Innovative financing can incentivize conservation and the sustainable use of forests. While the term ‘innovation’ often conjures up images of technological breakthroughs, it encompasses much more. At its core, innovation involves tackling problems from a new, unique standpoint. On this year’s International Day of Forests, read about a new approach to address the issue that is currently undermining efforts to save our world’s forests.
The challenge: low carbon prices continue to impede conservation and sustainable use of forest ecosystems
The continued depletion of the world’s forests highlights a critical flaw in the economics underpinning forest conservation. The persistent issue is a misalignment of economic and financial incentives: in the simplest terms, there is more money to be made by cutting down forests than by keeping them standing.
The value of conserving forest ecosystems for climate mitigation purposes is well known. When forests are cut down, a significant amount of carbon is released. Because of this, the international community has devised a financial mechanism to reward forest countries to reduce or halt deforestation. The metric used is tonnes of carbon. True, there is much more to forests than just the carbon contained in them, but there are ways to reflect this non-carbon value in the final price of payments.
The problem, however, is that the volume of payments and the price being paid are way too low to meet the Paris Agreement goal of limiting global temperature rise to below 1.5°C. The former is a fraction of what is needed, while the latter does not even come close to the cost of maintaining forests in developing countries, experts assess in a newly launched report on pricing forest carbon. Among other financial instruments, voluntary carbon markets can help solve this problem, provided they can ensure the social, environmental and accounting integrity of emission reductions.
A way forward: innovative financing could incentivize forests as a land use
The United Nations Environment Programme (UNEP) is working with countries to ensure that payments for forests, be those from the development community or from carbon markets, reflect the true value of forest ecosystems and provide a meaningful funding flow to developing countries.
Reducing Emissions from Deforestation and Forest Degradation (REDD+) can be a cost-effective strategy for halting deforestation and sequestering carbon. But, for that to happen, prices need to reflect the true value of forests, effort needed to maintain them and other economic opportunities that are forfeited. According to a report published by UN-REDD, forest carbon prices should rapidly climb to US$30-US$50 per ton of carbon dioxide equivalent to have impact. Currently, they are at or below US$10 per ton of carbon dioxide equivalent, which is by any measure, way less than it costs to maintain forests.
Paying US$30-US$50 to reduce a tonne of carbon dioxide emissions is also a very good deal for the international community, experts say. The abatement costs in the non-nature sector of the global economy is on average double that. It is not only cost-efficient, but also time efficient. Forests are also the sector with the greatest capacity to scale up mitigation in the short term.
In terms of innovation, there are additional options to explore. The report highlights the potential for "put options", which give countries the right, but not the obligation, to sell emission reductions at a pre-determined price within a specified period. Such put options for REDD+ can significantly leverage private investment, allowing for the recycling of public funds to attract further private capital. In REDD+ contexts, the set price of a put option ensures a guaranteed income stream for the REDD+ provider, conditional on achieving emission reductions.
The reverse of put options, known as “call options," also offers an innovative way to facilitate funding flows to developing countries. Call options enable upfront payments while preserving the chance to secure higher prices for emission reductions in the future. With a call option, a jurisdiction commits to sell emission reductions at an agreed-upon price if the option is exercised by the buyer. This arrangement protects the jurisdiction from extremely low emission reduction prices and, if combined with upfront payments, can give countries early funding to support the needed actions. If market prices fall below the pre-agreed price and the option expires, the jurisdiction retains the emission reductions, with the option to sell them later at higher rates.
The adoption of such innovative financial mechanisms can significantly increase the leverage of public funds to mobilize private finance and grow the supply of emissions reductions on REDD+. The adopted mechanisms can unlock substantial funding for scaled-up forest ambition and action that is much needed in the next round of Nationally Determined Contributions.
Download the report Pricing Forest Carbon.
