How to Grow Money On Trees

By Emmanuel Narokobi

Its a shame that even though traditionally in PNG we had our own rules and guidelines on how to look after our environment, it all seems to have gone to waste in the last 30 odd years. What’s worse is that its only now that the financial markets are getting involved that we have turned our attention back to this long abused resource. Now before I get to telling you the secret of how to grow money on trees, lets firstly take a look at what ‘carbon trading’ and ‘REDD’ is, and more importantly how much it is all worth.

What is Carbon Trading?

Carbon trading dates back to 1989 when it took took off as a market mechanism intended to tackle global warming after the Kyoto Protocol was signed. The Kyoto treaty came into force in February 2005.

Among the array of greenhouse gases carbon dioxide is the most common and which is mainly emitted by burning fossil fuels. Under the Kyoto Protocol, each participating government was to set its national targets for reducing carbon dioxide emissions. (Other reduction initiatives – not part of the Kyoto Protocol – include company-based schemes, which also have specific targets.)

The Kyoto protocol required that all industrialized countries cut down their emissions by some percentage or be liable to heavy fines. In order to measure how much less a country was polluting each ton of reduced CO2, was measured as a unit. There are various ways to aggregate these units called “CER” or “Carbon Emission Reduction” units, either:

  1. Invest in CDM/JI Projects, or
  2. Buy these credits from the market.

CDM/JI Projects: CDM or Clean Development Mechanisms are executed in developing countries where these countries cannot, on their own, introduce or change technology and/or infrastructure to reduce carbon emissions. For example, a company in a developed country can give money to a company in a developing country to buy the necessary technology and in turn own the carbon units generated by bringing that technology change and thus meet the targets set by their governments. This will help developing countries to get the much needed financial help and in turn help the developed countries to meet their emissions targets or if they end up with surplus units, they can sell them for a profit.

JI or Join Implementation is a similar approach, but differs in that both the parties involved are both from developed countries.

Carbon Trading: the second option for companies in developed countries is that if they fall short of their emissions targets, they can buy more from the market from another organisation who has been successful in meeting their targets and who would therefore have a surplus of carbon units to sell. The idea is that it’s not important that someone is doing more to reduce carbon emissions or someone else is just buying the rights to pollute the air. What’s important is that overall, there are restrictions to carbon emissions and someone is made financially liable for falling out of these targets.

How Big Is this Carbon Trading Market?

A BBC article states that the World Bank, one of the main players in carbon financing, estimated the value of carbon traded back in 2005 to be about $10bn. The World Bank further believes the carbon market has the potential to bring more than $25bn (£14bn) in new financing for sustainable development in developing countries.

Therefore, as always, Trading firms, brokers and banks are among those organisations who will make the most money through commissions for organising carbon deals.

To get an idea of how large this market is, the World Bank’s own carbon finance fund more than doubled from US$415m in 2004 to US$915m in 2006 alone. This year in 2009, the Carbon Fund is now worth now more than US$2.6 billion. (More on the World Bank Fund can be read here).

So what about globally? The global carbon market generated almost as much money in the first half of 2008 as it did throughout the whole of 2007, according to Point Carbon. A total of 1.8 Gt CO2e was traded globally in the first half of 2008, bringing it to be valued at some $59 billion in the first half of 2008 alone, compared to $63 billion for all of 2007.

With that sort of money being involved you can see now why saving our forests is not just to protect plants but is being seen as an economic issue for countries like PNG.

What is REDD?

The topic of reducing emissions from deforestation and forest degradation in developing countries such as in PNG was first introduced at the eleventh session of the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) in Montreal (December 2005).

The Climate Change Conference in Bali, in December 2007, opened the possibility of developing an incentive mechanism for Reducing Emissions from Deforestation and Forest Degradation (REDD). So REDD is a form of a Clean Development Mechanism (CDM). One example of REDD in action is the Forest Carbon Partnership Facility (FCPF). Some REDD mechanisms already feature in the voluntary carbon markets. And it is important to note here that Kevin Conrad played an important role in effecting the political climate at Bali and in so doing to help negotiations move forward with appropriate ratifications.

REDD mechanisms can deliver multiple benefits. In addition to mitigating climate change, REDD can support livelihoods, maintain vital ecosystem services, and preserve globally significant biodiversity. Discussions on the linkages between REDD and biodiversity conservation are increasing and is paramount to PNG’s stand in the world carbon markets principally because we have the third largest rainforest in the world and because 80-90% of our population are rurally based.

REDD is therefore now recognised as a vital component of a comprehensive solution to the climate change problem.

How Will REDD Work in PNG?

To start off, REDD is still in its infancy and Kevin Conrad and the rest of the world will be in Copenhagen later this year to fine tune its mechanics. In the meantime Acting Executive Director, Leo Tale explained in the Sunday Chronicle, June 21st 2009, that the Office of Climate Change and Environment Sustainability (OCCES) has been considering the possibility of undertaking several pilot projects.

