Pioneering investment deal prices 'utility value' of rainforest

An unprecedented deal announced March 28, 2008 opens the way for financial markets to price the ‘utility value’ of living rainforests, creating a positive incentive to conserve the world’s natural resources. For the first time investors will put a market value on the ecosystem services provided by a rainforest, including rainfall generation, climate regulation, biodiversity maintenance and water storage, thus rewarding developing countries that manage their forests in sustainable ways. The deal was announced at the world's first 'Biodiversity and Ecosystem Finance Conference'.

The Guiana Shield, one of only four intact rainforests left on earth, generates rainfall that supports agricultural production throughout northern Latin America and the southern Caribbean. Its heart is the million-acre Iwokrama reserve - “place of refuge” in the local Makushi language - which was gifted to the Commonwealth by Guyana in 1989 as a showcase for how tropical forests could be managed to provide ecological and economic benefits. Iwokrama, home to some of the world's most endangered species including jaguar, giant river otter, anaconda and giant anteater, is as rich in biodiversity as the neighbouring Amazon but is not disappearing because Guyana logs selectively and has a zero rate of deforestation. However, Guyana needs international support to raise local living standards while continuing to preserve the forests.

“This initiative fits perfectly with Iwokrama's original mandate to demonstrate that conservation, environmental balance and sustainable economic activity can be mutually reinforcing”, said Iwokrama's Chairman Edward Glover. Under the deal, Canopy Capital buys a licence to market Iwokrama’s Ecosystem Services for five years, through a guaranteed yearly payment to Iwokrama. The funds will be used to continue managing the Iwokrama forest sustainably while providing livelihoods for the 7,000 people living in the forest and the surrounding area. Expressing community sentiments, Iwokrama Head Ranger Ron Allicock said “I love this place. This is my home. I want it to be around for my children, my children's children, for ever.”

Speaking for Canopy Capital, Director Hylton Philipson describes the deal as “creating wealth that is worth having. Putting a price on such key  ecosystem services such as rainfall generation, moderation of extreme weather, carbon storage and biodiversity maintenance is like taking out an insurance policy to maintain our life support system and has the potential to generate billions of dollars for forest-owning nations, says Canopy Capital, which is funded 20% by the Global Canopy Programme, a UK charitable alliance of 29 scientific institutions in 19 countries dedicated to preserving tropical forests, and 80% by a dozen international investors.

The deal, drawn up by London-based international law firm Stephenson Harwood, defines 'ecosystem services' as the proven ability of rainforests to generate rainfall, cool the atmosphere, store carbon, moderate weather conditions and sustain biodiversity. The investment template created by the deal could help make it more valuable for developing nations to keep their forests standing than to cut them down. Forests such as Iwokrama act as pumps, drawing water from the Atlantic Ocean inland to the Amazon and Guiana Shield where they help to seed clouds and deliver moisture over vast distances. The Amazon generates the rain that helps make Brazil the second biggest agricultural exporter in the world.

"Rewarding people for good management is intrinsically more palatable than REDD [Reduced Emissions from Deforestation and Degradation] which rewards people for addressing a situation out of control," says Duncan MacQueen, a forestry expert at the Institute for Environment and Development in London, referring to a UN programme that was launched at the climate change summit in Bali, Indonesia, last December. REDD aims to pay countries to reduce deforestation. While a final agreement is not expected until 2009, it looks unlikely that REDD will reward countries, like Guyana, that have a long standing record for conserving their forests.

Last December, Merrill Lynch invested $9M in rainforest conservation in Sumatra, expecting to eventually profit from the sales of carbon credits representing 3.3 million tons of carbon a year and help save the 1.9 million-acre Ulu Masen forest in Indonesia's Aceh province. "Saving rainforests can only occur through attracting significant capital flows, and the private sector is beginning to play a leading role alongside government and philanthropy,"said Abyd Karmali, Managing Director and Global Head of Carbon Emissions at Merrill Lynch. "This deal presents a template for monetizing the benefits that come with the protection of standing forests. The preservation of ecosystem services in countries that choose to conserve their forests could become a billion dollar market."

While most investors are currently eyeing forests solely for their carbon value, Philipson believes they are overlooking more important services — especially rainfall generation. "If I were a farmer in Brazil's Mato Grosso or the mayor in Atlanta I would be very concerned about deforestation in the Amazon," he told mongabay.com, referring to studies by Duke University's Roni Avissar that have linked forest clearing in the Amazon to rainfall in North and South America. "The market is looking at carbon but what I believe will be far bigger will be the maintenance of rainfall."

