Can Carbon Bring Development? ‘Avoided deforestation’ carbon markets and the implications for small producers Presentation for Brussels Briefing ‘The climate challenge for ACP agriculture’, 13 February 2008 Leo Peskett, ODI

What is Reduced Emissions from Deforestation and Degradation (REDD)? International financial mechanism (possibly linked to carbon markets) to incentivise reduced rates of deforestation and degradation (DD) in developing countries Through policies and measures such as payments for environmental services (PES), agricultural intensification, sustainable forest management etc. 2005 - PNG and others proposed bringing REDD into UN climate regime DD = up to 20% of annual global carbon emissions 10% global reduction = $2.2-13.5 billion/yr (Ebeling and Yasue 2007) (compared to $1.5 billion/yr for forest sector ODA)

International financial mechanism (possibly linked to carbon markets) to incentivise reduced rates of deforestation and degradation (DD) in developing countries

Through policies and measures such as payments for environmental services (PES), agricultural intensification, sustainable forest management etc.

2005 - PNG and others proposed bringing REDD into UN climate regime

DD = up to 20% of annual global carbon emissions

10% global reduction = $2.2-13.5 billion/yr (Ebeling and Yasue 2007) (compared to $1.5 billion/yr for forest sector ODA)

Why is REDD ‘hot’? Politically charged, as gains are potentially high, but: Baselines – could end up rewarding countries with poor performance An excuse for developed countries not to reduce at home? Permanence – forestry is more problematic than other forms of emissions reduction (and it is not included in EU ETS partly for this reason) M and E are complex with different levels of capacity in different countries There are many actors wanting a slice of the REDD cake (national/local governments; NGOs; private sector) – governance challenge Still much uncertainty in form of REDD at national/sub-national level, but questions beginning to be addressed e.g: Central or devolved financial management? Types of policies and measures (e.g. agricultural intensification has very different implications to PES) Alignment with other processes (e.g. poverty reduction strategies)

Politically charged, as gains are potentially high, but:

Baselines – could end up rewarding countries with poor performance

An excuse for developed countries not to reduce at home?

Permanence – forestry is more problematic than other forms of emissions reduction (and it is not included in EU ETS partly for this reason)

M and E are complex with different levels of capacity in different countries

There are many actors wanting a slice of the REDD cake (national/local governments; NGOs; private sector) – governance challenge

Still much uncertainty in form of REDD at national/sub-national level, but questions beginning to be addressed e.g:

Central or devolved financial management?

Types of policies and measures (e.g. agricultural intensification has very different implications to PES)

Alignment with other processes (e.g. poverty reduction strategies)

What are the potential opportunities for ACP countries? Source: Ebeling and Yasue 2007

What are the potential opportunities for small producers? Large, additional financial flows could result in: Direct monetary (e.g. direct payments through market mechanisms) and non-monetary benefits (e.g. clarification of land rights) Indirect benefits (e.g. local development projects; value addition in supply chain) Contribution to growth in forest/ag sector?

Large, additional financial flows could result in:

Direct monetary (e.g. direct payments through market mechanisms) and non-monetary benefits (e.g. clarification of land rights)

Indirect benefits (e.g. local development projects; value addition in supply chain)

Contribution to growth in forest/ag sector?

What are the potential risks? Efficiency vs. equity trade-off – is REDD about environment or development and can it be both? Risk reduction to ensure trees maintained is key to investors: Finance likely to only go to areas where land rights are well defined Stringent rules and regulations are hard for producers to meet Complex institutional arrangements Low availability of capital can hamper market participation: High transaction costs Little upfront capital Asymmetry of information in establishing REDD could put small producers at a disadvantage Figures on REDD cost effectiveness mask the complexities of rural livelihoods: Elite capture Conflict over benefits/lost benefits Certain sustainable cyclical activities (e.g. shifting cultivation) could be at risk

Efficiency vs. equity trade-off – is REDD about environment or development and can it be both?

Risk reduction to ensure trees maintained is key to investors:

Finance likely to only go to areas where land rights are well defined

Stringent rules and regulations are hard for producers to meet

Complex institutional arrangements

Low availability of capital can hamper market participation:

High transaction costs

Little upfront capital

Asymmetry of information in establishing REDD could put small producers at a disadvantage

Figures on REDD cost effectiveness mask the complexities of rural livelihoods:

Elite capture

Conflict over benefits/lost benefits

Certain sustainable cyclical activities (e.g. shifting cultivation) could be at risk

Is REDD different from what has gone before? Larger scale, national systems allow for potential policy shifts towards improved sustainability in the forest sector (but not necessarily pro small producers) National carbon accounting may open up opportunities for other agricultural activities to access carbon finance and reduce overall transaction costs in the carbon market – this could benefit a wider range and number of small producers Forest preservation could increase ecosystem resilience to climate change and potentially increase human resilience to climate change in forest areas (though the links are still unclear)

Larger scale, national systems allow for potential policy shifts towards improved sustainability in the forest sector (but not necessarily pro small producers)

National carbon accounting may open up opportunities for other agricultural activities to access carbon finance and reduce overall transaction costs in the carbon market – this could benefit a wider range and number of small producers

Forest preservation could increase ecosystem resilience to climate change and potentially increase human resilience to climate change in forest areas (though the links are still unclear)

Conclusions Implications depend on international/national mechanisms REDD could offer significant new financial flows to developing countries and small producers… … but in selected cases (so not likely to be a panacea for climate change, poverty reduction or biodiversity) Need for increased emphasis on processes that help enable small producers and the rural poor to access benefits (access to legality; financial support; buyers taking on risks; broad commitment to public rather than private interests) Governance challenge – can REDD financial flows change the political economy of forest sector in countries?

Implications depend on international/national mechanisms

REDD could offer significant new financial flows to developing countries and small producers…

… but in selected cases (so not likely to be a panacea for climate change, poverty reduction or biodiversity)

Need for increased emphasis on processes that help enable small producers and the rural poor to access benefits (access to legality; financial support; buyers taking on risks; broad commitment to public rather than private interests)

Governance challenge – can REDD financial flows change the political economy of forest sector in countries?

4 Contact: Leo Peskett [email_address] Visit: www.odi.org.uk/Climatechange OR www.odi.org.uk/fpep