10 Point Proposal
The Prince's Rainforests Project has developed a proposal for a financing mechanism that would have a significant impact on reducing tropical deforestation. Full details on this proposal can be found in the PRP report, which can be downloaded here [PDF].
This ‘Emergency Package for Tropical Forests' has ten key elements.
1. Payments to Rainforest Nations for not deforesting
2. Multi-year ‘service agreements' based on clear performance targets
3. Payments used to fund alternative, low-carbon economic development plans
4. Transparent, multi-stakeholder disbursement mechanisms in-country
5. A ‘Tropical Forests Facility' focused on results
6. Developed country financing from public and private sources
7. ‘Rainforest Bonds' issued in private capital markets
8. Rainforest Nations participate when ready
9. Facilitating and accelerating a long-term UNFCCC agreement on forests
10. Global action to address the drivers of deforestation
1. Payments to Rainforest Nations for not deforesting
Deforestation occurs because it is in the financial interests of individuals, communities and enterprises in Rainforest Nations. The PRP proposes that the international community make payments to these countries based on the costs of pursuing an alternative, low-deforestation economic development path.
These costs would include foregone income from unsustainable logging, agriculture and other land uses, and transaction and enforcement costs involved in switching to alternative economic activities. Global surveys estimate the opportunity costs of halving deforestation at between US$10 billion and US$15 billion per year [1]. The exact amount would be a matter for negotiation, based on the situation in each Rainforest Nation.
2. Multi-year ‘service agreements' based on clear performance targets
Rainforest Nations would sign national-level forest maintenance agreements, covering five-year periods, under which they would commit to reduce deforestation to agreed levels and/or conserve areas of forest. In return, they would receive annual payments.
The bulk of the payments would be linked to actual delivery of results in the forest, measured through national and global monitoring systems using remote sensing technology. However, in the early years of an agreement, these payments could cover the costs of capacity-building, policy and institutional reform and the other preliminary steps a Rainforest Nation would need to take to alter its deforestation trajectory.
This would be a business-like arrangement, a service contract under which the world pays Rainforest Nations for delivery of ecosystem services, rather than traditional aid.
3. Payments used to fund alternative, low-carbon economic development plans
Rainforest Nations would be free to decide how best to use the payments. Some interventions would be within the forestry sector but much of the funding would be deployed outside the forests, as this is from where much of the pressure for deforestation comes. Likely actions might include the following.
• Changing policy and legal frameworks related to land use and tenure.
• Strengthening forest monitoring and enforcement systems.
• Providing incentives to private individuals and enterprises to sustainably manage existing forests, to plant new forests, to shift agriculture to available non-forested land, and to increase and sustain yields on existing agricultural land.
• Creating Payment for Ecosystem Services (PES) schemes for landowners.
• Investing in general economic development projects such as infrastructure, enterprise finance and education.
4. Transparent, multi-stakeholder disbursement mechanisms in-country
The Emergency Package would respect the sovereignty of nation states. It could only work with the full cooperation of Rainforest Nation governments. But addressing the drivers of deforestation would require the engagement of local communities, indigenous peoples, the private sector, and provincial, state and district administrations.
All stakeholders would need to be consulted when national governments draw up their alternative economic development plans and make decisions about the allocation of funding. High standards of transparency would be required in relation to how money is spent; this may include appeal mechanisms and safeguards for the rights of forest communities and indigenous peoples. Special institutions and accounts to handle rainforest payments may need to be created in rainforest countries to allow for multi-stakeholder involvement.
5. A ‘Tropical Forests Facility' focused on results
The Emergency Package would require a global institutional framework - referred to here as the ‘Tropical Forests Facility'. It would negotiate agreements with Rainforest Nations, raise finance from the international community, and disburse annual payments.
It may also need to coordinate a global forest monitoring programme and to support capacity-building by other international agencies within Rainforest Nations. The Tropical Forests Facility would need the technical ability to carry out these functions rapidly and effectively, and a governance mechanism that balances the interests of funding countries, Rainforest Nations and other stakeholders.
The Prince's Rainforests Project is studying alternative development agency models and consulting with governments to design an appropriate global architecture. One option would be to create the capacity within an existing institution (such as the World Bank).
