The Economics of Forests and Carbon Markets

Feature story - March 30, 2009
Greenpeace has released a report concluding that the inclusion of forest protection measures in international carbon markets would devalue the price of carbon as much as 75%, effectively neutering efforts to tackle global warming. If we are to avoid the worst effects of global warming, we must keep the rise in the global temperature below 2° Celsius. Achieving this goal is contingent on establishing a strong and stable carbon price, which will in turn help drive the development of renewable energy technologies worldwide. The devaluation of carbon credits that would result from the inclusion of relatively abundant forest credits would discourage such investments, according to the report.Aerial view of the rainforest in the Amazon, photographed during a flight from Cuiaba to Alta Floresta in the Brazilian Amazon. The Amazon rainforest is one of the most bio-diverse regions on Earth. More than 5,000 tree species are found here. Deforestation is a huge threat to these forests as farmers clear land to give way to soy fields, cattle farming, and large infrastructure projects. Ancient forest protection is crucial to preserving biodiversity and the global climate. © Greenpeace / Daniel Beltrá

The need to reduce emissions from deforestation and forest degradation in developing countries (known as REDD) has become an increasingly important part of the agenda for the United Nations Framework Convention on Climate Change (UNFCCC) discussions to be held in Copenhagen in December 2009. REDD is an attractive option because it can quickly reduce greenhouse gas emissions in a cost-effective manner, while also protecting biodiversity and the rights of local and indigenous peoples who rely on the world's tropical forests for their livelihood.

The Greenpeace report, "REDD and the effort to limit global warming to 2°C" (summary here), finds that developed countries should make additional "tropical deforestation commitments" in order to finance the protection of forests. Deforestation is responsible for some 20% of global greenhouse gas emissions, according to the report, which was released at the United Nations climate meetings in Bonn, Germany on March 30th. The report warns that the inclusion of forest credits in international carbon markets could lead to developing countries like Brazil, China, and India losing billions of dollars a year for investment in renewable energy technologies.

Key findings of the report

  • Including forest offset credits in the carbon markets would crash the price of carbon up to 75% under currently stated reduction targets and 70% for the reduction target most consistent with the 2°C goal (40% below 1990 emissions levels by 2020). If a lower potential supply of REDD credits is assumed, the price of carbon would still fall by 60%.
  • Under either scenario, REDD credits would significantly reduce investments in clean and renewable technologies in both developed and developing countries. In delaying such investments, REDD credits could cause a "lock in" effect, keeping high-carbon technologies and infrastructures in place for many years to come. The sunken costs associated with carbon-intensive economies could increase the overall costs of mitigation.
  • Including REDD credits in the carbon markets would reduce investments in clean technologies in developing countries, such as China, India, and Brazil, as there would be less demand for credits generated by emission reduction policies in energy and industry sectors. For example, China alone would lose an estimated $10-100 billion per year in clean energy and technology investments.
  • By integrating forest credits in carbon markets, developed countries could significantly overpay for reducing emissions from deforestation, due to the difference between the costs of REDD to developing countries and the international price of carbon. This could come at the expense of additional mitigation opportunities in developing countries.

Greenpeace conclusions and recommendations

World leaders must find a way to provide significant and reliable financing for REDD in addition to making deep emissions reductions in industrialized countries and making ambitious renewable energy and energy efficiency investments in developing countries. Among available financing options, the direct inclusion of forest offset credits in the carbon markets carries the greatest risks to both the climate and the forests. REDD credits could depress and cause major fluctuations to the price of carbon, thereby preventing the investments in clean and renewable technologies needed to keep global temperature rise well below 2°C.

Carbon markets must provide a strong and stable price of carbon to drive the development of clean and renewable technologies and should therefore remain focused on the more easily quantifiable and comparable fossil fuel emissions. A separate mechanism is needed to deal with the complexities and risks associated with REDD.

A successful REDD mechanism cannot be based on the inclusion of REDD offset credits in the carbon markets but should rather have the following characteristics:

  • Contain the goal of ending gross deforestation and associated emissions in all countries by 2020, and achieve zero deforestation in priority areas (such as the Amazon, the Congo Basin, and in Indonesia and the Archipelagos) by 2015.
  • Require national-level reductions in forest emissions in order to avoid the problem of leakage (i.e. deforestation shifting from one area to another), which would inevitably result from project-based (i.e. "subnational") approaches.
  • Allow for the broad participation of countries with tropical forests.
  • Benefit biodiversity protection consistent with international conventions and objectives to avoid perverse incentives and outcomes.
  • Fully respect the rights of indigenous peoples and local communities and provide a forum where their issues may be raised.
  • Ensure that benefits are equitably shared among and within countries.
  • Provide for independent monitoring and verification of activities and results.

Greenpeace has put forward its own proposal for a hybrid market-linked fund mechanism that would meet these requirements, avoid the problems associated with market-offset mechanisms for REDD, and become part of the next phase of the Kyoto Protocol. To learn more about the Greenpeace Forests for Climate (TDERM) approach, please see our "Forests for Climate" report.