REDD+ and new market mechanism

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Date produced: 21/11/2016

What are the advantages and disadvantages of including REDD+ activities in the sustainable development mechanism established under Article 6 para.4 of the Paris Agreement?

Advice:

Introduction

1. The inclusion of REDD+ activities in the sustainable development mechanism under Art 6(4) of the Paris Agreement would allow for REDD+ activities to be traded with other states under a market-mechanism overseen by the CMA. While the mechanism under Art. 6(4) has not yet been defined, it aims to allow states to meet at least part of their Nationally Determined Contributions (NDCs) by purchasing carbon abatement units (or an equivalent) from other states. The question raised is whether REDD+ activities should be included in this mechanism such that states could purchase or sell the carbon benefit of REDD+ activities.

2.It is important to note that there is nothing to prevent REDD+ activities forming part of a state’s NDC, as has been done by parties such as Brazil.

3. If REDD+ activities are included in the Sustainable Development Mechanism (SDM), countries with the potential for REDD+ activities may gain a valuable asset that could be traded once the SDM becomes active. However, this will be informed by the final accounting and other rules associated with the SDM.

4. If REDD+ activities are not included in the SDM, funding and revenue for REDD+ activities will need to flow from other sources (public funds, private funds or a mix of both).

5. While there is the potential for REDD+ activities to be funded under the Paris Agreement, there is currently no binding funding mechanism by which such funding could be secured. It is also not clear what funding mechanisms would be used to support REDD+ activities. There is, nonetheless, the potential for funding to be granted through the Green Climate Fund (GCF) or the UN-REDD program. For example, the GCF has committed to co-financing Ecuador’s REDD+ action plan over the next five years.[1]

6. Given the alternative to including REDD+ activities in Art. 6 is uncertain, providing an analysis of its advantages and disadvantages is also necessarily speculative. At the centre of this question is whether a higher price for REDD+ activities would be received from “results based payments” under Art. 5(2) of the Paris Agreement or from the SDM under Art. 6(4) of the SDM.

7. However, at this stage, we consider it is fair to state that:

  •   The inclusion of REDD+ activities in the SDM will likely lower the cost of many countries meeting their NDC;
  • The countries which have comparatively benefitted the most by excluding REDD+ activities from the SDM are those with significant potential for REDD+ activities and NDCs; and
  • The funding for REDD+ activities is less certain under Art. 5 but could be considered given the significant impact that REDD+ activities will have on climate change.

Paris Agreement

Article 5

8. The Paris Agreement addresses REDD+ activities in Article 5. Article 5(2) states:

” Parties are encouraged to take action to implement and support, including through results-based payments, the existing framework as set out in related guidance and decisions already agreed under the Convention for: policy approaches and positive incentives for activities relating to reducing emissions from deforestation and forest degradation… “

9. There is not currently a funding system in place that provides certainty to states of ‘results-based payments’ for REDD+ activities under the Paris Agreement. However, there are significant agreements as part of the decisions forming the ‘Warsaw Framework’ that regulate the measurement, reporting and verification procedures for REDD+ activities and other reporting matters[2].

10. There has yet to be a comprehensive commitment to providing ‘results-based payments’ for REDD+ activities. Paragraph 55 of the COP 21 Decision states:

55.          Recognizes the importance of adequate and predictable financial resources, including for results-based payments, as appropriate, for the implementation of policy approaches and positive incentives for reducing emissions from deforestation and forest degradation, and the role of conservation, sustainable management of forests and enhancement of forest carbon stocks; as well as alternative policy approaches, such as joint mitigation and adaptation approaches for the integral and sustainable management of forests; while reaffirming the importance of non-carbon benefits associated with such approaches; encouraging the coordination of support from, inter alia, public and private, bilateral and multilateral sources, such as the Green Climate Fund, and alternative sources in accordance with relevant decisions by the Conference of the Parties;

11. The importance of funding REDD+-related activities was noted in the Bali Road Map Outcomes in 2007. The importance of REDD+ activities to environmental sustainability was acknowledged at that time, and State parties to the UN Framework Convention on Climate Change were encouraged to ‘mobilise resources to support efforts’ in relation to REDD+ related activities.[3]

