May 2014
Creating appropriate incentives to
scale up private sector investment in
REDD+ from 2015
–
2020
Acknowledgements
Creating appropriate incentives to scale up private sector investment in REDD+ from 2015–
2020 was convened by the Global Canopy Programme (GCP) and UNEP Finance Initiative
(UNEP FI) in collaboration with the International Emissions Trading Association (IETA), the Climate Markets and Investment Association (CMIA), the London School of Economics (LSE), Fauna and Flora International (FFI), the Amazon Environmental Research Institute (IPAM) the Environmental Defense Fund (EDF), and kindly hosted PricewaterhouseCoopers (PwC).
About the Interim Forest Finance project (IFF)
The Interim Forest Finance (IFF) project is a collaborative initiative of the Global Canopy Programme (GCP), the Amazon Environmental Research Institute (IPAM), Fauna & Flora International (FFI), the UNEP Finance Initiative (UNEP FI), and the United Nations Office for REDD+ Coordination in Indonesia (UNORCID).
The IFF project advocates a strategic intervention by donor country and tropical forest country governments, and financial institutions, to scale up public and private sector demand for REDD+ emission reductions, in the interim period between 2015 and 2020.
The Interim Forest Finance Project is funded by the Norwegian Agency for Development Cooperation (NORAD).
Contact
To contact the IFF management team, please write to Nick Oakes and Anna Halton at:
iffmanagement@globalcanopy.org.
Disclaimer
Summary
On 15 May, 2014, GCP and partners convened approximately 20 private sector
representatives for an interactive workshop, to examine the key issues which urgently need to be addressed in order to facilitate an increase in the flow of finance into REDD+ activities. The participants included representatives from different elements of the REDD+ sector: project developers, financial and legal intermediaries, voluntary and pre-compliance buyers, as well as relevant industry associations.
In order to limit global warming to 2 degrees Celsius, the latest IPCC report shows that it is imperative that the international community takes immediate action in achieving deep and fast greenhouse gas emission cuts. In at least in the short to medium term, these cuts will need to include REDD+ and landscape level activities if they are to be cost effective or have a realistic probability of success. Time is of the essence in terms of scaling up investment in REDD+ activities, and public sector investment cannot bridge the gap on its own. Donor countries need to develop clear incentives to help leverage additional private sector investment if catastrophic climate change is to be avoided.
Currently however, the private sector is unable to invest in REDD+ activities at scale as there is a significant lack of demand for the resulting carbon emission reductions, the sale of which constitutes the return on their investment. Without robust demand for fully fungible REDD+ emission reductions or a clear belief that this will emerge, REDD+ activities as they currently stand remain a very uncertain and largely un-investable opportunity from the perspective of the private sector.
Such is the importance of addressing the issue in terms of interim finance for REDD+ in the period of 2015 – 2020 that the IFF project is advocating for a strategic intervention to scale up demand for REDD+ emission reductions. To achieve this, the project is working to raise awareness of the problem, build a mandate on how the problem could be addressed, and facilitate agreement on priority solutions which could be deployed at the national or sub-national level in forest countries.
The event provided the opportunity to discuss the diverse views which currently exist across the private sector with regards to what would be needed in order to scale up investment in REDD+ activities. During the event, private sector (only) attendees were requested to take part in a short survey looking at how to scale up private sector investment in REDD+
Summary findings
Participants indicated that they need a clear price signal and a clear regulatory environment to be able to increase their investment in REDD+ activities. At present, the lack of regulatory certainty over the short, medium or long-term makes it very difficult to understand or manage the risks and potential returns on investments.
An intervention in the REDD+ sector is necessary in order to (re-)build confidence in REDD+ as an investment proposition. This could be achieved by stimulating demand for REDD+ emission reductions, whilst also ensuring that REDD+ plays a pivotal role in helping to incentivise the transition to more sustainable use of natural resources (e.g.linking REDD+ to activities that lessen the impact of the drivers of deforestation).
The workshop provided a valuable opportunity to exchange views and consider ideas for how demand, and therefore investment, could effectively be scaled up.
Next steps
Workshop participants agreed that it would be valuable to develop a joint statement or Declaration, to highlight the threat posed by lack of demand for REDD+ emissions reductions to a wider audience, and propose what could be done to increase private sector investment in REDD+
Further outreach would be valuable to explore the options available in more detail, and how these could be developed into proposals for bilateral and multilateral
financing institutions to help scale up demand. This work will be carried forward by the IFF project.
Key points
1. 93% of participants said that addressing the lack of demand for REDD+ emission reductions was a high priority, and identified it as the greatest barrier to scaling up investment in REDD+.
