EDF and Partners Develop REDD+ Options Market and Risk-Reduction Tools

Why has Norway supported this project?

To address climate change it is essential to have a viable finance structure, which allows private sector demand for emissions reductions to meet compliance obligations.

While a global market for forest carbon remains in the future, many smaller markets are under development. As these carbon markets are being established, uncertainty over future policies holds back demand and supply, which in turn slows the regulatory progress.

To channel private capital to help limit deforestation and enable other cost-effective emission reductions during this transition period, the uncertain policy environment and resulting financing gap must be addressed using different private/public finance tools and risk-reduction approaches.

The project received funding as it aimed to design, communicate and demonstrate risk-reduction approaches, particularly REDD+ options (the right but not the obligation to buy/sell credits) and complementary tools, to deliver private finance for high quality results-based REDD+ programs during the transition period towards carbon markets for REDD+.

In this way, the project will encourage private buyers to purchase REDD+ credits/options; public and other funders to strategically support these purchases; and policymakers in major REDD+ jurisdictions (as well as in jurisdictions designing carbon market systems) to codify the frameworks and standards for developing, transacting, and accepting such credits for compliance purposes.

Linking high-quality carbon credits for REDD+ to compliance carbon markets would play a central role in combating tropical deforestation by unlocking private capital to protect the world’s major tropical forests and the carbon they contain.

Results

Norad’s assessment is that EDF has partly achieved the results structured around the project’s four outcomes.

The first outcome had been that potential buyers of REDD+ credits, including private companies, investors and financial institutions gain confidence, show interest and invest in REDD+ options as an immediate pathway to manage their carbon price risks through an options approach.

Norad assesses this outcome to be partly achieved as EDF has, together with its partners, analyzed, designed, and began to demonstrate private/public finance approaches to catalyze pre-compliance purchases of REDD+ credits and options. EDF reports that this effort has helped develop a private investment pathway for providing critical “bridge” financing for forest protection and accelerate policy acceptance of REDD+ within emerging carbon markets. EDF argues that the project has helped build support among business and other stakeholders for market-based jurisdictional REDD+ and private/public interim finance approaches based on options and complementary risk-reduction approaches.

This support is evidenced by negotiations on private jurisdictional REDD+ transactions between a private sector actor and Acre state, as well as by the development of a proposed “REDD+ Acceleration Fund” (RAF). The fund would combine corporate pre-compliance capital, mission-driven equity, philanthropic investment, and public capital to unlock financing for compliance-grade REDD+ credits for prospective use in emerging compliance carbon markets in California and elsewhere.

The proposal created by EDF, project partners and a mission-oriented investment firm, has generated formal expressions of interest from potential investors and is starting to signal that the market is moving from a strictly voluntary basis to more specified compliance standards. An actual transaction was not concluded within the originally anticipated time frame, and it is still uncertain if the RAF will be used to by private buyers to invest in REDD+ credits.

However, Norad found that the project demonstrated an interest in a broader vehicle that would provide a more systemic solution with potential to deliver finance on a larger scale to a wider range of programs. The RAF has a potential to contribute to the achievement of outcome 1 in the future, but at the closure of this project, it has not lead to investments in REDD+ options.

The second outcome has been that Governments and key REDD+ stakeholders in tropical countries (Brazil, Indonesia, Mexico) gain confidence to continue developing high-quality REDD+ credits as they begin to receive funds from sales of REDD+ options and acquire other tools to reduce risks of program development.

Norad assesses this outcome to have been partly achieved as international public finance has demonstrated the potential for jurisdictional REDD+ credit transactions that can provide resources to domestic actors on a payment for performance basis, despite the lack of private market demand. Combined with domestic resources, international public donor funds have enabled progress in terms of REDD+ jurisdictional program development.

EDF reports to have seen a shift relative to the baseline of no jurisdictional REDD+ transactions, as Acre and other jurisdictions have started to receive funding for jurisdictional REDD+ and gained confidence to continued developing REDD+ programs and propose more ambitious reductions, contingent on adequate finance in the future.

The EDF project team reports to have helped produce this shift by: (1) helping jurisdictions acquire tools to manage risks of program design and implementation as part of the VCS and FCPF Carbon Fund standards, (2) providing other analyses to inform jurisdictional program design, and (3) helping jurisdictions identify emerging private market opportunities.

The third outcome has been that a community of practice develops among academic and technical experts, and they become engaged in research to design and further develop a market for options on REDD+ and complementary financial and risk-management instruments to scale up REDD+ demand and supply beyond the contribution of the project team at the end of the 3-year project period.

Norad assesses this outcome to have been partly achieved as EDF reports that the analyses developed under this project provide foundation of technical understanding and have helped a community of practice to grow among academic and technical experts to design and further develop a market for options on REDD+ and complementary financial and risk-management instruments.

While engaging with technical experts, the project team reports to have helped support the development of high-quality jurisdictional REDD+ programs by providing tools to enhance program effectiveness and manage risks of program performance. In particular, the project developed and provided jurisdictions with more streamlined tools to manage risks of leakage, measurement uncertainty and reversals in jurisdictional program design and implementation, thus helping jurisdictions to proceed with crediting emissions reductions under the juristictional REDD+ crediting framework under the Verified Carbon Standard and the FCPF Carbon Fund Methodological Framework.

The fourth outcome has been that policymakers and regulators in developed and developing countries gain confidence and participate in the development of REDD+ crediting approaches and adopt regulations authorizing REDD+ use for compliance at the international, national and state levels based upon jurisdictionscale approaches that ensure high environmental quality and equitable benefit allocation among stakeholders so REDD+ regimes meet environmental and development goals.

Norads assesses this outcome to have been partly achieved. Existing compliance carbon markets remain closed to REDD+ credits, and there are no jurisdiction-scale credits currently validated by a recognized standard. Nevertheless, since 2013, there has been a significant shift relative to the baseline as policymakers have gained sufficient confidence in jurisdictional REDD+ to move towards incorporating high-quality REDD+ credits within compliance carbon markets in California, under the UNFCCC and international civil aviation.

In particular, there has been major progress in the UNFCCC in adopting a framework for jurisdictional REDD+, inclusive of market finance, under the Warsaw Framework of 2013 and the Paris Agreement of 2015. Furthermore, while overall demand for carbon credits remains low, there have been important increases in ambition in California and the international civil aviation sector under ICAO, as well as at the international level under the UNFCCC.

The Paris Agreement marked a potentially game-changing development that could spur a dynamic of increasing adoption of carbon markets domestically and internationally and increasing ambition of climate policies to achieve long-term goals, increasing demand for REDD+ and other emissions reductions over time. EDF reports convincingly that its policy outreach has helped build support for the inclusion of REDD+ within carbon markets in California, ICAO and in the UNFCCC.