12. The GCF can provide funding for REDD+ activities on an application-by-application basis. While there does not appear to be a dedicated fund for these activities, the GCF provides ‘readiness’ funding and proposal based funding. The ‘readiness funding’ is available to least developed countries, small island developing states, and African States. Readiness support is capped at US$1 million per year for each individual country. For proposal-based funding, two of the eight identified impact areas relate to REDD+ activities (namely, sustainable land use and forest management, and resilient ecosystems). The investment criteria do not specifically address REDD+ activities, but have the potential to incorporate REDD+ activities.[4]

13. The UN-REDD program, supported by a number of country donors, the Food and Agriculture Organization of the United Nations, the United Nations Development Programme and the United Nations Environment Programme provides support to developing countries to assist with REDD+ readiness. Funding allocations based on national programmes on REDD+ readiness are made to a number of developing countries upon application.

14. While it is possible that funding could be provided for REDD+ activities through the Paris Agreement, there is currently no binding commitment that secures financing for REDD+ activities. Further, there does not appear to be a dedicated financial instrument which represents verified emission reductions from REDD+ Activity.

Article 6

15. Art. 6 addresses the ability for countries to meet their NDCs through the use of ‘internationally transferred mitigation outcomes’ (ITMOs). This can be done directly between states under Art. 6(2)-(3) and it can be done through a general market mechanism under Art. 6(4). The Paris Agreement does not specify whether REDD+ activities could be an ITMO anywhere in Art. 6. This has been a key area of focus during COP22 and parties have been asked to consider how wide-ranging ITMOs may be under Article 6.2, or whether these should be confined to just emissions trading (for example, should ITMOs comprise trading of carbon offsets, allowances, renewable energy certificates, REDD+ or all (or some combination) of the above).

16. We currently understand that Art. 6(4) is proposed to provide the basis for a form of general market mechanism whereby a centralised body will oversee the sale and purchase of ITMOs. The mechanism under Art 6(4) is widely anticipated to be based upon the Clean Development Mechanism (CDM) under the Kyoto Protocol.

17. While the mechanisms for the SDM are yet to be determined, it is predicted that they will be largely based on the CDM.  REDD+ activities did not form part of the CDM and have different reporting mechanisms which are not currently integrated into the reporting mechanism which formed the basis of the CDM.

REDD+ activities included in Art 6 Mechanism

18. If REDD+ activities were to be included in the Art 6 mechanism, countries with the potential for REDD+ activities would likely have a valuable asset which could be traded on a carbon market once the Art. 6 mechanism has been implemented. Note that countries with the potential for REDD+ activities may use REDD+ activities to meet their domestic NDCs, regardless of whether they are included in the Art 6 mechanism.

19. However, there are a significant number of key issues and challenges to work through if  REDD+ activities are to be included into the Art. 6 mechanism.  REDD+ activities have their own evaluation mechanism which has been set out over a number of decisions, particularly  Decision 14/CP.19. The mechanisms for REDD+ activities and for the CDM (and potentially also the SDM) are different. The REDD+ activities are based on national measurement which report through Biennial Update Reports, while the CDM operates on a project basis.

20. Further, it is unclear how the safeguard mechanisms for REDD+ activities and the safeguards in the SDM would interact. REDD+ contains specific safeguards (for example respecting the “knowledge and rights of indigenous peoples and members of local communities”). These safeguards were not contained in the CDM.  Further, other safeguards in REDD+ are less quantifiable than those contained under the CDM.  Creating an effective flow of revenue through the market mechanism is likely to require standardisation of project assessment and market rules.

21. Ultimately, if a streamlining process were adopted the climate abatement results of REDD+ activities could be integrated into the unit of value that underpins the SDM (similar to the Certified Emission Reduction Units under the CDM). That is to say, REDD+ activities have a measurable, reportable and verifiable result which can be reduced to the same unit of value that underlies the SDM and NDCs.

REDD+ Activities Excluded from Art 6 Mechanism

22. If REDD+ activities are excluded from the SDM mechanism, they will fall exclusively under Art. 5 of the Paris Agreement. This mechanism encourages parties to “implement and support, including through results-based payments” REDD+ activities. If these mechanisms are used, countries may receive direct payments for REDD+ activities from sources such as the Green Climate Fund.

23. A number of initiatives have been announced to fund REDD+ activities, such as the Norwegian International Climate and Forest Initiative, the International Tropical Timber Organisation and the Australian International Forest Carbon Initiative. There have also been a number of references suggesting that funding for REDD+ activities may be provided by the Green Climate Fund, such as the recital from Decision 9/CP.19 which states:[5]

[Recital] Further recognizing the key role that the Green Climate Fund will play in channelling financial resources to developing countries and catalysing climate finance.

