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Another COP has come and gone. As usual, the atmosphere at COP27 was hopeful, but also not very concrete. The slogan for this year’s COP Together for Implementation, fell short. After COP26, the private sector was clapping its hands at clarity on Article 6 of the Paris Agreement, where the rules for bilateral emissions exchange transactions were spelled out. However, after a year of operating under the new rules, the Private sector is as confused as ever.
It’s difficult not to be a sceptic on this process. Could it be improved, absolutely. Is it better than nothing, you bet. In this latest article, I give a few examples of some of the positive things to come out of COP from the forestry side of things. I shed some more light on the Article 6 debacle and give some pointers for private investment in the tropics wanting to access carbon markets in the absence of clarity.
COP27 – The Good Stuff
COP is generally about rousing excitement and gaining momentum for the hard work that must happen behind the scenes in the year following a COP decision. It’s a place for negotiating sovereign responsibility towards addressing the global climate crisis. It has also become a place for private sector and civil society organizations to announce their own contributions to climate change mitigation and adaptation. Here are a few of the positive outcomes for forests from both the public and private sectors.
- Forest and Climate Leaders Partnership: In what has been called a boost for sustainable forest management, 26 countries and the EU launch the FCLP, which unites government, business and community leaders in a commitment to act in halting and reversing forest loss and degradation by 2030. Related to the private sector, commitments include: shifting the private finance system, and strengthening and scaling carbon markets for forests (UK Gov),
- Lowering Emissions by Accelerating Forest finance Coalition: Not a new initiative, but at COP27, LEAF, increased private sector financial commitments to purchasing high-integrity emission reductions credits from forest nations to over $1.5Bn (100% increase from private sector since COP26). LEAF pools funding from large corporations to protect these forests, and this year, Volkswagen Group and H&M join the team. Ecuador becomes the first country to commit to a binding Emissions Reduction Payment Agreement to be signed by end of April 2023 (Reuters),
- SouthBridge Group’ $2Bn fund: The Africa-based financial services firm, SouthBridge launches a $2Bn fund, together with the Arab Bank for Economic Development in Africa, to finance locally led restoration and reforestation projects in Africa. The fund blends $500M of concessional finance with $1.5Bn private investment, channeling patient capital to local restoration. The Fund implements its Vumbuzi investment structure across Africa in alignment with AFR100, Great Green Wall and other partnerships. A grant from the Bezos Earth Fund helped design the structure,
- The EU Forest Partnerships – The EU Commission signed Memoranda of Understanding with 5 developing forest countries: Guyana, Mongolia, the Republic of Congo, Uganda and Zambia. Through these partnerships, the EU agrees to “support our partners in sustainably managing and preserving forests”. Related to the private sector, these partnerships aim to enhance the business environment, stimulating the forest bio-economy through sustainable forest-related value chains and market access, and look for ways to facilitate production of and trade in legal and sustainable forest products. It is unclear exactly what this will look like, and how this support will be accessed. If it indeed will support a profitable and resilient private sector.
Zero Clarity on Article 6 in Practice
After Glasgow, participants in the Voluntary Carbon Market (VCM), and nations wanting to engage in bilateral emissions trading were excited on some clarity around Article 6 of the Paris Agreement, which spelled out how these emissions transactions could take place, and how the private sector could become involved (see my article from last year on the breakdown of Article 6). However, forest carbon project developers, investors wishing to access the VCM, and off-setters wishing to abate their emissions spent the last year assessing the risks, and waiting to see how nations would set up the legal framework and a ledger for carbon tenure around these rules.
If you were waiting for COP27 to create more clarity on this, you’re probably disappointed.
In the final hours of the conference, a draft text was released explaining how countries’ carbon registries might interact with the VCM – however, the technical steps on how to materialize this are being left to some future date in 2023 (Reuters, Business Today).
An alarming (if you ask me) development to come out of Sharm el-Sheikh, is the possibility of a second-tier market for carbon emissions trading, called Mitigation Contributions. This system would actually allow for the same emission reductions to be accounted for twice. Now, I’m all for a financial mechanism that allows for capital flow into forest geographies that would otherwise be un-investable, as a kick-start to their development, but this has red flags all over it. Under the Mitigation Contributions framework, both the host country where the emission avoidance/removal project is located AND the company paying for it could claim the same emission reduction (Climate Change News). Integrity people, come on! The VCM has enough challenges proving to its critics that this is not greenwashing, allowing companies to buy their way out of emissions reductions in their own business. In my view, this proposal is only going to add fuel to that fire and create more problems – not solutions.
What to do in the Absence of Clear COP27 Outcomes for Private Forestry
One of the undeniable benefits of forest investments in the tropics are their contributions to climate change mitigation and adaptation in vulnerable landscapes. Financial recognition of this value is being seen through voluntary carbon markets. However, some still see the risks in how governments will track carbon accounting of private sector emission removals or avoidance projects as grounds for holding off. Sitting on your hands and waiting until a decision is made at the national level for a country you are investing in is not the solution. You need to be proactive about getting the certainty you need. In the absence of legislation which dictates carbon tenure, you can still generate (and track) the climate benefits of your investment. In most cases, this uncertainty is not stopping voluntary carbon markets – neither on the supply or demand side.
However, if you’re wanting to hold off on carbon markets for now, here are some things you can do:
- Get active in the government – become a regular friendly face with the government agency(ies) responsible for the country’s Paris Agreement commitments (this might not be the same agency you work with for your regular forestry engagements). Join forest carbon working group discussions if they exist, and if not – start one. Work towards a partnership model with the government, exploring topics such as revenue sharing for carbon credits, or a splitting of the emission removals/avoidance itself. In the absence of legislation, an agreement with the government is second best (in some cases, maybe even better).
- Acquire carbon certification – maybe you already have it, or are hesitantly considering it. The fact remains that the eventual sale of carbon credits requires a lengthy development process, in the realm of about 2 years for development, and if your certification is related to afforestation/reforestation as opposed to a REDD+ avoidance approach, it will take another 3-5 years for the trees to grow before you can start issuing credits. By laying the groundwork for participating in voluntary carbon markets – you will be ready when the rules around carbon tenure come into place.
- Look Up! – are you operating in any of the sectors or geographies identified above in this year’s COP commitments? Do some digging and see if there is an opportunity to partner with any of these initiatives.
- Financial viability from traditional markets – It is risky to base a forest investment strategy on carbon market return drivers alone. I hope this goes without saying, but your forest investment strategy should focus on traditional wood markets – timber, poles, panels, biomass, etc. Forest investment strategies that are based on reforestation projects of native species or conservation projects, only to be monetized through the sale of carbon credits are risky. For one, because of the uncertainty mentioned in the market, but for two – the long-term viability or permanence of the project (what will happen if carbon funding runs dry).
Strategic support for your Climate-Positive Forest Investment Mandate
If you are unclear on how to integrate voluntary carbon markets into your forest investment strategy in light of uncertainty on how your investment’s host countries will address carbon tenure, please reach out. The important thing is to move forward, and not wait for the excessively slow political process to crystalize, or you may miss an important value generating opportunity.