriers: Does the project overcome non-financial barriers (technical, skill-based, institutional) that would not have been an issue under a business as usual scenario? If yes, then the project can be considered additional.

Common Practice: Are the technologies that are being employed through the project commonly used? If not, then the project could be considered additional.

Benchmark Approach

Recently, however, in response to concerns over the integrity of many carbon offsets approved under the UN Clean Development Mechanism (CDM), experts such as Ken Newcombe, the founding head of the World Bank’s Carbon Finance Unit, have promoted the use of a “top down” approach based on industry-wide benchmarks.

Under this approach, an emissions benchmark is established for a sector, and emissions reductions are then evaluated on the basis of their deviation from that benchmark in order to determine whether or not an additional reduction in emissions has occurred.

Because the top-down approach has pre-established parameters for determining what is additional, many believe it is much more objective and therefore less likely to be manipulated than the project approach. The US Regional Greenhouse Gas Initiative (RGGI) currently uses the benchmark approach in the administration of its program and the California Climate Action Registry (CCAR) also plans on adopting sector-based protocols.

Concerns with Measuring Additionality

Measuring and proving the additionality of a carbon offset project can be a difficult feat, at times resulting in harsh criticism of the carbon offset market, its incentive structures, and its regulation. For instance, under the current system, auditors are tasked with providing objective analysis of project additionality for the CDM executive board, but at the same time are being paid by project developers. Some might find parallels between carbon offset auditors and the financial ratings agencies tasked with objectively evaluating the investment potential of various debt instruments.

The Road to Copenhagen: New Approaches for Additionality

It is uncertain exactly how the rules around offset additionality will shape up in the next Climate Treaty and in country level rule-making, though it is clear that the mistakes made under the Kyoto Protocol must be addressed in order to truly begin to mitigate the climate change problem.



Avril David conducts research on the terrestrial carbon sector for Ecosystem Marketplace’s Forest Carbon Portal. She may be reached at adavid@forest-trends.org.

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EKO-ECO: the Ecosystem Services Blog

15 June 2009 | Ecosystem Marketplace and EKO Asset Management Partners have teamed up to launch EKO-ECO, a blog dedicated to promoting critical discussion of the emerging global ecosystem marketplace.

This project represents a logical progression of processes that began some nine years ago, when a group of people interested in the environment met under the auspices of a DC-based non-profit called Forest Trends to discuss a question that was pointedly on very few people’s minds: Should nature and the services it provides have an economic value?

That meeting took place in a town outside of Sydney, Australia called Katoomba (appropriately enough, we are told that the word in the local aboriginal dialect means “rushing water”), which is why the group began calling itself “The Katoomba Group“. The idea at the time was that one of the fundamental problems with the global economic system – one of the core reasons for our environmental problems – is that the value of nature isn’t properly being accounted for in anyone’s bottom line.

This concept wasn’t entirely new; there had already been much written in economic circles about the need for a new form of “environmental economics”, or for a “Green GDP”, and there were even estimates of the value of nature’s services that were being published by leaders in the field of environmental economics (I am, of course, thinking of the estimate by Robert Costanza that nature’s services were worth some $33 trillion on an annual basis).

What was different about this group, however, was that rather than rely on the estimates of economists, the group felt that markets were going to have to be created in order to “put a price” on nature. The sorts of markets that they had in mind were not only the “cap-and-trade” style markets like the one created to manage Sulfur dioxide (SO2) emissions in the US, but also other forms of “Payments for Ecosystem Services” such as the voluntary carbon markets that had already emerged, or government-mediated markets such as the ones that were emerging in Colombia, Costa Rica, and elsewhere.

In order to better understand how these systems might work, the group included scientists, NGOs, businesses, financiers, academics, and others. And the group was designed to be practical: to think not of what should be done to establish these payment schemes for ecosystem services, but rather what could be done and what was being done.

 

The Rise of Ecosystem Marketplace

As it turns out, all of the participants found the meeting to be hugely valuable (if nothing else because each of the participants felt a little less lonely after that meeting, knowing that there were others out there thinking about these issues) and so it became a regular event. Katoomba Meetings were held in London, Vancouver, Tokyo, Rio, Uganda, and many other cities and countries throughout the world.

At a key meeting in Switzerland, the participants realized that one of the links that was missing in the creation of these markets was information; it is no accident that markets generate information tools like the Wall Street Journal, the Financial Times, or Bloomberg.

Without information, markets cannot function. And so the group decided to create a “Bloomberg” for environmental markets in advance of the markets themselves. And that tool was called the Ecosystem Marketplace.

EM has now been operational for nearly six years, and in that time it has produced landmark studies such as the recently released “State of the Voluntary Carbon Markets” report, as well as similar reports and pieces of information on the wetland mitigation markets, species banking, and water quality trading.

But that is only the “ECO” part of this story.

 

The Alignment of Profit and Preservation

The “EKO” part reflects an explosion of private, for-profit companies created to serve and profit from these emerging markets: it’s the name of a company that some of us created two years ago because we felt there was a growing disconnect between these emerging environmental markets and large sources of capital – a disconnect that was often camouflaged by the success of the carbon markets, which are well-supplied with both capital and capitalists.

For instance, it is a little known fact that the US has had – for almost two decades – a thriving market in ecosystem restoration. The market is called “wetland mitigation banking” because it covers that particular ecosystem and arises out of language in the Clean Water Act, but it is essentially an environmental market – not unlike the EU market for carbon. This market currently transacts (according to the best estimates out there) some $3 billion a year and has led to the creation of other similar markets in species conservation, etc. But despite the fact that this is a real and (some might say) vibrant market, it is almost entirely underserved by large-scale capital providers.

That is why some of us created EKO Asset Management Partners, to serve as Green “Merchant Bankers” (or, if you prefer, a Boutique Investment Firm) created to help bring capital to bear in these new and exciting environmental markets. There are now dozens of other for-profit ventures designed to stimulate (and make money from) these markets, and that is only the beginning.

As we write this (in mid-2009), the US Congress has finished the first of what are likely to be lengthy discussions on the creation of a cap-and-trade market for carbon in the US. If and when a version of these laws finally comes to pass, it will create one of the world’s largest environmental markets. Already, the ripples are beginning to emerge: new businesses are being proposed almost daily to take advantage of these new markets.

 

Rapid Response

In other words, the pace of change is ramping up. When we created Ecosystem Marketplace (and, for that matter, EKO Asset Management Partners), it was enough to write articles every month or every couple of weeks and we were able to cover most of what was happening in this space. But today there is news daily (it sometimes seems like it comes hourly!) and our subjects are being discussed live, on air, via C-Span. For this reason, we believe it is time to create a faster, more vibrant form of discussion, news, reflection, and information on these markets; a truly interactive blog.

While we do not suggest that financial markets – heavily criticized in recent months for inflated profits, obtuse formulas, and outright fraud – are the only answer for conservation or climate stabilization, we do think that they have tremendous potential to achieve cost-efficient environmental aims, provided they are backed by sufficient government foresight and public oversight. They are a tool in our tool-belt, one we can ill afford to overlook.

Admittedly, not all conservation aims will be served by markets. As is the nature of virtually all human institutions, capital markets have proven themselves easily manipulated by human greed (in the guise of financial engineers and fancy derivatives, creating wild profits for a few at the expense of the many). However, the same forces that attracted early proponents to capitalism – namely, production cost-efficiencies and the better distribution of scarce resources – can also apply to environmental markets.

So we recognize that all is not well in the world of environmental markets. We know there are problems, we know there are issues. But we believe there can also be solutions and we hope you will join us (and our “guest columnists”) in discussing and debating these issues. Because only with such open intellectual discussion will we ever be able to solve the many environmental problems we face. We hope you’ll contribute often and let us know what you’re most curious about, what you think is most needed to make markets for ecosystem services succeed, and what you think is merely a green (or capitalist) pipe dream.

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Bonn Talks Open with REDD Agenda

Deforestation accounts for 20% of all greenhouse gas emissions, and the UN bodies charged with mapping out the role of forestry offsets in a post-Kyoto climate-change regime are meeting in Bonn, Germany, this week and next to continue the process of hammering out their differences. The groups will meet at least three more times before gathering in Copenhagen at the end of the year.

2 June 2009 | Delegates from 182 nations are beginning to arrive in the former German capital of Bonn to hammer their preferences into a 53-page negotiating text that will be kicked around ad nauseum between now and December, when the final version is set to be presented to high-level negotiators UN Framework Convention on Climate Change’s (UNFCCC) Conference of the Parties in Copenhagen.

On Monday, the working groups charged with hashing out sticky policy issues (see The UNFCCC Process, right) approved their agendas for the next two weeks, and not surprisingly Reducing Emissions from Deforestation and Forest Degradation (REDD) figures prominently.

