Forests and climate change

February 2010

Introduction

Given that emissions from deforestation are estimated to account for between 15 - 20 per cent of all global emissions, the way in which developing countries manage their forest stocks will have a key role in global efforts to tackle climate change. We see this as involving two inter-related themes relevant to our clients:

  • the development of incentives and regulations to prevent deforestation and forest degradation; and
  • the role of forest derived biomass in the low carbon energy scenarios envisaged by many developed countries.

Each theme brings with it a range of issues and opportunities. Our expertise lies in not only assisting clients identify issues but to pro-actively identify opportunities.

Global climate change and carbon finance practice

We have a dedicated global climate change and carbon finance team with members in London and across Europe, Asia, the Middle East and Australia. With a commercial and pragmatic ethos committed to adding value, we play a leading role in carbon credit generation projects, carbon trading and climate change regulation.

Asia Pacific is emerging as a key region for forestry projects and having an integrated team on the ground allows us to work closely together to ensure that we are at the forefront of industry and regulatory developments within the region and on the global stage. The transfer of knowledge between teams enables us to fully understand the opportunities and challenges which different jurisdictions, voluntary standards and project types present for our clients. Our local expertise combined with our global network ensures that we meet both the international expectations of our clients as well as achieving the highest domestic standards of legal advice.

Our forestry practice marries together expertise from a range of specialist areas including climate change and carbon financing, public/private finance initiatives, M&A , capital markets, foreign investment and project approvals, environment and planning and equity fund raising.

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Can markets help save forests?

Whilst emission reductions from afforestation and reforestation are included under the Kyoto Protocol, deforestation and degradation were excluded due to concerns over how to deal with issues such as permanence and leakage. Whilst we have advised on a number of forestry projects developed under the Clean Development Mechanism, the temporary nature of credits issued for such projects and their inability to be used for compliance purposes in Europe have significantly hindered the capacity of markets to drive afforestation and reforestation projects globally.

After a long period of development, at the UNFCCC  negotiations in Bali in 2007 there was an emerging consensus that a new regulated international mechanism was needed to support reducing emissions from deforestation and forest degradation (REDD). Recognising this, the Bali Action Plan agreed there included a specific reference to consideration of REDD.  In the final build-up to Copenhagen the negotiation process started in Bali moved to actually putting together a draft text for a REDD mechanism. Although that text was not approved at Copenhagen, clear progress has been made on the shape of the principles behind such a mechanism. If progress is made in 2010 those principles will include:

  • Overarching principles such as that participation under the mechanism should be voluntary and be in accordance with a country’s capabilities and national circumstances;
  • A definition of the scope of the activities that fall under the mechanism (at present this is likely to cover the full scope of what is referred to as REDD+ - including deforestation, forest degradation, conservation of forest carbon stocks, and sustainable management of forests);
  • The safeguards relevant to activities such as preventing leakage, ensuring participation of stakeholders such as indigenous peoples and ensuring existing forests are not converted to plantations;
  • The elements to be developed by developing countries wishing to participate, such as a national action plan, forest reference levels and monitoring and reporting systems;
  • Recognition that a country’s ability to participate under the mechanism should proceed in phases which move from capacity building to implementation and finally to results based actions; and
  • A work program for UN technical bodies to assist the mechanism to become operational.

Whilst the text negotiated at Copenhagen was not agreed, REDD did find a place in the Copenhagen Accord, which emphasised the need to provide “positive incentives” to enhancing emission reductions from forestry through the “immediate establishment of a REDD mechanism including REDD-plus, to enable the mobilisation of financial resources from developed countries”. It also specifically refers to a commitment to provide “substantial finance” for REDD-plus to developing countries..

Further detail concerning the consideration of REDD at Copenhagen can be found in our Summary of Copenhagen Outcomes publication.

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Parallel initiatives

Although it is clear that there is substantial momentum to develop a REDD mechanism, it is also clear that this will take time and other models will be needed in the meantime.

One of the key features of the Copenhagen Accord is the establishment of the Copenhagen Green Climate Fund. REDD is specifically mentioned as a beneficiary of the fund, although there is next to no detail about how the fund will operate and how monies will be allocated and made accessible to different recipients.  Billions of dollars are needed to deter the economic incentives offered by plantation and timber companies and funding will be required for capacity building, MRV, land reform, compensation and regulatory reform.

New and innovative revenue raising mechanisms, both public (for capacity building and regulatory reform) and private (project-based or via public private finance initiatives for pilot projects) will be required. Long term funding models for REDD remain uncertain after Copenhagen with possibilities such as the following still on the table:

  • Funds - bilateral/multilateral funds. The Copenhagen Green Climate Fund will be one such example. Another is a proposal from Brazil for a fund to be financed by developing countries with emission reductions retired and not used for compliance.
  • Market linked mechanisms - for example raising funds from the auction of AAUs. Norway, Tuvalu and Greenpeace are supportive of this idea.
  • Market mechanisms - a sectoral commitment to stay below a certain level with the capability of generating fungible credits with value in compliance markets.  
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The global picture

The UNFCCC developments are occurring alongside potential progress in the United States - where the proposed cap and trade scheme in the Kerry-Boxer Climate Change bill before the Senate also includes a mechanism for supporting REDD activities. There have been calls for the bill to be scaled down and for the cap and trade element to potentially be delayed in favour of focusing on energy reforms. Senators Kerry, Lieberman and Graham are developing a compromise version of the bill and have stressed that cap and trade will be a key part of that bill. If the cap and trade scheme with the original REDD elements does go through, the American market will be a key driver for REDD, and perhaps the best option for recognition of early action projects.

