The Althelia Climate Fund’s $7 million investment in the Madre de Dios region of Peru aims to support 1,100 farmers on sustainable cocoa production and protect a biodiverse national reserve. It’s a marriage of avoided deforestation and sustainable commodity production that is projected to pay off in more ways than one.
9 April 2015 | Last November, a group of Dutch business leaders found themselves far away from their desks, standing damp but happy in the Peruvian rainforest. Representatives from development bank FMO, carpet maker Desso, and energy competitors Eneco and Essent were visiting the forest they’d paid to save.
The trip brought them to a 570,000-hectare protected area spread across the Tambopata National Reserve and the Buhuaja-Sonene National Park in the Madre de Dios region, known as the “Biodiversity Capital” of Peru. It earns its nickname by providing critical habitat to threatened species such as the black caiman, harpy eagle, and giant otter. A recent government census puts the human population of Madre de Dios at just under 110,000 – more than 20 times what it was in the 1940s, when gold mining began to draw migrants from the South Andes.
Though they are technically government-protected areas, the forest cover in Tambopata and Buhuaja-Sonene is dwindling, with an estimated 1,189 hectares lost every year. The construction of the South Interoceanic Highway, which started in 2006, has accelerated gold mining, wood extraction, and slash-and-burn agriculture. Migration to the region has also increased, with the city of Puerto Maldonado swelling.
“What is so depressing is I came to Puerto Maldonado 31 years ago,” said Mark Meyrick, who heads Eneco’s carbon desk. “That town has not changed materially in terms of development in that time. It’s still pretty dusty, still pretty rundown, still doesn’t have much going for it, and yet there has been a huge amount of environmental damage done in that area and I ask myself, to what end? Who has got rich on this? And it’s very difficult to see that anybody has.”
Meyrick’s company has invested in a program that might not make people rich, but will at least help them make ends meet while taking pressure off the valuable forest: the Tambopata REDD project.
REDD stands for Reducing Emissions from Deforestation and Degradation of forests, and the Tambopata REDD project aims to spur economic activities that are based on the forest’s conservation rather than its destruction – activities such as cocoa production, chestnut harvesting, small-scale fish farming, and low-impact logging.
The project took about three years to get off the ground. Project developers first had to identify which portion of the forest was in danger and calculate the deforestation that would occur with and without intervention. They created a detailed project design document that underwent an audit to ensure it met the requirements of the Verified Carbon Standard, the body that would eventually issue offsets, each representing a tonne of carbon dioxide kept out of the atmosphere (delineated as tCO2e).
“Our goal is to avoid the deforestation of almost 12,000 hectares in both natural protected areas in the first 10 years of the project, and contribute to biodiversity conservation and socioeconomic development in the buffer zone,” said Paul Ramirez, the project manager.
But generating the offsets is only the first step. Then they have to sell them.
The market for REDD offsets is currently valued at around $100 million per year, according to Ecosystem Marketplace’s 2014 State of the Forest Carbon Markets report. Governments are currently negotiating how avoided deforestation might be including in an international climate change agreement, but until then the REDD market is entirely dependent on voluntary buyers. Though REDD offset sales are growing, prices are dropping, and last year project developers reported taking home less than 70% of the revenue they needed to keep projects afloat long-term.
The Althelia Climate Fund had an idea: Why not use REDD offsets as collateral against loans but also design projects to produce deforestation-free products, therefore creating multiple revenue streams? The Fund has raised more than 100 million euros to date from private investors and has attracted the attention of the US Agency for International Development, which last year announced it would guarantee Althelia up to $133.8 million to de-risk avoided deforestation projects.
The Tambopata REDD project was first conceived in 2010, when Althelia was just an idea. Ramirez, then a business manager at the Peruvian sustainable development NGO Asociación para la Investigación y Desarrollo Integral (AIDER), met Christian del Valle and Sylvain Goupille on a scoping trip to Paris to meet with companies interested in carbon finance. At the time, del Valle was the Director of Environmental Markets and Forestry at the French bank BNP Paribas, while Goupille was BNP’s Head of Carbon Finance.
A year later, the pair left BNP to start Althelia.