Over the next few days, the various contact groups will be taking shape, and we may soon have a decision on whether or not to break REDD into a separate negotiating stream. As the negotiations develop, Ecosystem Marketplace will be keeping tabs on them for you.

For now, here is a summary of the negotiations to date (slightly adapted from Tracking Trees on the Road to Copenhagen, which ran last month):

Financing REDD

It is an axiom of life that money complicates everything, and so it is for REDD. Over the course of the last Bonn meetings, the debate continued regarding how to finance the reduction of deforestation in developing countries. Should REDD be financed in the model of traditional government-to-government development funding, or should it be linked to a market, and should it generate credits that can be used by industrialized countries to meet their emissions targets?

No consensus was reached on these questions in previous Bonn meetings, but there was a general trend in the discussions towards developing a hybrid approach combining the various funding options.

A proposal from Norway helped focus earlier discussions around the idea of a multi-phased process for REDD implementation that would be customizable, to fit the circumstances of each participating country. Correspondingly, each phase would be funded through a different finance mechanism, beginning with direct government assistance, and culminating in the generation of credits that developed countries could use to meet their emission targets. The Government of Norway released a report that elaborates this approach.

Land Use, Land-Use Change and Forestry (LULUCF)

Leaving REDD aside, carbon emissions and sequestration from changing land use are already a part of the Kyoto Protocol, where industrialized countries must account for their LULUCF emissions. During a meeting of another of the working groups referred to above, the AWG-KP, a carbon accounting option suggested by the European Union caused quite a stir. The accounting method, known as the “bar approach”, proposes that a country would have a reference level of LULUCF emissions (or reductions), based on some agreed-upon historical baseline. If the country went below that emission level, it would be credited; if it went above, it would be debited.

The influential Climate Action Network viewed this proposal with a healthy dose of skepticism, suggesting in its ECO newsletter that the method might be susceptible to ‘gaming’. Without a doubt, however, the issue will reappear at the next AG-KP meetings, set for early June in Bonn.

Indigenous Rights

The rights of Indigenous Peoples in the development and implementation of REDD also continued to be a contentious issue at previous Bonn meetings, with a number of organizations contending that little was being done to enable the participation of indigenous communities, or to protect the right to free, prior and informed consent (FPIC), as provided in the UN Declaration on the Rights of Indigenous Peoples.

UNFCCC 2009 Schedule

June 1-12, 2009
Bonn, Germany
AWG-KP, AWG-LCA, SBSTA and SBI

August 10-14, 2009
Bonn, Germany
AWG-KP and AWG-LCA

Sept. 28-Oct. 9, 2009
Bangkok, Thailand
AWG-KP and AWG-LCA

November 2-6, 2009
Location TBD
AWG-KP and AWG-LCA

December 7-18, 2009
Copenhagen, Denmark
Conference of the Parties

 

Copenhagen: The End of the Beginning for REDD?

While the addition of two new working group meetings on the UNFCCC schedule indicates a true commitment on the part of the working groups to bring substantial and specific text to Copenhagen for negotiation, it is still too early to tell how much progress can honestly be made in the next six months. Referring to the REDD negotiations, AWG-LCA chair Zammit Cutajar urged prudence from the participants. He reminded them that the famously complicated Clean Development Mechanism (CDM) is only covered in one small article in the Kyoto Protocol, and suggested that participants focus on sending the right ‘signal’ in Copenhagen, with the details being hashed out later.

Perhaps REDD will be a mere sentence in the Copenhagen document, leaving the details for yet another day?

Reporting and Summaries

At each UNFCCC meeting, organizations and institutions offer their perspective on the events, either through reporting or analysis. Here we have highlighted a few we found particularly useful.

Earth Negotiations Bulletin

For those that want to follow the events of the Bonn meeting in detail, the International Institute for Sustainable Development (IISD) reporting service provides the most consistent and impartial reportage throughout the various climate negotiations. You can download the wrap-up from the Bonn meetings, or you can view the index of their daily Bonn reporting. A word of caution: These summaries are laden with acronyms and arcane terminology.

Carbon Finance

In an insightful piece, Andrei Marcu, a senior advisor on emissions trading at the Canadian law firm Bennett Jones and negotiator for Panama, reads the tea leaves on the REDD discussions at Bonn, to try to divine what might happen in Copenhagen. He also offers insights into what it all might mean for businesses and investors.

Global Canopy Program Blog

With two bookend postings from the Bonn meetings, Charlie Parker of the Global Canopy Program provides a quick summary of what could have happened and what did happen with regards to REDD in the various policy negotiating streams, and offers a another perspective the ultimate outcome Copenhagen.

ECO Newsletter

The Climate Action Network, which we alluded to above, represents 450 non-governmental organizations (NGOs) and provides daily coverage and (often witty) commentary from the NGO perspective through its ECO Newsletter.

Statements and Outputs

To coincide with the Bonn meetings, a number of organizations and institutions released reports to inform, and in some cases influence, the discussions. Here are a few of the relevant publications.

The International Institute for Environment and Development (IIED) released two briefings by Virgilio Viana, director general of the Amazonas Sustainable Foundation which helped to pioneer a system of REDD payments in Amazonas. In the briefings, Viana makes the argument for funding approach for REDD that combines market access (carbon credits) with funding from governments.

Greenpeace released a report proposing that including forest offset credits in carbon markets would cause a 75 percent collapse in the price of carbon, triggering a subsequent reduction in clean technology investments. The report, however, highlights findings of an unconstrained scenario as opposed to the more likely one with politically constrained supply.

Additionally, the recent draft US climate bill evidences a strong US demand projection for credits and thus the likelihood of international forestry credits causing global carbon prices to crash also decreases significantly. Moreover, revenue from the strategic reserve auctions and allowance set asides in the supplemental pollution reduction program to retire forestry credits should mitigate the deflationary price pressure as well.

A number of organizations are attempting to work the issue of agriculture into the negotiations, both in terms of adaptation and mitigation. The International Food Policy Research Institute (IFPRI) released a brief summarizing the main arguments for doing so.

UNFCCC Resources

As with any major UNFCCC meeting, there are a host of official documents to sort through. These are all available at the UNFCCC website for that particular meeting. There, one can find the documents that various stakeholders and observer organizations submitted in advance of the meeting, to see where they stand on the issues.

Of unique interest is the focus document for the working group on long-term cooperative action, written by the Chair of the working group. Released in two parts (one and

Evan W. Johnson is a Forest Carbon Consultant based in the US State of California. He can be reached at evanwjohnson@hotmail.com.

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REDD Turns Amber in Bonn and Brazil

UN negotiators meeting in Bonn, Germany, made progress on Reducing Emissions from Deforestation and Forest Degradation (REDD), while delegates to the Katoomba Meeting in Cuiabí¡, Brazil, broadly endorsed the use of REDD financing to save the Amazon Rainforest. Ecosystem Marketplace examines the best coverage of both proceedings.

8 April 2009 | The destruction of tropical rainforests accounts for roughly 20% of all greenhouse gasses, and is arguably the easiest cause to remedy: simply stop chopping down the trees.

That’s the logic behind allowing carbon offsets in the industrialized world for projects that reduce greenhouse gas emissions from deforestation and degradation (REDD) in the developing world, a concept that took a step closer to global acceptance at this week’s global climate change talks in Bonn, Germany.

If you’re already familiar with the vagaries of climate change negotiations, you’ll find a detailed analysis of the week’s results on the blog that blog that Charlie Parker of the Global Canopy Programme has been posting from the event.

If you’re new to REDD – or if you understand the REDD concept but can’t make heads or tails of UN negotiations surrounding it, see our December coverage of the Poznan Climate Change Talks and New York Times has posted a jargon-free summary.

The Debate Players

REDD has become one of the more controversial greenhouse gas mitigation strategies, and the conference opened with Greenpeace presenting the argument that allowing forestry offsets into a post-Kyoto accord would flood the regulated market with cheap offsets, thus reducing the incentives for industrial emitters to reduce their emissions. It’s a controversial argument and, we would argue, a weak one (some studies show that the cost of REDD projects will increase over time, and that there are plenty of less expensive industrial-reduction alternatives, for example, while others argue that the problem can easily be solved by simply pushing for deeper cuts than the current 20% by 2020 and then include forestry – arguments we will be examining in the weeks ahead).

On Tuesday, a high-level body charged with defining offset policies (the so-called “Ad Hoc Working Group on Long-term Cooperative Action under the Convention“, or AWG-LCA) is met to discuss the role of REDD.

If the AWG-LCA can set a clear policy agenda, the matter will be passed to another body that provides guidance on scientific and technical matters (the so-called “Subsidiary Body for Scientific and Technological Advice“, or SBSTA).

