Reducing emissions from deforestation and forest degradation (REDD): Harnessing the financing potential of carbon markets

Abstract

The destruction of forests-principally in the tropics-emits massive amounts of carbon dioxide. Reducing emissions from deforestation and forest degradation (REDD)-a prime source of lowcost reductions of greenhouse gas emissions-in tropical forest nations could make a substantial contribution to addressing climate change. To date, large-scale forest protection efforts have been financed primarily by official development assistance, which are in most cases orders of magnitude lower than required. A better way-both in terms of economic efficiency and political plausibility-is to draw capital flows from the carbon market. Using the market as a source of funds can free billions in financial flows. However there is no place for these tons in existing carbon market policy frameworks. The goal of this dissertation is to shed light on the issues preventing "market-based REDD" from taking off, as well as to illustrate some potential solutions and paths forward. "Market-based REDD" would enable developing nations themselves to earn carbon credits for verified emissions reductions against an agreed national baseline and sell them in existing carbon markets. This would encourage emissions reductions in tropical forest nations while helping to manage the costs of compliance in countries that take on economy-wide caps. However, a prominent concern with market-based REDD has been that emissions reductions from forests will be so abundant as to "flood the carbon market". We use a multi-period partial equilibrium modeling approach to assess the impact of REDD tons in frameworks with long time horizons. We conclude that the long-term horizon, the progressive tightening of emission caps, and the possibility of banking enable a direct market-based funding mechanism to deliver financing at significant scale and absorb the maximum quantity of REDD credit tons, even in the near-term. Absent an overarching international agreement, a bilateral agreement between the EU and Brazil would make great strides towards halting the destruction of the Amazon Rainforest. The Brazilian plan to reduce deforestation by 80% in 2020 sets the stage for a win-win situation for Brazil and the EU. If a portion of Brazils reductions, above a pre-determined reference level, were sold as carbon market credits, the EU would gain by reducing its compliance costs and could potentially increase its emissions reductions at no additional cost over the case without REDD. The EU would just need to create further certainty over future EU climate policy in order to enable greater emissions reductions over the near term for the purpose of banking credits for future use. A Brazilian economy-wide cap-and-trade system has the potential to tap on a broader mitigation potential in a cost-efficient fashion and to bolster the eligibility of REDD credits in the EU by linking the Brazilian cap-and-trade with the EU carbon markets. The Brazilian REDD crediting system could be easily integrated into the Brazilian cap and trade program through a point of regulation at the level of the Brazilian states, which could then establish so-called "nested" programs for crediting reductions within their jurisdiction in order to tap on private funding. Bilaterally linking the proposed climate protection efforts of the EU and Brazil through a future carbon market could not only multiply the effectiveness of each nations program and achieve greater combined climatic benefits, but also generate intangible and countless ancillary benefits associated with the conservation of the Amazon Rainforest.