Financing the World's Forests: integrating markets and stakeholders

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Fourth speaker 'Options for REDD and reducing the financial gap' Jessica Brown (Overseas Development Institute)

3rd August 2009 - Imperial College (CEP)

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  • Capturing the mitigation potential of REDD requires a flexible, phased approach to implementation in order to accommodate (i) the diverse capabilities of REDD countries; (ii) an expanded scope of REDD to include conservation, sustainable management of forests, and enhancement of forest carbon stocks; 2 and (iii) the nearterm constraints of the current global financial crisis. The timing of graduations from one phase to the next will vary, and REDD countries could skip a particular phase provided they meet the eligibility criteria for the next phase. Within countries, overlap between phases may also be necessary and even desirable. MRV should advance progressively with phase graduation, and should be upwardly compatible with a future framework that could encompass the whole agriculture, forestry, and other land uses (AFOLU).
  • Strategy development elements would include, for example, reference level and MRV assessments, and participation of indegenous peoples and local communities.
  • Strategy implementation elements would include, for example, reference level setting, improvement of MRV, and participation of indigenous peoples and local communities.
  • Clearly there will be gaps between what the money that is needed and the money that is available. For example, the current picture of available funding for forestry efforts that come from international public financing sources equates to 6-11% of the funding that would be needed to halve net global emissions from forests by 2030 (as estimated by Eliasch). (The cost of halving net global carbon dioxide emissions from forests by 2030 is estimated at USD 17–33 billion annually, if forest carbon is included in global emissions trading (Eliasch 2008).
  • Alternative financing sources could substantially increase the amount of finance available to address needs not financed directly by markets or ODA. These include proceeds from auctioning allowances in emission-trading schemes by Annex I countries and the allocation of revenues from other fees, fines and taxes. These may qualify as either ODA or some other public funding stream, depending on how these funds are channelled.
  • Auctioning of assigned amounts or emission allowances: Each Annex I country receives a number of greenhouse gas units to release and/or trade ( Assigned Amount Units, AAUs) in accordance with the Kyoto Protocol during the 2008-2012 commitment period. The underlying principle of this scheme is to auction a certain share of AAUs to generate revenue, rather than giving them out for free to Annex I domestic firms that have to comply with emission reductions.   A uniform global tax on CO2 emissions: Funds are raised by placing a global tax on all carbon emissions, but with a per capita exemption for least developed countries.   Levies on emissions from international maritime transport and aviation, or on air travel: Funds are raised by charging individuals and companies, based on their responsibility for climate change and/or their capability to pay. The charges or levies could be applied to international aviation and maritime transport, or air travel.  
  • Carbon market-based levies: Funding can be generated by applying a levy to the Kyoto Protocol’s tradable units generated from the CDM, JI, or emissions trading (a form of ‘climate currency’ with each tradable unit representing one metric tonne of CO 2 equivalent). The 2% CDM levy mechanism used to raise funds for the Kyoto Protocol’s Adaptation Fund is an example of a carbon market-based levy. There is interest in extending or increasing the levy to other aspects of the carbon market.   Bonds : Funds can be raised through bonds issued on the international markets available for immediate use. Currency transaction tax: a tax on wholesale currency transactions
  • Funding will have to be integrated into the overall financing architecture developed under the UNFCCC as part of a Copenhagen agreement. To ensure predictability, international REDD financing should be clearly identified and funding commitments firm, verifiable, and enforceable. International REDD finance would complement domestic funding by REDD countries, taking into account pre-existing national efforts and expenditures in sustainable forest management, forest protection, and forest inventories. Disbursement could be based either on five-year national REDD implementation plans and annual performance indicators, or left to the responsibility of a national decision-making process.
  • vertical funds (global initiatives):  Partnerships and related initiatives whose benefits are intended to cut across more than one region of the world and in which the partners: (a) reach explicit agreement on objectives; (b) agree to establish a new (formal or informal) organization; (c) generate new products or services; and (d) contribute dedicated resources to the program. Whereas a horizontal approach would provide support for existing country systems, vertical funds target focused global causes, such as health or education.  Particularly prominent are debates surrounding new vertical funds to be managed by institutions such as the Global Environment Facility (GEF) (the main financial mechanism for the UNFCCC), and the World Bank. Concerns have been raised by developing countries about the lack of representation in the governance structures of such funds, long lead times for accessing funding, complex application procedures and the type of finance (e.g. whether grants or loans).  
  • Financing the World's Forests: integrating markets and stakeholders

