HOW CAN GREEN MARKETS ACCESS ISLAMIC FINANCE?

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Author:

Khaled Hassouna and Gabriel Thoumi

Publication Date:

March 23, 2010

The amount of Shari’ah-compliant assets grew by nearly 30% over the past year, but no one really knows how much of that has gone to green sustainability investments. Ecosystem Marketplace examines the role that Islamic finance could provide in supplying payments for ecosystems services.

23 March 2010 | Just imagine a scenario where a Islamic Indonesian investment vehicle investing in a forest carbon project in Java on land managed by the local community through the Indonesian public forestry agency, Perhutani, could invest in afforestation, reforestation, and revegetation (ARR) activities. This could promote ecosystem restoration for profit with local control on Java where according to the latest estimates only 10,000 hectares of rainforest remain.

The local Javanese community could generate equity in their own forest carbon work, realizing with their own eyes that their hard work earns them money in a culturally appropriate manner while improving the local ecosystem services that a native forest restoration project offers. What if a small percentage of the $822 billion worldwide Islamic-compliant global financial assets tracked by the Economist began investing in local ARR forest carbon projects with local equity? The impact could be tremendous, and this could easily be started working with the multitude of effective on the ground counterparties in Java for example with funding from the broader sustainability community.

Zakat: Sharing Forest Carbon Offsets

By applying the Islamic finance concept of Zakat, which refers to “sharing of wealth” and “purification and growth”, it is possible to integrate sustainable economic development with culturally appropriate finance and governance structures within the growing nascent forestry carbon offset asset markets. In this way, local communities could invest in and receive equity in locally developed forest carbon offset assets within a culturally sensitive Islamic framework.

Considering the importance of Zakat in Islamic economic and social interactions, the question of proper methods to purify income is near Muslim economists’ and investors’ consciousness alike. Many Islamic thinkers from different scientific disciplines are exploring ways of utilizing Zakat money to better serve local communities and their livelihoods.

In enterprises utilizing natural resources in Islamic communities, Zakat is usually carried out by individuals that earn revenue from their businesses utilizing natural resources.

In this case, Islamic traditions require the investor who has a timber concession (colloquially “in his garden”) to give out Zakat on the day of cultivating the “fruits of the garden” (Zakat zerooa). Two scenarios apply here.

• Assuming the forest needs labor intensive maintenance, 5% of the profit from the commodity produced by this forest is due for Zakat.
• Assuming the forest does not need labor intensive maintenance to keep producing such a commodity, 10% of the profit from this commodity produced is due for Zakat.

In other words, the income generated by Zakat either from both / either sustainable timber harvesting and the sale of forest carbon offsets from the same property could go into a Local Community Fund (LCF). This Local Community Fund managed by local stakeholders, in turn finances sustainable local activities. These activities could be in the small and medium green enterprises and green job training sectors, so as to support local sustainability initiatives (download xx, right, for a schematic).

So the forest carbon value chain could provide funds at the local level to fund, under a Islamic finance program, native forest restoration work and carbon sequestration small business enterprises who sell forest carbon credits.

This Local Community Fund could pay for education, public health, green enterprises, and job training all resulting in local jobs including co-management of the forest and its forest carbon offset assets. It could be a virtuous circle that could be Islamic compliant allowing Indonesian and Malaysian pension funds, corporations, banks, and local communities to invest in, receive equity in, and be employed engaging in developing local carbon offsets and climate change mitigation and adaptation activities – all locally based in Java. As the forest carbon offset market grows, local Muslim communities could gain access to the global Islamic capital markets and engage in offset project development, restoring their degraded lands with native forest species allowing for agroforestry and other income generating potential.

Sukuk: Conservation Finance Bonds

This case study comes from technical advisory work conducted in 2006 on a forest protection project in Malaysia, and explored in detail in Mahmoud El-Gamal’s book Islamic Finance: Law, Economics, and Practice. In 2007, the overall project resulted in formally gazetting and protecting over 117,000 hectares of rainforest within the Belum-Temengor Forest Complex (BTFC) as the Royal Belum State Park.

The following financial model was not used in the final forest project efforts. Rather the model developed in Malaysia with Malaysian guidance was presented to the Malaysian government by Malaysians in 2006 and was well received and used as a discussion framework from which local institutions could discuss sustainable finance within a culturally appropriate financial framework. At the time the financing model was developed, the BTFC was outside of the national protected area system within Malaysia.

