Bringing forest carbon projects to the market

1. Bringing forest carbon projects to the market What is the place of forestry in the carbon markets ? What are the trends to anticipate ? How can forest carbon projects be financed and credits sold ? Clément CHENOST Lead author, ONF International June, 2010. Washington

2. Brief presentation of ONFI • ONF International is a subsidiary of the French Forestry Commission (ONF) • 12,5 millions ha of forests (mostly owned) • 15 million m3 of wood sold per year • 11000 people • ONFI consists of around 50 collaborators specialized in various sectors : forestry, climate change, bionenergies, etc. • International negociations, REDD+ strategies and capacity building • CCNUCC & Kyoto Protocol negocations • National REDD+ Strategies of 5-10 countries • MRV • Development of forest carbon projects • 2 validated CDM methodologies • Technical assistance to more than 30 forestry projects (PDD, VCS, CDM, CCBs, etc.) • Financial assistance : carbon credits sale, funds raising

3. Table of contents • Introduction to the guidebook • The place of forestry in the carbon markets • How can forest carbon projects be financed and credits sold ? • Post-2012 signals • Conclusion

4. Introduction to the guidebook • Context : • Weak development of forestry projects in the carbon market despite a tremendous potential to mitigate climate change • Technical and methodological barriers are falling down • Financial barriers remains very important for project developers and investors • Objective : instruct project developers and financial investors on how to develop and bring profitable forest carbon projects to the market (AR, REDD, IFM)

5. Introduction to the guidebook • Part 3 : How can forest carbon projects be financed and credits sold ? • Project cycle overview • Economy and risks associated • Project financing • Standards choice • Definition of credit property • Contracting (ERPA) • Part 1 : The place of forestry in carbon markets • Types of forestry projects • The place of forestry in regulated and voluntary markets • Global overview of 434 forestry carbon projects • Part 2 : What will the post-2012 forestry carbon market look like? • UNFCCC negotiations for REDD+ • EU-ETS and USA-ETS • Other markets • Impacts for market actors • Supported by a survey of 434 forestry projects and 5 case studies

6. Table of contents • Introduction to the guidebook • The place of forestry in the carbon markets • How can forest carbon projects be financed and credits sold ? • Post-2012 signals • Conclusion

7. A slow takeoff under the CDM Source : UNEP CDM pipeline, October 2009 • 1,4 % of projects in the pipeline • No credits (tCER / lCER) issued till now • Limited to AR projects • 0,4 % of registered projects

8. Reasons for exclusion from regulated markets • Limited demand for credits (EU-ETS exclusion) • Delays in definition of modalities and procedures but … Source : ONFI / UNEP • … fast evolution since methodologies are available • 13,4 MtCO2e in the pipeline before 2012

9. Maturation in the Voluntary Markets • In 2008, forestry represented 7 % of credits exchanged in VCM: 5 MtCO2e (36,8 MUS$) • Various reasons, especially environmental & community benefits • +140 % between 2007 and 2008 (essentially due to CCX) but … • … OTC market share in sharp decline : 30 % (2006), 8 % (2007), 7 % (2008)

10. Maturation in the Voluntary Markets • Criticisms towards the integrity of voluntary projects • Higher demand for high quality offset and emergence of standards • Diversification of portfolio with non forestry projects … • … but strong movement towards standardisation of forestry projects Source : ONFI

11. Maturation in the Voluntary Markets • This could reinforce the place of forestry projects in the VCM • Strong demand for forestry credits regulated by a demand for high quality offset • Markets flooding is not observed, even in a « small » voluntary market …

12. Table of contents • Introduction to the guidebook • The place of forestry in the carbon markets • How can forest carbon projects be financed and credits sold ? • Post-2012 signals • Conclusion

13. Financing forest carbon projects • Carbon credits remunerate environmental services provided by forests • Source of revenues (among others assets : wood products, etc.), not a source of funding • Barriers to investment are particulary important : • large up-front investment, • returns on investment after deferred lengths of time, • high risks (technical and political, lack of market visibility, etc.) • Environmental and social benefits reinforce the viability of projects

14. 5 successful case studies • Juma frontier REDD project (590 000 ha) is situated in state of Amazonas in Brazil. It is financed by by the environmental support of Marriott International and pre-paid credits to the hotel’s clients • Ibi Batéké is an afforestation project covering 4,000 ha on the Batéké plateau (DRC). Supported by a private company, Ibi Batéké is principally financed by borrowing and equity • The Magdalena Bajo Commercial reforestation project reforests 4,000 ha of land in Colombia. The project is financed by a consortium of Colombian public bank actors and private forestry enterprises • The restoration project of the Ankeniheny-Zahamena-Mantadia Corridor is a reforestation project that covers 975 hectares. The project is mainly financed by the World Bank which buys a portion of the credits via the BioCarbon Fund. The project also has REDD conservation component, protecting 376,000 ha of native forests. The project is principally supported by Conservation International

15. Three major types of financing • Voluntary offsetting and companie’s environmental support programs : • donations, • payments in advance of carbon credits (debt), • loans at preferential rates, etc. • Direct or indirect (through offsetters, NGOs, etc.) • Public funding : • subventions, • payments in advance of carbon credits, • loans at preferential rates, • guarantee funds to reduce risks, etc. • Limited access to the « usual » finance but very fast growing interest of investors due to positive market signals • These different types of financing can be combined

16. Table of contents • Introduction to the guidebook • The place of forestry in the carbon markets • How can forest carbon projects be financed and credits sold ? • Post-2012 signals • Conclusion

17. Post-2012 market signals • A re-integration into the post-Kyoto framework ? Under what modalities ? • Regional markets: • NZ-ETS • US-ETS ? • EU-ETS ? • AUS-ETS ? • JAP-ETS ? • These evolutions could greatly impact forest carbon finance

18. Table of contents • Introduction to the guidebook • The place of forestry in the carbon markets • How can forest carbon projects be financed and credits sold ? • Post-2012 signals • Conclusion

19. Conclusion • While forestry projects have long been on the back-burner of climate change mitigation strategies, they can now take advantage of new opportunities • After a slow start in the CDM market by forestry projects, there is now a groundswell of movement in AR • Although financial obstacles remain, the voluntary markets enables the development of innovative forestry projects especially those that are exemplary in terms of environmental and social development co-benefits. Moreover, the quality of voluntary emission reductions can now be readily guaranteed by numerous accepted standards

20. Conclusion • Some of them propose effective alternatives in difficult institutional contexts and may serve as role models for the rest of the market • More global projects (such as REDD) are already supported by "pilot" mechanisms such as BioCarbon Fund, CBFF, the CASCADe program (UNEP, FFEM) or UN-REDD • A possible opening of the carbon market to post-Kyoto credits enabling REDD and other forestry sectors not currently supported would drastically change the carbon forest market landscape, stimulating investment and induce maturation in this still nascent market

21. Additional information Guidebook available in three languages (English, French, Spanish): www.unep.fr/energy/activities/forest_carbon Contact ONF International Clément Chenost : clement.chenost@onf.fr www.onfinternational.org