[5] Encourages entities financing the activities referred to in decision 1/CP.16, paragraph 70, through the wide variety of sources referred to in decision 2/CP.17, paragraph 65, including the Green Climate Fund in a key role, to collectively channel adequate and predictable results-based finance in a fair and balanced manner, taking into account different policy approaches, while working with a view to increasing the number of countries that are in a position to obtain and receive payments for results-based actions;

24. While the infrastructure for the measuring, reporting and verification procedures have been accepted, there is no currently agreed financing mechanism. A financing mechanism for REDD+ is not on the agenda for COP22. It follows that a financing mechanism for REDD+ activities under Art. 5 remains uncertain.

Advantages and Disadvantages

25. The exclusion of REDD+ activities from the Art 6(4) mechanism is primarily to the advantage of states that have significant potential for REDD+ activities which they wish to use domestically as part of their NDC. These states have a capacity to more easily meet their NDC commitments whilst receiving additional revenue under the Art. 5 mechanisms. These opportunities will not be available to other states with significant NDC commitments but without the capacity to conduct REDD+ activities.

26. The inclusion of REDD+ activities as part of the Art. 6(4) mechanism may assist parties to meet their NDCs (by acquiring offsets under the Art. 6(4) mechanism). The NDCs are not necessarily affected directly by the availability of offsets through the mechanism under Art. 6(4). The effect that inclusion of REDD+ activities as part of the Art. 6(4) mechanism will have on the price of offsets is uncertain. The answer depends on the extent to which buyers and sellers of carbon abatement units (or an equivalent) will be able to acquire an offset under the Art 6(4) mechanism.

27.  It is not possible to accurately determine whether REDD+ activities would receive more funding under a funding model in Art. 5 or whether they would receive further funding at the price set under Art. 6(4). It is therefore not possible to say with any certainty whether states with the potential REDD+ activities would be financially advantaged by their inclusion under Art. 6(4) over time. However, the inclusion of REDD+ activities within Art. 6(4) may provide greater certainty to states with the potential to undertake such activities as opposed to the current position under Art. 5 which merely encourages ‘results-based payments’ without any commitment. In this way, allowing trading in this context may also assist with leveraging private financial flows. However, the availability of alternative funding through the GCF, UN-REDD Programme or other sources might provide a counter-balance to this perceived benefit (particularly in light of the environmental considerations as discussed below).

28. Finally, in terms of environmental considerations, the inclusion of the REDD+ activities under Art. 6(4) is likely to reduce the effectiveness of the current commitments collectively if there is not a corresponding increase in the level of commitment to reduce carbon emissions under NDCs. Under the Art. 5 mechanism, further greenhouse gas reductions from REDD+ activities are achieved in addition to those covered under NDCs (though some states will include REDD+ activities as part of their NDCs). However, if REDD+ Activities are covered by Art. 6(4), they will not produce an overall increase in the carbon reduction, but a reduced cost of meeting current commitments.

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[1] Green Climate Fund, ‘Priming Financial and Land-Use Planning Instruments to Reduce Emissions from Deforestation’, available at: https://www.greenclimate.fund/-/priming-financial-and-land-use-planning-instruments-to-reduce-emissions-from-deforestation?inheritRedirect=true&redirect=%2Fprojects%2Fbrowse-projects.
[2] See Decision 9/CP.19, Decision 10/CP.19, Decision 11/CP.19,  Decision 12/CP.19,  Decision 13/CP.19,  Decision 14/CP.19 , Decision 15/CP.19
[3] See Decision 2/CP.13.
[4] The six criteria are: climate impact potential; paradigm shift potential; sustainable development potential; needs of recipient [namely, vulnerability to climate change and financing needs of the recipients]; country ownership and effectiveness and efficiency. See further detail at: https://www.greenclimate.fund/documents/20182/466886/Project_Preparation_Funding_Application_Template.docx/65e91043-7122-4479-8778-b563b8ee3ee2.
[5] See also Decision 8/CP.20, “Report of the Green Climate Fund to the Conference of the Parties and guidance to the Green Climate Fund” at [18] requests the GCF consider decisions relevant to REDD+.