The model below explains how it could be possible to develop a Sukuk conservation finance bond that would be available for Malaysian institutional investors to invest so as to support local sustainable financial activities with Islamic law.

Belum Temengor Forest Complex

The BTFC is a unique site of biodiversity because it provides wildlife corridors between high priority conservation areas within peninsular Malaysia. The forest also contains an Environmentally Sensitive Area (ESA) Rank 1 under Malaysia’s National Plan (NPP). This forest is over 130 million years old, older than the rainforests in the Congo and the Amazon, and subsequently is much more complex in its diversity of flora and fauna.

The forest contains an ecosystem which supports over 100 species of mammals, 274 species of birds and 3,000 species of flowering plants. 13 globally threatened and 14 near-threatened mammals live in the boundaries of the proposed park include the Sumatran Rhinoceros, Asian Elephant, Malayan Tiger and Malayan Tapir. The forest is also recognized as an Important Bird Area (IBA) and is home of the threatened plain-pouched Hornbill. The area is also home of the Rafflesia, the largest flower in the world, and Cyads, the one of the oldest plants on Earth. Many indigenous people including those from the Jahai and Temiar tribes, who are an important part of Malaysia’s natural heritage, live in the forest.

The forest also is a major source of electricity and water for northern peninsular Malaysia. The forest contains Temengor Lake, which is a major catchment area for major rivers in the States of Perak, Kelantan and Pahang. The Temengor Lake dam is a major generator of electricity and the Temengor Lake is a critical source of water for downstream consumers. Finally, by protecting the BTFC including the Royal Belum State Park within its boundaries, Malaysia had a unique opportunity to create a Trans-Boundary Park including the Hala-Bala Wildlife Sanctuary and the Bang Lang National Park in Thailand.

BTFC Land Tenure

Originally, the BTFC contained the existing Royal Belum State Park which was formed in 2003, production forest reserves which includes land currently under short-term contracts and long-term contracts to logging companies, previously logged land, protection forest above 1,000 meters in elevation, and the East-West Highway Corridor Land proposed for an Acacia plantation.

Land Description Hectares

Royal Belum State Park 117,500
Temengor Forest Reserve 68,588
Production Forest (short-term license) 10,192
Production Forest (long-term license) 14,593
Production Forests Not Under Contract 43,482
Not Specified 10,850
East-West Highway Corridor 17,000 (estimate)
BTFC Total 282,205

It was realized that what the public sector needed was a method to find the transition from logged forest to protected forest. It was thought that public financing might work in this situation since the goal was to assist the Government of Malaysia with protecting their forests while replacing income streams from lost revenue and taxes. Many public financing options that could have been used to protect the BTFC were reviewed. The following public finance options were reviewed:

• Debt for nature swaps.
• Trust funds.
• State owned corporation bond.

It was realized that the goal of using public sector finance in Malaysia at the state level to fund the creation of the BTFC was to create a win-win scenario by addressing the objectives and issues of the various stakeholders involved such as Malaysia’s citizens, federal government, the Perak State Government, the State of Perak logging industry and environmental NGOs.

An initial stakeholder survey was conducted to identify the specific objectives of individual citizens, the federal government, the Perak state government, the Perak logging industry, and domestic NGOs.

Funding protection for the BTFC through a public finance mechanism meant stakeholder issues had to be addressed in the following manner within a Islamic compliant framework:

• Local Population. The park could maintain biodiversity for future generations, ensure clean downstream water resources for people in affected states, and open up additional recreational opportunities. Jobs in ecotourism could also be created in areas surrounding the park.
• Federal Government. The park could conserve biodiversity including many endangered species by creating the second largest national park in Malaysia creating a major tourist attraction.
• State of Perak. BTFC could provide the State of Perak with a new fund raising tool to finance its annual budget because jobs could be created in international ecotourism and its citizens could have a source of clean drinking water as well as a recreation area for future generations.
• Logging Industry. The logging industry will lose the revenues, jobs and source of timber directly affected by licenses and concessions in the Temengor Forest Reserve. However these figures represent a small part, less than 4%, of the State of Perak’s logging industry.
• Environmental NGOs. The BTFC could be saved for future generations of Malaysians. Infrastructure and resources to manage the park including sufficient staff to educate visitors and protect the wildlife could need to be funded. All legal logging could cease and illegal logging could be curtailed through increased enforcement from full gazettement.

