The Private Sector in the REDD+ Supply Chain: Trends, Challenges

and Opportunities

Florence Bernard

ASB Partnership for the Tropical Forest Margins13TH NOVEMBER 2012, NAIROBI

Outline

1. Why is the Private Sector critical for REDD+?

2. Implications of COP 17

3. Research questions and methodology

4. Trends, Private Sector key players and motivations

5. Challenges surrounding Private Sector involvement

6. Potential strategies to stimulate Private Sector involvement in REDD+

7. Research gaps and on-going research

Why is Private Sector critical for REDD+?

• Funding is a major concern in the implementation of REDD+ activities• Upfront annual investment ≈ US$17–40 billion

• Cumulatively available public REDD+ funds from donor countries pledged since 2008 ≈ US$7.2 billion

• The private sector is a key stakeholder for fostering innovation in REDD+ activities by providing a range of expertise

• The Private Sector is an actor that can both drive deforestation and help conserve forests

Implications of the REDD+ Outcomes of COP 17 for the Private Sector

• “Results-based finance provided to developing country parties that is new, additional and predictable may come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources’’

• Recognition of the possibility of developing “appropriate market-based approaches for REDD+’’

Goal and Research questions

• Goal: to improve REDD+ outcomes by fostering successful private sector engagement

Research Questions

1. In the REDD+ supply chain, who are the private sector players and what are their motivations and types of interventions?

2. What are the current challenges and enabling conditions for private sector engagement in REDD+?

3. How can private sector engagement be enhanced in REDD+?

Defining the Private Sector: privately owned assets firms and primarily oriented towards maximizing profits

Research Methodology

• Review and Analysis of 12 Projects • 8 REDD+ projects (Tanzania, Kenya, Cameroon, DRC,

Madagascar, Zimbabwe, Vietnam); 3 reforestation projects (Philippines, Kenya); 1 Conservation project (Madagascar)

• 15 semi-structured interviews • Private sector entities and key representatives

• Third sector entities leading projects with private sector involvement

• Governmental stakeholders

• Expert meeting with focus group discussion

The REDD+ Supply Chain

InvestmentProject

Development and implementation

Carbon credit trading and

retailing

Carbon credit purchasing

Capacity-building

& Technical advisory

Validation

& Certification

Primary production

Processing Distribution and trading

Consumption

Trends of Private Sector involvement in REDD+, 2002 to 2010

The REDD+ Supply Chain

InvestmentProject

Development and implementation

Carbon credit trading and

retailing

Carbon credit purchasing

Capacity-building

& Technical advisory

Validation

& Certification

Primary production

Processing Distribution and trading

Consumption

INVESTORS

Who Form of Intervention Motivation

Investment funds (e.g. Althelia, Macquarie-International Finance Corporation, Terra Global Capital)

Banks (e.g. BNP Paribas, Nedbank)

Direct investment with project developers

Pre-buying carbon credits through purchase agreement

Re-sale for profit within voluntary or pre-compliance markets

Gain of experience in REDD+

Emissions-intensive industries

Pre-buying carbon credits through purchase agreement

Voluntary credit offsetting

Large multinational firms (e.g. Toyota Motor Corporation)

Grant Corporate Social Responsibility (CSR)

Private Sector key players, form of intervention and motivations

INVESTORS

Who Form of Intervention Motivation

Medium- to large-sized carbon offset private firms(e.g. Wildlife Works)

Direct investment Business for profit

Private Sector key players, form of intervention and motivations

The REDD+ Supply Chain

InvestmentProject

Development and implementation

Carbon credit trading and

retailing

Carbon credit purchasing

Capacity-building

& Technical advisory

Validation

& Certification

Primary production

Processing Distribution and trading

Consumption

PRODUCERS

Who Form of Intervention Motivation

Medium- to large-sized carbon offset private firms(e.g. Wildlife Works, Terra Global Capital, Infinite Earth, South Pole Carbon Asset Management Ltd)

Development and implementation of REDD+ projects

Niche of activities + Business for profit

Large multinational firms (e.g. Toyota Motor Corporation)

Co-implementation of REDD+ projects (technical expertise and technological capacity)

Corporate Social Responsibility (CSR)

Greening their image / Branding

Private Sector key players, form of intervention and motivations

The REDD+ Supply Chain

InvestmentProject

Development and implementation

Carbon credit trading and

retailing

Carbon credit purchasing

Capacity-building

& Technical advisory

Validation

& Certification

Primary production

Processing Distribution and trading

Consumption

BROKERS

Who Form of Intervention Motivation

Financial firms (e.g. Carbon Neutral Group, ClimateCare)

