Market Analysis

The data and text on this page is based on a January 2014 report of the Interim Forest Finance (IFF) Project, funded by the Norwegian Agency for Development Cooperation (NORAD). The report was prepared by The Global Canopy Programme (GCP), the Amazon Environmental Research Institute (IPAM), Fauna & Flora International (FFI), the UNEP Finance Initiative (UNEP FI) and the United Nations Office for REDD+ Coordination in Indonesia (UNORCID). Read the full report.

Supply scenarios

Land use change upper bound

Upper bound estimate of global supply of emission reductions needed from all forest and land-use activities in order to achieve a 50% reduction deforestation by 2020. This assumes there will be deforestation and land use change of 6.6 Gt C02 emissions per year. The recent IPCC AR5 report identifies that a target of 50% reduction in emissions from deforestation is commensurate with the need to limit the global temperature rise to 2 degrees Celsius.

Land use change lower bound

For this scenario, we assume that there will be emissions from deforestation and land use change of 2.2 Gt C02 emissions per year.

Select REDD+ estimate

Not all forest and land use emission reductions will be paid for through an international REDD+ trading mechanism. Select a range estimate to see examples of the global supply of forest and land use emission reductions that could be paid for through REDD+.

Analysis

The report assesses the difference between supply and demand in the interim period, considering a global target of a 50% reduction in annual deforestation levels by 2020 (compared to current levels). The target proposed by the European Commission, which includes many donor countries, is used here in the absence of a global target agreed by all countries. Estimates of emissions from deforestation differ: the scenarios – upper and lower bounds – estimate that between 3,300 MtCO2 emissions and 9,900 MtCO2 emissions of emission reductions will be generated between 2015 and 2020 from all forest and land-use activities. In contrast, the total potential demand for REDD+ emission reductions is only around 253 MtCO2 emissions. Demand is defined as the volume of carbon that can be purchased by potential buyers of units of REDD+ emission reductions.

The majority of funding for REDD+ so far has been from the public sector. Around US$4.5 bn was pledged by Annex I countries in the 2010–12 period, while very few commitments have been made outside the REDD+ Fast Start Finance period, which ended in 2012. Public sector funds for REDD+ are channelled through a variety of multilateral and bilateral channels. However the majority of public sector funding channels are not focusing on purchasing REDD+ emission reductions (which can happen in Phase 3 of REDD+). Instead they are investing in REDD+ Readiness, preparing countries for the implementation of REDD+. Once countries have moved in to Phase 3, however, a large-scale source of demand for REDD+ emission reductions will be required to ensure REDD+ becomes sustainable in the future.

Demand can originate from market or non-market sources. Market-based demand can come from compliance markets, such as the California Emissions Trading Scheme, or from the voluntary markets. Non-market sources may include funding channels such as the FCPF Readiness Fund, the UN-REDD Programme as well as others such as the BioCarbon Fund and the KfW REDD+ Early Movers Programme. After 2020, demand is expected to originate from a compliance market established as part of a global climate change agreement under the UNFCCC. In the interim period, however (between 2015 and 2020), other compliance markets, voluntary markets and non-market sources must serve as a source of demand.

The supply of emission reductions from forest and land-use activities is between 13 and 39 times greater than the total potential demand for REDD+ emission reductions in the interim period. Using the two supply scenarios, and assuming a carbon price of US$5/tCO2, the supply-demand mismatch equates to a gap of around US$15–48 bn of primary market transactions in the interim period. (Note: an implicit price for forest carbon is unlikely to emerge whilst there is no liquid secondary market. In the absence of this, US$5/tCO2 is an estimate of the carbon price used by some market participants, e.g. the Amazon Fund.)

It is likely that not all emission reductions from forest and land-use activities will be sold through an international trading mechanism, such as an international REDD+ offsetting mechanism, as many will likely be used to meet domestic emission reduction targets. If, for example, only 25% (825–2,475 MtCO2 emissions) of all forest and land-use emission reductions are paid for using international REDD+ trading mechanisms, then the supply is between 3 and 10 times greater than demand, and the gap is valued at around US$4–12 billion. This scenario assumes a significant role for an international trading mechanism, but not such a large role that it disincentivises domestic action in the industrialised, non-tropical forest countries. It should be noted, however, that this is a hypothetical value, and that the proportion of emission reductions that can or may need to be achieved through such a mechanism may be far greater. The graph above allows the user to select between high, medium or low estimates.