Emerging Compliance Market for REDD+: An Assessment of Supply and Demand

Terra Global
March, 2013

The forest sector is a significant source of emissions contributing between 10 to 17 percent of global emissions. Reducing emissions and sequestering carbon from forests is a cost-effective option to reduce global greenhouse gas (GHG) emissions. But forests are more than carbon. The world’s forests support the livelihoods of up to 1.6 billion people and provide habitat to 80 percent of the world’s terrestrial biodiversity. Sustainable management and protection of forests offers an opportunity to support climate-resilient economic development and protect biodiversity while accelerating poverty alleviation in some of the least developed nations. The Parties to the United Nations Framework Convention on Climate Change (UNFCCC) are negotiating policy to reduce emissions from deforestation and degradation and enhance carbon stocks (REDD+). To achieve this, there needs to be predictable, long-term finance available to incentivize conservation and sustainable use of forests, the protection of biodiversity, and support local communities whose livelihoods are linked to forests. Global economic studies dedicated to estimating the costs of REDD+ find that the annual funding needs are in the tens of billions of dollars. When these figures are considered against the finite amount of public finance available, a significant funding gap is apparent. As a result, the international community has identified the need for broad participation by the private sector. In 2011 at the seventeenth session of the UNFCCC Conference of the Parties (COP) in Durban, South Africa, the Parties reached the important decision that financing REDD+ could engage the private sector. The Parties agreed that “appropriate market-based approaches could be developed by the COP to support results-based actions.“ Many market-based mechanisms for REDD+ are already either developed, under development, or anticipated in the future. Private sector capital has been responsive and has started to develop REDD+ activities and generate REDD+ credits.

This report assessed the policies and early REDD+ actions that represent the current status of market and results-based finance mechanisms for REDD+ around the world. This included potential demand from multilateral, bilateral, national and sub-national approaches, along with potential supply of “compliance-grade” credits based on empirical research and analysis of known REDD+ projects and programs. A synthesis of emerging compliance market demand and the supply pipeline will better inform public and private sector decision makers.

Demand Outlook
A total of 30 market or results-based mechanisms that may create demand for carbon credits were identified and analyzed for this report. This included multilateral, regional (trans-national), national and sub-national emissions trading schemes, along with other multilateral and bilateral initiatives to pay for or purchase emission reductions or removals from REDD+ activities. The design features of these programs determined the scale of demand for credits. Design features of emissions trading schemes, including rules determining the eligibility of credits, caps limiting the quantity of credits used by regulated entities, approaches to managing non-permanence risk, and methods for accounting and crediting, were analyzed and commented on. Where emissions trading systems were sufficiently developed, these factors were taken into consideration to estimate demand.