Our Impact: Carbon Credit Payment Tools for REDD

Nicholas Institute Researchers Help Frame International Carbon Credit Payment Processes under the United Nation’s REDD+ Initiative

This is the second installment in a 12-part series highlighting the environmental policy impacts of the Nicholas Institute for Environmental Policy Solutions over its first decade.

A key point of talks at the 2014 United Nations Climate Change Conference twentieth Conference of the Parties (COP) in Lima, Peru, was ways to help developing countries reduce carbon emissions, including those due to deforestation and forest degradation—activities that account for nearly one-fifth (17 percent) of total global greenhouse gas emissions. In 2005, the United Nations Framework Convention on Climate Change (UNFCCC) first introduced Reducing Emissions from Deforestation and forest Degradation, or REDD, to the agenda for its COP meetings. The core objective of what is now called REDD+ is to encourage local stakeholders in developing countries to reduce emissions from forest clearings by placing a financial value on keeping forest-stored carbon in place. But the initiative left unanswered questions about the design of economic incentives for cutting deforestation rates. The Nicholas Institute for Environmental Policy Solutions tackled those questions, providing guidance to countries negotiating the UNFCCC and to parties developing REDD+ protocols in tropical developing countries.

An effective global REDD+ policy depends not only on policies that create the demand necessary to produce forest emissions reductions but also on a reliable source of finance to pay for those reductions. The Nicholas Institute’s Brian Murray, Christopher Galik, and Lydia Olander and former Nicholas Institute staff member Aaron Jenkins, working with colleagues at other universities, financial institutions, and NGOs, analyzed compensation design options in light of several challenges, including establishing baseline emissions levels against which reductions can be calculated, ensuring the permanence of emissions reductions given natural disaster risk, and shifting of emissions to other unprotected forests through market-driven “leakage.” These challenges are further heightened by local variation in forest carbon project potential.

“On the local level,” says Murray, “REDD+ programs can succeed only if they generate payments that exceed their planning, implementation, and monitoring costs as well as the foregone profits (opportunity cost) of forest clearing. These programs must also be sustainable and culturally acceptable to local populations reliant on forest access for their livelihood or food.”

The payment design framework developed by the Nicholas Institute and partner organizations reflects the understanding that a one-size-fits-all model won’t work. “We recommended that sourcing for payments remain flexible, whether it be a compliance process for countries that have mandatory emissions reductions caps, a non-market-specific transfer of funds to countries reaching emissions reduction goals, or a combination of these approaches,” notes Galik.

The Nicholas Institute, Ohio State University, and the Environmental Defense Fund established that international forest carbon reductions through voluntary markets or emissions compliance markets could be established if policies created demand for a sufficient supply of reasonably priced carbon credits.  

Nicholas Institute researchers and other policy analysts also determined that a combination of approaches is necessary to finance various REDD+ activities under the UNFCCC and in voluntary markets—at least for the present. “To ensure that we are paying for additionality—that is, paying to avoid emissions that otherwise would have occurred—we established a baseline for crediting. This baseline is a point of reference for virtually every financing approach used for REDD+ activities,” says Murray. “Ensuring the additionality of emissions reductions from REDD+ payments is critical to the system’s integrity—a principal at the heart of the Nicholas Institute’s work on policy design.”

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--Story by Melissa Edeburn