May 6 (Bloomberg) -- The world’s forests may spur financial rewards and risk management opportunities as a way to curb climate change, according to the United Nations.
Tropical forests are disappearing at a rate of about 13 million hectares (32 million acres) each year, or an area the size of Greece, which is equivalent to the release of six billion metric tons of carbon dioxide into the air, according to a UN Environment Program report published today. That’s about 3.6 times the emissions of power stations and factories under the European Union cap-and-trade program last year.
Financing tree projects that create carbon credits can be profitable, reduce risk portfolio diversification, and cheapen compliance costs for emitters, the UNEP said in the report entitled “Reddy Set Grow,” in a reference to Reducing Emissions from Deforestation and Degradation, or REDD. The document outlines the role of banks, insurers and investors in forestry carbon markets. Trees absorb carbon dioxide for growth and release it when they rot or burn.
BNP Paribas SA and Wildlife Works Carbon LLC said Sept. 21 they plan to develop credits from REDD projects in Africa. BNP Paribas committed as much as $50 million of finance for such activities.
‘Almost Infinite Value’
“The asset that REDD seeks to monetize, no one questions that value,” Christian Del Valle, director of environmental markets and forestry at Paris-based BNP Paribas, said today at a meeting in London. “You have an asset that has an almost infinite value, but the price doesn’t reflect that,” he said. The projects appear like a “very undervalued asset, like a distressed asset.”
South Africa’s Nedbank Group Ltd. received on Feb. 8 credits for its initial funding of Wildlife Works’ Kasigau Corridor project in Kenya, which protects 500,000 acres of forest over a migration route in the Tsavo National Parks. Those credits were the first of their kind.
Credits from planting trees account for only 1 percent of the UN’s Clean Development Mechanism, a program that accredits emissions cutting projects with tradable certificates for use by companies and nations to comply with limits. That compares to forestry projects making up as much as 24 percent of voluntary markets, according to the report.
Most of the world’s forests are in developing nations. The forest-related carbon market was worth $37 million in 2008, or 0.03 percent of total emission markets, data in the report show.
The risks of these kinds of investments is “almost like emerging markets squared,” Abyd Karmali, managing director and global head of carbon markets at Bank of America Merrill Lynch, said at the meeting. They can be managed through structured products, he said.
Companies that choose to offset emissions rather than being forced to under climate laws can use credits from the so-called voluntary market. Quality standards can be attached to the credits to assure they are credible.
The use of forests as a tool for an international agreement to fight climate change has been mulled for two decades. Credits linked to deforestation, rather than tree planting, were excluded from the 1997 Kyoto Protocol as a way for countries to meet climate targets. They aren’t covered in Europe’s program.
International talks held last year in Cancun, Mexico, considered ways of creating carbon forestry credits, which may be part of a new climate treaty. About 200 nations will meet in Durban, South Africa, in December to carve out a role for forests as a means of emissions reduction.
Brazil, Indonesia, Nigeria and the Democratic Republic of Congo may be the top producers of REDD credits, according to analysis from Barclays Capital.
The EU’s emissions trading system, the world’s largest, caps about 12,000 factories and power stations.
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