The Rainforest Rush is on!

Although you may not be aware, all the World’s largest corporations are rapidly purchasing as much-endangered rainforest as possible. Why would they do this you ask? To which the simple answer is that they are all highly undervalued and so a very good investment!

All multi-national corporations have enormous global carbon footprints, and only in the coming years will this officially become a financial burden to them as global governments slowly enforce various methods of what is effectively an emissions tax. As the underlying unit of CO2 emissions is the carbon credit, and rainforests are the largest organic owner of carbon credits, the investment decision is an easy one.

With deforestation the root cause of around 20% of global carbon dioxide pollution, “reduction of emissions from deforestation and degradation” (REDD) projects should be accepted by the UNFCCC this December in Copenhagen. Once this occurs, implemented REDD projects will have carbon credit values within the Kyoto Treaty’s “Clean Development Mechanism” giving them enormous inherent financial value. Rather than wait for this decision most MNC’s have made their minds up, taken the bull by the horns, and are buying their stock at “pre-launch prices”. The Rainforest Rush is on!

As scientists worldwide perfect their analysis techniques including using satellite technologies, the carbon stock already stored and the sequestration rates of forests are being calculated and rainforests evaluated. It isn’t every forest of course. Only those that are officially endangered by a high risk of deforestation, in countries such as Brazil, Indonesia and Papua New Guinea, will pass the rigorous REDD standards.

amazon rainforest

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PAPUA NEW GUINEA CARBON CREDITS SUSPENDED

Its not all good news in the evolution of the voluntary carbon markets. Papua New Guinea has the highest deforestation rates in the World, significantly affecting PNG’s and global carbon sequestration levels.

With illegal and legal logging rife in PNG and Indonesia, financial incentives are crucial to prevent further deforestation and motivate reforestation. Forests carbon credit value are already calculated and traded on the Voluntary Carbon Markets, however the Reducing Emissions through Deforestation and Degradation (REDD) initiative must be ratified at the United Nations Climate Change Conference in Copenhagen this December 2009 to make these valuations official and regulated.

In the mean time, considering the potential financial / carbon-offset value these forests may have in the future, developed countries are jostling for control over developing countries forests and reforestation opportunities. Should the carbon credits be accredited or not, distribution and sales of these credits is also a highly pursued market. In PNG suspicious government activity has cast a shadow over the future forest carbon credit market and even attracted the attention of Interpol. Peter Younger from Interpol told Reuters that he expected to see fraudulent trading of carbon credits, as organised crime infiltrates the systems of companies and countries in the developed world’s buying rights to the stored carbon.

The PNG government “Office of Climate Change and Environmental Sustainability” OCCES recently awarded two brokers the opportunity to sell $500m of carbon credits allocated to one rainforest “April Salome” in return for a payment of US$8m to assist the agency set-up. In the memo seen by Reuters, the officer requesting sign-off from the PNG Prime Minister also highlighted that the OCCES would receive 20% share of the brokers ongoing profit.

April Salome is expected to generate up to 1m tonnes of avoided carbon dioxide emissions, and with the voluntary market valuing these credits around $8/tonne, the annual revenue to be generated from the credit sales is significant. Whilst the PNG government have now stated that an “open tendering” system will be in place for brokers to win the business, one broker firm “South Pole Carbon Asset Management” claims to have all the legal documents giving it rights to sell April Salome. They are already selling the carbon rights despite the project not yet approved or validated by any third party according to Reuters.

With the UN Conference in Copenhagen still a long way off, this will be a very interesting summer and will hopefully show all the weaknesses the existing market has. Fingers crossed this will enable policy makers to make the critical decisions in implementing the right system to motivate a fully global movement toward forest protection and sustainable reforestation.

Papua New Guinea deforestation

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Avoiding the Carbon Crunch

Our planet has entered a new era, an era where the actions of the dominant species now directly control the wellbeing of the planet itself. Luckily, as inherent with any species, we will do whatever possible to protect our own future.