The Provinces they have been looking at are: East Sepik, Morobe, Oro, western Province, Southern Highlands and West New Britain. However, these locations are yet to be finalised, all except for April Salome in Ambunti Drekikier District and most probably Morobe.

Mr. Tale explained further that the Land Groups in April Salome, with the support of the Member for Ambunti Drekikier and Minister for Correctional Services have spearheaded a trial carbon sequestration project which is under way. Landowners in Nawae and Kabbum are also organising themselves for a similar project which is being supported by the Governor Hon. Luther Wenge. The National Forest Research Institute and University of PNG will be assisting in the preparation of technical reports for the Morobe project should it go ahead.

According to the OCCES, REDD projects consist of 3 stages:

1) Project Initiation: this involves defining projects and assessing whether they are able to participate in specific greenhouse gas abatement schemes. Eligible criteria are established by schemes to ensure the project delivers positive, real and permanent outcomes. If the project is eligible then typically a feasibility analysis is undertaken to determine what the likely environment, social and economic outcomes of the project are likely to be. Project options are discussed between all stakeholders with management or ownership interest in the land.

2) Project Design and Development (PDD): this involves the actual development of the project. In this stage all stakeholders with ownership and management interest in the actual land are further consulted and included in the formulation of project objectives. Objectives may be explored through a process of land use as planning optimization. These projects are developed through project management and project implementation plans. The PDD assess the project leakage, risks and ongoing monitoring activities. The PDD is submitted for accreditation by relevant scheme or standard.

3) Project Registration and Sales: this involves the registration and sale of credits that have been accredited through third party accreditation of the project. The key to securitizing the development process is for the PNG Government to “Gazette” the development of the project and its formation steps that sit behind elemental development. The approval must start with the consultative process. When individual land groups (ILGs) are formally signed into the project, the corporation is formed. This fact is then gazetted to enhance the authority of the landowner project with support from the Local Member and Provincial Government. When the local authorities notify the PNG Forest Authority that they do not wish to log, but wish to participate in a REDD carbon project, this activity should then be gazetted to add weight and sanction to it.

This is then submitted to the Minister for Climate Change for approval and Gazettal. When the PDD and methodology are submitted to the verifiers, this activity is also gazetted to enhance credibility of the project under Voluntary Carbon Standard.

Are there any REDD Projects being Operated Right Now?

From what Leo Tale has been telling us in the media, the OCCES has suspended registration of carbon traders who wish to undertake voluntary REDD projects in PNG. He says that this has been done to ensure that the OCCES policy guidelines are developed before proceeding with registrations of carbon traders in readiness of the compliance market.

He added that for any carbon credits to be issued they must first identify a project site where the forest is under credible threat. So before actual carbon credits are calculated an inventory of the forest types needs to be undertaken and an amount of credits identified before it can be issued to the project developers. Guess that begs the question of what the legal definition of a forest is and its many types, what a ‘credible threat’ is and more importantly what standards we are applying to quantify all this and who are these standards accountable to?

Mo Money, Mo Problems

So now comes the fun part where we start talking about money. As reported in the papers, the UN Environment Programme (UNEP), the UN Development Programme and the Food and Agriculture Organization of the United Nations (FAO) will provide approximately US$1m or roughly K3.2 million to assist PNG in establishing robust methadologies for calculating PNG’s emissions. I hope this will also go some way to assisting with the credit calculations as well.

The above capacity building financing sounds fair enough, so if  carbon trading registrations in PNG have been suspended temporarily, then what’s with all these ‘Climate Assist PNG Pty Ltd’s’ and ‘Carbon Planets’??  Reports of a $1.2 million payment to the OCCES for carbon trading and incidents of irregularities at the OCCES do not help our current standing as a leader in Carbon Trading. It hurts more too if a big name media outlet like the Economist is reporting it. (See here, here and here). Because whether or not money has exchanged, bad news has an immediate effect on the PNG teams efforts to do some good with the REDD concept.

If any of it is proven to be true, we will have a serious hole in our foot for shooting ourselves and we’ll eventually have no legs to stand on in the pursuance of REDD being a viable form of Climate Control and Socio-economic assistance to rural PNG.

Journalist, Natasha Loder explains quite well the dangers PNG faces in her blog by saying that: “The main point of my post is to pick up on a press statement published by the Office of Climate Change in a number of newspapers on Tuesday. I have a copy of one of these which was published on page 7, of The National. There must be about 1,500 words in this vast statement, which contains some bizarre and and a few ill-advised statements.

The press statement is signed by Leo Tale, acting executive director, of the Office of Climate Change on June 15th, but must have been submitted to the newspaper at least the day before on the 15th. This is very curious because on that day, Theo Yasause was also giving a press conference as the director of the Office of Climate Change. Who is running Papua’s Office of Climate Change right now? I’ll let you know when I have an answer on that.

Until then, if you happen to be part of the international community of donors (Norwegians, Australians, UN, World Bank) currently rushing to thrust money on Papua New Guinea in order to improve “governance” so that REDD will work… you might just want to make sure you know who is running the Office of Climate Change before you write the cheque. Indeed, if you can get a good answer to that question I’d be delighted to know. Until then, you have been warned.”

