Climate Change and Forests: Emerging Policy and Market Opportunities

Chapter 2. The Idea of Market-Based Mechanisms for Forest Conservation and Climate Change

The world has approximately 4 billion hectares of forests, roughly 30 percent of them primary forests.1 Their provision of goods and services plays an important role in the overall health of the planet and is of fundamental importance to human economy and welfare. These goods and services—collectively called ecosystem goods and services, or simply ecosystem services—include, among other things, food and timber, the formation of soils, the regulation of climate and hydrological processes, and the spiritual, aesthetic, and recreational opportunities associated with people’s enjoyment of nature.2 Regulating greenhouse gases is one of the most significant ecosystem services provided by forests today. It is estimated that forests store more than 280 gigatonnes (Gt) of carbon in biomass.3 Conserving this biomass prevents the emission of carbon dioxide (CO2) and other greenhouse gases (GHGs) that cause climate change. When forests are destroyed, heat-capturing gases and aerosols are released into the atmosphere, aggravating climate change effects.4 This will most certainly have ecological and physiological effects on forests, possibly altering the lengths of growing seasons, biomass production, and species competition and distribution and ultimately causing major shifts in biomes.5 The combined effects The Idea of Market-Based Mechanisms for Forest Conservation and Climate Change rosimeiry portela, kelly j. wendland, and laura ledwith pennypacker 2 11 The views expressed in this chapter are those of the authors and do not necessarily represent the views of Conservation International, with which the authors are affiliated. of climate change and habitat fragmentation pose the most important humaninduced threat to biodiversity and ecosystems.6 One effect may be the major loss of cover of tropical forests as a result of drying conditions.7 Despite the numerous benefits that forests offer humans, decisions to convert forests to other land uses are often based on market incentives that do not incorporate the value of ecosystem services. There are several reasons for this. In some cases people lack an understanding of the functioning of large-scale natural systems and the effects that human actions can have on them. In other cases losses of forests are associated with the fact that conventional market systems undervalue ecosystem services in everyday decisionmaking.8 In order to correct for this market failure and change undesirable behaviors, policy instruments or incentives are required. In this chapter we first review the policy instruments that have been used to achieve forest conservation, looking particularly at the role of market-based mechanisms. We then discuss the opportunities that climate change and carbon markets present for forest conservation. The current climate regulation regime, through voluntary and regulatory markets, particularly the Kyoto Protocol’s Clean Development Mechanism (CDM), is already providing opportunities to harness market forces toward the conservation and restoration of forests. The effects of these markets on forests, however, are still limited. The implications for forest conservation become more interesting when one starts to consider several potential market opportunities for forest carbon. These new market opportunities could dramatically shift forest conservation market practices and ensure the provision of many other ecosystem goods and services, including globally important biodiversity. These new approaches offer a holistic approach to human-induced climate changes and would support ecological sustainability, human welfare, and the world economy. Policy Mechanisms for Forest Conservation Although forest loss has been occurring for many centuries, the last few decades have shown alarming rates of deforestation, with about 13 million hectares of forest converted to other land uses every year. This cumulative loss of forest biomass represents a significant decline in total carbon stocks, which decreased by about 1.1 Gt annually between 1990 and 2005. South America and Africa had the largest net forest losses from 2000 to 2005, with averages of 4.3 and 4.0 million hectares of forest cleared in those years, respectively.9 Decisionmaking generally prioritizes private, direct benefits from forest clearing, even though the loss threatens the existence of forests and deprives society of biodiversity and other important ecological benefits. This problem stems from the failure of policymakers and market institutions to translate demand for forest goods and services into income 12 r. portela, k. j. wendland, and l. l. pennypacker for local landowners and to account for the social costs incurred by the clearing of forests for private benefits. Market Failure in Forest Conservation In a competitive economy, markets control the way the resources available to society...