State-Owned Corporation Bond Issue

The Perak State Parks Corporation, a state owned enterprise which currently manages the Royal Belum State Park (“PSPC” or “Issuer”) could access the Malaysian domestic bond market to raise funds to fund the protection of the BTFC. PSPC’s formation documents could include a reference to allow this type of funding. PSPC is controlled by the Perak State Development Corporation. Malaysia’s government could act as Guarantor of the issue which will provide a form of sovereign credit enhancement. PSPC could mandate a local Malaysian financial institution such as AmMerchant Bank Berhad to act as underwriter of a public sector. In order to maximize investor interest and liquidity, an Islamic finance instrument could be structured and sold to Malaysian institutional investors such as pension funds, unit trusts, insurance companies, asset managers, and commercial banks (Download xx, right for a schematic of the bond corporation framework).

Funds raised by bond revenue could be used for to pay off:

• Short-term licensing fees and long-term logging premiums and timber royalties.
• Logging company compensation for license and concession buyouts.
• Job loss reimbursement.
• BTFC capital improvements.
• Terminating natural forest conversation to acacia plantation forests along the East-West Highway.

Primary source of bond repayment could be PES generated by:

• Park entry fees and other spending in area.
• Ecotourism operator and hotel fees.
• Hydroelectric and watershed conservation fees.
• Forestry carbon markets.

In real Islamic finance, we have two paths – one is to invest and share in the profits and losses or two make a loan and get what you put into the loan. To further analyze these themes we invite other authors who with more experience to further this concept along so as to explore the possibilities of a Sukuk conservation bond.

Summary

The Islamic public finance sector could use payments for ecosystem services including Zakat to fund sustainable economic development within current market models such as the globally developing forestry carbon markets. As this is a concept note, we invite other authors to comment on the feasibility of these two concepts.


Khaled Hassouna, Ph.D., is a research associate at Virginia Technical University, and Gabriel Thoumi is a carbon specialist with Forest Carbon Offsets, LLC, as well as a Lecturer at Ross School of Business, University of Michigan.

Special acknowledgments to Dr. Yassir Samra, Assistant Professor of Management, Manhattan College

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Stroud actress takes 'carbon-neutral' donkeys on walk

Sarah Blowers (left) was inspired after rescuing a donkey in Spain A group of artists are planning to walk 400 miles (644 km) through Gloucestershire using "carbon neutral" donkeys to carry their provisions. The trip is being led by Sarah Blowers, from Stroud, who said they would leave no "ecological footprint". The project aims to create artworks along the way and encourage people to think about the environment. The eight-week walk starts from Stroud on 21 June and ends in the Forest of Dean in August. 'Time to be still' Actress Sarah Blowers, 39, said she was inspired to set up the project, called As I Walked Out, after she rescued a donkey in Spain 15 years ago and trekked 600 miles (966 km) from Almeria to England. She said: "We are so fast today and work so fast that we don't have a lot of time to be still or to just walk. "When I was walking before [in Spain] all I had to do was think about the basic essentials. I even had to busk for my supper." Ms Blowers said the donkeys would be properly fed, watered and rested. The trip is also being supported by the Chalford Donkey Project. Two of the donkeys taking part, Teddy and Chester, are already famous for delivering goods to inaccessible houses in the county. Each leg of the journey will be about six to nine days long, and the artists will set up three-day public camps in each of the county's six districts along the route. The project has £31,000 council funding as part of the Cultural Olympiad

Australia backs carbon markets

• From correspondents in London
• From:AAP
• April 01, 2010 6:47AM

• Increase Text SizeAUSTRALIA has stressed the importance of carbon markets in raising billions of dollars to help developing countries reduce greenhouse gas emissions at high-level talks in London.

Parliamentary secretary for international development assistance Bob McMullan told the advisory group on climate-change financing in London, convened by United Nations general secretary Ban Ki-moon, that carbon markets could provide the right economic incentives to cut forest carbon emissions.

