Reducing emissions from deforestation and degradation: What contribution from carbon markets?

Tropical deforestation is responsible for 15-20% of total man-made emissions of greenhouse gases. In December 2007, at the international conference of Bali, the United Nations acknowledged that a viable solution to climate change must include a mechanism to limit deforestation and forest degradation. Today, the most widely used economic tool to reduce emissions is carbon markets: caps on emitters, and trade allowed between emitters and reducers, drive a price signal on carbon and provide incentives to control emissions. This report examines the different possibilities to broaden the range of this tool so that it helps reduce emissions from deforestation. The three main possibilities presented are a tax-based fund, the use of auctions revenues, and the issuance of tradable credits. The report does not discuss other instruments unrelated to carbon-related payments. We first summarize existing information on the causes of deforestation, and the impact forest loss has on the global climate. To the contrary of a commonly held view, we find that farmers, more than loggers, are driving deforestation. Some, mostly in Africa, cut the forest to grow staple crops, while others, especially in South America, do so in response to the increasing demand for commercial crops and cattle. Building on this analysis, we describe the different possibilities to link carbon markets to the fight against deforestation. In the latter case of the issuance of tradable credits, we find that while carbon markets could substantially increase the amount of funding available to develop projects and programs that reduce deforestation, demand for carbon credits must keep up with this potential new source of supply, probably around one billion ton of CO2 per year. As an analysis conducted by EDF shows, the emission caps currently advocated by the European Commission for Europe and by the Lieberman-Warner bill for the US would create enough demand to generate a price signal around 20 €/tCO2. Other solutions such as reserve prices in auctions or credits banking have been put forward to mitigate the risk of too many deforestation credits flooding carbon markets. In any case, reducing deforestation and maintaining a high price signal on carbon markets are like conjoined twins in the fight against climate change. Their link can be both a source of strength and vulnerability, but they eventually are both essential to achieve the ultimate goal of stabilizing the climate