    1. 1. Options for REDD and for reducing the financial gap <ul><ul><li>Presentation by Jessica Brown (ODI) </li></ul></ul><ul><ul><li>Imperial College conference: Financing the World’s Forests </li></ul></ul><ul><ul><li>3 August 2009 </li></ul></ul>
    2. 2. Presentation overview <ul><li>Setting the context for REDD finance </li></ul><ul><li>Phased approach for REDD </li></ul><ul><li>Matching the phases with finance options </li></ul><ul><li>Filling the financing gap for REDD </li></ul><ul><li>New and innovative revenue raising mechanisms for REDD </li></ul><ul><li>Challenges ahead </li></ul>
    3. 3. Setting the context <ul><li>A financing mechanism for REDD is under negotiation, to take effect after 2012. </li></ul><ul><li>Mechanism will draw on public and private financing sources to respond to diverse needs of different developing countries. </li></ul><ul><li>Examples of financing needs include: </li></ul><ul><ul><ul><li>capacity building </li></ul></ul></ul><ul><ul><ul><li>monitoring system </li></ul></ul></ul><ul><ul><ul><li>forest inventories </li></ul></ul></ul><ul><ul><ul><li>land tenure reform </li></ul></ul></ul><ul><ul><ul><li>policies and measures (e.g., incentives to encourage forestry, regulated infrastructure expansion) </li></ul></ul></ul><ul><ul><ul><li>ongoing emission reductions </li></ul></ul></ul><ul><li>Financing for upfront capacity building (‘readiness’) is likely to rely on public funds; financing ongoing emission reductions is likely to come from funds and/or carbon markets </li></ul>
    4. 4. Phased approach to implementation Phase 1: National REDD strategy development, including national dialogue, institutional strengthening, and demonstration activities. Phase 2: Implementation of policies and measures (PAMs) proposed in those national REDD strategies. Phase 3: Payment for performance on the basis of quantified forest emissions and removals against agreed reference levels. Recommendations from the Norwegian government’s REDD Options Assessment Report (REDD-OAR)
    5. 5. An initial support instrument that allows countries to access immediate international funding . A fund-based instrument that allows countries to access predictable REDD finance . Continued funding under would be results-based, but performance would not necessarily be monitored only on basis of emission reductions. A GHG-based instrument that rewards performance on the basis of emissions reductions . <ul><li>Phase 1: National REDD strategy development, demo activities </li></ul><ul><li>Phase 2: Implementation of PAMs proposed in national REDD strategies. </li></ul><ul><li>Phase 3: Payment for emissions reduction performance </li></ul>Matching the phases with finance
    6. 6. An initial support instrument that allows countries to access immediate international funding . <ul><li>Phase 1: National REDD strategy development, demo activities </li></ul>Matching Phase 1 with finance <ul><li>Activities should continue to be supported by voluntary contributions that are immediately available </li></ul><ul><ul><li>Ex: World Bank’s FCPF, UN REDD, bilateral arrangements. </li></ul></ul><ul><li>Eligibility for access to funds should be based on a demonstrated national commitment to REDD strategy development. </li></ul>
    7. 7. A fund-based instrument that allows countries to access predictable REDD finance . <ul><li>Phase 2: Implementation of PAMs proposed in national REDD strategies. </li></ul>Matching Phase 2 with finance <ul><li>Activities should be supported by predictable funding from a global facility supported by an internationally binding finance instrument with enforceable commitments </li></ul><ul><li>Eligibility based on demonstration of cross-sectoral commitment to REDD strategy implementation within national government </li></ul><ul><li>Continued access to funding based upon performance </li></ul>
