Finance To Protect Tropical Forests: Not Just One Silver Bullet

This story originally appeared on the Forest Trends blog

22 February 2018 | Tropical forest countries are critical for reaching the climate goals under the Paris Agreement. Many of them have ambitious targets for protecting forests, provided they receive sufficient support from the international community. Among the most important forest countries is Brazil, home to the vast expanses of the Amazon rainforest. Brazil had considerable success in reducing its deforestation rate while increasing agriculture production in the decade from 2004. However, in the last few years, economic difficulties have started to reverse these efforts, so policies and resources (public and private, international and local) need to be more effectively aligned. At the same time, there is the potential in Brazil to leverage the country’s advanced legislative framework for the protection of tropical forests—the Forest Code— to help it deliver on its national climate goals.

In recent years, forest countries like Brazil and international donor agencies have focused much effort on improving agricultural productivity to reduce the need for conversion of more forest land for agricultural purposes. However, stopping further advances in deforestation will also require investments in forests themselves to increase their value relative to other uses. And doing so at a large-scale means supporting ambitious policies in forest countries at national and jurisdictional levels, as well as on the ground. No one silver bullet can make this happen, but, as a new Forest Trends report discusses, a number of complementary approaches could be combined into a more integrated strategy for forest conservation.

The report, Toward a Financial Architecture to Protect Tropical Forests: The Case of Brazil, discusses how public policy and public finance can form synergies with private sector finance and corporate sustainability commitments to achieve forest conservation, forest restoration, and more productive agriculture and forestry sectors. The financial and policy architecture it proposes provides a pathway for how tropical forest countries such as Brazil can achieve the multi-billion dollar scale of investments necessary to meet their commitments under the Paris Agreement.

Building such a successful financing strategy for forest protection will require the construction and connection of three fundamental pieces of architecture, namely:

• Enhancing the effectiveness of REDD+ (Reducing Emissions from Deforestation and Forest Degradation) approaches;
• Supporting the implementation of domestic policies and legislation for forest protection; and
• Harnessing private sector funding for forest protection from commodity buyers, agribusinesses, and consumers.

1) Enhancing the Effectiveness of REDD+

REDD+ results-based finance can play an important role in helping countries reach their ambitious climate goals. However, the successful implementation of REDD+ at the necessary scale will require tremendous investment—more than bilateral and multilateral public funding sources alone can offer. Private sector finance is therefore needed for REDD+/sustainable forestry to reach its full potential.

• Private sector demand for REDD+ credits could be harnessed with price floors for public REDD+ credits, providing forest country national or regional governments with the certainty of a minimum price, while also opening the possibility of attracting additional demand from the private sector.
• Developing a way to leverage donor commitments for future performance-based REDD+ payments into current financing flows is also important for generating near-term action, for example through the utilization of enhanced bond structures that are explicitly linked to REDD+ results-based finance.

2) Supporting Domestic Policies and Legislation for Forest Protection

National and regional public policy and regulation in forest countries are critical to catalyzing the necessary scale of pro-forest investments. Two approaches that could efficiently improve the linkage between REDD+ finance and forest protection measures on the ground by supporting implementation of Brazil’s powerful Forest Code legislation are:

• Expanding the capacity of Brazil’s public banks to provide loans, at significantly lower rates of interest, for farmers to invest in reforestation to comply with the Forest Code; and
• Allowing public and private actors to buy and retire the rights of private Brazilian landholders to trade their surplus acreage of protected forest as “offsets” to compensate for deforestation elsewhere in Brazil. Under the requirements of the country’s Forest Code, this trading is permitted as a tool for landowners to achieve the minimum required “quota” of forest protection, but purchasing and retiring these rights would reduce the “supply” available for trade, collectively leading to more forest protection/restoration than the minimum required by the Forest Code.

3) Harnessing Private Sector Funding from Commodity Buyers, Agribusinesses, and Consumers

Recent years have witnessed a groundswell of private sector commitments to reducing deforestation in agricultural commodity supply chains. However, these corporate commitments are not financing the actual transition to more sustainable production.

• What is needed is a mechanism through which the relevant actors in the supply chains help fund payments for the public goods and services associated with forest conservation, thereby reducing the financial burden that currently rests on the shoulders of forest countries and international donors.
• In addition to prioritizing commodity purchases from producers and regions that can demonstrate “sustainability,” agribusiness could also supplement donor funding for REDD+ and public expenditure in forest countries with commitments of capital that represent a very low percentage of the payments made for commodities. As a result, these investments would be directly linked to jurisdictional REDD+ achievements and would support implementation of the Forest Code.

In sum, the report lays out a path of strategically structured public policy and public investment that can leverage private investment more effectively toward shared goals of forest conservation and increased agricultural production. Given the fact that public sector budgets for forest protection are limited, these approaches can provide the incentives needed to generate REDD+ finance from private actors—together providing an architecture and a pathway forward for financing tropical forest protection.