Althelia’s first investment was in Wildlife Work’s Taita Hills project in Kenya. But soon after, Juan Carlos Gonzalez Aybar, who did a brief stint at AIDER before becoming Althelia’s Latin America Director, started advocating for the project in Peru.
In September 2014, Althelia announced its $7 million investment in the Tambopata REDD project as part of a $12 million initiative. The Peru-U.S. debt swap fund “Fondo de las Americas” committed another $2 million in co-financing.
No Fences Around This Forest
While dozens of avoided deforestation projects are currently being developed around the world, Tambopata is among a subset of REDD projects that explicitly builds sustainable commodities into its business model.
“You have two options for avoiding deforestation,” explained Ramirez. “One is to put fences and rangers to keep people out – this option in the long-term is not sustainable. The other, which is actually the good one, is to work with people to change their practices.”
SERNANP, the national protected areas authority of Peru, awarded AIDER a 20-year contract to manage Tambopata and Bahuaja-Sonene – an agreement that allows the non-profit to attract private investment for conservation. Through the REDD project, AIDER aims to work with 1,100 farmers in 19 villages around the buffer zone of the protected regions. These farmers practice migratory agriculture, moving from plot to plot over time and sometimes clearing sections of the Reserve. AIDER seeks to break this cycle by helping them intensify agricultural production on land outside of Tambopata and Bahuaja-Sonene, as well as by planting crops that are lucrative enough that farmers can earn a long-term livelihood from a finite land area.
The NGO helped to form a farmer’s cooperative called Tambopata Candamo, founded in October 2014 with an original 21 members. The cooperative is focused on harvesting, processing and commercializing cocoa, with a goal of maintaining 4,000 hectares of fine aromatic cocoa trees. With AIDER’s help, they’ve invested in infrastructure such as warehouses, dryers and fermentation facilities, and trucks that will transport the processed product to market. Between the chocolate trees, farmers will also plant other cash crops such as bananas and beans.
AIDER is starting small, with a goal of planting just 300 hectares in this first year of the project – a proof of concept that they hope will convert skeptics. The biggest challenge so far has been communicating the concept of payment for performance to local farmers, according to Ramirez.
“It’s [hard] to make them understand that this is not a donation project, because they are used to NGOs coming with projects as grants and they don’t have to give anything back,” he said. “I think that’s why many projects don’t have the impact that they should have: Because people have machines and they don’t take care of the thing because it didn’t cost them. So this is a different project. It’s not a grant project, it’s a business project.”
Farmers receive financing “on the condition that they won’t deforest anymore and that a share of revenues will go to investors,” Ramirez explained.
In exchange for that promise, the project will pay to get them up to speed for certification by Fairtrade, which ensures fair labor practices and establishes a floor price of $2,000 per tonne of cocoa. Ecotierra, a Canadian-Peruvian company, supports the cooperative with finding a “route to market” – helping overcome the most common barriers facing cocoa farmers in Peru. The real money, however, will come on the back-end.
The cooperative will receive the majority of the revenues from what AIDER hopes will eventually be at least 3,200 tonnes of cocoa produced each year, certified as both organic and Fairtrade. AIDER expects farmers to earn a $500 premium over the market price because of their organic and Fairtrade certifications.
Premium or not, though, the cocoa industry in Peru is booming. Exports reached $146 million in 2013 and were forecast to rise 20% by 2014, according to the USDA’s Food and Agricultural Service. If cocoa prices hold at 2014 levels of $3,100 per tonne and if the project achieves 3,200 tonnes of annual cocoa production, this would translate into estimated revenues of almost $10 million per year for the cooperative.
The goal for the Tambopata project is to create a roughly equal split between the revenue streams from cocoa and carbon. But the project may lean more heavily on carbon sales in the beginning as the cooperative slowly expands its cocoa production and undergoes the organic and Fairtrade certification processes. Cocoa trees usually take three years to produce their first fruit and eight years to reach peak production. In the meantime, the revenue from the carbon offset sales begins to repay Althelia’s investors.
“We are entering into a mechanism which is like any other business,” Gonzalez Aybar explained. “So for the first time, we actually have carbon finance working. You have a carbon asset which is pledged for collateral for a loan and then you have companies that are buying the carbon from the project which serves to pay back the loan – and to make profits on top of that which are shared among the partners.”
