Deforestation's Role in Carbon Markets

Deforestation is fast becoming a central part of any Post-Kyoto agreement on global greenhouse gases. It’s easy to see why. According to the Intergovernmental Panel on Climate Change, the sector produces 17% of emissions worldwide. That makes it the third largest source of greenhouse gases — even bigger than the transport industry, including airlines and shipping.

To offset emissions caused by deforestation, policy-makers plan to pay countries to maintain forests, instead of cutting them down. The scheme already has a (clunky) title: Reducing Emissions from Deforestation and Forest Degradation, or REDD. It would allow companies/communities, in predominantly emerging countries where the majority of forests are located, to bank carbon credits from protecting trees. These emissions credits could then be sold in the global carbon markets for a profit. In theory, polluters would buy them to offset their own CO2 output. The UN-backed project already has pilots underway, with analysts predicting the market for forestry credits could top $50 billion by the next decade.

Some aren’t hanging around for REDD to be approved.

According to the Latin American Herald, Peru will pay indigenous communities just over $3 per hectare of rainforest they help to preserve. That's an almost 100% increase from previous incentives, but still low by international standards. Under current projections for REDD, forests could be worth $800 per hectare for their carbon, depending on the level and speed of deforestation. The Peruvian scheme could lead communities to pocket $37 million for protecting local forests. The country's environment minister says the plan would be grandfathered into any Post-Kyoto agreement.

The benefits of tackling deforestation could be profound. But many obstacles could still scupper the proposals. A lack of monitoring in developing countries could make it hard to prove trees aren't being cut down. Companies may also pocket the money from carbon credits, but fail to make the plans sustainable. That's what happened when forestry projects were used in the voluntary carbon markets (See page 10 of PDF). Experts fear local communities may fail to benefit from the influx of capital. And carbon market participants, such as investment banks and utilities, may shy away from risky forestry credits, preferring green energy investments elsewhere to offset emissions.

These questions will be central when global policy-makers meet in Copenhagen in December to hammer out a Post-Kyoto agreement. Negotiations are expected to be difficult. But with the likes of Peru already establishing deforestation in its overall carbon plan, analysts expect some form of REDD to be included -- despite ongoing concerns.

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