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03/17/2010

Copenhagen Climate Change Conference Sets Stage For Growth of Ecosystem Services Market


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DeforestationDeforestation is currently responsible for about 20% of global greenhouse gas emissions and that percentage is likely to increase if serious efforts are not undertaken to decelerate the rate at which forests are being destroyed and degraded. If anything substantive came out of the December Copenhagen Climate Change Conference it was an almost universal recognition of the critical need to reduce emissions from deforestation and to provide positive financial incentives to encourage reforestation and forest preservation. 

The primary framework for enabling this process is the United Nations Collaborative Program on Reducing Emissions from Deforestation and Forest Degradation (REDD). This mechanism will allow developed countries to offset a portion of their carbon emissions by investing in projects that preserve forests or prevent deforestation in developing countries. In the coming months, a more efficient, user-friendly, and transparent infrastructure for vetting such projects is also expected to emerge. A portion of the $100 billion climate change mitigation fund pledged at Copenhagen is also likely to be funneled into REDD initiatives. The World Bank has committed to assist in funding REDD, including arranging credit enhancements for REDD bonds backed by sovereign states and development banks. The country of Norway has unilaterally pledged to contribute $430 million a year to forest preservation and reforestation in developing countries.

But projects that will capture the value of forests as “carbon sinks” are only one among many categories of investment in the emerging ecosystem services market. Others include investments in ecosystem biodiversity, watershed protection, wetlands restoration, natural flood mitigation, soil quality enhancement, and ecotourism services. A noteworthy study issued in November by The Economics of Ecosystems and Biodiversity initiative of the UN Environment Program (UNEP) estimates the potential value and cost savings of such ecosystem restoration investments in the “multi-trillions” of dollars and reports that governments that are already investing in ecosystem preservation projects have reaped substantial economic returns.

Not surprisingly, private investors are beginning to take note of the value to be extracted now and in the future from investing in forest and other natural habitats preservation projects. Indeed ecosystem service contracts in the private sector are nothing new. For example, in 1988 in order to ensure the purity of the company’s bottled water, Vittel began to put into place a multi-million dollar payment program to compensate farmers operating upstream of its springs as they transitioned to more sustainable land use practices. The business models for other ecosystem service ventures have required enabling public subsidies either through direct government payments or the creation of some sort of tradable or transferable service “credit.” For example, the Florida Wetlandsbank Group, established in 1992, earns revenue from wetlands mitigation services provided to private and public entities and also generates state and federal freshwater wetlands credits.

In April 2008, Merrill Lynch (acquired by Bank of America in September 2008) announced that it would invest $9 million to protect 750,000 hectares of forestland as part of an “avoided deforestation” project in Indonesia. It expects to sell the resulting carbon credits and “ecosystem benefits” to its clients over a 30-year period.

Meanwhile, the London-based private equity firm Canopy Capital is paying the government of Guyana an annual fee to support rainforest preservation on government land. In exchange Canopy Capital will be paid a portion of the value of environmental services that it develops on that land, including rainfall generation, carbon sequestration, and biodiversity preservation. In Malawi, a small social entrepreneurial venture called Hestian Innovation has developed a stove that reduces wood fuel consumption by up to 80%. (Because the Hestian stove produces less smoke it has provided the added social benefit of reducing respiratory infection rates in the local population.) Hestian has been selling its stoves through a microloan program to rural Malawi residents and hopes to generate REDD carbon credits in recognition of the associated deforestation avoidance benefits.

At the conclusion of the climate change meeting in Copenhagen, the United Nations Principals of Responsible Investment (PRI) institutional investor initiative published an open letter to the heads of state of the developed world, reminding them that “at least 80% to 85% of the finance and capital required in our collective response to the mitigation and adaptation needs of climate change will come from private investment sources and capital markets.” Clearly the rapidly evolving market for ecosystem services will be playing a central role in that collective response.

--Susan Arterian Chang writes about sustainable investing and the new economy from White Plains, New York.

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