Piloting a System of Positive Incentives for Reducing Emissions from Deforestation and Degradation (REDD) The Proposed Forest Carbon Partnership Facility Benoît Bosquet The World Bank Inter American Development Bank Washington, DC, June 7, 2007

Context  “Avoided deforestation” excluded from the CDM  UNFCCC/SBSTA discussions on REDD  Stern Report: need for action in REDD  World Bank has long involvement in forestry sector  World Bank has experience in piloting the carbon market Prototype Carbon Fund: global pioneer since 1999 BioCarbon Fund: LULUCF pioneer since 2004, including W2 for avoided deforestation at project level

Context  Several developing countries have expressed interest in a World Bank initiative to provide financial incentives for REDD  Industrialized countries interested in REDD Germany, France, UK, others support Bank’s proposal Need for action + learning  World Bank preparing “Global Forest Alliance” More coherent partnership framework for forest sector One pillar is new financing mechanisms for the forest sector  UNFF: adoption of a non-binding treaty Portfolio approach on forest investments

Proposed Response Prepare for a system of positive incentives post-2012 that includes REDD through  Capacity building: readiness for a future system  Pilot performance-based payments Readiness: $50 m Pilots: $200 m > $1 b

Readiness Mechanism “Readiness”: capacity building  Update forest data and reporting methodologies  Establish historical and current deforestation rates and causes  Estimate future emissions based on reference scenario  Conduct economic analysis: what are the costs of REDD?  Design strategy for REDD –Pick interventions –Establish/reinforce institutions and partners –Design payment channels  Monitor emission reductions –Follow leakage

Carbon Finance Mechanism  Price Carbon ≥ Opportunity Cost of land  Pick low-hanging fruit first ha Cost per ha of forest saved Enforce Protected Areas Prevent Conversion to Ranching/Food Crops Prevent Conversion to Soy/Palm Oil $2,000 $500 $100 Clarify Land Tenure Control Fires

Pricing Current Market References:  Europe: ~ $25/EUA (2008)  Kyoto Protocol: ~ $10-18/CER (2012)  Kyoto Protocol forestry (BioCarbon Fund): ~ $4-5/tCER (with 10 years’ permanence)  Voluntary market: ~ $3.5/t (CCX)  Price reflects risks and benefits  World Bank will not set the price  Need for objective mechanism - e.g. indexation to EUA price?

Overall expected purchase volume Assuming $200 million for pilots over $5/t (one-off) would save ~ 100,000 ha or 40 Mt CO 2 e  Is this too much, too little?  The objective is not to save the world’s forests with $200 million  The objective is to demonstrate a mechanism that produces sustainable reforms and can be scaled up

Sellers’ Expectations  Meaningful role in FCPF governance  Compensation for:  Opportunity cost, e.g. ≤ $500/ha of “lost” agricultural/pasture land  Investment costs in long-term protection measures (policies, institutions)  Operational costs  Some of the incentive upfront  Off-take guarantee for ERs generated during the first years  Possibility of participation in upside once market matures  Various models  Market vs. fund  Payments

Donors & Buyers Carbon Finance $200 million Readiness $ 50 million Donors, Investors Recipients/ Sellers Investments Carbon purchase guarantee Carbon ERs

Milestones June 8: G8 Summit communiqué + first financial commitment? June 28: Bank Board briefing July-August:  Continuing consultations with potential buyers, sellers, international organizations, NGOs  Draft Information Memorandum and Instrument September: Bank Board discussion December: launch at CoP13 March 2008: FCPF operational

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