The Tambopata REDD project has issued 108,335 offsets to date under the Verified Carbon Standard and is also validated under the Climate, Community and Biodiversity Standard. In addition to the Dutch companies that visited Tambopata last November, a Peruvian insurance company, Pacífico Seguros, has also purchased offsets from the project, which is expected to avoid the emission of more than 4.5 million tCO2e by 2020.
The trip to Madre de Dios left an impression on the representatives from the Dutch companies.
“I’ve been in the carbon market for 11 years now and the whole reason I came into it in the first place was because of my concern about the loss of biodiversity in the world,” Meyrick said. “So being able to actually get involved in a real project that protected some really key area of the world to me was absolutely massive.”
Gonzalez Aybar admits that a company buying 100,000 carbon offsets “won’t change the world” – nor will it fully support the Tambopata project. But he sees carbon offset purchases as a gateway for companies to begin thinking more holistically about their supply chains and their impact on the environment.
“For example, Desso today makes carpets and tomorrow probably they will be sourcing – I hope – some materials, for example latex, from reforestation projects,” he said. “For companies to start buying offsets is important for the offset itself, but also for the contacts with the projects and the business opportunity it brings.”
The Althelia Climate Fund is set to mature in 2021, at which point investors will be repaid and cocoa production is projected to be in full swing.
“We really try to set up projects where we can catalyze a change into sustainable land use so that when we exit, when we are not there anymore, the project is self-sustainable,” said Edit Kiss, Director of Business Development and Operations at Althelia. “In the case of Tambopata, we estimate that from year six the project will have enough revenues from the cocoa and the carbon revenues will be much less needed, and we really hope that it’s going to be very successful.”
As countries submit their plans to cut greenhouse gas emissions – commitments known as Intended Nationally Determined Contributions, or INDCs – ahead of this year’s international climate negotiations, the role of forests and land use in this agreement is still developing. This article will be updated often to offer summaries of how land use is included (or not) in INDCs as they are submitted to the United Nations Framework Convention on Climate Change (UNFCCC).
If you want to read the INDC documents, they are all available here.
This article was originally published on Ecosystem Marketplace.
INDC submitted: April 1, 2015
Notable because: It’s the first African country to submit an INDC.
The basics: Gabon will cut emissions by at least 50% by 2025 compared to a business-as-usual scenario.
Inclusion of land use: Gabon notes that 88% of its land area is covered by forests and the country therefore acts as a net carbon sink, absorbing four times the carbon dioxide it emits. Since 2000, Gabon has adopted a Forest Code, created 13 national parks that ban logging across large areas, and created a National Land Use Plan that identifies carbon-rich forests. However, the country notes that it does not want to rely on international carbon finance to preserve its forests, stating that these market mechanisms hinder its sovereign economic development.
*This INDC was submitted in French and has been roughly translated.
INDC submitted: March 31, 2015
Notable because: Russia’s submission means that two-thirds of industrialized nations covering 80% of emissions from developed countries have now released their climate plans.
The basics: Russia will limit emissions to 70-75% of 1990 levels by 2030, on one condition…
Inclusion of land use: Russia’s commitment is conditional on the “maximum consideration” of forests in emissions accounting under the UNFCCC. The country notes that it houses 70% of the world’s boreal forests and 25% of the world’s forests overall. Protecting these forests is the “most important element” of Russia’s climate policy, the INDC states.
*This INDC was submitted in Russian and has been roughly translated.
INDC submitted: March 31, 2015
Notable because: The United States is the second largest emitter in the world.
The basics: The U.S. will reduce emissions 26-28% below 2005 levels by 2025.
Inclusion of land use: The U.S. does not intend to use international carbon market mechanisms to meet its targets – a move that would appear to exclude mechanisms such as Reducing Emissions from Deforestation and forest Degradation (REDD+). However, it will account for emissions from the land sector using a “net-net” approach, which in UNFCCC-speak means subtracting the net emissions in the accounting period from the net emissions in 1990, the base year for most countries. This land-use carbon accounting will include emissions by sources and removals by sinks as reported in the Inventory of United States Greenhouse Gas Emissions and Sinks, including everything from cropland to forest land to wetlands to rice cultivation.