The talks, hosted by British Prime Minister Gordon Brown, were ordered as a follow-up to the Copenhagen climate change summit last December so finance ministers could consider ways to raise $US100 billion ($108.8 billion) needed to tackle carbon emissions.

As well as the use of carbon markets, the meeting discussed introducing new taxes on international flights and shipping as well as a so-called Robin Hood levy on all financial transactions to help raise the money.

"What Australia has traditionally said, and I said again today, was we think there's no way to get $US100 billion without looking at carbon markets," Mr McMullan said.Mr McMullan said the meeting agreed to have the different options evaluated so delegates could recommend the best way forward at another summit later this year.

"Internationally, there will need to be some sort of mobilising of private investment in developing countries to deliver these emission reductions without affecting their climb out of poverty.

"It's a tricky task."

The group of 19 financial leaders involved in the talks today have been asked by UN secretary general to report back to him by the time fresh climate talks take place in Mexico in November.

Those at the London talks included billionaire financier George Soros and US President Barack Obama's economic adviser Larry Summers.

Forestry Commission launches ‘Woodland Carbon Task Force’

Today the Forestry Commission launches the Woodland Carbon Task Force charged with kick-starting a major increase in new woodland planting to help the UK curb and adapt to climate change. The Task Force will make a key contribution to delivering Defra’s Climate Change plan, also launched today. [1]

The Climate Change plan takes forward the strategy set out in the Government’s Low Carbon Transition Plan of July 2009, which highlighted the potential for new woodlands for removing carbon dioxide from the atmosphere. The Plan gave the illustrative example that 10,000 hectares of new planting per year in England over 15 years could remove 50 million tonnes of CO2 between now and 2050. If the wood produced was also used for construction and as biomass energy in place of fossil-fuels, a further 37 million tonnes of CO2 could be saved. [2]

A separate scientific assessment of the potential for the UK’s trees and woodlands in curbing climate change concluded that woodland creation provided, ‘a highly cost effective and achievable abatement of greenhouse gas emissions’ - calculating that mixed woodland delivered reductions of carbon dioxide at £20 to £40 per tonne. Up to four times less than the £100 per tonne figure deemed cost effective by the Committee on Climate Change. [3]

The Woodland Carbon Task Force will catalyse and create the conditions to deliver on those indicative planting and economic figures. As well as additional planting, it will work to ensure there are viable markets for timber and other products from new and existing woodlands to support their sustainable, economic management. An example of such market development that the Task Force will take forward is the Forestry Commission’s Woodfuel Strategy. With a target for increasing the amount of wood harvested for fuel from England’s woods by 60%, the Strategy is supporting the installation of lower-carbon wood-fuelled boilers and bringing currently uneconomic woodland into productive, sustainable management. [4]

Paul Hill-Tout, Director, Forestry Commission England said:

"It is now recognised that our woods and forests have a significant part to play in helping curb climate change. The Woodland Carbon Task Force will deliver the Forestry Commission’s contribution to shifting society to a lower carbon economy. But neither the Government nor the Forestry Commission can meet this challenge without the support of the very wide range of individuals and organisations involved and interested in our trees, woods and forests. We look forward to engaging with all of these, adding their energy and ideas to our own. Identifying new ways to attract private investment funding for woodland creation will also be key if we are to achieve the major step-change in woodland creation needed." [5]

Creating new woodland as a key component in the Government’s strategy for curbing climate change must be balanced with the wider objectives and benefits of forestry and woodland in the UK. Today, Defra and the Forestry Commission are also announcing their agreed policy on Open Habitats. This will allow some areas of land that were afforested in previous years, before their wildlife value was fully understood, to be restored after harvesting for timber to open habitat. Together the Government’s woodland creation and Open Habitats policies will ensure net woodland cover in England continues to grow, whilst also benefiting biodiversity. [6]

Ends

NOTES TO EDITOR

1. Defra’s Climate Change Plan launched by Hilary Benn, Secretary of State for the Environment, Wednesday 31st March 2010.
   
   Extract from Hilary Benn’s speech:
   
   "We know that forestry is a cost-effective way to drive down our emissions – new woodland can absorb carbon dioxide for as little as £20 per tonne over the trees’ lifetime. Forests help us adapt too, holding soil together and helping to absorb extra rainfall.
   