Taking Stock of Bonn and Mato Grosso

Charlie’s blog covers the latest developments in the AWG-LCA, and in the weeks ahead, we will be piecing together news out of Bonn with news flowing from the recent Katoomba Meeting in Mato Grosso, which ended in a draft letter urging Brazil’s federal government to endorse REDD.

The draft was put together by representatives from non-governmental organizations (NGOs) attending the Katoomba Meeting, and it will be polished and endorsed this week and then presented to governors of states in Brazil, Bolivia, and Peru across whose states the Amazon Rainforest spreads. Then the endorsed letter will presented to Brazilian President Luiz Iní¡cio Lula da Silva.

Growing Support for REDD

As became clear in Bonn and Mato Grosso, support for REDD is growing from the bottom up, even if it faces opposition from a few NGOs and politicians. Indeed, a new study about to be released by EcoSecurities and GreenBiz is expected to reveal increased demand among potential buyers, tempered by uncertainly over the direction regulators are expected to take.

EM’s Kate Hamilton, who co-authors the annual State of the Voluntary Carbon Market (and therefore knows a thing or two about what’s happening beyond the headlines) caught up to Johannes Ebeling of Ecosecurities on day three of the Katoomba Meeting. You can hear the two comparing notes here:



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

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Payments for Ecosystem Services: Download the Primer

Payments for Ecosystem Services encourage entities that benefit from ecosystem services to pay for maintaining those ecosystems – but how? At the Biodiversity Conference (COP 9) in Bonn, Germany, Forest Trends, the Katoomba Group and the United Nations Environment Programme (UNEP) have jointly unveiled a nuts-and-bolts primer designed to answer that question.

21 May 2008 | Francis Ogwal has spent years trying to balance the opposing forces of economic development and environmental protection.   Now, as focal point for the Convention on Biological Diversity (CDB) within Uganda’s National Environment Management Authority, he believes he’s found a tool that help him do just that.

“Payments for Ecosystem Services (PES) are still relatively new in Uganda, but there is growing interest in that approach, because we have been relying mainly on the old method of provision of money for conservation from government and donors,” he said at the ninth meeting of the Conference of the Parties (COP 9) to the CBD. “But there is a lot of competition for these resources, especially in developing countries – where you want to put money into education, health, and agriculture – and conservation always ends up way down on the list.”

New Resource for Rural Poor

He was speaking at a side event introducing Payments for Ecosystem Services Getting Started: a Primer, which is now available for download.

The 70-page document was compiled by theKatoomba Group (parent of the Ecosystem Marketplace), Forest Trends, and the United Nations Environment Programme (UNEP), with contributions from the Division of Environmental Law and Conventions (DELC), and funded through UNEP by the Norwegian Government.

It is designed as a resource for people in developing countries looking to implement such schemes in a way that not only preserves and promotes ecosystem services, but does so in a way that empowers the rural poor of the developing world as stewards of an ecosystem service, for which they can be justly compensated.

Four-Step Process

The document covers the challenges of structuring programs that both deliver environmental benefits and benefit the rural poor, and its core is a four-step process for establishing PES projects. The steps include:

• Identifying Ecosystem Service Prospects and Potential Buyers
• Assessing Institutional and Technical Capacity as well as Access
• Structuring Agreements
• Implementing PES Agreements

Each of these steps is broken down into smaller steps in an effort to introduce potential sellers of ecosystem services to the details of PES deals. Throughout the document, there are numerous case studies to illustrate components of the process.

Not a Panacea

The document makes it clear that PES is not a panacea. Among the obstacles highlighted: high transaction costs, a lack of regulatory drivers, and lack of understanding among those who can benefit the most from such schemes.

“People have to understand that PES schemes won’t lead to a windfall of money, and that you can’t just go out, plant trees, and hope to get rewarded,” said Rahweza. “This is a learning process, and we are simply trying to provide a resource that will help people along that process.”

Eva Haden agrees. Water and Ecosystems Program Officer for the World Business Council for Sustainable Development, she said that industry has a long to go before funding of PES schemes takes place on a level anywhere near that of the booming carbon markets.

“At this point, there is just too much uncertainty – even about basic definitions of what constitutes payment for an ecosystem service, or what constitutes an ecosystem service,” she said. “Documents like this go a long way towards moving beyond abstract theory and providing some sort of common definition, but we have a long way to go.”

Steve Zwick is managing editor of the Ecosystem Marketplace. He can be reached at SZwick@Ecosystemmarketplace.com.

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Additional resources

The Matrix: Mapping Ecosystem Service Markets

17 June 2008 | Over the past decade, more and more businesses have come to recognize that man’s economy depends on the earth’s ecology, and that ecosystem services – from waste treatment and pollination to genetic resources – generate tangible benefits to industry.

Furthermore, because these benefits have gone unquantified, they have also gone unpaid for – and the ecosystems that provide them are in decline.

This has sparked a diverse array of efforts around the globe to value and pay for ecosystem services.

Many of these Payments for Ecosystem Services (PES) efforts – like the booming carbon markets – already channel billions of dollars into projects designed to keep the planet’s ecosystem infrastructure alive.

Others, however, are less developed.

Even in carbon – by far the most successful ecosystem market to date – the concepts are emerging, changing rapidly, and dispersed across geography and institutions.

All of which makes it difficult to get a clear sense of the big picture of these markets: What are the major markets for ecosystem services? How big are they? Who’s involved? Where are they heading?

 

Mapping the Markets

To map this PES landscape, the Ecosystem Marketplace researched the main PES schemes and each of their sub-categories (mandatory or “compliance” offsets for carbon forestry, voluntary offsets for carbon forestry, government-mediated watershed protection, and mandatory or “compliance” offsets for biodiversity, among others) and their key characteristics (size, environmental impact, community impact, market participants and shapers, and emerging trends).

To collect the information on such a broad spectrum of topics, we pulled together a team of authorities on PES, each of whom performed interviews, literature searches, and web searches to collect information for a specific category of market.

The result of this effort is a large spreadsheet showing all of the markets and their defining characteristics side by side. This poster-sized chart is a powerful tool for viewing and thinking about PES markets. We’ve dubbed it “the Matrix”.

To create a more reader-friendly format for accessing this information online, we’ve split the Matrix into ‘market profiles’ that are essentially executive summaries or narratives for each market.

 

Commodity Types

There are different ways of categorizing markets for ecosystem services. If you’re viewing them as ecological commodities, they follow the popular grouping of: carbon, water, biodiversity, and bundled services.

Carbon markets generally reward the stewardship of an ecosystem’s atmospheric regulation services – specifically, the absorption of carbon dioxide from the atmosphere.

Water markets provide payments for nature’s hydrological services – primarily the filtering of water through wetlands.

Biodiversity markets create an incentive to pay for the management and preservation biological processes as well as habitat and species.

Bundled payments secure all or a combination of carbon, water, and biodiversity services. Bundled payments also include those in which the ecosystem service payment is built into the price of the product, such as certified timber or certified produce.

 

Payment Types

If, on the other hand, you are viewing them as payment types, they fall into three categories: voluntary, compliance, or government-meditated.

Compliance markets are driven by regulation and enforcement, similar to other pollutant trading markets.

Voluntary markets are driven by ethical and/or business-case motives. In many cases, the threat of future regulation also drives these markets.

And government-mediated markets are publicly-administered programs that use public funds to pay private landowners for the stewardship of ecosystem services on their property.

 

Lay of the Land

The Matrix shows that while most PES markets are growing at approximately 10 to 20 percent a year, the carbon markets are skyrocketing at 200 to 700 percent a year.

While this is no surprise to most followers of environmental markets, carbon’s surge is a dramatic entrance for an environmental commodity onto the world markets, and perhaps indicative of the power of markets for ecosystem services.

 

Promises and Pitfalls

The participants and experts we surveyed said they believe existing markets have the potential to serve the environment – but may not be living up to their potential. This underscores that these payment systems are instruments that by themselves aren’t a solution.

PES, in other words, is not a single tool, but an entire tool box with different instruments for different circumstances.

To achieve the sustainable management of ecosystem services, PES schemes must be designed and implemented carefully, intelligently, and adaptively.

 

Spreading (and Tailoring) the Wealth

A recurring theme is the potential benefit for PES schemes in developing countries, as well as the necessity to tailor them to the specific circumstances of the region.

Many of the national compliance markets in developed countries require sophisticated regulation and enforcement to drive effective markets, such as species mitigation credits and water quality trading.

Developing countries, however, host a good number of PES schemes that are structured differently. The largest of these are the government-mediated programs in South Africa, Brazil, and China. China’s watershed protection program alone is estimated to generate $4 billion a year in payments.

 

Social Equity

Perhaps the most important example of how these markets must be crafted and managed carefully is the issue of social equity.

