Carbon firm highlights risk, appetite of forest credits

David Fogarty, Reuters 11 Sep 09;

* Firm hopes to sell A$1.6 billion in forest credits
* But market for such carbon credits small and uncertain
* Analysts point to delivery risk from forest carbon projects

SINGAPORE (Reuters) - An Australian firm hoping to broker A$1.6 billion in carbon credit sales from saving tropical forests highlights the promise and peril of a U.N.-backed scheme that rewards projects for curbing deforestation.

Carbon Planet, in presentations to investors, says it has contracted 100 million carbon offsets over five years from projects in Papua New Guinea and 60 million over five years from Indonesia at an average of A$10 ($8.5) each offset, or credit.

That equates to 160 million metric tons of carbon dioxide saved from being emitted by keeping the forests standing.

None of the 25 projects in PNG and 8 in Indonesia have yielded credits although the company, a carbon services provider, hopes credits will start to flow soon and says it has buyers.

But brokers and analysts say there is no appetite currently for that volume of "avoided deforestation" credits on the global voluntary carbon market, which is driven by demand from corporates wanting to offset their carbon emissions.

Demand worth potentially billions of dollars annually would only come from future national emissions trading schemes such as in the United States and Australia and an eventual global scheme backed by the United Nations, called reduced emissions from deforestation and degradation (REDD).

Analysts say giving large credit flow forecasts from REDD projects before they are audited or validated is fraught with risk if projects do not yield as many credits as forecast.

In addition, REDD's final design has not been decided by the U.N., it is unclear how the scheme will be included in national schemes or if early REDD projects will be included in the U.N. framework.

"People are contracting REDD as though it's on the verge of becoming a compliance market," said Martijn Wilder, head of Baker & McKenzie's global climate change and emissions trading practice, referring to markets that would allow REDD credits to meet mandatory emissions curbs in rich nations.

The United Nations hopes REDD will be included in a broader climate pact the world body wants to be agreed in December during a major meeting in Copenhagen. The idea is for a global REDD credit market to formally begin in 2013.

"We are using much more conservative figures when we are talking to our investors," said Darius Sarshar from New Forests, which is developing a large REDD project in Papua, Indonesia.

In Indonesia, there are an estimated 20 projects at various stages of development, the World Bank says.

"However, such engagement remains speculative, extremely expensive and has numerous challenges," said Wilder.

COMPLEXITY

This is particularly the case given the early stage of development of REDD and the complexity and time needed to develop REDD projects in developing countries.

"In terms of the forecast market demand of voluntary credits, it is by no way even up to the volumes that I've seen promoted as imminent from REDD projects," said Chris Halliwell, a senior emissions broker for TFS Green in Melbourne, Australia.

"There seems to be a mark-to-market valuation but not really supply and demand analysis."

REDD holds the promise of unlocking billions of dollars in annual revenue to developing nations from carbon offset sales to wealthy countries.

The scheme is designed to curb deforestation and restore the world's tropical forests so they can soak up growing amounts of planet-warming carbon dioxide from burning fossil fuels.

But REDD projects must provide funds for local communities, prove they are designed to address local causes of deforestation, ensure they are long-term and be able to accurately calculate how much carbon the forest will lock away over several decades.

Such complex calculations take time. Proving who actually owns the carbon stock in a given area is also crucial.

Carbon Planet's projections seem daring if only because the entire value of the world's voluntary carbon market was US$705 million in 2008, up from US$335 million in 2007, according to "State of the Voluntary Carbon Markets 2009" by Ecosystem Marketplace and analysts New Carbon Finance.

Of this, global sales of "avoided deforestation" credits were just one percent of turnover.

Carbon Planet Founder Dave Sag told Reuters the A$600 million in revenues over five years from Indonesia was "based on a very conservative estimated yield of 12 million tonnes per annum."

"I understand that people have concerns about our projections. Anyone would given the scale of them. But the numbers to us do not seem unrealistic."

TOUGH STANDARDS

Sag said the projects would meet tough yardsticks -- such as the respected Voluntary Carbon Standard (VCS) and Climate, Community and Biodiversity Project Design Standards -- and the firm was looking more to future compliance markets.

"That's why we are busting a gut to make sure that these projects are produced properly."

But large markets that will accept large volumes of REDD credits are several years away. And many developing nations have yet to develop rules governing REDD, adding to uncertainty.

Another REDD project developer in Indonesia said it was crucial to prove to investors that protecting an area of forest actually curbs deforestation and therefore emissions.

"You are basically doing projects and drafting legal agreements in the absence of any rules," said Wilder.

"From our point of view, doing a REDD project is similar to other long-term infrastructure projects in the sense that the legal foundations have to be beyond reproach," he added.

Sag says REDD credits will soon start to flow from its projects, starting later this year with 10 million VCS-standard credits from Kamula Doso rainforest in Papua New Guinea.

The company has signed a deal with a firm called Nupan, which represents the 52 land-owner groups in the 800,000 ha (2 million acres) reserve who are the legal owners of the "carbon stock."

He denies Carbon Planet is playing fast and loose with its projections, saying investors want to know the numbers.

"I am the confident the credits will start walking out the door pretty soon. We have buyers lined up."

(Additional reporting by Sunanda Creagh in Jakarta; Editing by Michael Urquhart)