Can money grow on trees?
There is a new wave of entrepreneurs aiming to get rich by saving the rainforests. Richard Lofthouse reports
Ever wanted to get rich by doing absolutely nothing? In a bizarre way that’s what a bunch of new entrepreneurs and large corporations are trying to do. The formula is ridiculously simple: buy up or lease a tract of rainforest, prop up a deckchair and watch it grow. Put a financial price on its mere existence and sell a range of ‘products’ – called ecosystem services – to polluters. If trees could hear, they’d be setting up trade unions.
Is this the last and most crucial frontier in addressing climate change or a slightly daft get-rich-quick scam? Proponents stick one big uncomfortable fact to the pioneers of clean-tech, namely, that the most cost effective way to put the brakes on global carbon emissions would be to halt deforestation today rather than pour vast sums of money into whizzy new technologies, low emission cars and solar panels in Germany that would be 20 times more effective in the Sahara desert. They add that deforestation is accelerating, and that no government or charity has succeeded in halting it.
Take money-man-turned-tree-hugger Hylton Murray-Philipson, whose London-based Canopy Capital recently struck a historic deal with the Iwokrama Reserve in Guyana, investing an undeclared sum of money to protect and manage a tract of 370,000 hectares of pristine rainforest. Terrified of the rapidly disappearing forest and acutely aware of the implications for his 11-year-old son, the ex-investment banker laments: “When conservation comes up against money, money always wins.”
Yet he wants a private sector, for-profit solution on the same basis, with one source of private capital trumping the other, turning the tide away from lucrative deforestation to even more lucrative conservation. “Unlike currencies, commodities or the share prices of banks, ecosystem services, with incalculable planet-wide significance, are presently rated at nil. The market in natural services that have an increasingly clear economic value can therefore only go up,” he says.
He and a dozen co-investors believe they will eventually reap a financial profit from ‘products’ offered by the forest, recognising that it regulates climate, stores water, sequestrates carbon dioxide, generates rainfall and preserves wildlife and biodiversity. These are the ‘ecosystem services’ that the forest provides. Now they just have to be valued monetarily, says Philipson. Historically, none of these planetary lifelines have been valued at all. Instead, the whole universe of investment and capitalism has revolved around exploitation of the natural world with none of the so-called ‘external costs’ of pollution being taken into account.
Johan Eliasch, the author of a recently published UK government-sponsored report on the subject (see review, p99) says: “Without action on deforestation, avoiding the worst impacts of climate change will be next to impossible, and could lead to additional damages of $1 trillion a year by 2100.”
No wonder a living rainforest suddenly resembles a precious commodity if you take a hard, level-headed look at the realities of climate change instead of all the noisy-but-nice considerations such as job preservation in Detroit. Cut down a rainforest and you get two negatives. First the trees stop absorbing vast amounts of CO2, and then to make things worse the soil and timber left behind start to ooze their own massive quantities of greenhouse gases. According to Nicholas Stern’s 700-page Review on the Economics of Climate Change (2006), “Deforestation releases more carbon dioxide into the atmosphere every year than all the world’s cars, aircraft and ships combined.”
Preserving forests generates many additional benefits to mankind that don’t result from cleaner power stations, hybrid cars and wind turbines, such as biodiversity, pharmaceutical ingredients and real regulation of the climate. Barry Gardiner, a forestry specialist and UK government special adviser recently called for a ‘turbocharging’ of forestry assets in a successor treaty to Kyoto, due to be negotiated in Copenhagen in December. He argues that a tonne of rainforest carbon is worth two or four times more than a tonne from some other source.
This so-called ‘gourmet carbon’ approach is controversial because it goes against a key market tenet adhered to within the existing, Kyoto-derived carbon market, that ‘a tonne of carbon is a tonne of carbon’, and that from the point of view of atmospheric science and climate change it doesn’t matter where emissions fall as long as they fall.
But for now, despite all the non-climate-related assets contained in a complex forest ecosystem, we don’t even value its tonne of carbon. In fact forests are excluded from the UN-sanctioned carbon market, and also the European Emissions Trading Scheme (EU ETS), a decision back in 1997 described by Brazilian Pedro Moura Costa, chairman of Ecosecurities, as: “The greatest environmental crime of the 20th century.”
Of course, the profit dimension is not as simple as doing nothing while the trees toil away, removing carbon dioxide from the atmosphere. “It shouldn’t be seen as money for nothing,” says Charlie Kronick, senior climate adviser for Greenpeace UK. “There must be actual protection.” Both he and the European Union fear that bringing the world’s remaining forests into the global carbon market will unleash a tidal wave of cheap credits, denting efforts to develop carbon capture and storage technologies and adding volatility to an already shaky carbon price.
Beneath these disagreements is a human dimension. Eric Bettelheim, executive chairman of Sustainable Forestry Management, notes that there is no point demonising the loggers, who are responding rationally to market forces. Furthermore, plantations and reforestation are the other half of the equation, he says, otherwise there will be no source of timber for a world on course to have a population of over nine billion by 2050.
No forestry preservation scheme will work without prosperous, sympathetic local communities who derive their share of the benefits and paying jobs. For the same reason, avoiding the spectre of colonial meddling is a massive challenge.
Yet there is a growing global community of powerful individuals who are burying past conflicts for powerful new alliances. Canopy Capital’s grand gesture followed Guyanan president Bharrat Jagdeo’s dramatic offer in 2007 to cede the forest of his entire country to outside stewardship, on the right terms.
US investment bank Merrill Lynch last year announced a plan to preserve a huge tract of forest in the Indonesian province of Aceh. On much the same basis as Canopy Capital, the bank believes it can financially support the provincial government’s attempts to protect the forest and generate new jobs for illegal loggers in exchange for obtaining the ￼ right to sell a share of the carbon credits resulting from the avoided deforestation.
