This impact story was originally published by the Environmental Defense Fund here.
The challenge is clear: if tropical deforestation were a country, it would rank fourth, only behind China, the US, and India in emissions. However, the solution is even clearer: these same forests can provide 23% of the cost-effective climate mitigation needed before 2030, if the right economic incentives are in place.[1]
Despite numerous pledges, forest loss shows little sign of abating. The cost of protecting all forests at high-risk of deforestation by 2030 requires $130 billion in annual funding while existing financing is only $2-3 billion.[2] Bridging this gap will require public, private, and philanthropic funding on a scale and at a speed we have never seen before.
Part of the solution rests with the promise of financing from carbon credits for jurisdictional-scale forest conservation programs (JREDD+), which aims to reverse current economic incentives, so that forests are worth more alive than dead. And momentum is building. At the last COP, Costa Rica and Ghana signed agreements worth more than $60 million with the LEAF Coalition. This builds off Guyana’s landmark deal a year earlier for $750 million with Hess Corporation.
However, for JREDD+ to achieve its promise, companies need to rise to the occasion and governments need to continue to develop mechanisms to compel corporate action. On the supply side, jurisdictions must be equipped with pricing transparency to equitably negotiate sales contracts with corporate buyers.
A new report from EDF, with data powered by MSCI Carbon Markets, Navigating Jurisdictional REDD+: A Pricing Guide for Tropical Forest Nations, is intended to provide forest nations with the latest insights into this nascent marketplace. Below we summarize the findings across five key questions decision makers should have top of mind.
- JREDD+ credits trade in the Voluntary Carbon Market (VCM). What is going on in the VCM?
The VCM has experienced rapid growth with various forecasts indicating that the market could reach $10 – $50 billion in value by 2030, driven by an increase in corporate net-zero commitments and increasing convergence with regulated markets.
However, demand has not yet risen to meet these forecasts. Over the past two years the market has been in a state of “wait and see” as integrity concerns, combined with a lack of sufficiently strong regulatory mandates, have led to demand plateauing. If demand does not rebound, increasing supply will continue to put downward pressure on prices, limiting incentives for jurisdictions to conserve these crucial ecosystems. - What developments could impact JREDD+ throughout 2024?
Jurisdictions should pay close attention to two major voluntary governance initiatives. The Integrity Council for Voluntary Carbon Markets (ICVCM), which defines a threshold for quality carbon credits, is set to issue guidance on whether jurisdictional credits meet their “Core Carbon Principles.” Second, SBTi (Science Based Targets Initiative), which provides guidelines to companies to meet their net zero commitments, is set to clarify their guidance on the use of carbon credits as a mechanism for companies to address emissions in their supply chains – a potentially huge source of demand.
On the supply side, our analysis shows an upside scenario of 300 million tons of annual supply coming from jurisdictions in the ART-TREES pipeline by 2030 – six times the size of REDD+ demand today. For forest nations, more supply needs to come online to prove JREDD+ as a high-integrity asset class, but if this supply significantly outstrips demand, prices could suffer. - What does this mean for JREDD+ prices today?
While REDD+ prices have fallen 70%+ in the last 12 months, “premium” REDD+ projects are trading at double the price of average projects. Moreover, a survey of 478 corporate buyers indicates a 20 – 40% willingness to pay a premium for JREDD+ credits over REDD+. However, for countries with older credits, we are seeing these credits trading at steep discounts.
As a result, EDF estimates that JREDD+ credits have an estimated market value of $6 – $12 today depending on the year the credit was generated and individual jurisdiction considerations. However, the LEAF Coalition has functionally set a floor price of $10, while Guyana’s 2022 deal with Hess Corporation for an average price of $20 through 2030, effectively sets an upper bound for prices. - What does the future hold for JREDD+ prices?
Looking forward, average JREDD+ prices are forecasted to grow from current levels to $15 in 2028. 162 scenarios were modelled and tested with experts to determine this forecast. Nonetheless, the report also notes that “Given the limited trading volumes in the VCM, and JREDD+ specifically, forecasts can be highly imprecise and 1-2 large policy changes could shift pricing dramatically in the near-term. This is represented in the high variance in outlier scenarios ranging from $8 – $27 in 2028.” - What should jurisdictions consider beyond price?
To create a holistic sales and negotiations strategy, forest nations should look beyond just topline price and ensure they:
Understand all direct costs (and their timing) to ensure sufficient revenues are secured to sustainably execute conservation programs
Focus on maximizing the net present value (NPV) of carbon proceeds, the financial value of a JREDD+ program today, and a useful tool to compare competing sales offers
Define the relative prioritization of securing guaranteed cash flows versus maximizing upside revenue potential
Determine financing options to address potential upfront revenue shortfalls, with many jurisdictions using a “blended approach” of public, concessional, and private funding
Establish clear priorities for negotiations, understand your counterparty’s objectives, and negotiate in good faith