2. Participants said that a significant increase in demand, preferably through compliance market regulation, would be the factor that would generate the greatest increase in private sector investment between 2015 and 2020. Participants agreed that the most important outcome of an intervention by governments to scale up investment in REDD+ activities would be a clear price signal for REDD+ emission reductions over the medium to long term.
demand) being the uncertainty around a global climate agreement, and the third being uncertainty around national policy and regulation in relation to REDD+.
4. It was far more important to participants that the financial signals and incentives were in place than that there was greater public funding for REDD+ activities at the national or sub-national level. Addressing the lack of demand and having a clear price signal were considered more important than an increase in funding for national or sub-national REDD+ activities, and more important than an increase in performance-based payments between national or sub-national governments.
5. Technical issues relating to how REDD+ is implemented on the ground, such as land rights, development costs, MRV systems and safeguards, as well as other kinds of risk, such as reputational and delivery risk, were ranked far lower than demand, regulatory clarity and political will, in terms of what the private sector needs in order to invest.
6. The private sector places great importance on the predictability of returns, rather than expectation of fast returns. The majority (60%) said that a price floor for a lower carbon price with a longer time horizon would be better than a price floor for a shorter time with a higher carbon price.
7. 80% of participants indicated that, provided that the public sector helped establish the right suite of incentives, the private sector could scale up investible funds for REDD+ by more than four times between 2015 and 2020.
8. 63% of participants believed that, without a significant commitment of public finance or access to emissions markets for REDD+ credits, the number of companies active in the REDD+ sector would decrease between 2015 and 2020.
Survey results
Q.1. Is there a lack of demand for REDD+ emission reductions?
Q.2. Is the lack of demand a low/medium/high priority?
Q.3. Which of these issues are the most problematic? Score has been weighted based on a ranking of the top 3.
a.
Lack of demandb.
International uncertainty around a global climate agreementc.
National policy/regulatory uncertainty surrounding REDD+d.
Land rights and ownershipe.
MRV systemsf.
Community Safeguardingg.
Cost of developingh.
Reputational riskQ.4. Which of these issues are the least problematic? Score has been weighted based on a ranking of the top 3.
a. Lack of demand
b. International uncertainty around a global climate agreement c. National policy/regulatory uncertainty surrounding REDD+ d. Land rights and ownership
e. MRV systems
f. Community Safeguarding g. Cost of developing h. Reputational risk i. Delivery Risk
Q.5. Which of the general interventions below would provide the largest increase in private sector investment in REDD+ between 2015 and 2020? Score has been weighted to rank preferences in descending order.
a. A significant increase in demand for REDD+ emission reductions.
b. A significant increase in funding for REDD+ readiness activities at the national and sub-national level in forest countries
c. A significant increase in ‘performance-based payments’ exchanged between national or
sub-national governments
d. A significant ramping-up in political will at the international level
Q.6. Which of the more specific interventions below would provide the largest increase in private sector investment in REDD+ between 2015 and 2020? Score has been weighted to rank preferences in descending order.
a. Demand side incentives/price management tools (e.g. futures and options contracts, price floor).
b. Provision of finance (e.g. cheap loan)
c. Risk management tools (e.g. political risk insurance)
d. Regulation (international or national; could include creation of a compliance market) e. None of the above
Q.8. This intervention is focused on the period between 2015 and 2020, but over what timeframe is ”soft” financing required for REDD+ activities (e.g. cheap/flexible credit)? 1. 2015-2020
2. 2015-2025 3. 2015-2030
4. It won’t be needed at all
Q.9. Which risk-management tool is the most important? 1. Political risk insurance
2. Commercial risk insurance 3. Credit guarantees
Q.10. With your ideal suite of interventions (e.g. a price floor, post-2020 regulatory certainty) provided by the public sector from 2016 onwards, and an assumed large-scale source of demand in place from 2020 onwards, investable funds in REDD+ activities between 2015 and 2020 could be scaled up by:
1. Zero times 2. 2 x
3. 4 x
4. More than 4 x
Q.11. In the absence of a significant commitment of public finance or access to emissions markets for REDD+ credits, do you anticipate the number of companies in the space to decrease or increase between 2015 and 2020?
Q.12.What are the top three positive outcomes of the intervention that are needed to scale up investment in REDD+ activities (these are not mutually exclusive)? Score has been weighted to reflect ranking of options in descending order.
a. A clear price signal for REDD+ credits b. An increase in buyers of REDD+ credits
c. An increase in designated national focal points/entities/departments for REDD+ in forest countries
d. An benchmarked minimum acceptable standard for pre-compliance methodologies e. An increase in the public funding for REDD+ readiness activities.
f. A clear political understanding of the implementation of REDD+ within a climate agreement before or after 2020.
g. Reduced riskiness of REDD+ projects as perceived by providers of capital.
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