We now know that the burning of fossil fuels produces Carbon Dioxide that directly effects the stability of the planet’s ecosystem. We also now know that deforestation has a double conseqence, burning of trees not only releasing Carbon Dioxide in to the atmosphere but also cutting down trees removes the essential function of sucking Carbon Dioxide out of the atmosphere. We also know that as a species we continue to grow, not only through reproduction but also due to improving healthcare and medical advances we are all living longer, with predictions suggesting we will reach 9bn in 50 years time. We know that the survival of 9bn will depend on certain fundamental needs being fulfilled; clean air, clean water, housing, food and energy, and we know that succeeding in this for 9bn people will be impossible unless we change our habits.

So as the responsible species we seek solutions, and we have the tools to be capable of doing so. Technology is advancing. We are developing better educational systems to outline the problems we all face. We are developing better methods of purifying and recycling water. We are developing more environmentally-friendly ways of constructing homes, communities, offices, factories, and implementing infrastructure to maintain our lives. We are working on global political movements to ensure that all humans live and work towards our common survival. We are developing new environmentally-friendly technologies to deliver the energy we need, harnessing solar, wind and bio-fuel energy, and methods of reducing our power consumption. We are implementing regulations to protect the existing forests of the World, and incentives to plant new forests for the World. 

We now face the greatest challenge, not just fast and smooth system implementation but most importantly how to integrate this in to our financially-driven societies. The rapid creation of the Carbon Markets is crucial and necessary, giving Carbon emissions (or the lack thereof ) a financial value across as many industries as possible. This illustrates our survival instinct not only as a species but at an individual level - the age-old desire to gain via trade. As Carbon Markets develop the greatest concern is how to develop them to perform their fundamental task, ensuring the health & safety of our grandchildren, whilst still giving us the platform to compete amongst one another.

The Carbon Markets are essentially derivates markets, buying and selling “futures” or ‘forwards”, aka the promise to deliver a Carbon Allowance or Credit at a set price at a set date in the future. The danger arises with the necessary inclusion of Carbon Offset Credits, in that these are “earned” for NOT emitting Green House Gases (GHGs). So they are not a genuine product. Issues have already arisen with dangerous GHG chemicals being produced and then destroyed purely to gain the Carbon Credits. Verification and assessment methods for quantifying volumes of GHGs emitted are still not perfected, and many industrial projects going ahead anyway will claim Carbon Credits despite not being intentional for that purpose. Welcome to Subprime Carbon. Alarm bells ringing yet?

Today over a third of Carbon trading is suspected to be Carbon Offset Credits, leaving the door wide open for Subprime Carbon. Traders and speculators make up the majority of the market place, with independent carbon indexes and carbon funds already structured not to help companies achieve their Carbon Caps, but purely for capital gain. Should this really be an open market-place, where speculators can roam free and where hedge-fund tactics will surely selfishly allow the bubble to form with no care for the serious need for a stable market? Securitization of various classes of carbon offset credit projects can easily be done, and is no different from the very same securitization of various mortgage products which led to the eventual downfall of the credit market. These two models will be the same, and it could easily be far more difficult to analyse the variation in carbon-backed securities, which would eventually lead to a collapse of similar magnitude.

Can we afford for this, probably the World’s largest but definitely most important, market to disappear down the same black hole into which our financial markets fell? Serious regulation is needed, united and inter-communicating, not self-regulating such as the debacle of Wall Street over the past decade. Conflicts of interest must be keenly investigated and whilst the development of sophisticated products will be unavoidable in the future, they must also be scrutinised and independently regulated. How corruption, political influence and Wall Street will be kept separate from destroying the environmental integrity of the market is yet to be seen. Emission-reduction target setting must be based on unbiased scientific opinions and emission tracking must also be analysed by effective and independent monitoring systems. Price and market transparency is also essential.

Where we will end up in the future we can not tell, what we do know is that the road to get there is a treacherous one, which we have no choice but to take.

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So money Doesn’t grow on Trees … ?

Or so the old adage goes …. but as we enter a new era, an era where Carbon is the most talked-about and most important commodity in the World, then suddenly this age-old saying now seems a little short-sighted.

With over 20% of the planet’s carbon stored in trees, global governments and organisations now recognise and acknowledge that the protection of the forests is absolutely vital in preventing devastating climate change. Not only do trees continue to capture and store Carbon, when destroyed by fire they release harmful CO2 in to the atmosphere. At last their value is now substantiated financially, with carbon credits in the Voluntary Carbon markets averaging over $6 per tonne of CO2 equivalent and the highest values being placed on reforestation projects at over $8/tCO2e. So not only good for the environment, growing trees is now at long last serious business.

