The creation of a “forest carbon economy,” where countries reap the economic benefit of the emission reduction contributions of their forests, is increasingly seen as an important source of income for countries in Africa, Latin America, and Asia-Pacific. Brazil’s President Lula is promoting the creation of an initiative inspired by the Organization of the Petroleum Exporting Countries (OPEC) to increase economic opportunities for countries with jurisdiction over tropical forests, such as the Amazon rainforest, the Congo rainforest in Central Africa, and the Sundaland in Indonesia, Malaysia, and Brunei. The message is simple: these countries are endowed with an asset that is indispensable to fighting climate change and that can be monetized. Although oil production and carbon emissions avoidance and abatement have little in common, the OPEC analogy is useful because it points in the direction of governments wanting to maximize the market value of a critical asset.
The numbers that support this idea are appealing. According to the Intergovernmental Panel on Climate Change, reductions in deforestation and forest degradation have the potential to contribute up to 18 percent of the emissions cut required to meet the 1.5°C warming goal set out by the Paris Climate Agreement. Estimates indicate that under a high carbon prices scenario, the value of the forest-based carbon credit market could increase from US$1.3 billion in 2021 to US$25 billion per year by 2030.
There are, however, some important caveats. First and foremost, the rapid increase in carbon credit transactions—which reached nearly a trillion dollars in 2022—has not been based on forests; in fact, forests account for only 0.1 percent to 0.2 percent of those transactions. Instead, the increase is based on other sources of carbon mitigation, such as the use of renewable energy. Moreover, tropical forests represent only a fraction of the total forest-based carbon economy (the main source of forest-based carbon credits originating in Europe). In fact, most of the funds that tropical forests receive do not come from carbon markets but from official development assistance (ODA). In 2021, ODA flows for the protection of forests reached US$1.1 billion.
In a new paper, we discuss the positive and negative externalities of forest-based carbon credits that need to be addressed before developing this market. Tree monocropping, a common reforestation practice that occurs when the goal is exclusively to reduce carbon emissions, is a source of negative externalities such as population displacement, increases in food prices, and biodiversity degradation. Corruption and land grabbing are other negative consequences, typically part of what can be called a “Green Dutch Disease” brought on in part by the sudden influx of foreign exchange and weak governance structures. These pitfalls suggest that enforcing social and environmental safeguards in carbon market transactions is critical.
To maximize the benefits of forest-based carbon credits, “productive development policies,” are needed. Land is not the only relevant factor of production; key components of the upstream and downstream value chain are intensive in skilled labor and capital, which have to be available. For example, measurement and verification require the use of satellites and other land surveying technology. Structuring and marketing carbon credits require financial expertise. Without the right policies, tropical forest countries, and local communities, will not be able to capture the benefits of carbon credits.
A call for National Carbon Federations
Our paper proposes the creation of National Carbon Federations to deal with some of these market failures. In addition, these organizations could improve the bargaining power of local actors and strengthen democratic governance and contract transparency, thereby preventing conflict. Carbon Federations can be nonprofit public-private partnerships that also provide key public goods, so that living standards improve as a result of the development of this market. Federations need to have a source of income, which can take the form of a tax on the sale of carbon credits.
Federations should be national-level organizations that unlock the benefits of carbon markets by aggregating small-scale forest carbon producers such as indigenous communities, peasant organizations, rural associations, and communal forms of land ownership. Their main role would be to aggregate and warehouse a pipeline of bankable projects that would otherwise be deemed too small for potential buyers in primary and secondary markets.
Just as in the past experience with agricultural federations, such as Colombia’s century-old National Federation of Coffee Growers, Carbon Federations can provide technical assistance, enforce adequate standards and quality, and develop the necessary capacity for monitoring and verification. By aggregating supply from carbon producers, Carbon Federations could access both primary and secondary carbon markets at scale, eliminating the need for intermediaries. They could also give voice to the dispersed communities that are underrepresented politically. At the macro level, Federations can partner with governments to explore the need for price stabilization mechanisms, provision of liquidity, and exchange rate risk management.
There is a long road to travel before tropical forest countries benefit from the carbon credits market. The most relevant obstacles are institutional, not technological. Carbon Federations, led by producers, are a vehicle to address the issues that have impeded the development of this market in tropical forest countries, while at the same time avoid becoming another example of the resource curse.
Efficient, transparent, and democratic institutions are necessary to remove many obstacles for the development of forest-based carbon markets. Governments and donors should actively promote the creation of National Carbon Federations.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
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