   So today I’m pleased to tell you that Defra and the Forestry Commission have set up the Woodland Carbon Task Force. It will kick start large-scale private sector investment in woodland planting, looking at everything from GHG reporting advice for companies to working with private and public landowners.
   
   Where we plant is as important as what we plant and the Task Force will make sure we get this right.
   
   Perhaps more than anything else its aim is to break down the barriers that exist to creating woodland in the first place."
   
   http://www.decc.gov.uk/en/content/cms/what_we_do/lc_uk/carbon_budgets/departments/departments.aspx
   
   
2. The UK Low Carbon Transition Plan, 15 July 2009:
   ‘Woodland creation is a very cost-effective way of fighting climate change over the long term, but it requires an upfront investment.
   
   The Government will support a new drive to encourage private funding for woodland creation.’
   
   
3. Combating Climate Change, A Role for UK Forests. An assessment of the potential of the UK’s trees and woodlands to mitigate and adapt to climate change. Professor Sir David Read & others, 2009.
   
   UK woodland cover stands at 12% of total land, one of the lowest in Europe. England’s tree cover is lower at only 9%. A 10,000 hectare annual planting figure represents a major challenge. The Read Report gave an overall UK target figure of 23,000 hectares of new planting per year over the next 40 years, which along with woodland planted since 1990, could soak up c. 10% of the UK’s total annual greenhouse gas emissions by the 2050s. That represents a 4% increase in overall UK tree cover to 16%, but around a 200% increase on current planting rates.
   
   
4. The Forestry Commission’s Woodfuel Strategy for England:
   Sets the target of facilitating the harvesting of an additional 2 million tonnes of wood each year as fuel and other products by 2020. Endorsed by 13 leading environmental & conservation groups from Friends of the Earth, RSPB to the Wildlife Trusts, the strategy will help deliver a lower-carbon economy, bring under-managed woodland into productive rotation, whilst also creating more diverse, beneficial habitat for wildlife.
   
   Additionally funding of woodland creation and management through the Rural Development Programme for England (RDPE) stands at c. £30m per annum.
   
   
5. Possible measures to attract private investment:
   The Forestry Commission and Defra have been considering whether a guarantee of future payment for carbon sequestered through the growth of new woodland would encourage investors to provide the up-front finance required for woodland creation and to compensate for other income that the land might otherwise have generated.
   
   
6. Open Habitats Policy:
   The area of forest cover to be removed under this policy is minimal compared to the overall area of current planting and that proposed under the new woodland creation – but hugely significant in terms of redressing previous wildlife & biodiversity losses. Between 1999 and 2008, the area of woodland removal reported amounted to about 9,300 hectares. In contrast, woodland creation amounted to nearly 50,000 hectares.
   
   The UK Forestry Standard and the forthcoming Code of Good Practice for Forest Carbon Projects will guide the Woodland Carbon Task Force, ensuring that the principles of sustainable forest management are maintained and that ‘the right trees are planted in the right place for the right reasons.
   
   
7. Media Contact: Stuart Burgess, 01223 346027, stuart.burgess@forestry.gov.uk, 07785 748351

Carbon Permits Emerge as a Boon to Major E.U. Industries

By JAMES KANTER

Published: April 1, 2010

The decline in industrial production because of the recession meant that emissions from most of the installations covered by the Union’s trading system dropped by 11.2 percent, according to Reuters.BRUSSELS — As the global economy faltered last year and factories idled, industries in the European Union benefited from one of the most lucrative outcomes of the recession: a huge excess of permits to emit carbon dioxide.

That would be the largest decline since the program began in 2005.

Analysts had predicted a drop of 10 to 11 percent.

Emissions from factories and power plants were 1.69 billion tons, according to an analysis by Bloomberg. But that covers only factories and power stations that have reported so far. The figures released Thursday cover at least 80 percent of the emissions from installations in the system.

The price of a ton of carbon dioxide on European markets had already fallen sharply in the past year because of the recession, and in early afternoon trading Thursday, prices were slightly lower at about €12.75, or $17.21.

The permits are traded on several exchanges throughout Europe, which dominates a global industry worth about $140 billion a year.

The price of carbon permits has been languishing around €13 apiece for some months, meaning that if a company were to exceed its emissions quota, it would need to pay €13 for each excess ton of carbon dioxide produced — a price that experts have said is far too low to result in a significant change in the way companies generate and use energy.

