Posts Tagged ‘permanence’

Insuring against failure

With Rio+20 about to open I have to give a shout out to the idea of iREDD advanced by Corey Bradshaw et al. They propose to address some of the major challenges of REDD by requiring sellers of REDD credits to purchase insurance (that oh-so-cool i on the front of iREDD). One very good point in its favour is that this should massively increase the buyers’ confidence, although, it should be noted that voluntary carbon market standards such as VCS already require project developers to retain substantial buffers of carbon offsets for just such an eventuality. However, I think financial insurance is a stronger option, since one catastrophe – e.g. a massive forest fire – could wipe out a project’s entire carbon achievements with no recourse. Insurance provided by a highly capitalised third party delivers much better cover for such events.

Thus insurance appears a very good way of dealing with the problem of permanence. It should also be fairly easy; there are pretty good data available on wild fires, whilst forest owners who themselves cleared the forest (or allowed someone else to do so) would be guilty of insurance fraud. (Following the logic of my post yesterday, insurers would probably also have to consider political risk, in which the forest owner suddenly finds they are no longer the forest owner.)

But in tackling the other challenges in REDD in demonstrably delivering real net additional reductions in carbon emissions (see here for my previous observations) iREDD seems mostly just to come down to the idea of insuring against the risk that a proposed action does not result in the desired outcome. Here I see a much greater challenge for insurers. How should they quantify such risks? Every project will be unique in some way or another. I foresee great difficulties in developing standard metrics by which these things can be assessed, and where such guidelines could be determined I fear they would tend to favour cookie-cutter style projects and incentivise against innovation.

On the other hand, if these hurdles could be overcome, this seems to me like an idea that has great potential way beyond the REDD arena. How about if donors required every aid project except for the riskiest (which would therefore obviously stand out) to obtain such insurance? That would force project developers to confront major operational risks in a much more explicit manner than at present. Furthermore it could open up innovative approaches to project funding (donors would expect to get some of their money back when projects fail), and could allow private sector operators taking a greater responsibility for the entire project cycle and assumption of risk. This would be in contrast to the current model for involving the private sector in which big consultancies make fat profits for running flawed projects designed by a donor who should have but didn’t know any better.

Owen Barder recently blogged about attempts to extend the still experimental idea of Social Impact Bonds into the international development space*. These also invite private sector players to assume some of the risk of delivery. Insuring projects against failure could be another option to add into the mix.

In practice I can see that it is going to take quite a while for these various different instruments to be put into practice, during which time we can hope – indeed reasonably expect! – that significant numbers of poor people and poor countries will have developed to the point where they are rather less poor and less in need of development assistance. But that could also work in these ideas’ favour: the least developed countries have the least capacity to engage in these kind of risk-sharing models involving the private sector.

So all in all I think it is great to see innovative thinking around conservation and development finance, and I hope that at least some can come to serious fruition. And I look forward to one day filling out an insurance registration for a project I have helped design!

* The various comments echo my points above about some of the practical challenges that would need to be overcome to introduce these as financial instruments worthy of the name.

Standing on principle

If I am to believe what I read in the Anglo-Saxon press, Germany’s admirable but unbending economic principles are in danger of killing the Euro. Low politics will probably once again kill any hope of a deal at the next UNFCCC CoP which starts in Durban in a week’s time. But even if by a miracle something worthwhile were to emerge from it, e.g. a REDD agreement, I fear that, like the Euro, it may contain within it seeds of its own failure in the form of some admirable but infeasible principles.

For those not familiar with all the ins and outs REDD is built on four key principles:

  • Emissions reductions need to be real and verifiable. Fair enough. REDD would not amount to much if imaginary emissions reductions were to be allowed, but I fear just such an outcome is possible with a fund-based solution that developing countries want. They want a fund-based approach because (a) gives them much for freedom to spend the money how they want (on dreaming up new emissions reductions in endless workshops), and (b) because it gets them out of the next three principles which are much harder to implement. (See here for my previous musings on fund-based versus transactional arrangements for REDD.)
  • Emissions reductions must also be additional, i.e. claimants have to show they would not have happened anyway. This one is the real bugbear for it asks the unanswerable counter-factual question: what would have happened without the REDD project?
  • A related requirement to additionality is the stipulation that only net reductions can be claimed: if a project simply shifts deforestation elsewhere it cannot sell carbon offsets. This puts huge burdens on projects to track all the carbon leakage from their activities.
  • Finally emissions reductions must be permanent. Obviously it does not achieve very much if you pay someone not to chop down a forest today, and next year they (or someone else) go and chop it down any way. All those emissions savings are immediately lost. Except that this also places an unrealistic expectation on the forest owner. What happens if the forest is struck by lightning next year and burns down?

These four simple ideas give rise to huge complexity in project design; complexity that can rapidly overwhelm a project team. The need to really tackle drivers of deforestation in order to deliver emissions reductions that are both net and additional inevitably pushes one towards working through national governments who have the necessary policy levers rather than at the project level. But equally, anyone who has the power to cut down some trees, has a valid claim to REDD funds, and indeed could wreck an otherwise successful initiative. This pushes one instead to working with local communities who live in and around the forests. In reality there should be enough money to go around to deliver both policy changes and to secure local forest protection – indeed enforcing forest protection would itself likely be part of a successful policy mix – but that requires an awful lot of actors to work well together and to agree amicably on how the cake should be divvied up. I am not optimistic.

All of which begs the question: so what would I do with those apparently ever so reasonable principles. Here’s my answer. Firstly we could do away with the need for permanence by calculating carbon stocks as an accumulation of X years worth of growth. Simply divide the total sequestrated carbon C by X to get an annual payment. If the trees are still standing next year pay them again. A forest owner who wanted more money up front could always borrow on the strength of their future anticipated earnings. This approach would enable to local communities who do not understand carbon markets well to test the waters before committing themselves to major land use decisions.

Then net additionality could be tackled by splitting the requirement for forest protection and reducing the drivers of deforestation, which are two separate activities. A simple 50-50 cut could be used as a rough guide. There would have to be limits on how long forest protection could  be funded without equal leakage mitigation, but forest conservation agencies could make a start on protecting the forest now. In particular the much quicker rate of progress which that would facilitate could start to deliver on the overall goal as well: some forms of leakage may not travel far, so, if all the local forests are effectively conserved, then this may in itself reduce overall deforestation as well as contribute to the wider policy push to combat forest loss.

I do not pretend that the above changes do not contain risks, but I think the benefits of vastly simpler requirements for project development would be worth it. I have heard the odd suggestion that some folks in REDD policy circles are starting to wake up to these issues, but the momentum behind the original principled framing seems unstoppable. Some people I know in project development are starting to get very gloomy, and are writing REDD off before it has even got properly started. That would be a crying shame, because I do really feel that the time has come for REDD. If the world does not start to properly value its forests soon we’ll have lost something that can never be replaced.

%d bloggers like this: