SINGAPORE, (Reuters) – A potentially lucrative scheme to save forests and earn carbon credits must overcome huge risks before it starts drawing major investments, a leading carbon trader and investor said yesterday.
The U.N.-backed scheme, called reduced emissions from deforestation and degradation, or REDD, aims to reward developing nations that preserve areas of forest as part of global efforts to curb the pace of climate change.
In return, REDD projects would earn valuable offsets for every tonne of planet-warming carbon-dioxide locked away by the forest. Rich nations needing to meet emissions obligations would buy the offsets.
The United Nations hopes to formally endorse the scheme at a major climate meeting in December in Copenhagen but has to agree its design before it starts in 2013. The fledgling scheme now relies on companies’ demand through the voluntary carbon market.
“There is no shortage of capital that is ready to be committed,” said Abyd Karmali, global head of carbon markets at Bank of America Merrill Lynch in London.
“But the framework for REDD needs a lot of firming up at the international level through the U.N. negotiations, and also at the individual country level.”
The bank has several pilot REDD projects under development, including a large project in Indonesia, but remains cautious.
“What’s critical, from an investor’s standpoint, is there are some prerequisites for the full potential of REDD credits to be realised,” Karmali told Reuters in an interview.
The Copenhagen agreement would have to recognise early action taken by developing countries with some pilot projects, he said.
“Otherwise, the projects that are being undertaken in this early action phase would be confined to the voluntary market.”
Secondly, countries with REDD projects should be allowed to authorise private and public entities to participate. Most of the roughly 50 pilot projects globally were at the sub-national level and involved private entrepreneurial risk-taking, he said.
“So the question is, are these types of activities going to be part of the eventual U.N. agreement?”
Also, agreement for a REDD mechanism would need to adopt the best practice for projects emerging in the voluntary market.
“We’re of the view that for the REDD market to be sustainable, it needs to be linked in to the compliance market,” he said, referring to a global U.N. market and national emissions trading schemes.
Nor is there certainty about project design standards that will be accepted by the Waxman-Markey climate bill in the United States, even though it is generally positive about REDD.
“For all these reasons, there are very significant risks in this space,” Karmali said. “I have referred to this segment at present as the junk-grade end of the investment spectrum in the carbon space because of massive risks and potentially massive rewards.
“The irony is, in all of the carbon market, this is the segment that should be the gourmet end of the spectrum.”