Willow Rivers recommend investing in sustainable rainforests in Costa Rica, Indonesia, Malaysia and Sri Lanka not only for the carbon credit potential, but also for the actual goods produced. In conjunction with local governments these re-forestation projects grow teak and aquilaria, both forecast for thriving demand as global populations swell. Permits ensure the forests are sustainable aka as soon as harvesting occurs a rest-period is enforced followed by healthy re-forestation. With harvesting periods between 8 and 18 years, investors choose when to harvest portions of the forest so producing “waterfall returns” and mantaining maximum soil health. These types of forest investments can also be structured via SIPPS and are able to give additional tax advantages.

Further than carbon credits and actual sustainable wood harvesting, even further values are being placed on forests by some organisations such as their rainfall production, water storage and weather moderation capabilities. Whilst the relevant values are yet to be justified and proven, there is no doubt that the future is looking good for trees.

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RTC3 - Indonesia first country to go REDD

As our 3rd story on the Road to Copenhagen, we focus again on Indonesia which is now the first government to formally enact regulations governing a UN-backed REDD (Reducing Emissions from Deforestation and Degradation) scheme.

Under the Indonesian regulations, foreign parties can now join with local companies to develop REDD projects, delivering Carbon Credits to the owners. REDD projects are not yet officially accepted within Kyoto’s CDM scheme for emission reduction credits, and can only be traded on the voluntary carbon markets, however it is hoped that in Copenhagen this December that decision will be reversed.

Indonesia is the Worlds 3rd most rain forest covered country, and as such holds an enormous resource in the carbon-sinking trees. Deforestation problems exist within Indonesia due to the popular and lucrative Palm Oil production, the plantations for which are often on cleared rain forest. It is hoped the ratification and acceptance of REDD as a genuine CDM mechanism will stop this deforestation before too late.

“Carbon Conservation” is working with the Aceh government in Indonesia on “Ulu Masen”, the World’s first independently validated REDD project covering 1.87m ha. How the credits generated will be traded, and what the Indonesian government will receive as a levy, are yet to be decided. Most importantly, with 20 REDD projects under development in Indonesia, progress is atleast under way.

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RTC2 - Financial evaluation for REDD

As part of our second blog on the Road to Copenhagen, we ask our selves what will it take for REDD (Reducing Emissions through Deforestation and Degradation) to be endorsed at Copenhagen in December? To become a genuine financially-acceptable solution to the global climate change problem, the value placed on preserving the forests needs to increase.

Rhett Butler and colleagues devised forecast models to estimate the equivalent financial return from a 10,000 hectare forest over 30 years according to its use and REDD’s accreditation. Firstly they considered preserving the forest and giving it the current REDD voluntary credit market pricing, which only produced a net present value of up to $994 per hectare. Secondly they considered deforestation and development of a Palm Oil plantation, which generated a far superior NPV of up to $9,630 per hectare. Thirdly they applied the desired model, that of giving REDD credits the compliance market credit value which would result in a far more competitive NPV of up to $6,605 per hectare.

This clearly shows that from a financial motivation perspective, the protection of our forests to prevent irreparable climate change and damage is going to REQUIRE the REDD credits to be given a higher value than they currently are. Fingers crossed for the United Nations Framework Convention on Climate Change in Copenhagen in December this year!

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Sustainable forests keep the rain falling

Research recently published in New Scientist magazine has shed new light on the way our planets weather is formed. Meteorologists have suggested that the world’s forestry is acting as a gigantic pump, generating tremendous winds that push rainfall all over the globe.

Forestry has a long-standing relationship with rain - nearly 50% of all precipitation that falls on a typical tropical rainforest is evaporation from the trees. This in turn keeps the air above the canopy moist and with strong winds arriving from the ocean, more and more rain is generated; hence the name ‘rainforest’. But now two Russian scientists claim that the forests themselves are in fact creating more wind pumping the moisture across the planet.