Analysts had warned against taking firm positions ahead of the announcement by the commission, because the data are released only once a year, rather than on a quarterly basis, and because of difficulties in estimating emissions during such a severe downturn.

The decline in 2009 was “uncharted territory” for carbon traders, warned Kjersti Ulset, the head of European carbon analysis for Point Carbon in Norway.

In particular, it was “unclear whether the relationship between production and emissions is the same in a growing industry sector as it is in a massively decreasing, in some cases even collapsing, one,” she said.

The prospect of the shortfall had led to calls earlier in the week by international climate officials to consider stiffening European targets.

The size of the shortfall could strengthen calls in the United States and Australia — which have not yet introduced national systems to control emissions — to try alternatives to trading, like a straightforward carbon tax.

The chief beneficiaries of the recession have been some of the Continent’s largest industrial companies, like the steel producer ArcelorMittal and the cement maker Lafarge, which received many of their permits for free from governments to help them meet the challenge of competition from parts of the world without such regulation.

Many of those companies have booked millions of euros from the sale of their excess credits, anticipating that they would have plenty in years to come, or because they needed to generate cash to shore up their balance sheets as the economic crisis bit deeper.

In many cases, those companies have also held on to some of their surplus, which will make it easier for them to offset future emissions once the economy recovers.

Defenders of the system say surpluses created by the economic collapse show that the system is working, by rewarding companies at times when they polluted less and by cutting them slack at a time of economic hardship.

But critics say the system is in danger of losing sight of its original purpose and becoming another form of corporate handout unless Europe orders deeper emissions cuts, requiring companies to use up their surplus permits and invest more in clean technology and efficiency.

Yvo de Boer, the U.N. climate change chief, said during a telephone conference Wednesday that surpluses of permits in the European system since 2005 “had allowed businesses to get used to the emissions trading scheme without immediately being under a huge constraint.”

Mr. De Boer said the decline in prices mostly reflected the severity of the recession, rather than problems with the design of the system. But he also suggested that Union governments now had the opportunity to make the system far more effective by agreeing to cut emissions by 30 percent by 2020, as some countries have advocated, compared with the current agreed level of 20 percent.

Commenting on the possibility of a higher target, the Union’s climate commissioner, Connie Hedegaard, said Wednesday that she was “now analyzing costs, potentials and co-benefits” in going to 30 percent. “To achieve a 20 percent reduction by 2020 is not nearly as ambitious today as it was two years back before the crisis,” Ms. Hedegaard wrote in an e-mail message.

Mr. de Boer said another factor that might have been depressing prices of the permits was the failure by governments meeting in Copenhagen in December to agree on a timetable for a binding global agreement to curb climate change, which traders say has cut the momentum. Mr. De Boer said reaching such a deal would now probably take until the end of 2011 — two years later than originally envisioned.

The main idea behind carbon trading was to give companies the incentive to reduce emissions by requiring the heaviest polluters to buy additional pollution permits. As a cap on the number of permits steadily tightened, companies that invested in greener production would be best placed to continue competing in a low-carbon economy of the future.

That goal was undermined four years ago when the price of carbon permits lost nearly all of their value in the European Union. Governments had handed out too many of the permits to powerful industries that had lobbied successfully for more than they needed.

Then last year, the environmental goals of the Union’s system were sidelined again by the worst economic slowdown in a generation, which cut industrial production in the 27-nation bloc.

Although prices of carbon permits already have weakened considerably because of the recession, analysts said the permits were not expected to lose almost all of their value again, as they did in 2006, because companies could bank the permits for future use unlike in previous years, reflecting a change in the rules.

Union governments have committed to keeping the system going until at least 2020. That should ensure there is eventually a shortfall of permits as the overall cap tightens and the Union authorities restrict the distribution of free permits in future.

For the moment, however, many companies are profiting from their surpluses.

Lafarge earned €142 million from selling permits in 2009, according to the company’s annual report. That figure is almost double the €85 million that Lafarge made from selling permits in 2008.

The money “allowed us to further invest into R.&D. programs and improve the environmental performance of our plants,” a company spokeswoman, Claire Mathieu, said, referring to research and development.

The number of permits Lafarge will end up holding in 2010 also “should exceed our needs,” the company said in its annual report.