The majority of ecosystem services are produced in rural and natural areas where local communities depend closely on ecosystem goods and services and are the environmental stewards. It is clear from our research that an important aspect across all of these markets will be to ensure that the communities and small scale producers are able to actively participate and benefit from ecosystem service markets.

This will mean developing instruments to provide support, such as aggregation services to communities, shaping regulation to engage local small-scale providers, and clarifying tenure and user rights associated with these new opportunities.

There may be a large wave of investment opportunity in rural areas that are providers of these services. To make sure it is distributed fairly, organizations and overseas development aid groups that care about the equity dimension will have to provide a focused effort.

This is an important section of the Matrix and is reflected in the work of Forest Trends and the Ecosystem Marketplace.

 

Staying Oriented

A quick glance over the Matrix and through the pages of the market profiles will show that, indeed, there are a good number of initiatives attempting to value and pay for the services our green infrastructure provides. And with a closer look, informative patterns emerge in how PES are being applied in different circumstances.

We developed the Matrix to help members of the Katoomba Group and others working in this field to visualize and track the shifting global trends and nuances in PES – basically, to get oriented in the PES landscape.

 

Building a Database

To further this aim, we are developing an online database of the Matrix. This will provide convenient and current access to basic PES information provided in the Matrix. It will also allow for collaboration and data contribution, enabling the PES Matrix to be a living document under broad and continual update.

The Matrix products – chart, narrative, and online database – will aid in the evaluation and comparison of the different shapes and sizes of PES systems around the globe, creating a better understanding of what is being done, as well as where, by whom, and with what effect. We hope this will help refine existing PES systems and spur new and creative solutions.

Nathaniel Carroll is Biodiversity Market Adviser to the Ecosystem Marketplace and Forest Trends. He can be reached at ncarroll@ecosystemmarketplace.com.

Michael Jenkins is Publisher of the Ecosystem Marketplace and founding President of Forest Trends.

 

Additional resources

EU Call to Action Leaves Trees in Limbo

The European Commission has called for an OECD-wide carbon market by 2015 and ratcheted up calls for developing countries to keep their own emissions in check. One sticky issue has been pushed to the back-burner – namely, how (and if) Europeans will be able to use offsets to reduce emissions from deforestation and forest degradation.

31 January 2009 | European Commissioner for the Environment Stavros Dimas says he’s all for saving the tropical rainforests, and has often lamented the fact that the destruction of this vital resource contributes about 20% of all greenhouse gas emissions worldwide.

He also says the European Union should do something to halt the loss, but draws the line at letting European industrial polluters pay for the capture of carbon in rainforests – at least when those payments are used to offset their own emissions (a concept called Reducing Emissions from Deforestation and Degradtion (REDD).

The European Council and European Parliament seem to agree. Each signed off on the European Union’s climate and energy package in December. That package includes a commitment to develop “financing mechanisms” that will support the rainforests, but pointedly does not mention forestry offsets – in contrast to a proposal that the decidedly REDD-critical European Commission floated in October.

That scheme would have allowed forestry offsets into the European Union Emissions Trading Scheme (EU ETS) over time – beginning by skimming money for capacity-building from revenues taken in through the auctioning of allowances in the next phase of EU ETS, which begins after the Kyoto Protocol expires in 2012 (a difficult proposal, because the member states see that money as their own). Then would come a second phase, during which European governments could purchase credits from pilot REDD projects in the developing world, and then, finally, a point where private sector emitters could offset their emissions with forestry credits – albeit only on a very limited scale.

“This plan would support our goal of cutting the rate of deforestation in half by the year 2020,” said Valerie Merckx, who is Dimas’s chief policy officer on climate change, as the proposal was being debated.

Then came this week’s Commission proposal, which is designed to inform further debate in both the European Parliament and European Council. The January 28 document challenges developing countries to slow their emissions growth and calls for a OECD-wide emissions trading scheme by 2015; but it also makes scant reference to forestry, and no reference to offsets.

Fear of Flooding

Although the European Parliament and the Council of Europe are the European Union’s two legislative bodies, laws originate in the form of proposals generated by the European Commission; and the Commission has been dead-set against the use of forestry offsets for years (see “Europe and Forest Carbon: a Climate Focus analysis of the main actors and their views on REDD”, right).

Dimas reiterated his skepticism on the fringes of the recent Climate Change Conference in Poznan, Poland.

“I consider forestry offsets quite dangerous to the environmental integrity of the EU ETS,” said, before adding mournfully, “Unfortunately, some form of forestry offsets will be in the EU ETS after 2020.”

At issue is a fear that letting forestry credits into the EU ETS will flood the market for offsets, driving down prices and failing to create an incentive for industrial reductions within the European Union.

“The Commission has targeted a price signal of around €38 per ton of CO2 by 2020,” explains Matthieu Wemaí«re, Research Fellow for Climate and European Affairs at the Institute for Sustainable Development and International Relations (IDDRI) in Brussels. “That is a key condition to allow investments to be made by them to make sure there will be reductions.”

So, when it came time for EU heads of state and then the European Parliament to debate the role of forestry offsets in the EU ETS under the new climate and energy package, they closed the door for now – but essentially left a key in the lock with instructions to open only in the event of an aggressive international agreement.

EU ETS and Larger EU Policy

“When trying to understand the role of forestry in the European Union’s emission-reduction plan, it’s important to keep in mind that there are really two things going on here,” says Wemaí«re. “EU ETS only covers a few industrial sectors, while the Kyoto Protocol covers a nation’s entire emissions.”

Indeed, non-EU ETS sectors can use afforestation credits under the Kyoto Protocol’s Clean Development Mechanism (CDM), but those afforestation credits are few and far between: only one afforestation project has met the stringent requirements dictated by the CDM, leaving forestry credits essentially non-existent in the European Union’s proposed post-Kyoto compliance scheme.

“Basically, the EU ETS is one policy area, while the policy area dealing with deforestation is seen as a separate policy block from ETS,” explains Tuomas Rautanen, Project Manager for Methodology and Risk at project developer First Climate. “The linkage between the two would be forestry projects in EU ETS, but this linkage does not exist.”

Unlocking Forestry Offsets

Anders Wijkman, a Swedish Member of European Parliament, says the linkage could come into existence if a global agreement is reached that calls for drastic cuts in global emissions by the year 2020.

“Under the agreement we passed in December, the European Union has to revisit its climate and energy decision if there is such an agreement,” he says. “We have already said that, if the rest of the world agrees to slash emissions 20% or more by 2020, then we will reduce our emissions 30%, and doing so will require a number of additional policy measures.”

One of those policy measures could be the inclusion of forestry offsets in the EU ETS. Although that inclusion is not a given, the December law explicitly states that, if such an international agreement is reached:

…the Commission shall submit a report assessing … afforestation, reforestation, avoided deforestation and forest degradation in third countries in the event of the establishment of any internationally recognised system in this context.

Offsets or Fund

Wijkman says his fellow Parliamentarians are well aware of the sequestration potential of forests – and, for that matter, of land-use in general. Indeed, he points out that the December law calls for more research into ways of capturing carbon through improved methods of agriculture.

“Deforestation and agriculture together probably account for 35% to 40% of all interference with the climate system,” he says. “Unless you rethink those two sectors, we are not going to succeed. But there is still a real debate on the best way to earmark funding.”

The question, he says, isn’t whether saving the rainforests will slow global warming, but whether offsets are the best approach.

“This is not a perfect solution,” he says. “There are, for example, clear advantages to a fund approach over offsets – mostly because the emissions trading market is volatile: prices go up and down, and that’s not the ideal conditions for forest protection.”

In the long run, he says, even the proposed offset strategies aren’t going to get the job done – but he believes they are the best way to get the ball rolling.

“None of the measures we are discussing are going to bring us down to zero emissions in 30 or 40 years time,” he says. “If you think you can do that by fiddling around with offsets, you’re fooling yourself.”

The Test

Wemaí«re says that, even if the European Union approves a forestry regime post-2012, it will likely resemble the phased approach proposed by the Commission – with an early capacity-building phase, followed by a pilot trading phase open only to governments, and then culminating with limited private-sector buying of offsets.

“There is a lot of distrust of offsets in the Commission,” he says. “And it is not just because of flooding; there are also concerns that those countries that will host REDD projects will not be able to manage leakage.”

He believes that risk management mechanisms – such applying a discount factor to allow for leakage or setting up buffer zones – will offset any leakage, but he also says many proponents of REDD under-estimate the capacity issues.

“I have some experience with forestry project on the ground in Madagascar and elsewhere, and it’s one thing to have a nice project on paper and have a nice person in the ministry who understands all the implications and who can agree from a political perspective that these projects should go on and should be approved and blah blah blah,” he says. “It’s another dimension to implement this project and to enforce any legislation that should be applied for the preservation of the carbon stock.”



