Policies to Reduce Emissions from Deforestation and Degradation ...

The Current Market for Forestry Credits
Because REDD is excluded from the financing mechanisms of the Kyoto Protocol, demand for deforestation
credits is relatively low and composed entirely of voluntary efforts. Demand for credits
from AR activities is also low because the European Union’s Emissions Trading Scheme (ETS),
the largest such scheme in the world, currently excludes forestry credits, including those from AR
activities. This is not to say that demand is nonexistent—in fact, forestry projects accounted for
15 percent of the voluntary carbon market in 2007 (Hamilton et al. 2008). However, this is still
less than 0.2 percent of the $64 billion worldwide market for carbon-denominated assets.
Among voluntary programs, the World Bank dominates the current forestry credit market
with its BioCarbon fund portfolio, which is expected to produce 6 million carbon credits. Taking
into account the 5 percent cap on forestry CDM credits, Neef and Henders (2007) estimate the potential
market volume to be 75 million carbon credits, much higher than the current market size.
With the encouragement of the Group of Eight, the World Bank announced a new, $250 million
Forest Carbon Partnership Facility (FCPF) in Bali on December 11, 2007 (G8 2007). The FCPF
is two funds within one facility with the dual objective of (a) building capacity for REDD in developing
countries and (b) testing a program of performance-based payments in pilot countries to
lay the foundation for a larger system of positive incentives and financing flows in the future. The
general goal is to catalyze institutions and capacity-building for REDD such that the market will
eventually take over much of the funding activities. Because REDD activities are outside the CDM
protocol, credits generated by FCPF projects cannot be used for compliance as long as REDD activities
are excluded from the regulatory market. In the meantime, REDD credits are expected to be
traded on the voluntary market. The FCPF focuses on national-level participation and requires a
country to make a nationwide commitment to reduce its deforestation rate. It will not support
project-level activities without a national commitment to reduce deforestation.
In July 2008, the World Bank announced the first recipients of the readiness fund of the FCPF.
The funding will support work to establish baseline emissions reference levels, adopt strategies to
reduce deforestation, and design methodologies for monitoring progress. The selected 14 countries
are in Africa (Democratic Republic of Congo, Gabon, Ghana, Kenya, Liberia, and Madagascar),
Latin America (Bolivia, Costa Rica, Guyana, Mexico, and Panama), and Asia (Nepal, Lao
PDR, and Vietnam).
In addition to the World Bank’s efforts are a handful of planned and existing REDD projects,
ranging from discrete forest conservation projects to provincial-level REDD commitments that involve
a portfolio of sustainable forest management, forest conservation, and other activities. Credits
from these projects are sold on the voluntary market and cannot be used by entities seeking to
meet compliance obligations. Perhaps the most noteworthy of these subnational projects is the
Ulu Masen project, which incorporates the entire province of Aceh, Indonesia. In February 2008,
the project design was approved by the CCB Standards, a rigorous design standard that requires
land-based carbon projects to simultaneously generate climate, biodiversity, and sustainable development
benefits. The Ulu Masen project is projected to reduce emissions by 100 million tons
over 30 years, equivalent to Mexico’s annual emissions (Efstathiou 2008). Given its size and complexity,
the Ulu Masen project is breaking new ground for REDD activities. It is expected to begin
generating credits for sale on the voluntary market in late 2008.
2 Policies to Reduce Emissions from Deforestation and Degradation in Developing Countries