    8. 8. Matching Phase 3 with finance A GHG-based instrument that rewards performance on the basis of emissions reductions . <ul><li>Phase 3: Payment for emissions reduction performance </li></ul><ul><li>Could be financed on large scale </li></ul><ul><li>Transition from global funding facility to integration with compliance markets (or non-market compliance mechanism) </li></ul><ul><li>Eligibility contingent on compliance-grade monitoring, reporting and verification (MRV) and accounting of emissions. </li></ul>
    9. 9. How do we fill the financing gaps? Most promising avenues for meeting financing shortfalls in post-2012 context is from ‘new and innovative’ forms of finance.
    10. 10. Innovative financing options for REDD <ul><li>Revenue raising options </li></ul><ul><li>Auctioning of emission allowances; </li></ul><ul><li>A uniform global levy/tax on CO 2 emissions; </li></ul><ul><li>Levies/taxes on emissions from international maritime and air transport; </li></ul><ul><li>A levy on market-based mechanisms under the Kyoto Protocol; </li></ul><ul><li>Bonds </li></ul><ul><li>Currency transaction tax </li></ul><ul><li>Hybrids </li></ul>
    11. 11. Proposals on the table Proposal Source of funds Amount of funds generated AUCTIONS OF EMISSIONS ALLOWANCES Norway’s auctioning of AAUs Annex I allowances withheld, auctioned internationally $20-30 Bn annually A UNIFORM GLOBAL TAX ON CO2 EMISSIONS Swiss Global Carbon Tax Tax ($2/t CO 2 ) on emissions; ≤1.5/t CO 2 per capita exempt $30-40 Bn annually LEVIES ON EMISSIONS FROM INTERNATIONAL MARITIME AND AVIATION International Air Passenger Levy, International Maritime Emission Reductions Scheme, Tuvalu’s Burden Sharing Mechanism, Oxfam International, etc $6 per ticket fee (economy class), $62 per ticket fee (business/first class); or a straight charge on emissions (not based on ticket); or levy on international airfares, maritime transport charges $8-10 Bn annually, for first five years of operation
    12. 12. Proposals on the table (cont’d) Proposal Source of funds Amount of funds generated CARBON MARKET-BASED LEVIES Extending the levy to JI and/or IET Levy on JI and/or IET 2008–2012: $5.5–8.5 Bn p.a. 2013–2020: $3.5–7.0 Bn p.a. Pakistan’s CDM levy 3-5% levy on CDM $0.2–0.5 Bn p.a. at levy of 5% BONDS EC GCFM High rated bonds $1.3 Bn annually for next five years CURRENCY TRANSACTION TAX Currency transaction tax small levy (0.005%) on foreign currency exchange transaction $15-20 Bn annually HYBRIDS Mexico’s World Climate Change Fund Multiple sources Initially $10, scaling up to $95 in 2030
    13. 13. Other considerations for REDD finance <ul><li>Funding integrated into the overall financing architecture developed under UNFCCC </li></ul><ul><li>International REDD financing should be predictable, verifiable, with firm funding commitments </li></ul><ul><li>International finance should complement domestic funding </li></ul><ul><li>Disbursement based on five-year national REDD implementation plans, or left to the responsibility of national decision-making processes </li></ul>
    14. 14. Challenges ahead <ul><li>Uncertainty over how much of the new finance sources would be channelled to REDD – many competing priorities for other sectors and mechanisms (adaptation, technology transfer, etc) </li></ul><ul><li>Challenges depending on the structure of the international financing facility </li></ul><ul><li>Challenge of vertical funds – </li></ul><ul><ul><li>Difficult to maintain national ownership </li></ul></ul><ul><ul><li>Difficult to align international fund support with national strategies and institutions. </li></ul></ul>
    15. 15. Thank you Contact: Jessica Brown [email_address] Visit: www.climatefundsupdate.org www.odi.org.uk/climatechange

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