More Than 20 Years of Forest Carbon Yield Plenty of Lessons for Investors

It’s more than two decades since a handful of environmental non-profits and green industrialists first began experimenting with mechanisms that slow global warming by funding the preservation of rainforests.   In the ensuing decades, we’ve learned a lot about about what works and what doesn’t.   Now Forest Trends and Bio-Logical have distilled these lessons into one 30-page guide for investors.

2 March 2011 | The general public didn’t hear about REDD (Reducing greenhouse gas Emissions from Deforestation and forest Degradation) until it became the one real success at Copenhagen climate talks in 2009.   But REDD is just one of many forest-carbon based mechanisms designed to slow global warming by preserving swathes of endangered rainforest.   Indeed, such mechanisms date back more than 20 years, and in the ensuing two decades, more than 20 million tons of forest-carbon based CO₂ offsets have been transacted.

So, what have we learned about forest carbon projects in general and investment insights in particular?

The recently launched Forest Trends and Katoomba Group report “Investing in Forest Carbon: Lessons from the First 20 Years” addresses that question. With support from Bio-Logical Capital, the team at Forest Trends and the Katoomba Group conducted over 50 one-on-one interviews with forest carbon leaders — from investors, through standard-setters, project developers, and sellers.   The report combines insights culled from these interviews with data collected from the extensive survey performed for the purpose of the State of the Forest Carbon Market 2009 and its suceessor, which will be released later this year.

Beyond including a glimpse into the over 200 projects developed in the last 20 years, the report’s authors, Sissel Waage, Director of the International Katoomba Group, and Katherine Hamilton, Managing Director of Ecosystem Marketplace, dive in and find the lessons in the successes and failures.

“There have been few, if any, 360 degree reviews of lessons learned around forest carbon projects to date,” says Waage.   “We and our sponsor Bio-Logical Capital felt strongly that there was a need to step back and view the whole domain of forest carbon and lessons learned from multiple vantage points: investors, project developers, buyers, sellers, methodology developers, and others.”

Over the past two decades, a diverse forest carbon marketplace has developed.   Even with limited regulatory drivers, the market development has included the establishment of key industry infrastructures — legal and political frameworks, project standards and methodologies, and expert resources.

“No two forest carbon projects are exactly alike,” says Hamilton.   “Yet, while interviewing over 50 practitioners in the field, common lessons and hurdles emerged.”

The lack of regulatory certainty, however, has prevented this emerging market from developing into an established market.   Forest carbon investments have faced additional challenges as well, such as a lack (until recently) of approved methodologies for measuring forest carbon and difficult cash requirements, which include significant up front costs.

Screening Future Projects

A key contribution of this report is the forest carbon project screening selection criteria.   Appropriate screening selection criteria are essential to mitigating risk for forest carbon investors around the world.   Many project developers consider their due diligence processes and project screening criteria a key element of their intellectual property.

Now, project developers from around the world have access to a composite list of these criteria drawn from leading thinkers in the forest carbon world.  

“Screening criteria is a necessity for investors,” says Waage.   “Thus far, it has been a learning by fire; as there hasn’t been a really an independent entity compiling the criteria based on years of experience.”

With a section and annex dedicated to selection criteria, the report provides a clear guide for the investor community to evaluate risk before investing in forest carbon projects around the world.   The screening selection criteria in the report examine every aspect of the potential project, from national laws surrounding carbon transactions to local context to technical prospects.  

Tackling the Complexities

This report does not shy away from reminding practitioners that they will have to be “comfortable with complexity” — but it also includes recommendations on how to mitigate these complexities and reminds investors of the rewards.

“Fortunately, risk mitigation strategies are better than before and project screening criteria is more robust, and thus investors have an opportunity to be part of forest carbon development as standards, rules, and best practices are being defined,” says the report.   “Early forest carbon project funding… would allow them to share in the rewards, as forest carbon matures as investment class and risks decrease in the coming years.”

In addition to detailed screening criteria, the report includes a number of other recommendations for practitioners to create successful projects. These include: engaging on-the-ground with community associations and project participants; utilizing the scientifically-based and peer-reviewed methodologies; ensuring access to individuals with the technical skills throughout the project; and being conservative in estimates regarding the cost and time of projects.

As REDD fast-start and bilateral funding continues, forest carbon projects will continue to be a key part of the international carbon world.   And investing in forest carbon is an essential component to tackling climate change: “If you are not investing in forest carbon, you are not going to tackle a key segment of emissions contributing to climate change,” says Waage.   “We have to consider forest carbon as part of overall carbon emission reduction strategies.”

Though, as the report notes, investing in the world of forest carbon project is not for the faint-hearted, the report provides investors a good start for managing those challenges and developing successful (and profitable) forest carbon projects.

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