Another would be to create a new entity, either as a supranational agency or a charitable foundation, supported by a wide range of governments. In either case, the agency, as a temporary institution, would seek to outsource functions to existing institutions and would retain a light structure. Any new institution would also work closely with existing forestry initiatives.
6. Developed country financing from public and private sources
Developed countries would be asked to make long-term commitments to the funding of the Emergency Package. The required financing, which could rise to US$10-US$15 billion per year, is small compared to the potential benefits: the net present value of halving tropical deforestation has been estimated at US$3.7 trillion [2].
It would be up to individual countries to decide how to finance their obligations. Funds could come from general government revenues or from sector-specific levies. Suggestions that have been put forward include auctioning carbon emission permits in national cap-and-trade systems, a levy on the catastrophe risk component of insurance premiums, and levies on commodity markets or aviation and shipping fuel. One option that has much potential is for governments to raise money from private capital markets by issuing ‘Rainforest Bonds'.
7. ‘Rainforest Bonds' issued in private capital markets
A fixed income security - a Rainforest Bond - could be issued in global private capital markets to raise upfront financing. Such bonds typically offer investors a fixed rate of return, normally an annual coupon, together with the repayment of the principal on maturity. Over US$400 billion of Sovereign, Supranational and Agency Bonds were issued in 2008 [3]. The Project has held discussions with pension funds and the insurance sector, which indicate that there would be significant demand for AAA-rated bonds with long-term maturities.
Rainforest Bonds could be issued by the World Bank, or by an independent entity with support from the World Bank. The bonds would be guaranteed by developed country governments, which would be responsible for payment of the coupon and repayment of the principal. However, it may be possible to mitigate the financial calls on these governments, for example by channelling some of the money into green investments that would generate financial returns.
Private sector bonds provide a way to raise large amounts of finance for tropical forests in the near-term, while allowing underwriting governments the time to generate revenues for repayment from clean development investments, domestic carbon permit auctions or other schemes. The Prince's Rainforests Project is working with the World Bank and institutional investors to develop this bond concept further.
8. Rainforest Nations participate when ready
The Emergency Package would be open to all Rainforest Nations. However, the speed with which they engage would depend on their political will and their capacity to address the drivers of deforestation.
Some Rainforest Nations would be in a position to sign multi-year agreements with the Tropical Forests Facility quickly. Others would require time to study the opportunity costs of not deforesting, to consult with stakeholders on an alternative economic development plan and to initiate policy reform. Some countries may require more fundamental institutional capacity-building.
The Tropical Forests Facility would work with existing bi-lateral and multi-lateral programmes to build these capacities. Nonetheless, it is expected that countries representing over two-thirds of current deforestation would be able to participate in the scheme rapidly.
9. Facilitating and accelerating a long-term UNFCCC agreement on forests
The Emergency Package would not be a replacement for, or an alternative to, a Reduced Emissions from Deforestation and Degradation (REDD) mechanism or any other avoided deforestation scheme formulated under the UNFCCC.
Instead, it would act as a bridging mechanism. It would build the capacities in Rainforest Nations that would be needed in any event to participate in a REDD mechanism. Its payments would decrease as carbon-based payments started to flow to Rainforest Nations. In addition, by preserving large amounts of rainforest it would increase the future scope of REDD.
More broadly, substantially reducing the amount of carbon emissions from deforestation over the next ten years would make it easier for the world to reach its carbon emission targets.
10. Global action to address the drivers of deforestation
The Emergency Package focuses on action in Rainforest Nations. But steps can also be taken in major commodity-importing countries to weaken the drivers of deforestation. Developed and rapidly developing economies import large quantities of agricultural commodities and timber products from tropical countries.
As such they are in a position to offer positive incentives to producers in rainforest countries who do not contribute to deforestation. This could reinforce the efforts taken by Rainforest Nations to change the nature of production in forested areas and support the implementation of their alternative economic development plans.
A number of certification and incentive schemes have already been launched or are in development. By participating, consumers, businesses, and governments in commodity-importing countries can all play a role in helping Rainforest Nations to save the world's tropical forests.
Sources
1 IIASA cluster model, GCOMAP model and Grieg-Gran study, cited in Eliasch Review, Ch. 5
2 Eliasch Review, Ch. 5
3 Euromoney Bondware
