Insuring Forests
Around the world, deforestation and forest degradation accounts for about 20 percent of global greenhouse gas emissions. It also threatens biodiversity and exacerbates a cycle of poverty for those who depend on forest resources for their livelihoods.
In an effort to tackle these interrelated issues, a concept emerged from a 2005 UN climate conference which proposed a system of trading carbon credits to keep forests intact. This proposal has since developed into the REDD programme (reduce emissions from deforestation and forest degradation).
Through natural processes, forests can draw in and store large amounts of carbon from the atmosphere. REDD therefore promotes the concept of a country with high carbon emissions paying a nation (usual a developing country) to protect its forests in exchange for carbon pollution ‘credits’. This not only reduces overall emissions by keeping the trees alive, but also maintains biodiversity in the protected forests.
From theory to practice
In theory, REDD offers a win-win scenario whereby carbon emissions are reduced whilst biodiversity and forest resources are preserved. In practise however, there are a number of flaws in the concept which are underpinned by the fact that the system relies fundamentally on trust between the two parties.
Three major issues have been identified. First is a phenomenon called ‘leakage’. If a country is paid to preserve a particular forest resource but simply moves it’s deforestation practices to an adjacent forest then the net environmental degradation remains unchanged rendering the transaction pointless.
Second, the protections placed on a forest resource need to be permanent. If the resource is exploited once an arbitrary time limit is reached (say 10 years) then the conservation efforts again become irrelevant. Finally, REDD cannot work in situations where a forest isn’t under any threat of being felled.
Getting some insurance
The problems described above are all borne from the tricky issue of trust. In order to overcome this hurdle, REDD needs to incorporate a mechanism that encourages all parties to do the right thing. One such mechanism that has been mooted recently is to develop an insurance-based version of REDD (known as iREDD).
In this system an outside broker would establish a premium for the contract between the party wishing to buy carbon credits (the buyer) and the party agreeing to protect their forest resources (the seller). This premium would be based on an assessment of risk which quantifies factors such as government reputation, management capability and political buy-in.
Once a risk assessment is complete, the buyer places up to a third of the proposed transactional costs (depending on the risk level) into a separate ‘insurance policy’ account that generates interest over time.
If the contractual obligations have been met at the end of the project, the seller receives the money in the insurance policy plus accumulated interest. However, if the seller reneges on the agreement, the buyer can extract the money from the policy along with the interest.
Towards a solution
The researchers proposing the iREDD scheme acknowledge that it will not solve all issues associated with REDD or that it is a panacea for climate change as a whole. However, interest from the private sector and governments is high and policing the REDD scheme through financial controls offers a feasible mechanism to make sure everyone ‘plays fair’.
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