Trading and retailing / Intermediary between investor and producer

Re-sale for higher prices in the future

Private Sector key players, form of intervention and motivations

The REDD+ Supply Chain

InvestmentProject

Development and implementation

Carbon credit trading and

retailing

Carbon credit purchasing

Capacity-building

& Technical advisory

Validation

& Certification

Primary production

Processing Distribution and trading

Consumption

END-BUYERS

Who Form of Intervention Motivation

Emissions-intensive industries

Large multinational firms

Purchase agreement Voluntary carbon offsetting

Pre-compliance

CSR

Branding 

Private Sector key players, form of intervention and motivations

The REDD+ Supply Chain

InvestmentProject

Development and implementation

Carbon credit trading and

retailing

Carbon credit purchasing

Capacity-building

& Technical advisory

Validation

& Certification

Primary production

Processing Distribution and trading

Consumption

AUDITORS

Who Form of Intervention Motivation

Provider of services (e.g. Det Norske Veritas, SGS)

Audit Business for profit / niche of activity

Private Sector key players, form of intervention and motivations

ADVISORS

Who Form of Intervention Motivation

Private consulting firms, provider of services(e.g. Camco, GAF AG)  

Technical expertise regarding deforestation and degradation mapping via remote sensing analysis; capacity building

Business for profit / Niche of activity

Key findings (1)

• The functions are not mutually exclusive and a private sector actor can wear several “hats” simultaneously.

• Top 3 motivations: re-sale of carbon credits, voluntary carbon offsetting or pre-compliance purposes, CSR and branding

• Emergence of a strong secondary forest carbon market

• Growing involvement of financial institutions --> confidence in the future of REDD+

Challenges to Private Sector Involvement

• Uncertainty on long-term and robust demand for REDD+ credits• Risk-adjusted return on investment • To ensure a certain level of demand for tradable

REDD+ credits by agreeing on more ambitious mitigation targets while recognizing REDD+ as one of the instruments for achieving it

• Lack of a clear regulatory and policy framework

• Need for national REDD+ strategies, national emission targets, clearly defined roles

Challenges to Private Sector Involvement

• Unclear land tenure and Carbon ownership systems

• Acquiring the rights to the land versus acquiring rights to the carbon sequestered by the project (fungible, tradable commodities)

• FPIC with the communities, clear BSMs

• Lack of a Legal Basis for Private Investment • Due diligence in the investment process; e.g. DRC

National REDD+ Registry • Level of Insurance and Risk-Sharing Mechanisms • Appropriate Dispute Settlement Arrangements • Devising clear rules for BSM

• Appropriate Social and Environmental Safeguards

• Consultation practices for obtaining the FPIC of affected peoples

• Transparency• Asymmetrical bargaining power• Biodiversity considerations

Challenges to Private Sector Involvement

Potential strategies to stimulate private sector involvement in REDD+

• Enhancing investment though compliance carbon markets

• To increase demand for REDD+ credits, REDD+ to be included in compliance markets

• New and emerging compliance markets : California and South Korea’s cap-and-trade systems, Australia’s new climate legislation and Japan’s Bilateral Offset Credit Mechanism

• Crediting using a nested framework• Integrated, jurisdiction-wide accounting frameworks

within a country will reduce risk of intra-country leakage • Allows the direct issuance of performance-based

payments to the private sector• Enables crediting of subnational projects independently

from the overall national performance

Potential strategies to stimulate private sector involvement in REDD+

• Engaging the Private Sector in National-Level Strategies

• Formulating national strategies with involvement of sector actors as both private drivers of deforestation (e.g., timber, mining), as well as potential investors

• To help shape an overall policy framework that is win-win-win for all parties (the private sector, government and the affected stakeholders)

Potential strategies to stimulate private sector involvement in REDD+

Key findings (2)

Research gaps and on-going research

Some research gaps•Better information on global and regional private sector financial flows for REDD+•More research is required on the most effective ways to incorporate extractive industries into the REDD+ supply chain.

On-going research•Identifying and differentiating the key private sector subgroups by type of activity, scale, scope and motivation in REDD+ / disaggregated profile of the private sector…

Building REDD+ Policy Capacity for Developing Country Negotiators and Land Managers

The Private Sector in the REDD+ Supply Chain: Trends, challenges and opportunities

Another key determinant of REDD+ success will be ensuring effective private sector engagement. Funding is a major concern in the implementation of REDD+ activities and involving the private sector will be absolutely critical to scale up investment in REDD+. Nevertheless, little has been done to identify who the key private sector players are, the roles they play and the sector’s diversity in terms of scale, expertise, motivations and forms of involvement. The research examined:

In the REDD+ supply chain, who are the private sector players and what are their motivations and types of interventions?

What are the current challenges for private sector engagement in REDD+? How can private sector engagement in REDD+ be enhanced?

In exploring these key areas, the research aims to increase the scope and scale of effective private sector involvement in REDD+. The research concludes that while challenges exist, private sector involvement can help bridge the financing gap between public sector financing and developing country needs, as well as make vital contributions to REDD+ initiatives by providing technical expertise.

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The three-year initiative, Building REDD+ Policy Capacity for Developing Country Negotiators and Land Managers, was delivered with the generous support of the Norwegian Agency for Development Cooperation (Norad) as part of its Climate and Forest Initiative civil society support program.

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