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

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Additional resources

Biodiversity Banking: A Primer

Mitigation Banking makes it possible for real estate developers to turn biodiversity into an asset instead of a liability – which ultimately makes it possible to preserve that biodiversity across the United States. But how do such mechanisms work? And what challenges do they face? The Worldwatch Institute’s 2008 State of the World Report tackles these and other issues – excerpted here in Ecosystem Marketplace.

Note: This article has been adapted from Chapter 9 of the 2008 State of the World: Innovations for a Sustainable Economy. For the sake of brevity, footnotes and sidebars have been eliminated. View the article in its entirety (pdf), or visit the Worldwatch Institute’s State of the World web site.

19 February 2008 | Assuming agreement of the need to protect Earth’s biological wealth, how much would you be prepared to pay to protect an endangered fly? Would you spend $1.50, $15, $150,000, or more?

How about society as a whole: How much should society spend on the protection of this fly? Does the answer depend on the nature of the fly itself? On its role in the ecosystem?

Or is the calculus based on something else – perhaps on what you must give up to save the fly, or your standard of living, or your priorities?

The questions may seem crass and materialistic – and in some ways they are – but they are essential if the world is to conserve the species and ecosystems that sustain humankind.

The reason is simple: like many other important matters, the staggering loss of biodiversity is really a matter of values – and not just the principles that allow people to distinguish right from wrong, but also the more mundane concept of economic values.

Externalities: The Economic Blind Spot

In a way, the issue boils down to the fact that the world is losing species and ecosystems because the economic system has a blind spot. It sends the signal that cutting down a rainforest to grow soybeans or palm oil plantations makes more economic sense than leaving that forest intact. It says that building a shopping mall to sell iPods is more valuable than having a wetland that buffers coasts against storms, filters water, and provides nesting ground for birds.

It is what economists call a problem of externalities. Some values – like that of a species of woodpecker or of a particular ecosystem such as a rainforest or a wetland – do not enter into the economic system. They are external to it, and so they are not taken into account when economic decisions are made. Indeed, for eons the price of nature has been woefully close to zero. Supply outstripped demand, and priceless came to mean worthless.

But that equation is changing. Priceless nature is becoming increasingly scarce, and therefore needs to be made valuable once again. Giving some economic value to biodiversity would make it easier to protect. At the very least, standing rainforests would not compare so unfavorably when considered against soybean fields and palm oil plantations. Their value would no longer be zero.

Nature on the Block

It may sound strange, even counterintuitive, but the solution to the loss of biodiversity may actually lie in the very same markets that appear to be causing the problem. It may lie in creating payment schemes for biodiversity; mechanisms that give nature a value and that force the economy to look into its blind spots.

Luckily, a good number of countries – from Australia and Brazil to the United States – have been experimenting with such schemes, sometimes for more than 20 years, and there is much to be learned.

Countries use a variety of mechanisms for giving value to ecosystems and the services they provide. In essence, these can be summarized as follows:

  • Government sets the price: This is done either by fining those who damage the ecosystems (through endangered species laws, for instance) or by paying those who conserve it (providing tax breaks or subsidies for conservation, for example). While these systems are useful and play an important role in protecting biodiversity, they suffer from a fundamental flaw: they do not send the right signals to the economy; they do not permit society, via markets, to determine and understand the actual value (the price) of biodiversity.
  • Voluntary transactions set the price: Users of ecosystem services voluntarily agree on the value with those who provide the services. These “self-organized private deals” are sometimes mislabeled as “markets,” but true markets depend on multiple buyers and multiple sellers meeting regularly to exchange goods and services. In contrast, in most cases these are one-time-only deals. They may also take the form of “voluntary biodiversity offsets,” in which an individual or company that damages biodiversity pays to “protect, enhance, or restore” an equivalent amount of biodiversity somewhere else.
  • A hybrid system sets the price: In this case, scarcity of a traditionally “public” good is established through government regulation, which then forces buyers and sellers to negotiate in order to set a price for the good or service in question. Examples of this include various “cap-and-trade” schemes in the United States for sulfur dioxide and in Europe for greenhouse gases. These schemes create true markets because they generate demand for services from multiple buyers and therefore lead to the provision of services from multiple sellers.

While government payment schemes and voluntary biodiversity offsets are extremely useful and are likely to account for the majority of global payment schemes for biodiversity in the near future, they tell more about where we are now than where we might be in the future. The new and emerging regulated markets for biodiversity offsets hold the key to that future.

Therefore, we are focused here mainly on the third of these mechanisms: regulatory cap-and-trade systems.

Before delving too deeply into these issues, however, a story:

There is a small town nestled in the sand dunes east of Los Angeles – Colton, California – that provides some idea of the new world that may be emerging as a result of regulated markets for biodiversity off-sets.

Colton is smack in the economic center of San Bernadino County, one of the fastest-growing counties in the United States. But there is a fly in Colton’s ointment of future economic growth.

A Fly in the Ointment

The city is currently involved in a series of legal battles over how much it should be prepared to pay to save an endangered fly: the Delhi Sands Flower-loving Fly, a rather pretty insect that, like a butterfly, hovers and sips nectar from local flowers. This tiny creature has the distinction of being the first fly—and only the seventeenth insect—to be declared an endangered species in the United States.

According to the U.S. Endangered Species Act (ESA), no individual or entity, public or private, can harm an endangered species – not even a fly – without a permit from the government. Thus, shortly after this fly was listed as an endangered species, construction of a hospital in San Bernadino county ground to a halt.

The hospital had planned to pave over seven acres of occupied fly habitat, but that all of sudden became illegal. The hospital then had to spend $4 million redrawing its plans, moving its parking lot 250 feet, and making a few other minor changes. All so it wouldn’t harm a fly.

The $150,000 Fly

How much is a fly worth? Do you judge by what the fly does? With this fly, scientists do not know the answer to that question.

They know that pollinators, such as this fly, tend to have important and symbiotic relationships with the plants they feed on. In some cases, without the pollinator the plant cannot reproduce. Perhaps the flower-loving fly plays that role. Or it could be a cornerstone species, without which an entire ecosystem could collapse. Or maybe protecting this fly will protect dozens of other species, some of which may not even have been discovered yet.

Or maybe not.

E. O. Wilson has written: “I will argue that every scrap of biological diversity is priceless, to be learned and cherished, and never to be surrendered without a struggle.”

The state of California, in contrast, has a more moderated view. Having determined that the fly should be protected, it decided to let the market decide what it costs to conserve it. And the market determined that the going rate in California for Delhi-sands fly habitat is currently somewhere between $100,000 and $150,000 an acre.

This story is interesting not so much because it is hard to believe that people are buying fly habitat – let alone paying $150,000 for it – but rather because it forces society to answer that crass and materialistic question: How much is nature really worth?

Some would argue that the question should not even be asked. And yet society answers this question “by default” every day. Every time people buy soybeans, for example, they are putting a value on the Amazonian rainforests that were cleared to grow them.

At least in the case of the fly, the price tag is clear, evident, and visible. If a developer wants to pave over fly habitat, it will cost the company (in today’s market) as much as $150,000 an acre. If that were all there was to this story, the concept of putting a price on endangered species would be quite troubling. It implies that someone could pay the price set by the marketplace and then go ahead and destroy the last surviving population of a species.

Bug Offsets

But that is not what is happening. The $150,000 paid to pave over the fly’s habitat is actually being used to protect or create habitat for that same fly somewhere else. It is, in other words, an “offset” – not unlike the carbon offsets people are buying to counteract their greenhouse gas emissions.

As the money goes into legally and financially protecting the flies forever (at least in theory), in a way it is a market, or at least a market-like mechanism. It puts a value on endangered species and habitat, turning them into marketable assets. It puts a cost on the fly for those who would harm it, and at the same time it creates a value for those who would conserve it.

It is this marvelous alchemy – turning cost into value, liability into asset – that may ultimately allow society to preserve biodiversity. But does it work? And, if so, how does it work?

Wetland Mitigation Banking

Since the mid-1980s, the United States has had a series of functioning biodiversity markets worth more than $3 billion a year. This system is currently the largest and most well-established experiment on Earth on creating biodiversity markets. Although these are markets involving the private sector, it is government that makes these markets possible.

The system that makes the flower-loving fly worth real cold, hard cash begins with government regulation. Indeed, it has its roots in two very important U.S. laws: the Clean Water Act (CWA) and the Endangered Species Act, both passed in the 1970s.

Although the CWA is basically designed to prevent the dumping of chemicals into the nation’s rivers, it is also in some respects a rather innovative biodiversity law – thanks to section 404, which attempts to prevent the placement of dredged and filling materials into the “waters of the US.”