So then How Do You Grow Money on Trees?

money-growing-on-treesWell like any business and industry and well even like a game of rugby, you have to start with a level playing field, rugby players and you need a good referee. No games at all should be played until we have those elements in place. How can you even begin to play a game that you do not have the rules for and as Natasha pointed out above, how can you play if you don’t know what the referee is doing?

But if somewhere, somehow the government, the NGO’s, the people of PNG, the carbon traders and the OCCES wanted to do this right then we should take a leaf out of the jungle of Iwokrama, a 370,000-hectare rainforest in central Guyana.

The Economist reports that “…in 1989 the president of Guyana had the foresight to give the forest as a gift to the Commonwealth for research into global warming. Today it is administered by an international board of trustees, who have devolved the day-to-day management to the Iwokrama International Centre. It is this centre that has been working to exploit the forest sustainably.

Edward Glover, one of Iwokrama’s board of trustees, says that it became clear more than a decade ago that the forest could not rely on donor funding to survive, so it had to look elsewhere for finance. The centre’s first job was to identify the forest’s assets and to exploit them. It seems to have perfected its art. Today the centre makes money in areas such as ecotourism, timber-extraction, forest-products such as honey and oils, bio-prospecting and forestry research. Its results for 2008 reveal that it made a surplus for the first time that year, with revenues of $2.4m and a profit of $800,000. The previous year it had lost $200,000. Revenues from timber were up by 44%, ecotourism by 26% and training by 22%.

There should be more money to come. Eighteen months ago, it sold a licence for the measurement and valuation of the forest’s “ecosystem services”. This is not to say that the forest has actually sold these rights, but that an investment company, Canopy Capital, based in London, has bought the rights to create a financial deal for the forest’s services.

Ecosystem services are what a forest provides merely by existing. A standing forest can generate rainfall, prevent flooding, regulate the soil, provide biodiversity and store carbon. These benefits are received by everyone in society, but no one pays for them. Such environmental services are often termed “externalities” because they are not included in the price of the forest. When forests are traded in a traditional way, their price usually depends only on the value of the timber and the land on which it grows. No account is taken of the broader services to society. The result is that forests are being cut down because an incorrect price is put on them.”

I think at the end of it all, its a matter of what we value and how we reflect that valuation in the way we treat our resources and I don’t mean just financially but within a PNG social context as well. The billion dollar figures being touted by the carbon markets should not blind us to the fact that our forests are what our grand parents passed on to us and it is what we will need to pass on to our children. But if we really want to make money from our trees then the same basic issues of corruption, transparency and  the rule of law need to be dealt with as soon as they arise to show that we are serious about what we are doing. The Guyana example is a perfect case of what can go right and I can only put that down to proper management. When was the last time a group of people made $800,000 in profit from not cutting down their rainforest?

8 thoughts on “How to Grow Money On Trees

  1. Thanks for the timely information!

    There really needs to be a lot more education and awareness concerning this emerging issue (or industry) considering that it concerns our forest which has been the source of our ancestors’ survival and continues to be for more then half of our population today.

    The other issue that you raised concerning PNG credibility and proper management seriously needs to be address if anything positive is to come out of this.

  2. This company is saying they have already started “forward selling” carbon credits in PNG. This is at odds with what Dr Yasause of the PNG OCC said last week. Something worth investigating?

    “Carbon Planet sees profits ahead
    Article from: The Adelaide Advertiser


    June 29, 2009 11:30pm

    SOUTH Australian company Carbon Planet has dismissed reports of financial problems, saying it is “extremely confident” of making profits next financial year.

    The company has incurred accumulated losses of about $6 million since its incorporation in 2000 and its current liabilities exceed its assets by $20,020. It had expected to return to profit this financial year as detailed in its financial statements submitted to the Australian Securities and Investments Commission.

    The company’s losses last financial year were as planned and “standard”, chief executive Jim Johnson said.

    “We are a growing company. We are expected to make losses . . . We don’t have any financial problems. We are extremely confident of making profits in the next financial year,” he said.

    Mr Johnson confirmed the company had paid developers for carbon-trading projects in Papua New Guinea, but this was nothing unusual.

    The company has helped two project developers working with landowners in PNG with $1.2 million in funding, and has started forward-selling its carbon certificates.

    “We have been in PNG for over a year now and it has been our strategy to help with forestry projects,” Mr Johnson said. “We’ve supported a bunch of developers around the world.”

    Responding to claims of a lack of policy or legislation on such projects in a news report this month, Mr Johnson said most countries, including Australia, did not have any legislation for such activity. “

  3. Australia backflips on a national carbon reduction scheme.

    It is sad that attempts to reduce carbon emissions has been set back by political fighting in both Australia and the US.

    Maybe PNG can show the world the way forward by preserving old-growth forests, but this will be a setback for companies hoping to sell REDD credits internationally, as there is no incentive for purchase.

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