An exploratory study on forest carbon markets in Asia

Abstract

Based on expert interviews and a structured survey with over 50 experts and industry leaders, this research provides a snapshot of forest carbon market development in Asia and offers future perspectives of challenges and opportunities. This study suggests that the carbon market is in the first generation of rigorous forest carbon standards programs. Those surveyed reflected a guardedly optimistic view that these markets will continue to be one of the solutions to address climate change. Interest in forest carbon projects was highest for “Reducing Emissions from Deforestation and Degradation” (REDD) and for afforestation/reforestation project types. The resonance of biodiversity conservation and community development associated with forest carbon offset projects remains attractive. Compared with other types of carbon credits, those from forest carbon are generally considered rich in co-benefits. The higher social and biodiversity benefits should therefore continue to be favored by companies (e.g. those with corporate social responsibility programs) and individuals in the voluntary market. With respect to quality of carbon credits, the quality brought about through co-benefits from the projects were the highest-rated concern factors, although the project developer experience with carbon projects was also close to the top. Additionality, leakage, permanence, baselines, monitoring and verification are all cornerstones of the quality of forest carbon credits and should have direct impacts on the market price of carbon credits.

Keywords:

• forest carbon
• market survey
• Asia

Introduction

Human activities have increased the atmospheric concentrations of greenhouse gases (GHG), including carbon dioxide (CO₂), primarily through the combustion of fossil fuels, agricultural production and land-use change. In the carbon cycle, forests help to slow down the build-up of atmospheric CO₂ by absorbing GHG, thereby mitigating climate change. Specifically, forests use CO₂ to synthesize the organic molecules that are stored in trees and thereafter in organic soil matter and dead leaves (Stern 2007).

Forest carbon credits and offset projects were created in this context. Compared with other types of carbon credits, forest-based offsets are unique with the potential to produce significant environmental and social values as co-benefits. As a relatively new type of environmental (or “payment for environmental service” [PES]) market, carbon markets operate in a similar way to those for most other traded commodities – there are global markets, with different prices depending on the marketplace, market requirements, and different trading traditions and systems, etc. In addition, there is discussion of differentiation in the market through the quality along the carbon creation chain of projects where positive attributes associated with conservation are factored into the marketing, sale, and, hopefully, price of the carbon (Gorte and Ramseur 2008).

However, expanding the market for forest carbon credits will be difficult unless challenges such as leakage, additionality, tenure insecurity, high transaction costs, political instability, and a lack of institutional capacity are addressed. Meanwhile, substantial funds are needed to offset current policy and economic incentives driving deforestation and to deliver benefits to local forest-dependent communities (Estrada et al. 2008). These constraints are further compounded by the current global economic downturn, which has led to falling demands and significant price drops in the global carbon markets over the past few years (Peters-Stanley et al. 2011).

Therefore, this study was developed with an aim to understand future challenges and opportunities in Asian forest carbon markets as perceived by industry leaders and experts.

Survey results

In order to gain further insights into the dynamics, complex and evolving, for forest carbon finance, project development, and carbon markets, we conducted a survey between January and March 2009 from a diverse range of practitioners, investors, fund managers, wholesalers, and developers. Our objective was to generate shared perspectives of the individual firms, investors, project wholesalers, and retailers who are involved in forest carbon on a global basis, and to analyze their tendencies and motivations or risks and concerns related to investing in forest carbon, generally, and for projects in Asia, more specifically.

Fifty-one experts and industry leaders who are active in the forest carbon market were contacted for their participation in this survey. They included carbon project developers, funders, standards development organizations, and environmental groups. As of 27 March 2009, 22 people participated in this survey, of which 20 people provided their feedback through phone interviews and 17 took the online survey.

Respondent profile

Respondents represented a mix of project developers (12), project investors (6), brokers (5), wholesalers/aggregators (4), carbon standards organizations (2), and one retailer. Many self-identify as taking on more than one role in the forest carbon “supply chain”. This was illustrated by the fact that over 90% of respondents indicated that they were involved in project development. Respondents were involved in a variety of forest-based offset projects, led by Reforestation (14) and “Reducing Emissions from Deforestation and Degradation” (REDD) (12). Notable, too, was the involvement in projects based on sustainable (or improved) forest management (9) and afforestation (8) of prior crop and agricultural lands. Despite the relative newness of this market and of the prominence of forestry project types, half of the respondents had more than 5 years of experience in the carbon market.

Factors impacting forest carbon markets

Quality of credits

From a buyer's perspective, particularly for those looking to purchase carbon credits in the marketplace, the quality of forest carbon offsets stands out as the most important factor. Most respondents interviewed emphasized designing and implementing “high quality” or rigorous projects to ensure future marketability of carbon credits generated as the key principles for developing and selecting projects (Figure 1).

Figure 1. Forest carbon project selection criteria.

Co-benefits

Compared with other types of carbon projects such as methane or HFC destruction, forest carbon projects have a greater potential to generate benefits beyond greenhouse gas emissions mitigation: through these projects, biodiversity is conserved, livelihoods are secured for many of the world's poorer people, and other ecosystem services, such as water regulation, are protected.

Survey respondents suggested that the stories of offset projects with long-term social and environmental benefits beyond just carbon sequestration are attractive to voluntary market buyers; in particular, they identified them as being of value to corporate leaders with corporate social responsibility (CSR) commitments.

