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Harnessing markets to save tropical forests

Reducing deforestation can best be achieved by combining jurisdictional forest conservation with the power of markets. Read More

(Updated on September 10, 2024)
Source: Shutterstock

This article is sponsored by Environmental Defense Fund.

If tropical forests, mangroves and peatlands were effectively managed, protected and restored, they could absorb more greenhouse gases each year than the United States emits. Unfortunately, we are currently moving in the opposite direction: If tropical deforestation were a country, it would rank fourth in global emissions.

To change this trajectory, the world needs to reverse current economic incentives, so that forests are worth more alive than dead. Part of the solution rests in financing conservation through carbon markets. However, the Voluntary Carbon Market (VCM), where international forestry credits are sold, shrank in volume for the second straight year amidst concerns about the integrity of the most popular credits. Media scrutiny has highlighted the tendency of some project-scale approaches to conservation to merely shift deforestation from one area to another. Smaller projects are also prone to overstating their climate impact by protecting areas at low risk of deforestation or by comparing their results to “cherry-picked” reference areas. Additionally, critics argue that some project developers, in their rush for profits,  sideline local communities and Indigenous Peoples who are the true stewards of the forest.

Viable forest conservation programs

This scrutiny of carbon projects is not cause for alarm but a sign of a healthy system. The question should not be whether we need a functioning market to finance forest conservation, but how do we get this right, as forests have no other business plans.  Fortunately, the private sector, government and civil society are rallying behind jurisdictional forest conservation programs (JREDD+) that reduce deforestation across entire countries and states as a viable alternative.

JREDD+ addresses many of the structural issues of smaller projects. Halting deforestation requires regulatory reform, incentives for landowners and industry, alternative models for sustainable development, and the active participation of Indigenous Peoples and local communities—all activities best delivered by governments. The size of jurisdictional programs also reduces the risk that deforestation will simply move elsewhere. Moreover, reference levels to measure performance are set at a national or sub-national level, ensuring that credits are generated only when entire jurisdictions reduce deforestation.

Policymakers are also stepping up. In May, the Biden-Harris administration announced new principles to restore confidence in the VCM. The US Commodity Futures Trading Commission is finalizing its guidance on carbon credits, with a rulebook expected by the end of the year, and the Securities & Exchange Commission is proposing requirements for companies to disclose climate-related risks for the first time, including the use of carbon credits.

Tropical forest governments are rising to the occasion, with more than 300 million metric tons of jurisdictional forest carbon credits in the pipeline through 2030—more than the annual emissions of California and New York combined and six times the annual size of the project-based market. However, integrity concerns in the VCM have led to prices collapsing, risking spillover and putting the viability of jurisdictional conservation programs at risk.

High-quality carbon credits

The priority for any company should be to reduce its own emissions. However, given existing technology gaps and the high consequences of inaction, companies should be incentivized to use high-quality carbon credits to abate emission in their value chains, also known as Scope 3 emissions. Over 3,300 companies have a clearly defined path to net zero in line with Paris Agreement goals. Governance initiatives should provide clear incentives to companies to leverage high-quality carbon credits to meet their climate commitments when cost-effective mitigation measures are not otherwise available. Failure to do so may be keeping billions of dollars on the sidelines.

Clear markers of quality are critical to attract private investment, which needs confidence that one ton of CO2 purchased equates to one ton of CO2 avoided in the atmosphere. Governance initiatives following science-based principles for identifying high-quality carbon credits are leading the way and private rating agencies are filling critical data gaps—highlighting the quality of jurisdictional-scale approaches and increasing buyer confidence.

Leading companies are beginning to follow suit, with up to $60 million committed to Ghana and Costa Rica for emission reduction credits late last year, via the LEAF Coalition and other similar deals are expected to be announced soon in Brazil and Asia. More companies need to join in and invest today in jurisdictional credits at prices sustainable for tropical forest nations.

Scaling up conservation through compliance-driven markets

While voluntary markets receive most of the press, compliance markets—through carbon taxes or cap-and-trade schemes—cover 30 percent of global emissions and have a traded value of nearly $1 trillion, dwarfing the $1 billion size of the VCM. And these markets work. Studies show “consistent evidence that carbon pricing policies have caused emissions reductions.”

However, most schemes do not allow the use of international credits due to protectionism and prior challenges in measuring climate impact. If the world is serious about keeping tropical forests intact, the power of markets must be leveraged. As U.S. Treasury Secretary Janet Yellen stated, “High-integrity VCMs offer significant potential economic and climate opportunities. They can enable buyers to source cost-effective credits from different technologies, ecosystems and geographies. And they can channel capital towards the most effective climate solutions.”

International aviation andSingapore’s carbon tax program are already leading the way and expanding their markets to include JREDD+. These examples show that allowing international credits can add to industry-wide and domestic ambitions, not replace them. More countries should adopt similar measures.

In 2021, more than 140 countries pledged to halt deforestation by 2030 to avoid the worst impacts of climate change. We are not on track. While debates persist over the shortcomings of the VCM, nearly 4 million hectares of primary tropical forest were lost last year—over 13 football fields a minute. Embracing the potential of jurisdictional forest conservation and the power of markets offeran opportunity to change course before it is too late.

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