Anyone wishing to dredge or fill a wetland considered of national importance in the United States must first obtain a permit through a program administered by the U.S. Army Corps of Engineers and the U.S. Environmental Protection Agency (EPA).

In considering whether to award this permit, EPA and the Corps are supposed to follow a process known as “sequencing,” in which the first step is to determine if the damage to the wetlands can be avoided. If it cannot, the next step is to minimize the damage.

Finally, the developer is supposed to offset, mitigate, or compensate for any damage that cannot be minimized.

This hierarchy should be considered in all forms of offsets, but it is not usually codified into law. Section 404 of the CWA is an exception. The law is also quite clear on what is considered appropriate compensation for the damage to wetlands: developers must “create, enhance, or restore” an amount equal to or greater than the amount being damaged in a wetland of “similar function and values” in the same watershed. In some special cases, protecting a similar wetland is considered suitable compensation, though this is rare. The law recognizes that not all wetlands are equal: Someone cannot damage a wetland in California and protect one in New Jersey.

The compensation for any development projects that harm wetlands – whether done by private developers or the government – can be undertaken by the developers themselves or by third parties. And the Army Corps of Engineers and EPA are charged with overseeing this process and making sure the compensation happens.

One of the most interesting repercussions of this law is that there are now private, for-profit, wetland mitigation bankers who make money by creating, enhancing, and restoring wetlands and then selling the resulting “wetland credits” to needy developers.

They buy wetland areas in parts of the United States that are likely to experience economic growth; they work with the Corps and EPA to get “credits” for their “creation, enhancement, and restoration” of wetlands (hence creating a “wetland bank”); and then they sell these wetland credits to developers who find themselves in need of compensation.

Government Guides the Invisible Hand

In other words, wetland mitigation banking is possible because the government is restricting supply and allowing the market to set a price – a value – on this particular aspect of biodiversity.

In a way, it amounts to governments tinkering with the economic infrastructure in order to protect those aspects of biodiversity that should be valued, the externalities. And it is no small matter: Although there are no reliable figures on the size and value of wetland banking, the best guess is that there are more than 400 wetland banks throughout the United States, that the market for wetland mitigation is worth more than $3 billion a year, and that entrepreneurial wetland mitigation bankers account for about one third of that business.

The rest is composed of people doing their own wetland mitigation in order to obtain permits or paying the government or nonprofit groups a fee instead of compensation.

Although wetland mitigation banking has proved to be a rather innovative concept – fueling the growth of a new “nature management industry” – it is important to point out that it is by no means perfect. Like all innovations, it has come in for some serious criticism. Some of these critiques are really about a reticence to assign a dollar value to biodiversity, reflecting an inherent dislike for the use of markets and capitalist tools to protect nature.

The critics often argue that the only way to protect nature is for government to restrict its use and strongly enforce this restriction. Although there is clearly a place for this type of protection, there are other powerful tools that should be used as well.

Besides, without wetland banking, U.S. wetlands would be worth little or nothing, and they would continue to disappear under strip malls, airports, and highways. With banking, their loss has at least a very real monetary cost and can generate funds that may actually lead to the creation of new, very similar wetlands.

More important, this cost sends a signal: developers who want to develop a site that has wetlands will spend considerably more per acre, so they had better be absolutely sure they must have that particular site.

The Shortcomings

Two other criticisms do merit concern, however. The first has to do with the fact that it is notoriously difficult to “create, enhance, or restore” wetlands, so the wetland acre used as compensation may be inherently “less valuable” in terms of biodiversity than the acre being damaged. Partly for this reason, many of the U.S. wetland banking systems require that each acre damaged be compensated with two, three, or more acres of wetland “created, enhanced, or restored.” It is a form of overcompensation or insurance and, while it alone does not resolve the matter, it does help.

So far, the studies on the quality of the wetlands created as compensation are mixed. In one study conducted in Ohio, scientists looked at the 12 oldest of the state’s 25 wetland mitigation banks. Although these had been studied and monitored by the Army Corps and EPA, the study found that many were not up to standard when checked against stringent scientific criteria. Indeed, against these measurements only three banks scored in the “successful category,” while five passed in some areas and failed in others. The remaining four failed nearly every assessment, functioning more like shallow dead pools than wetlands. More disturbing, none of the government agencies charged with oversight were taking the bank managers to task for this fact.

Overall, however, the study found that the banks were most successful when they maximized the areas defined as wetland, minimized areas of open water, and had similar plant and animal life to natural wetlands.

Ensuring Quality

Despite its implicit criticism of banking, the study’s author, wetland ecologist John Mack, remains one of the more steadfast supporters of mitigation banking. He says that the conclusion from his study should not be that banking as a concept is flawed, but rather that – when done properly – it can succeed. He argues that by using better designs, performance standards, enforcement, financing, and an appropriate watershed approach, wetland mitigation banking can produce high-quality wetlands.

The second important criticism centers on how wetland mitigation banks are monitored and implemented. How is it possible to ensure that an acre of wetland protected today will still be there tomorrow, the day after, and the day after that?

There is also a related question: Will funding be ensured to maintain the newly-created wetland?

Ensuring Longevity

To address these issues, the Corps and EPA require that wetland bankers provide both legal and financial assurances that the “created, enhanced, or restored” wetland will last (presumably) in perpetuity. The legal assurances usually take the form of conservation easements (legal restrictions on the use of land) held by third parties (usually a nonprofit or the government). The financial assurances can take a variety of forms. They are either trust funds set up to produce the interest necessary to run the bank or bonds or letters of credit that hold the bank financially liable for the protection of the wetlands.

In addition to these assurances, wetland mitigation banking requires a considerable amount of enforcement and verification. It needs the government agencies overseeing the system to continuously monitor and ensure that the promised wetland protection is delivered. Such “perpetual oversight,” however, is costly and is usually very difficult for understaffed and underfunded government agencies.

Nevertheless, as the mitigation industry grows it may generate the funds needed to monitor itself.

Despite these warranted criticisms, wetland mitigation is still probably a better system than the alternative—which, realistically, amounted to little or no real protection. Even if there were no wetland banking, roads would still be built, airports would still be constructed, and shopping malls would still go up. Wetlands, in other words, would still be damaged. History shows that society has not been very good at blanket prohibitions on the use of land.

And even if all further damage to biodiversity could realistically be prohibited, the problems of government enforcement and monitoring would still exist. It just would be spread out across tens of thousands of projects, and tens of thousands of acres of damaged wetlands, rather than across hundreds of wetland banks. In fact, numerous government officials report that the existence of wetland mitigation banking makes it easier for them to carry out their monitoring, enforcement, and protection work.

Endangered Species: From Liabilities to Assets

If endangered species are so important, so valuable, why does the economic system see them as liabilities? The perverse unintended consequence of the Endangered Species Act – forcing people to see endangered species as a liability – is nothing new. Ever since the act was passed some 30 years ago, people have been complaining that listing an endangered species places an unfair burden on the private landowners whose land harbors these species.

In such cases, they argue, the incentive is not to protect an endangered species but rather to get rid of it fast, before anyone knows it is there. This is what some have called the “Three Ss Approach to Endangered Species Management”: shoot, shovel, and shut up.

Critics of the ESA have often used this attitude to argue that the act needs to be revised or even dismantled. But rather than throw the legislative baby out with the bathwater, there are other, less drastic approaches. One of these involves a process known as conservation banking.

In the 1990s, people began looking for a better way to accomplish the ESA’s objectives – one that, instead of penalizing private landowners for harboring endangered species, would perhaps reward them. To do this, they created a system reminiscent of wetland banking. Under this system, landowners with an endangered species on their land can get a permit to harm that species (known as an “incidental take” permit in the euphemistic language of the government) if they can show they have compensated for it by creating habitat for that same species somewhere else.

Again, as with wetland banking, this has paved the way for private, for-profit, species bankers to create habitat for endangered species, get credit from the government for any new members of that species found on their land (“new” meaning above an initial baseline), and sell those credits to other developers who intend to damage that species’ habitat or harm the species somewhere else.

Not much is known about the size and breadth of species banking across the United States, though it appears that there are more than 70 species banks and that these might trade anywhere from $100 million to $370 million in species credits each year.

Whatever the size, the use of conservation banking means that species banking, also known as “conservation banking,” can turn a species liability into a species asset. This is just what one company in Colton, California, discovered.

While the municipal government there sued the federal government over the Delhi Sands Flower-loving Fly, saying the government had no place regulating where people can build their houses, a sand and gravel company called Vulcan Materials Corporation acquired 130 acres of prime fly habitat—the largest remaining contiguous area of it in the Colton dunes.

But instead of hiring lawyers and attacking the fly’s endangered species status, Vulcan decided to see if it could make the fly pay.

