The international forest and climate communities have placed high hopes on the potential for compliance carbon markets to generate funding to reduce tropical deforestation through international forest offsets. At a meeting last week in San Francisco on “Navigating the American Carbon World” (NACW) it seemed as if these hopes are likely to be dashed. Or at least not realized in time to save the vast tropical forests in time for them to play a significant role in combatting dangerous climate change.

The backstory

Reducing deforestation and conserving forests is a critical part of a solution to global climate change. Compelling evidence for this is at the heart of a recent CGD publication Generating results-based funding to pay tropical forest countries for their performance in reducing deforestation has been envisioned as a promising approach to mitigating dangerous greenhouse gas (GHG) emissions, and was enshrined in Article 5 of the Paris Agreement.

One way to generate funding to reward forest countries for reducing deforestation is to include forest offsets in compliance carbon markets. Carbon offsets allow GHG emitters to pay others for actions to reduce GHG emissions cheaply, outside the capped enterprise or sector, such as from uncapped sectors like forests. Offsets can provide an important tool for keeping the cost of emissions reduction low. As our CGD Working Group report, Look to the Forests, noted, there is not yet enough results-based funding, so hopes have been pinned on the potential of carbon markets to generate funding to pay for results.

In recent years over 50 jurisdictions have implemented policies to put a price on carbon. Some of these programs, including China and Korea, allow for the use of domestic forest offsets. But so far, only California has an active compliance carbon market (cap and trade program) that includes the potential to use international forest offsets in its enabling legislation.

The International Civil Aviation Organization (ICAO) has set itself voluntary goals to offset emissions from air travel and is also considering buying high quality international forest offsets in its market based program CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation). If cap and trade programs are allowed to purchase international forest offsets, this could be a boon to global efforts to reduce and halt deforestation, with enormous benefits both for local communities and the globe.

Where is California’s market today?

California has developed robust procedures that that would allow capped entities (polluters) to pay tropical forest countries to reduce their deforestation as a way to offset their own emissions. But until now, the procedures have not been cleared for use by the California legislature.

The launch of California’s international forest offset program has been slow and subject to continuous delays. There are several reasons for this. First, international forest offsets will compete with domestic (within California) offsets, which are already up and running. In California, the cap & trade program has generated an entire industry engaged in producing domestic offsets within the state. They have gained lots of experience with developing and implementing the domestic forest offset protocol. Companies that are required to reduce GHG emissions are keen to see more offsets because it drives the price of compliance down. But companies that generate offsets within the state are not interested in encouraging international offsets because they may be cheaper and compete with the domestic offsets.

Second, in California there is an active and outspoken community of people from disadvantaged communities located either near heavily polluting industries or major transport corridors. These communities, referred to as the Environmental Justice (EJ) community, and others, are opposed to the use of offsets, and in fact oppose trading emission permits altogether. They believe that there is a correlation between emission of GHGs and local pollutants that are harmful to health, and they hope to tackle the latter by forcing polluters to reduce more emissions in situ rather than through trading or offsets. The pressure from the EJ community is strong and finding a more sympathetic audience in the California legislature. The legislature is currently reviewing the impact of cap & trade, and especially offsets, on reducing local toxic and criteria air pollutants. There is pressure to stop cap & trade after 2020 and to replace it with direct command and control regulations, or even a carbon tax.

In the current California political climate, REDD+ and the use of international forest offsets are considered toxic. Some legal experts are even questioning whether carbon trading across borders is constitutional. Only sovereign governments are allowed to enter into international treaties. Do the agreements between sub-national governments like California and Ontario, or a future agreement between California and the state of Acre in Brazil, constitute an international treaty?

Perhaps the most significant obstacle is regulatory uncertainty in California. California’s cap & trade program is due to expire in 2020. The legislature is considering legislation that would extend it to 2030. There is solid support for the program in Governor Brown’s administration and by the majority democratic assembly and senate. But extending the program is likely to require a two-thirds supermajority vote and this would be more difficult to ensure. The administration already expended considerable political capital in passing the recent $52 billion transportation bill, which required a two-thirds majority, so there are questions about the level of political energy that remains to pass the cap & trade extension by a two-thirds majority. When California first put in place its cap & trade program (AB32), which goes till 2020, only a simple majority was needed. In the meantime, law suits were filed against AB32 claiming that revenues from the program are actually a tax, which requires passage by a two-thirds majority of the legislature. While the courts ruled that cap & trade revenues are not in fact taxes, but are regulatory fees, in 2010 voters approved Proposition 26 which stipulated that a two-thirds supermajority vote in the legislature is required to pass any fees, levies, charges or taxes that previously could have been enacted by a simple majority.

All this means that the potential for compliance cap & trade markets to generate funding to encourage tropical forest countries to halt deforestation is uncertain. At the NACW, experts suggested that California’s international forest protocols would be unlikely to be approved before 2020, and possibly as late as 2025. This is bad news for tropical forests. At current rates of deforestation, by 2025 a huge swath of tropical forests could be gone. Given that reducing deforestation, and reforesting degraded areas, can account for as much as 30 percent of current global emissions, maintaining forests is critical to halting dangerous global warming, and is one of the most cost-effective options to do so. With funding from compliance carbon markets in question, new ideas to generate funding for a financial incentive to halt deforestation are badly needed.