Tag Archives: forest carbon markets

Better than Nothing: the Forests Bond

Kasigau Rangers. Image from http://www.coderedd.org/redd-project/wildlife-works-carbon-kasigau-corridor/#.WBoE4vkrLIU

Launched on November 1, 2016, the Forests Bond will provide investors the opportunity to invest in a traditional financial product that offers the unique option of receiving interest payments in the form of environmental impact — in this case, verified carbon credits generated through REDD, an initiative that rewards landholders for protecting forests, thereby reducing carbon emissions that worsen climate change. The development of the bond is a collaboration of the International Finance Corporation (IFC), a member of the World Bank Group, and BHP Billiton with technical support from Baker & McKenzie and Conservation International (CI).

REDD (short for Reducing Emissions from Deforestation and forest Degradation), which offers financial incentives to landholders in tropical countries to keep their forests standing, has met with mixed success since its launch in 2005, in part because the lack of a carbon market left it dependent on voluntary action and bereft of the certainty needed to attract private funding.

“If you look at the scale of the problem, roughly US$ 100 billion to 300 billion needed to cut deforestation by half over the next decade, it’s clear that we need to mobilize private institutional investors, who control vastly greater amounts than public or philanthropic aid can deliver,” said Agustin Silvani, Conservation International’s vice president of conservation finance. “The REDD mechanism has mostly excluded them because it required specific carbon expertise or a specific interest in forests to engage with it.”

The Forests Bond supports a REDD project in Kenya, and investors can choose between a cash or carbon credit coupon (the interest received from the bond), or a combination of both. This unique element of the bond is made possible by the price support that BHP Billiton**is providing, which means that investors can either 1) elect to take the carbon credits to offset corporate greenhouse gas emissions or 2) sell them on the carbon market, or 3) take a traditional financial return instead. This provides the certainty needed to attract institutional investors while still generating verified reductions in deforestation, in the form of REDD credits…

The REDD project that the Forests Bond will support takes place in the Kasigau Corridor in eastern Kenya….Forest protection activities include forest and biodiversity monitoring, funding for community wildlife scouts, forest patrols, social monitoring and carbon inventory monitoring. Community development activities include reforestation of Mount Kasigau; establishment of an eco-charcoal production facility; support to community-based organizations; and expanding an organic clothing facility.

The bond is listed on the London Stock Exchange and has raised US$152 million from institutional investors.

**BHP Billiton is providing a price support mechanism of US$12 million that ensures that the project can sell a pre-defined minimum quantity of carbon credits every year until the Bond matures, whether or not investors in the Bond elect to receive carbon credit coupons.

Excerpt from Bruno Vander Velde  New bond aims to unlock private investment to protect forest, Reuters, Nov. 1, 2016 and BHP Billiton and IFC collaborate on new Forests Bond, Press Release of BHP Billiton, Nov. 1, 2016

Natural Resources Markets in China: upcoming

fish ponds near Daye, Hubei, China, Image from wikipedia

A nationwide  carbon-trading scheme, to be set up in 2017, is the most visible example of a broader trend in China towards using market mechanisms in environmental matters…[A] reform plan issued by the government on September 21st, 2015  laying out the basis of future policy, talks about developing “a market system which allows economic levers to play a greater role in environmental governance”. If the plan is to be believed, China will go further than any other country in developing environmental market mechanisms.

The plan talks of selling “green” bonds, ie, those financing projects certified as environmentally sound. The government will improve financial guarantees for low-carbon projects. But those are becoming common. More fundamentally, the reform says China will separate the ownership of all natural resources from the rights to use them—and sell the usage rights at market.

This is much more radical. The idea is rooted in communist dogma, which says all natural resources—land, rivers, minerals and so on—are collectively owned. The reform plan begins by calling for a massive Domesday-like inventory of who owns what, whether central government, provincial governments or lower tiers. It then says, with utter insouciance, that “with the exception of natural resources which are ecologically important [eg, national parks], the ownership rights and use rights for all other natural resources can be separated”. And, having separated them, the usage rights can be bought and sold, rented out, used as collateral or as the basis of loan guarantees, and so on.  

The carbon-trading scheme suggests what this could mean in practice. It is like a market in energy-usage rights, with the carbon treated as part of the cost of using fossil fuels. A market in water rights will also be set up. Trials will be held in Gansu and Ningxia, two north-western provinces. The plan talks cryptically of setting up a “natural resource asset exchange”.

Excerpts from Markets and the environment: Domesday scenario, Economist, Oct. 3, 2015, at 46