Working with the U.S. Fish and Wildlife Service and the Riverside Land Conservancy, Vulcan set up a conservation easement on the land, created a management plan for the fly habitat, established a baseline for flies on its land, and obtained the right to sell “fly habitat credits” above that baseline to needy developers.

The bank opened in June 2005 and by December had already sold three of its credits.

Although Vulcan will not officially release the sale prices, reliable sources estimate that at least one credit sold for $100,000, although they also say the price has now risen to $150,000 per acre, as mentioned earlier.

According to Kevin Klemm, the owner of the development company that was Vulcan’s first customer, the credits were worth it. “The Vulcan Materials people were tremendous,” he says. “They were business-like and accommodating. They didn’t waste any time. The bank is a tremendous value… I spent six years of my life trying to build 18 buildings.”

And presumably he got nowhere because the government made it illegal for him to harm the flower-loving flies. Now, with a bank from which to buy offsets, he has an option.

To people like Klemm, the rapid response mitigation solution now offered by the Vulcan bank is no doubt a blessing. And Vulcan is not alone.

There are now conservation banks in the United States that sell credits on everything from vernal pool fairy shrimp and valley elderberry longhorn beetle to tiger salamanders, Gopher Tortoises, and prairie dogs. As noted, these markets may be worth as much as $370 million a year. The conservation of endangered species has thus become a very real, and very profitable, business opportunity.

Government Programs: Benefits and Drawbacks

Outside the United States, several other countries are also experimenting with regulated biodiversity offsets. For instance, the Australian states of Victoria and New South Wales either already have or are setting up schemes similar to the U.S. system, although with a few important differences.

The BioBanking system in New South Wales has proposed a scheme whereby some areas would be deemed too sensitive for development. These would be “red-flagged” and would ideally be the sites where species banking would occur. In other words, the Australians are looking at addressing one of the main pitfalls of the U.S. system: a lack of broad-based, landscape-level planning to determine which areas are most needed for conservation. For now, it looks like the BioBanking scheme will be voluntary, but the hope is that, since compensation for damage is obligatory, BioBanking will be cheaper than the alternatives.

In the state of Victoria, the BushBroker scheme is mandatory and applies to native vegetation. The principle is simple: whoever harms native vegetation in Victoria needs to offset that damage by creating or protecting the same type of vegetation in the same bioregion.

Applying this scheme, on the other hand, is extremely complicated. There are literally dozens of vegetation systems and bioregions, which makes finding the right match a daunting task. To address this problem, the government of Victoria is building a sophisticated computer matching system that it expects will be operational any day now.

The Challenge of Governance

While cap-and-trade regulated offset schemes to protect biodiversity can indeed create real markets and can be extremely powerful when used correctly, they also require strong government oversight, effective legal systems, enforcement of rules and regulations, and robust financial institutions.

These conditions may be found in some industrial countries, but they are not the conditions of much of world – especially in those parts that hold most of the world’s biodiversity, places like parts of Central and South America, Congo, China, Indonesia, Madagascar, and Mexico.

So, what can be done in those parts of the world? Fortunately, the underlying concept behind both conservation banking and wetlands mitigation banking – that is, putting a value on biodiversity – applies in all countries, even if the exact systems for providing these payments may not. Even the U.S. government has a multimillion-dollar-a-year program to help farmers and private landowners conserve.

It comes in the form of Farm Bill payments such as the Wetlands Reserve Program, the Conservation Security Program, the Conservation Reserve Program, and the Environmental Quality Incentives Program.

In Brazil, the government requires that a minimum amount of a landowner’s territory be kept in forest cover. There is also a law on Brazil’s books that requires compensation for damage to biodiversity, although the laws to determine that compensation are not adequately established yet. Similarly, in places as far afield as South Africa, Colombia, and the European Union, laws requiring or encouraging biodiversity offsets are either being considered or already being implemented.

The Chinese government has long had a program known as Grain for Green (the official title translates as the Sloping Lands Conversion Program, or SLCP) that pays farmers to keep forest cover on hillsides. Its aim is to help conserve watersheds and prevent floods, but it also affects biodiversity conservation.

This is not a market-based system, however; it is a system of government subsidies and payments. The money comes directly from tax revenues and is redistributed based on certain established criteria. While the SLCP system does help increase the value of standing forests (and has an astounding budget of $43 billion over 10 years), it does not directly link the users of the biodiversity services with the providers of those services. Government mediates the transaction, so the users of the service are not receiving information on the cost of their use.

Mexico is introducing a similar system. It was modeled on a program for water conservation in the country known as Pago por Servicios Ambientales Hidrolí³gicos (PSAH, or Payment for Environmental Hydrological Services). The PSAH is interesting in that it collects a fixed amount of revenues from water users and then redistributes it to key targeted forested watersheds across the country.

The principle here is that by helping protect forested areas in key watersheds, the payments will help support the provision of water-related ecosystem services throughout the country. The program started in 2003 and pays between $30 and $40 a hectare for forest conservation, depending on the type of forest being protected. Currently the program is paying for the management of close to a million hectares.

Building on its success with water services, Mexico has received a grant from the Global Environment Facility to establish a similar program to make payments for biodiversity conservation. The problem with this approach is twofold. First, as in China, the money is coming from philanthropic sources or the government. Second, the payment and the payer are severed from the actual service being received. In other words, while all Mexicans contribute a bit of the money they pay for water to the PSAH, they often do not know they are making this contribution. And the money they pay is not necessarily used in the watersheds that supply those individuals with water. Again, the link between buyer and seller is not direct. This makes it difficult for users of the service to make decisions based on the economic costs of their use.

One of the most talked about payment for ecosystem services programs, as these are often called, is the Pago por Servicios Ambientales (PSA) program created by Costa Rica in 1996. Private landowners in Costa Rica who protect their forest cover receive a payment from the National Forestry Trust Fund. These payments are made at a base rate of $40 per hectare but can vary depending on type of forest cover. Most of the money for this trust fund comes from a tax added to fuel sales in Costa Rica, but this is supplemented by “environmental credits” sold to businesses and other sources of international finance.

Between 1996 and 2003, the Costa Rican PSA program had enrolled more than 314,000 hectares of forested land, transferring more than $80 million to landowners in the process.

Once again, this is a government-run program here the user and provider of the biodiversity services are not closely linked. Also, like China’s Grain for Green program and Mexico’s PSAH, the price per hectare of biodiversity is set by government, not via a direct market-based mechanism. They are in effect government monopsonies (one buyer without competition, the opposite of a monopoly) for biodiversity services, and as such they may be paying too little or (though this is less likely) too much for the conservation of biodiversity. The price is largely arbitrary and based on the government’s ability to pay rather than on supply and demand for the service.

Despite these drawbacks, the programs in China, Mexico, and Costa Rica have been extremely successful at giving added economic value to biodiversity and, some observers say, have also been successful in their overall goal of increasing forest cover.

A particularly interesting and different approach to payments for biodiversity services is found in Victoria in Australia. Through two programs there – known as BushTender and EcoTender – the state has established a reverse auction system for providing government payments to private landowners who conserve local biodiversity (among other goals).

The pilot for BushTender took place in Victoria in 2003, and according to Mark Eigenraam, one of its architects, it “used an auction system to distribute environmental funds to landholders who were interested in improving terrestrial biodiversity on their properties. The implementation of BushTender led to 5,000 hectares of native vegetation on private land being secured under management agreements. In economic terms, it created the supply side of a market for nature conservation and generated significant cost savings when compared with previous grant-based systems for distributing conservation funds to landholders.”

BushTender’s success is now being followed up with EcoTender, in which the state is inviting local landholders to submit competitive “bids” for government funding to pay for improved management of remnant vegetation and re-vegetation on their properties.

“Where BushTender focused on a single environmental outcome (increasing terrestrial biodiversity), EcoTender aims to achieve multiple environmental benefits, including improvements in saline land and aquatic function,” explains Eigenraam.

What is interesting about BushTender and EcoTender is that they use government’s monopsony buying power to invite bids that effectively serve to discover the “best” price at which biodiversity conservation will be achieved. Nevertheless, the buyer is once again the government using tax revenues, so the connection between the buyer or user of the biodiversity services and the seller is still not direct.

Voluntary Biodiversity Offsets

Beyond government regulation, numerous companies have begun to set up biodiversity offsets voluntarily in places like Qatar, Madagascar, and Ghana because they think it makes good business sense to do so. Like voluntary carbon markets, the number and investment in such offsets is presently modest. But they are likely to become much more widely used as a part of standard business practice.

Some observers believe that they could serve as the precursors to larger, more broad-based biodiversity markets in the long term. Essentially, they demonstrate that there can be a business case for investing in biodiversity conservation.

Expanding the Business of Biodiversity

To understand whether, when, how, and where voluntary biodiversity offsets should be undertaken, the Washington-based nongovernmental group Forest Trends established the Business and Biodiversity Offsets Program (BBOP). This is a partnership of over 50 companies, governments, conservation experts, and financial institutions from many different countries and led by Forest Trends and Conservation International.

The BBOP partners believe that biodiversity offsets may help achieve significantly more, better, and more cost-effective conservation outcomes than normally occur in the context of infrastructure development. The program aims to demonstrate conservation and livelihood outcomes in a portfolio of biodiversity offset pilot projects; to develop, test, and disseminate best practice on biodiversity offsets; and to contribute to policy and corporate developments on biodiversity offsets so they meet conservation and business objectives.

Companies undertake biodiversity offsets for one or more of three reasons: they are required to by national legislation (as in the United States, with wetland mitigation banking and conservation banking), they are encouraged to or facilitated by Environmental Impact Assessment legislation or other planning procedures, or they find a legitimate business case to get involved.

BBOP staff have identified numerous benefits for companies in doing this; namely, voluntary offsets can help companies:

  • ensure continued access to land and capital and to the license to operate;
  • bring competitive advantage or favored status as a partner;
  • increase investor confidence and access to capital;
  • reduce risks and liabilities;
  • ensure strong and supportive relationships with local communities, government regulators, environmental groups, and other important stakeholders;
  • influence emerging environmental regulation and policy;
  • assure “first mover” advantage for innovative companies; and
  • maximize strategic economic opportunities in emerging markets (for instance, establishing companies to implement offsets).

Currently, BBOP is working with partners on projects in a variety of countries, including Ghana, Kenya, Madagascar, Qatar, South Africa, and the United States, and is exploring projects in Argentina, China, Mexico, and New Zealand. Some of the companies the program is working with or in discussions with include Newmont Mining, Rio Tinto, Shell, and AngloAmerican.

As these experiences mount up, and as case studies become available on best-practice biodiversity offsets, it is likely that both the supply and demand for these offsets will grow. Countries that establish clear policies may improve land use planning and use market mechanisms to create aggregated offset areas that achieve significant conservation outcomes in high biodiversity-value areas.

How Much is Nature Worth?

Whether through voluntary offset mechanisms, government-mediated payment schemes, or full-fledged markets in offsets, the concept of payment for biodiversity services is beginning to take hold. More important, these approaches are beginning to subvert the current economic model that is blind to the value of biodiversity, to the services that species and ecosystems provide, and to the costs inherent in destroying the natural wealth on which human well-being depends.

The problem these systems are trying to address is self-evident: When iPods are valued over whale pods, the economic system will deliver ever more species of iPods and wipe out yet another species of whales. When wet-lands are seen as nothing more than mosquito-infested swamps, they will lose out to shopper-infested malls. And as land becomes ever more scarce, the problems will simply be aggravated.

The economic system is not broken. It is doing exactly what it was set up to do: deliver more of what people value – or at least more of what the imperfect price signals say people value – and less of what they don’t.

The solution to the problem may actually lie in using markets and the economic system to our advantage. Imagine how powerful it would be if market forces – the same market forces that have inexorably pushed for the destruction of rainforests and the extinction of countless species – could be used to protect species, to give them a real value in people’s everyday decisions of what to eat, what to wear, and what to buy.

To return to the questions at the start of this chapter: How much should society be prepared to spend to protect nature? The answer will in large measure determine whether humanity ends up living in a world of whales, wild tigers, and wetlands or a world of pavement, iPods, and pollution.

Better yet, we can hope that through a form of economic jiu-jitsu these market mechanisms will make it possible for the pavement and the iPods to co-exist comfortably with the whales and the wetlands.


Ricardo Bayon is a Partner and co-founder of EKO Asset Management Partners, a new breed of “merchant bank” seeking to influence, encourage, and profit from new and emerging markets for environmental commodities (carbon, water, and biodiversity). Formerly he helped found and was the Director of the Ecosystem Marketplace. he can be reached at rbayon@ekoamp.com.

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Painting the Town REDD: Merrill Lynch Inks Massive Voluntary Forest Deal

In a major demonstration of confidence in the viability of voluntary carbon offsets as a strategic investment, Merrill Lynch is raising equity for a 100-million-ton, for-profit avoided deforestation project in Aceh, Indonesia. Tellingly for the future of the forestry market, the decision to take the plunge had more to do with the cultural and biodiversity benefits than with the carbon itself. The Ecosystem Marketplace examines the deal and its significance.

8 February 2008 | “Pre-Bali, no one wanted to touch avoided deforestation,” says Dorjee Sun, CEO of Australian project developer Carbon Conservation. “Now people are starting to recognize AD as the next big thing, and they are looking for ways to participate with an edge.”

On Thursday, Carbon Conservation and Merrill Lynch confirmed that the investment bank will be offering its retail and commercial clients voluntary carbon credits from a massive Indonesian AD project that could yield up to 100 million metric tonnes of offsets over 30 years.

To put this number into context, Ecosystem Marketplace tracked just over 24 million tons of voluntary credits transacted in 2006.

More importantly, says Sun, the project is part of a larger scheme to build Aceh’s economy along what he calls a “Green Paradigm” incorporating not only culture and biodiversity standards attached to the carbon, but also sustainable agriculture.

Coffee and the Economic Ecosystem

The longer-term plan involves new financing mechanisms designed to jump-start the cultivation of sustainable palm oil, coffee, and cocoa, which will then be marketed under the brand name “Aceh Green.” It is this later phase, details of which are still to be announced, that convinced Merrill to take the plunge, according to Abyd Kamali, the bank’s Global Head of Carbon Emissions.

“The overall approach being proposed in Aceh is truly innovative and reflective of the need for forestry, carbon, and softs to be treated as one economic ecosystem,” he said.

Climate Community and Biodiversity

Both the future green commodity project and the current carbon project are centered on 750,000 hectares of the Ulu Masen Ecosystem. (For a detailed examination of the project and the challenges of implementing it, see It’s Not Easy Being Green in Aceh, Indonesia).

Carbon Conservation began developing the project together with Fauna & Flora International and the government of Aceh Province in February, 2007. One year later, on February 6, 2008, the project became the first forest conservation project to achieve Climate Community and Biodiversity (CCB) certification when the Rainforest Alliance SmartWood Program signed off on it.

“I can’t emphasize enough the significance of being approved by SmartWood,” says Sun. “Jeffrey Hayward raked us back and forth over the coals until he was convinced that we could implement the plan as presented, for the money budgeted, and in the time allotted.”

The Economics of Quality

Sun is banking on the idea that the extra money spent on preserving biodiversity and supporting the local economy will pay off in spades when it’s time to get the emission reductions certified – and the resulting certificates sold.

Both he and Karmali say the project wouldn’t have happened without strong local support, and they give credit for that to Aceh Governor Irwandi Yusuf, who Karmali first met in September. “Meeting the Governor of Aceh, as well as the other stakeholders involved in the project, left a strong impression about the collaborative approach that has been employed – and the strong buy-in from all stakeholders on this project,” he says.

Local buy-in, however, wasn’t a foregone conclusion, and the next five years will be critical in maintaining it. That is the time over which the first $48 million will be spent – more than half on economic development in local villages.

“Deforestation isn’t caused by big companies coming in and chopping down trees,” says David Pearse, who is overseeing the land use aspect of the project for Carbon Conservation. “It’s caused by local people having no other source of income than the forests.”

“Aceh still has standing forests because of the war between the Aceh rebels and the Indonesian government,” adds Sun. “Now that they have peace, illegal deforestation has started going rampant. The governor understood the loose structure of carbon credits, and tied it into a moratorium on logging.”

Jostling for Post-Kyoto

Sun says he expects the first tranche sold through Merrill Lynch to bring in $5 to $10 per tonne of CO2 sequestered, which is a slight premium to the price of voluntary allowances trading on the Chicago Climate Exchange.

Over time, however, he believes the social benefits of the project will boost the prices of his credits to a level more in line with those of the compliance market – especially if avoided deforestation becomes a recognized offset vehicle for carbon emissions in a post-Kyoto world.

“If we monitor our vintages right, we will be on the right track for compliance credits, and will be pushing a compliance price,” he says. “In the meantime, people will be looking at prices of carbon under the European Union Allowance (EUA) scheme, and then looking at voluntary methods, and they will realize that projects that can show additional benefits are worth paying extra for.”

The challenge now, of course, is to actually deliver. “This is only the first step,” says Governor Irwandi. “The hard work will be in financing and implementing our proposed project to help preserve the largest remaining bloc of unprotected Sumatran forests.”

Updated: February 11, 2008




Steve Zwick is managing editor of the Ecosystem Marketplace. He may be reached at steve.zwick@gmail.com.


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