INDC submitted: March 27, 2015
Notable because: Norway has been an early and consistent supporter of international efforts to reduce deforestation through payments for performance to REDD projects. Its International Climate and Forest Initiative has funding up to three billion Norwegian Krones ($517 USD) per year pledged to avoided deforestation efforts, from the Brazilian Amazon Fund to the Congo Basin Forest Fund.
The basics: Norway will cut emissions at least 40% by 2030 compared to 1990 levels.
Inclusion of land use: Accounting emissions from the land-use sector remains a question mark for Norway. "Net removals" of greenhouse gases by forests accounted for 10.1 million tonnes of carbon dioxide equivalent (MtCO2e) in 1990 – about a fifth of Norway's total emissions in that year. As forests grow, Norway projects that the land-use sector will account for 21.2 MtCO2e in net removals by 2030. The country does not currently have a final position on land-use carbon accounting, but plans to work with European Union member states to come up with one. Depending on the outcome, "the commitment would need to be recalculated to ensure that the ambition level stays unchanged," according to the INDC.
INDC submitted: March 30, 2015
Notable because: Mexico was the first developing country to submit an INDC.
The basics: Mexico will unconditionally reduce its emissions 25% under the business-as-usual scenario by 2030. With access to financial resources and technology under an international agreement, the country has set a more ambitious “conditional” target of a 40% emissions cut.
Inclusion of land use: Mexico’s INDC states that the country will reach zero deforestation by 2030 and focus reforestation efforts in riparian zones, to promote ecosystem-based adaptation in important watersheds.
INDC submitted: March 6, 2015
Notable because: It covers 28 Member States and sets the tone for an entire region.
The basics: The European Union and its Member States will reduce domestic emissions at least 40% by 2030 compared to 1990 levels.
Inclusion of land use: The EU’s INDC states that “Policy on how to include Land Use, Land Use Change and Forestry into the 2030 greenhouse gas mitigation framework will be established as soon as technical conditions allow and in any case before 2030.” A previous EU decision sets rules for how to account for carbon emissions from the land use sector, but is just a first step.
Agricultural subsidies worth at least $486 billion per year dwarf the $8.7 billion total committed to avoiding deforestation in tropical countries, a new working paper by the Overseas Development Institute finds.
This article was originally published on Ecosystem Marketplace.
6 April 2015 – The race against deforestation is being won or lost hectare by hectare in the tropical rainforest countries that also provide the majority of the world’s agricultural commodities. But subsidies for commodities that drive deforestation may be undermining the efficacy of financial incentives for conserving forests and their carbon content, according to a new working paper by the Overseas Development Institute (ODI), a United Kingdom-based think tank.
Agricultural subsidies worth at least $486 billion in 2012 dwarf the $8.7 billion total that developed countries have committed towards Reducing Emissions from Deforestation and Degradation of forests (REDD+) since 2006, the report finds. However, financial incentives for avoiding deforestation would be much more effective if countries address the heavyweights on the other side of the scale, the researchers, Will McFarland, Shelagh Whitley and Gabrielle Kissinger, argue.
“Instead of raising the cost of GHG (greenhouse gas) emissions or penalizing activities linked to forest loss and degradation, the balance of government support is in the form of subsidies to the production and consumption of the key commodities that are driving forest loss,” they write.
The Big Four deforestation drivers
Alongside population growth and rising incomes, global appetites for deforestation-driving commodities – namely beef, soy, palm oil, and timber – is set to expand over the next few decades, according to research by Forest Trends, Ecosystem Marketplace’s publisher. Agriculture accounts for 70% of deforestation in tropical countries.
The economic signals for clearing forests to make way for agricultural commodities are strong. Brazil is the world’s largest beef producer, with exports contributing $7 billion to the economy – 3% of total export income. Soy covers more than a third of Brazil’s arable land and exports to China, the European Union, and elsewhere earned $26.2 billion in 2010. In Indonesia, palm oil covers a fifth of agricultural land and exports reached $17.6 billion in 2012, with timber contributing another $10 billion.
As the top two deforesters in the world by land area cleared annually, Brazil and Indonesia are ground zero for figuring out how REDD+ financing can work with existing policies. Deforestation currently accounts for up to a fifth of global GHG emissions and preventing further deforestation is one of the most effective levers to pull to mitigate climate change in the short term, according the United Nations Framework Convention on Climate Change (UNFCCC).