ArcelorMittal has earned $108 million from selling permits since 2007, according to its annual report for 2009. The company specified that it had purchased the permits it sold, but it gave no further details about its trading strategies.

The company has no plans to continue selling permits, “since we may need them in the future” to cover the costs of pollution, said Jean Lasar, a spokesman. “However, if we do sell any carbon credits, the proceeds will be invested in energy-saving projects to improve our long-term carbon footprint.”

ArcelorMittal did not disclose how many excess permits the company currently held, or had invested with banks.

Most big companies in the cement and steel sectors had generated surpluses of permits each year since the start of the European system in 2005, according to Cédric Bleuez, the managing director of Carbon Market Data, a research company with headquarters in Britain and France.

That trend concerns critics like Bryony Worthington, the director of Sandbag, a nonprofit group based in London that is campaigning to make carbon trading more effective. Cap-and-trade in Europe “has become a kind of subsidy scheme for companies feeling economic distress, and that was not the original idea at all,” she said.

South American Environmental Trusts Join Columbia Center to Create Amazon Forest Carbon Credits

Five environmental trust funds in Bolivia, Brazil, Colombia, Ecuador and Peru have joined with Columbia University’s Center for Environment, Economy, and Society to establish the Amazon Forest Carbon Partnership, a collaboration to reduce carbon emissions and provide an economic alternative for forest dwelling communities and commercial enterprises in the Amazon. The issue of forest carbon credit, in which wealthy countries offset their emissions by compensating land holders for preserving forests, was a core point of negotiations at the global climate summit in Copenhagen.

Amazonian rainforest, upper Amazon basin, Loreto region, Peru

Worldwide, more than 12 million hectares of tropical forest—roughly the size of Pennsylvania—are cleared every year. Forests act as carbon sinks by storing carbon dioxide. According to experts, deforestation is responsible for 12 to 15 percent of global annual CO₂ emissions. If the rate of tropical deforestation continues, the resulting emissions have the potential to single-handedly negate all the emissions reductions gained by adherence to the Kyoto Protocol, a global agreement to combat global warming. Forest-based carbon credit is being considered as a way for countries, companies and individuals to offset their emissions by preventing deforestation and the release of stored carbon dioxide.

Thanks in part to a $3 million grant from Cargill, the Amazon Forest Carbon Partnership (AFCP) is working to develop and implement the practical means for bringing tropical forest carbon credits to market.

The primary goal of the AFCP is to ensure that the necessary elements are in place to generate carbon credits for avoided deforestation in the Amazon. Such credits are based on what is known as reduced emissions from deforestation and degradation, or REDD, and are included in proposed U.S. legislation on energy security under the Waxman-Markey and Kerry-Boxer Bills.

There is criticism of using forests as a carbon offset mechanism, primarily due to the lack of effective monitoring to ensure that logging elsewhere is not negating saved forests. Another criticism is that forests could be cleared once substantial payments for the offset have been made. Additionally, these agreements will not benefit the communities that have traditionally held rights over the lands in question. The failure to deal equitably with local owners is viewed as a threat to permanence, since the local owners would have no incentives to protect the forests.

As part of the AFCP, the Center for Environment, Economy, and Society, or CEES, has organized technical experts to advise on all aspects of the effort, including the development of a platinum standard to validate, verify and monitor carbon credits generated from avoided deforestation activities and to develop the curriculum to train individuals for implementation. Once the platinum standard is created and experts are trained to apply the standard, it will be essential to develop an institutional structure to ensure that the standard is properly applied. The AFCP will lay the groundwork for the creation of such a structure.

CEES and each of the five environmental trust funds, or ETFs, which serve as stewards of conservation and protection in their countries, will work with corporate, individual, community and indigenous forest holders on the supply side, and corporations, traders and private equity investors on the demand side.

Currently, the Kyoto Protocol excludes carbon emissions credits from avoided deforestation, when a forest is completely and permanently cleared, and degradation, when it is damaged by burning, pollution or excessive removal of flora and fauna. If the successor to the Kyoto Protocol allows for REDD, then forest carbon can be monetized, and emissions reductions from avoided deforestation can be traded in carbon markets. If REDD is not included in an international agreement, it is likely to still be included in domestic legislation of the U.S. and other nations.