In a very brief explanation the process is as follows; 1) Vapour from forests and oceans condense to from droplets and clouds. 2) The gas takes up less space as it turns to liquid, lowering local air pressure. 3) The pressure is lower over coastal forests, which suck in moist air from the ocean, generating wind which pumps the moisture further inland. 4) This process continues over and over again covering new sections of forest and pushing rain and moisture further and further inland.

If these scientists are correct then government attitudes to forestry and climate change may be changed forever. To justify their hypothesis the meteorologists point to areas of the world like West Africa and Northern Australia which don’t have coastal forests - where the climate becomes increasingly drier as you head inland. This is in stark contrast to the parts of the globe that have forestry running from the coast to the interior, where rainfall is consistent from the coast all the way inland.

With climatologists already concerned about the effects of deforestation on our planet, this news will further validate their fears. However, the good news is that by re-planting forests then these powerful woodland pumps can spread rainfall across our continents once again.

Sustainable Forestry investments such as those offered by Ecogen Investments in Malaysia and Sri Lanka are conducted in careful conjunction with the local governments. Land is leased to Oxigen Plantations who plant and manage Teak and Aquilaria trees, two woods predicted for high future demand. Investors receive waterfall returns over 4 years < 16 years, depending on when the trees are harvested, and investments can be made through the UK SIPP structure to give taxation benefits. With the progression of REDD projects in many dense forest countries such as Indonesia, many believe these forestry projects will be accepted by the CDM and so also yield profitable carbon credits for owners of Sustainable Forest projects such as this. After harvesting, new trees are planted, ensuring the forest is sustained.

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REDD in Action from Brazil to Kenya

Companies like ImageTree and centres like Woods Hole Research Centre in the US are providing two of the Worlds largest populations, Indonesia (4th) and Brazil (5th), with hope for reaching their carbon reduction goals. As two of the largest Green House Gas emitters, ranked 3rd and 4th respectively in the World, Indonesia and Brazil both have serious deforestation problems which cause the majority of their carbon emissions. Whilst we still have until Dec 09 in Copenhagen to find out what the COP decide to do with regards to any implementation of REDD policies, it is at least certain that some REDD activities and incentives will commence soon. Once the best form and methods of REDD implementation is decided, whether at a project or government-level and whether via the carbon market or an incentivized fund method, it will only be a matter of time before REDD activities become the norm. Very soon the REDD-related technologies behind forest carbon level analysis and deforestation rate assessment, protection and prevention, as such developed by ImageTree and Woods Hole Research Centre, are sure to be in high demand by global governments in the future.

Meanwhile in other areas of the World some countries are ploughing ahead with their REDD plans despite the certainty of the final outcome. In Kenya for example the Kenya Forest Service (KFS) have now signed a deal to protect their 80,000 acre natural wildlife area, with the entire project funded by sale of the land’s carbon credit values in the Voluntary Carbon market, as certified by the Voluntary Carbon Standard (VCS). For many of the twelve nations to originally receive funds from the World Bank’s Forest Carbon Partnership Facility the time to act is now!

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RTC1 - The Road to Copenhagen

In December of this year, the world’s governments will meet in Copenhagen to discuss the issue of climate change going forward from 2010 and beyond. The Kyoto Protocol will expire next year and with nearly all countries currently signed up (albeit without the most powerful - the USA), the planet sits and waits anxiously to see how climate change policy will be determined over the next decade. One of the most challenging tasks will be how both the developing and developed world are brought into the framework in someway.

Through this special blog on the “Road to Copenhagen” Willow Rivers will offer insights and opinions on the challenges and developments currently facing governments around the World. Kicking off this week with a brief mention on how the economic downturn is having an effect on the efforts of governments and business.

In these difficult times many governments will be reluctant to increase the burden on businesses unless it is absolutely necessary. However, many governments are mitigating the downturn by providing large sums of money investing in renewable energy infrastructure and other such projects. Businesses meanwhile are placing an even greater emphasis on cost control. Many will be looking to increase their energy efficiency, which will naturally reduce costs, and this coupled with reduced global business activity will also ease the demand for energy. However, this is where global leaders are presented with a headache - lower demand for energy translates into lower costs for fossil fuels, making investments into alternative energy less attractive.

This is but one of the many problems leaders will have to try and balance when Copenhagen comes round in December. Look out for further updates on Willow Rivers blog over the coming weeks as we look ahead to Copenhagen 09.

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