Governments have various motivations for putting subsidies in place, the ODI study finds. Subsidies may aim to ensure food security, create energy security by encouraging homegrown biofuel production, or serve as temporary buffers against commodity price shocks. But once in place, subsidies are difficult to remove – even if they have outlived their original purpose. Interest groups that benefit from subsidies lobby for their persistence, and governments often keep subsidies in place to garner political support, the researchers find.
Subsidies may accelerate environmental degradation in various ways, the ODI paper argues. They may draw more investment to industries such as beef and palm oil than the market would otherwise support. They may lower the cost of consumption of agricultural products, leading to overconsumption. They may remove incentives for natural resources industries to operate efficiently. And, if commodities are sold below market price, they may deprive domestic governments of tax revenue that could otherwise be invested in enforcing conservation regulations.
The working paper identifies eight beef and 16 soy subsidies in Brazil and 19 soy and 10 timber subsidies in Indonesia.
Brazilian cattle farmers have access to loans worth an estimated $218 million per year, and the below-market interest rates are credited with significantly reducing costs for producers. Brazilian soy growers have benefitted from about $540 million annual investment in roads, railways, and ports that help them get their product to market.
In Indonesia, developers benefit from about $800 million in annual concessional loans to develop commercial plantations for pulp and paper, with a government goal of establishing plantations across nine million hectares by 2016. Subsidies for smallholders palm producers led to the proliferation of palm oil plantations over an additional two million hectares between 2000 and 2009. A domestic mandate to produce fuel with at least 7.5% biofuel content is also encouraging palm expansion.
Overall, “levels of REDD+ finance stand in stark contrast to domestic subsidies, with average annual domestic agriculture subsidies in Brazil and Indonesia exceeding REDD+ finance by factors of 70 and 164 times, respectively,” the ODI paper finds.
Reweighting the scales
REDD+ financing could be used in part to reform subsidies to key commodities in a way that avoids further forest loss, the ODI paper suggests. In fact, the researchers identify examples of subsidy reforms that have already addressed the drivers of deforestation. The most successful example, according to the paper, is Brazil’s reform of its rural credit system in 2008 to require compliance with legal and environmental requirements. This resulted in an estimated $1.4 billion not loaned to out-of-compliance farmers between 2008 and 2011. The majority of this finance would have gone to supporting illegal beef production, leading to an estimated 15% increase in the rate of forest loss during those years.
There are also opportunities for subsidies to work harder in forests’ favor, according to ODI, particularly when it comes to intensification, or producing the same yields on less land area and with fewer inputs. Indonesia’s current palm oil yields of 3.8 tons per hectare fall below Malaysia’s yields of 4.6 tons per hectare. Smallholders in particular lag behind the productivity of private or government-owned plantations, indicating that with technology and financial support, smallholders could increase output without expanding plantations into the forest.
The ODI paper argues that these opportunities to shift the economic incentives around agriculture and forests should be an essential part of REDD+ process, both by phasing out or reforming subsidies that encourage deforestation and by designing any new incentives for REDD+ so that they complement other domestic efforts to shape private investment.
“There is current momentum on subsidy reform,” the authors write, citing countries’ emerging climate plans under the UNFCCC as well as the UN Sustainable Development Goals being developed for post-2015 as potential opportunities to rejigger agricultural subsidies to align with low-carbon development objectives.
Another key opportunity comes with the pending disbursement of the $10.2 billion in developed country pledges to the Green Climate Fund (GCF) established under the UNFCCC to support emissions reductions projects in developing nations. Norway, a major donor country, sees the GCF as an important channel for distributing REDD+ finance.
Thus far, finance for REDD+ “readiness,” or activities that will prepare countries to receive payments on the condition of successfully reducing deforestation, have not focused on changing subsidies connected to deforestation. However, this doesn’t have to be the case, the ODI paper argues.
“REDD+ finance could be used as a resource to support transparency, and as a lever to encourage subsidy reform,” the authors write.
Allie Goldstein is a Senior Associate in Ecosystem Marketplace's Carbon Program. She can be reached at email@example.com.