“The AFCP’s efforts are aimed at getting all aspects of REDD projects ready for implementation on the ground, in anticipation of accepted legislation and bilateral agreements,” said Don Melnick, director of CEES and Thomas Hunt Morgan Professor of Conservation Biology in the Department of Ecology, Evolution and Environmental Biology. “The AFCP will then be ready to help forest holders generate credits and get them to market.”

Organizations involved in the Amazon Forest Carbon Partnership expect to begin rolling out their plan in the summer of 2010 and to complete the initiative in 2011.

The South American ETF partners include: Bolivia’s PUMA (Fundación Protección y Uso Sostenible del Medio Ambiente or Foundation for the Protection and Sustainable Use of the Environment), Brazil’s Funbio (Fundo Brasileiro para a Biodiversidade or Brazilian Fund for Biodiversity), Colombia’s Fondo para la Acción Ambiental y la Niñez (or Fund for Environmental Action and Childhood), Ecuador’s FAN (Fondo Ambiental Nacional or National Environmental Fund), and Peru’s PROFONANPE (Fondo de Promoción para las Areas Naturales Protegidas del Perú or Peruvian Trust Fund for National Parks and Protected Areas).

The Amazon Forest Carbon Partnership is supported technically by a group of experts from Columbia, Duke and Stanford Universities, as well as Covington & Burling, an international law firm with specific expertise in U.S. and international carbon emissions policy

New Zealand Land lies idle as foresters fear conversion

Friday 26 Mar 10 10:00am

Thousands of hectares of recently deforested land is lying fallow because under the emissions trading scheme owners can’t afford to convert it to other uses.

The latest Ministry of Agriculture and Forestry deforestation survey shows that more than 5000ha of the plantation forests that were harvested in the past two years have not been replanted.

The report also shows that without the ETS, the level of likely deforestation between 2008 and 2020 would treble, from 31,000ha to 101,000ha.

The report’s author, Dr Bruce Manley of Canterbury University’s School of Forestry, says that many owners want to change the use of their land from plantation forestry to things like farming and lifestyle blocks, but say they can’t afford to because of their carbon liability under the ETS.

The scheme requires anyone who changes the land use of pre-1990 forests to account for the carbon lost when the trees are harvested and not replanted.

New Zealand forest owners have been lobbying to have an offsets provision – under which they’re not penalised for land use change if they plant an equivalent amount of forest somewhere else – included in the scheme, but the Government says that it will not do it unless offsetting is included in international carbon accounting rules.

Manley asked major forest owners what their land-use intentions were for the period from 2008 to 2020 under three scenarios – the current ETS, no ETS, and an ETS with offsetting provisions.

Results show that with the ETS, major forest owners will deforest 19,000ha, compared to the 76,000ha they would deforest if there was no ETS. Under an ETS that allowed offsetting, they would deforest 48,000ha.

Manley says that when small forest-owners are included, the likely deforestation figures jump to 31,000ha under the ETS, 101ha without the ETS, and 67,000ha with offsetting.

He told Carbon News that many landowners are waiting to see what happens to international carbon rules and prices before making decisions on replanting or land-use changes.

Meanwhile, Climate Change Issues Minister Nick Smith says the report shows that land owners are starting to replant.

"New Zealand lost a net area of 30,500 hectares in the years from 2005 to 2008, while last year there was a small gain of 500 hectares," he said in a statement.

"I am encouraged that the survey of forest intentions is indicating net growth of 4700 hectares this year, 5700 hectares in 2011 and 7700 hectares in 2012.

"This turnaround has been driven by both reduced deforestation and new planting. This trend is positive and shows confidence is coming back into the forest sector.

"The report is very clear that New Zealand would be losing significant forest area without the ETS legislation," Smith said.

"The survey indicates deforestation rates would be more than three times higher or about 8000 hectares per year as compared to 2300 hectares per year.

"The Government has gone to considerable effort in it's moderation of the ETS to more than half the cost for consumers and industry, but to retain the full price signals to the forest sector, and this latest data on forest intentions is showing the positive results from this policy.

"This turnaround is good news for the forest sector and the environment. Every new hectare of forest absorbs in time more than 800 tonnes of CO2 as well as assisting with soil retention. The Government will be working with the forest sector on enhancing the environmental benefits from forestry."