If a tree falls… preventing deforestation with insurance

3 05 2012

As CB readers will know, I’ve reported a few times on our iREDD idea, and it got a little pick-up overseas. Here’s a great article by Rachel Nuwer covering the concept, published in Ecoimagination.com.

Almost everything we own – our houses and cars and our very health – is insured. It works on a simple principal: the higher the risk, the higher the premium. It’s an age-old concept that ecological modelers have decided to apply to a new area: forest preservation.

A new proposal, published in the journal Conservation Letters, would create forest insurance to make the U.N. forest preservation program Reduced Emissions from Deforestation and forest Degradation, or REDD, more effective. REDD is generally supposed to function by paying developing countries to protect their forests in exchange for carbon pollution credits. Currently the program has 42 partner countries across the globe. The program is crucial to the fight against climate change since deforestation and forest degradation accounts for about 20 percent of global greenhouse gas emissions and threatens biodiversity.

“REDD is a fantastic idea,” said Corey Bradshaw, director of ecological modeling at the University of Adelaide and co-author of the study. “You get a carbon advantage and biodiversity doesn’t get wiped out at the same time, it seems perfect.”

But it has a few major flaws that the insurance scheme, called iREDD, seeks to remedy.

REDD only works if the parties are honest and stick to the agreement. Bradshaw doesn’t have much faith that will happen. “If there’s a way to cheat, people will cheat. That’s the nature of all life, not just humans, but we excel at it,” he said. If, for example, a country is paid to conserve one forest but moves its deforestation efforts to an adjacent forest in order to get both money and timber, in terms of carbon offsets, that transaction was a failure. This phenomenon is called “leakage.”

Carbon-capture also only works if it’s maintained indefinitely. If a country accepts money for ten years and then cuts its forest the day after the agreement expires, then all of that conservation was for naught. This issue is called “permanence,” usually translated into an arbitrarily defined period of time set by countries in terms of decades or centuries.

Finally, there is the concept of additionality: there is no point in paying to protect forests that aren’t in danger of being cut. Bradshaw calls leakage, permanence and additionality, the “unholy trinity” of REDD.

In order to stifle the temptation to cheat, Bradshaw and his colleagues proposed translating ecosystem services (hard-to-quantify but impossible-to-live-without benefits like the water cycle, pollination and forest carbon capture and storage) into a format that the market could understand: the insurance industry. “This polices the system through a financial mechanism,” Bradshaw explained. “People have an incentive to do the right thing because they get more money at the end.”

How would such a system work?

Individual contractual agreements must be drafted between the buyer, or the party interested in carbon credits, and the seller, or the forest manager. The researchers propose setting a premium based on an assessment of risk. To quantify this, an outside broker would use a Likert scale to assess an area’s governmental reputation, management capabilities, monetary resources, community endorsement, and political buy-in. Once the risk ranking has been made, then a certain amount of the invested cash – generally no more than one-third – is used to purchase an insurance policy that scales to that agreed-upon risk, Bradshaw explains in his blog, Conservation Bytes. The amount is put into an insurance account, which collects interest over the project’s duration.

If the forest managers meet the agreed upon conservation goal — including monitoring to make sure there is no leakage and maintaining the project over the agreed upon permanence scale—at the end of the contract, the seller gets all the money from the insurance premium plus the interest gathered. (Even if a contract was set for 100 years, a decadal pay scheme could be set).

If, on the other hand, the forest managers violate the contract and clear-cut parts of the forest anyway, the sellers could be charged or the buyers could pull out and get all of their money back plus the premium.

If this system worked, it would provide a means to sequester more carbon to offset increasing anthropogenic emissions. The potential interested parties are extensive, including companies, countries, forest ministries, governmental departments, individuals and agencies like USAID. “This won’t completely solve the problem, but it would put dent in the way emissions are tracking,” Bradshaw said. “It’s just one of the many things we have to do to get our heads around climate change and do something about it.”

Rachel Nuwer is a science journalist who writes for venues including the New York Times, ScienceNOW and Audubon Magazine. She lives in Brooklyn, New York. She tweets @RachelNuwer


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29 11 2013
King for a day – what conservation policies would you make? | ConservationBytes.com

[…] be therefore eligible for payment from carbon pricing if maintained in perpetuity (following an insurance-based approach). The requirement for additionality would be waived in this […]

7 05 2012
If a tree falls… preventing deforestation with insurance … | | Pollution News | reporting on pollution solutions in 2012Pollution News | reporting on pollution solutions in 2012

[…] deforestation and forest degradation accounts for about 20 percent of global greenhouse gas …conservationbytes.com/2012/05/03/if-a-tree-falls/ Recommended ReadingPollutionVideo: Is REDD a real solution for deforestation? :: Climate […]

4 05 2012
CJAB

This from Alex Diment who agreed to have his comments made public:

“I’m not sure how this approach differs greatly from the set-up of the current schemes, such as VCS certified credits?

I haven’t used these standards myself, and I’m no expert, but the standard seems to account for uncertainty and leakage in the C calculations, and has a pooled buffer system to address risks of permanence and management/governance.
(e.g. see here)

Additionality is, of course, much harder to deal with, but their whole estimation relies completely on this, so I’m sure they’ve thought a lot about it.

I’m just not sure how your insurance proposal is fundamentally different – except that you bank a proportion of the initial cash, and they bank a proportion of the initial credits.

But maybe I’ve understood it wrong.”

4 05 2012
CJAB

Thanks, Alex. I’ve asked Penny van Oosterzee to respond since she’s much more familiar with VCS than I am:

“The VCS is comprehensive, but it is fundamentally different in two main ways. First, its aim is to calculate a buffer that is set aside into the pooled buffer account where they are held as ‘insurance’ and used to replace credits that are lost. There is no financial instrument attached to them.

Second there is no contract with a potential buyer associated with the calculation of risk. Its aim is not to increase uptake of REDD or general AFOLU projects through usable finance options. It does increase transaction costs for project developers.

What iREDD also does quite neatly is allow the buyer to be a participant in a joint risk assessment.”

4 05 2012
CJAB

And James Blignaut added this:

“… the point here is the iREDD is MUCH more flexible; it’s negotiated, it’s transparent and upfront (no shenanigans), it’s based on an evaluation system, AND it’s financial. In the end, that is what matters because it is the metric the investor understands and that allows for a degree of calmness as he/she does have a recourse in the case of problems. It also allows for re-investments in better alternatives 20 years on that cannot be foreseen now. I do think a combination of the VSC standard for certification and the iREDD for reducing the risk linked to uncertainties could work well though.”

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