This story was compiled from a variety of sources, including Iwokrama's news release; information on the Canopy Capital website; a March 27, 2008 mongabay story entitled Private equity firm buys rights to ecosystem services of Guyana rainforest; a March 27, 2008 NewScientist story entitled Investor puts his money into the rainforest by Catherine Brahic; a March 27, 2008 story by Daniel Howden in the Independent newspaper entitled Millions of acres of Guyanese rainforest to be saved in groundbreaking deal; a March 27, 2008 Bloomberg story by Jim Efstathiou Jr. entitled Rainforest saviors are investors betting jungle value; an article in the Telegraph by Global Canopy Program director Andrew Mitchell entitled Putting a value on rainforests; and a November 24, 2007 Independent article by Mr. Howden entitled Take over our rainforest - Guyana's extraordinary offer to Britain to save one of the world's most important carbon sinks.

The Economist reports May 18, 2009 that "Iwokrama is making money now, before it has even sold its ecosystem services. It is already part of the global economy. But with sustainable forestry and ecosystem services, the lesson of Iwokrama is that rainforests present an opportunity. For a few bright sparks out there, financial innovation and engineering combined with science will let them generate wealth in a whole new way. There is money in the forest. It is growing on trees." For Iwokrama's "annual statement", see here.

UPDATE: Villages in Kenya, Niger, Nigeria, and China could unlock carbon markets for farmers, foresters and conservationists in the developing world

Village communities in Western Kenya, alongside communities in Niger, Nigeria, and China, could become the key to unlocking the multi-million-dollar carbon markets for millions of farmers, foresters, and conservationists across the developing world. Catchments in and around Lake Victoria have been chosen as a test-bed for calculating how much carbon can be stored in trees and soils when the land is managed in sustainable, climate-friendly ways. The initiative, known as the Carbon Benefits Project, was launched May 11, 2009 in Nairobi by the UN Environment Program (UNEP), the World Agroforestry Centre, along with a range of key partners; the project is being funded by the Global Environmental Facility.

Under the UN's climate convention and its Kyoto Protocol, developed countries can offset some of their greenhouse gas emissions by paying developing economies for implementing clean and renewable energy projects such as wind, solar, and geothermal power. In December 2009, at the crucial UN climate convention meeting in Copenhagen, Denmark, nations may decide to also pay to tropically-forested countries for maintaining standing forests under a scheme known as Reduced Emissions from Deforestation and forest Degradation (REDD). This is because up to 20% of the greenhouse gas emissions linked with climate change come from deforestation - more than from cars, trucks, planes and ships combined. UNEP, along with the Food and Agricultural Organization and the UN Development Programme, is working with nine developing nations including the Democratic Republic of Congo, Tanzania, Papua New Guinea, and Panama, in preparation for the inclusion of REDD in a future agreement on climate change in Copenhagen.

By some estimates a country like Indonesia, for example, could earn $1 billion a year if it manages to reduce its rate of deforestation by one million hectares annually, with revenues calculated on the basis of the price per tonne on the carbon markets at the time. If REDD is agreed as part of a post-2012 climate regime, this could open the door to carbon storage payments for other kinds of nature-based management covering 'ecosystems' such as grasslands, pasturelands, peatlands and mangroves. It could also open the door to more environmentally-friendly kinds of agriculture from agroforestry to conservation farming, as they too can store large amounts of carbon in vegetation and soils. 

"We all hope for a deal in Copenhagen, and it is having such tools (as the Carbon Benefits Project) that will actually make the deal implementable on the ground," GEF official Maryam Niamir-Fuller told reporters at UNEP headquarters in Kenya. "The true economic value of ... ecosystem services has not been integrated into the value of crops or livestock. Since that value is not there, it is not captured by the markets -- then you have all kinds of distortions." 

This update was prepared from a news release by the UN Environment Programme entitled Lake Victoria Communities Could be Key to Millions of 'Climate' Dollars for Poor Around the World, Nairobi, May 11, 2009, and Agro-forestry study may open carbon market to poor by Reuters May 11, 2009. 

For more stories about forests, see:

Briquettes provide energy, let forests regenerate in Malawi

Click a day plants 16 million trees in Brazil’s Atlantic coastal forest

Community residents protect Malaysia’s oldest forest reserve

Guerrilla tourism helps protect remote mountain forest in El Salvador

Madagascar plan to reduce deforestation achieves excellent results

Abdul’s dream of restoring mangrove forest in Malaysia takes root in villages

Re-establishing forest ecosystem in Uganda fights climate change

Reforesting desolate Colombian savannah shows sustainability can be created anywhere

Tanzanian blacksmiths pass on skills, creating jobs and saving forests

Tanzanian botanist honoured for reforestation efforts

Traditional Mexican coffee farms could help regenerate forest

World’s first solar cooker village helps cut deforestation in Somalia