Willingness to pay

Of all respondents who were asked whether or not buyers are willing to pay more for projects with potential co-benefits, 60% respondents said that they were likely to or absolutely were. When questioned more deeply in the phone interviews, some respondents tended to draw a line between VER and CER buyers, by arguing that buyers in compliance markets do not seem to weigh co-benefits seriously as an important project selection criterion. Instead, in compliance markets the credibility of the accounting for the GHG offset is of overwhelming importance.

As one respondent put “[willingness to pay] depends on what buyers want. They may be buying for philanthropic reasons and more concerned with livelihoods or poverty-reduction or biodiversity benefits than the robustness of the carbon measurements (not to imply that there is always a trade-off). Also, those buyers who want credits most likely to create such [co-]benefits, have little option but to take VERs, since the CDM has not worked for forestry.” This respondent's criteria for purchasing from a project were: (1) Is the project certified to a standard? (2) Is the project additional? (3) Does it have measures to ensure permanence? (4) Does it have additional benefits? We found respondents shared the perspective that “many buyers are looking for a story to tell, so projects with a human face or strong biodiversity element are likely to be more competitive.”

The cost/price

The cost of developing and implementing forest carbon projects includes the cost of providing information about carbon benefits to potential buyers (such as costs of establishing additionality; measuring carbon benefits; auditing, verifying, and marketing projects); costs of communicating with project partners (identifying and negotiating with project participants; building capacity); and costs of ensuring parties fulfill their contracted obligations (such as contract development and enforcement; legal costs and insurance) (Williams et al. 2005).

For most experts interviewed, the cost of validation and verification is a big concern. As one respondent put it, existing carbon standards and use of third-party verification would be too costly to be worthwhile for any project until the carbon is valued at over $12/ton. The respondent suggested that verification is currently only financially viable for projects that are over 30,000 tons in size – that costs associated with the verification of projects under that size are unsustainable. The respondent recommended that standards be made straightforward and enable small landholders to get validated and verified at a reasonable cost (under $10,000). Interestingly, the respondent would concede a conservative monitoring process to achieve what he considers to be a more reasonable verification system.

Other factors

Risk is one of the key challenges that forestry carbon project developers and investors are facing. The risk of non-delivery (called by at least one respondent a catch-all for all other kinds of risk) and political risk are the most-cited concerns of the respondents interviewed.

Respondents also indicated that when they evaluate potential projects they consider the following: (1) the availability of in-country partners with capacity to mobilize stakeholders and get work done on the ground; (2) local government commitment to forest conservation; and (3) the existence of sufficient finance for project development and implementation.

The impact of the global economic downturn on forest carbon markets

Regarding the impact of the global economic downturn on forest carbon markets, in general, respondents were divided into two camps. Most respondents foresee reduced investment in carbon projects, particularly those for forest offset projects, but only a few believe that economic crisis will stimulate the growth of forestry carbon projects as a low-cost alternative to other types of carbon projects. They still hope that despite the grim outlook of the compliance markets, voluntary markets have the potential to grow driven by CSR movements as more and more companies are working to voluntarily reduce their carbon footprint through internal emissions reductions supplemented with offset purchases; such demand from the USA may grow substantially in the coming years.

Overall, forestry projects are facing an increasing financial challenge, but this does not mean there is no funding opportunity. As one respondent pointed out, “ …  even though the compliance markets are showing signs of accepting REDD, it will be some years before there is a structure in place, and the CDM continues not to work for A/R. Therefore, the value of innovative and sustainable approaches being developed continues to be very high, and there appear to be reasonable funding opportunities especially for pilot REDD projects.”

Conclusions

The overall opportunity for forest communities to actively participate in forest-related carbon offset or carbon credit projects is growing every day. However, the forest offset market is extremely dynamic – it is not a mature market just yet.

Based on the research implemented through this project, it is clear that we are in the process of participating in the first generation of rigorous forest offset programs. Though some forest carbon offset initiatives started as far back as the late 1980s and early 1990s, the vast majority have been developed only over the past couple of years. Only in the last two years have more rigorous, inclusive global standards been put in place that both respond to the broad challenge of climate change and forests, and address the dynamics of both voluntary and regulatory forest carbon markets. These standards will continue to evolve and hopefully improve.

Currently, most of the action on forest carbon is in the voluntary carbon market. However, as has been lampooned in various publications, “cowboy carbon” (carbon projects that have not been rigorously designed) is present in the voluntary marketplace and carbon investors and project developers must take clear steps to ensure that the projects it develops or gets involved with are designed and implemented to the highest technical, financial, social, and environmental standards.

In all, forest carbon markets represent a highly innovative, fluid or dynamic new financing mechanism for promoting sustainable forestry practices in Asia. Forest offsets are popular mainly because of their “co-benefits” in terms of forest conservation, wildlife conservation, support to local communities and indigenous groups, etc. Keeping track of these co-benefits through an aggressive monitoring and evaluation system (including both quantitative and qualitative information) and an effective communications approach that captures and articulates for public consumption the “good stories” should provide additional advantages to forest carbon projects and credits compared with other types of credits in the marketplace.

Acknowledgements

This research was partially supported by a Korea Forest Service research grant (No. S210911L010100). The authors also wish to thank forestry experts and researchers working at the Rainforest Alliance, University of Washington's School of Forest Resources, as well as two anonymous reviewers, who provided valuable input and suggestions for improving the quality of this manuscript.