Meanwhile, US hotel group Marriott last year committed $2m (€1.6m) in a direct, face-to-face agreement with Amazonas governor Eduardo Braga in Brazil. Working with the local community, Marriott’s plan is to preserve a tract of rainforest in exchange for being able to measurably claim to have offset CO2 emissions generated by Marriott’s hotel rooms.
In another, not-for-profit private initiative, called Plan Vivo, private monies are channelled to villagers in Mexico and Mozambique in return for their audited achievements in protecting forest.
If these solutions are so obvious why haven’t they occurred earlier and on a much larger scale? The obvious answer is that there has been no clear regulatory or price signal to markets to mobilise private capital. Forests are inherently slow and require long-term planning and investment. Until now, that simply hasn’t existed.
Ironically, aspects of the Kyoto treaty have made things worse by placing a premium on the principle of ‘additionality’. The term refers to the view that a tradable carbon credit must rest on a real reduction of greenhouse gases. The trouble with rainforests that haven’t been cut down is that they are not ‘additional’ to what was there before. The result is a perverse incentive to cut down trees, since only growing new ones is ‘additional’. More likely, in the new climate of diminished food security, cleared forest will be converted to soybean or palm oil crops.
Excluded from the Kyoto-derived carbon market, all the various schemes to invest in living forests are privateer efforts boasting unofficial carbon-worthiness. This means that their credits are worth far less on the open carbon markets than a certified, UN-approved credit. By the end of 2007 the voluntary carbon market was worth less than 1% of a global market estimated to be $70bn.
Yet the outlines of a plausible, market-enhanced forestry solution are looming in to view. The EU emissions trading scheme, which began in 2005, has already made carbon into an emerging asset by forcing big polluters to buy credits from more efficient industries to meet a ‘cap’, hence the broadly used term for such schemes being cap-and-trade. The EU scheme currently covers five industries and 27 countries. If Obama sets up a similar US scheme, as he is widely expected to, it might generate as much as €300bn a year in revenues.
If only a fraction of that was channelled towards sustainable forest investment, Philipson could get rich and Marriott might be sitting on a valuable strategic asset.
The trouble with the EU ETS, as its critics eagerly point out, is that while it has “contributed to an unleashing of carbon entrepreneurialism in developing countries,” according to Abyd Karmali in a new book on the subject (see review, page 98), the vast majority of the regulated carbon abatement investment has gone on quick-fix industrial solutions in China and India.
The first generation of low-carbon millionaires has already been minted by these UN-sanctioned schemes – people like Ecosecurity founders Marc Stuart and Pedro Moura Costa, Camco International’s Tristan Fischer, Carbon Capital Markets’ Lionel Fretz, Climate Exchange’s Neil Eckert and Carbon Capital’s Stuart Clenaghan. All made fortunes when their companies went public, mostly on London’s Alternative Investment Market, even though those fortunes have subsequently dwindled as share prices and carbon credits have fallen. Now the hope is that this amazing pool of entrepreneurial talent could be unleashed on carbon abatement projects, including forests.
The NGOs are less sanguine. “The last thing we need is to pretend to protect the climate by paying people to pretend to protect the forest,” says Roger Higman of Friends of the Earth.
He also raises issues about governance, and how carbon market money might be spent. “It’s critical that any payment goes to the people who can protect the forest, and have the right to do that, and in situations where it is clear forests would have disappeared if there was no payment. This means clear property rights will need to underpin any effective financial transfers.” Greenpeace’s Kronick adds, “Governance is the largest problem. With forests as with other climate related issues – it all boils down to who benefits from globally traded commodities,” he says.
Philipson remains optimistic, insisting that 90% of the benefits from his plan for a rainforest bond (see sidebar) will return to the local community. Stern estimates the funding gap between present efforts to save the forest and the economic benefits of deforestation is “around $30bn a year”. Even by the standards of the most generous charity donations this scale of expenditure will remain a pipedream until there is a market for living forests. The only alternative, says Philipson, is an ‘ecosystem crunch’ that will make the current credit crunch “look like a storm in a tea cup.”
MARKET SOLUTIONS TO SAVE THE FOREST
Prince of Wales’s Rainforests Project
The pension plan for the planet’ involves an international agency raising funds by offering 15-year rainforest bonds with competitive returns. The bonds would be guaranteed by richer countries’ governments and the interest and principal would be repaid from a share of the income from future rainforest carbon markets. The hope is that pension funds would be attracted to the bonds as a source of safe returns.
Philipson will this year launch an Ecosystem Service Certificate attached to an €80m, 10-year tradable bond, the interest from which will pay for the protection and maintenance of 350,000 hectares of the Guyana rainforest.
Simon Petley, EnviroMarket
A tradable, forest-backed bond would allow investors to access exposure to sustainable forestry while “effectively providing the ability to buy and sell the underlying asset.
Sustainable Forestry Management
Wants a successor to Kyoto by the end of the year, with the following attributes: A long-term target for equalisation of per capita emissions; a medium-term target for stabilisation of greenhouse gas emission; emissions targets for all countries consistent with continued economic growth; crediting all emissions reductions including those from land use change and forestry; an international fund to build market-based capacity in all developing countries; principles-based regulation and delegation of compliance methods to the national level.
serves on the steering group of the Prince’s Rainforests Project
Wants governments to encourage the private sector to fund forest protection: Rainforests must be part of any successor treaty to Kyoto, and the emissions caused by their destruction included in the market mechanism after 2012 (when Kyoto ends); governments can introduce fiscal incentives or guarantees to make private investment less risky; the EU can build consumer demand for beef, soy and palm oil that is sustainably produced; governments can provide funding to kick-start the whole process.