Other countries are making their own way to drive REDD forwards. Indonesia, Brazil and the Democratic Republic of Congo have each focused on REDD as one of their nationally appropriate mitigation actions (NAMAs) in their submissions to the UNFCCC. Indonesia is one of the first countries to develop a regulatory regime for REDD, upon which we have frequently been asked to advise. Our work also on projects in Africa and Latin America enables us to quickly target the key local diligence issues for a project such as the identification of analogous forestry or environmental conservation concessions in countries where REDD regulations are yet to be developed.  

Copenhagen has highlighted the need for answers to key questions around REDD which our international teams are regularly considering and advising on, including:

  • What developments need to occur before there is the possibility of REDD activities generating credits capable of use within existing and proposed cap and trade schemes?
  • What role will early action REDD projects under voluntary emission reduction standards play under the developing REDD mechanisms?
  • How will committed funds be allocated and what other models for combined public and private sector finance can be used to protect forests?
  • How can proactive developing countries devise nationally appropriate REDD strategies that attract private sector support?
  • How will the “immediate establishment” of a REDD mechanism be effected, particularly without a legal framework?

A selection of our recent advisory work includes:

  • Advising on afforestation and reforestation CDM projects (including tracking proposals to reform the rules relating to such projects, particularly the temporary nature of credits).
  • Advising on several plantation projects in Australia, involving the generation of credits for use in Japan’s voluntary emissions trading scheme, and advising on the structuring, documentation and regulatory aspects of BP’s first investment by its emissions asset business in Asia Pacific.
  • Acting for private land holders and managed funds on forestry transactions in relation to the purchase of freehold title and registered forestry rights (both from a grantor and grantee perspective).
  • Acting in respect of several current REDD projects being developed in Asia (including the world’s first commercially financed avoided deforestation project), South America and Africa, including advising on project documentation, due diligence issues and off-take arrangements.
  • Providing strategic advice on the likelihood of credits from REDD projects becoming capable of use for compliance purposes under US, European and Australian trading schemes.
  • Tracking developments under the UNFCCC negotiations relating to REDD as a dedicated service for clients.
  • Assisting in the design of innovative financing mechanisms to combine public and private sector finance for REDD activities.
  • Assisting with the development of methodological standards for voluntary REDD projects.
  • Assisting in the design of appropriate regulatory structures for REDD project activities within forest nations.
  • Advising on to the potential establishment of a forest conservation fund in a host country with biodiversity and carbon sink benefits which would compensate owners who cease harvesting timber and clearing land.

Our client base in this area includes:

  • Carbon originators
  • Early stage financial investors
  • Service providers in areas such as remote sensing
  • National governments and regulatory authorities.

Our team is also actively engaged in a range of forums focused on ensuring any REDD mechanism is appropriately designed to achieve its environmental goals, including the Carbon Markets Investors Association, the International Emissions Trading Association and the World Economic Forum working groups.

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Biomass as part of a low carbon future?

Developed countries around the world have sought to shift to a low carbon future by creating incentive mechanisms for increased renewable power generation. In Europe, feed-in tariffs and “green” certificate regimes have driven the growth of the renewable sector, including the role of forest derived biomass in power generation. Similar initiatives such as those that would be deployed under proposed US schemes will also drive such usage. The growth of biomass power generation in Asia is also increasing, driven in part through the Clean Development Mechanism but also from particular opportunities within relevant domestic markets. In the longer term this sector faces the challenge of ensuring market growth is sustainable, particularly as the international effort to tackle deforestation and forest degradation gathers pace.

We are working with a range of clients to manage the immediate and longer term issues that arise from this, including:

  • Providing detailed advice on the current and proposed regulatory incentives for biomass fuelled power generation in Europe and elsewhere across out international network.
  • Working with buyers and sellers of biomass to address sustainability issues, either at a regulatory level or under voluntary certification approaches.
  • Advising on the development of a range of significant biomass fired power generation facilities, including developing vertically integrated procurement chains for sustainable biomass. Our experience in Europe and Asia in this sector is market leading with deep practical knowledge of the issues to be managed and the solutions that work for developers and financiers.
  • Advising on the development of, or investment in, a range of plantation types.
  • Developing aggregation structures for the sourcing of energy crops for the European market through existing agricultural channels.

Our client base in this area includes:

  • Suppliers of forest derived biomass
  • Utilities purchasing biomass products
  • Developers and financiers of biomass power generation facilities.
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Forest carbon experts:

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Biomass experts:

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