From Paper to Carbon Money: Financing Forest Conservation and Offset

Abstract

As a result of the 21st Conference of the Parties (CoP-21) in 2015, the Paris Agreement formally recognised the importance of finance and forests to tackle climate change. However, Article 9 of the convention calls for the leadership of developed countries in mobilising climate finance, while encouraging other parties to provide financial support voluntarily. This is rather an unstable mechanism, since it is strongly affected by political and economic hardships. Forest finance could be established instead that, just like capital markets, might allow for countries to choose between interest-bearing bonds from forest conservation (natural forests) and/or offset (forest plantations). Bonds demand comes out of carbon savings from forest conservation or offsetting forests, whereas bonds supply arises from investments giving off carbon emissions that must be avoided through forest conservation or offset through forest plantations. A Loanable-Forest Funds (LFF) model is developed which shows that forest conservation scenarios require lower rates of interest on forest bonds than forest offsetting ones. Then, unlike the Kyoto Protocol, which emphasises forest offset (forestry-CDM), the formal inclusion of forest conservation (REDD+) in the Paris Agreement might lower the real rates of return to long-term forest investments.