Market Analysis

Analysis

Supply and demand in REDD+ credit market is unbalanced, with the market expected to be chronically oversupplied across most demand scenarios. This situation is likely to persist over the outlook period (2015-2025) unless REDD+ credit developers significantly scale back ambitions or ambitious levels of new demand is created.  As government sellers and buyers influence the market, reversion to supply and demand balance is unpredictable.

For example, over the last 12-18 months, the REDD+ market has changed significantly. On the demand side, the Californian market has not moved to admit REDD+, and the Australian market was wound up before it became fully operational. On the other hand the BioCarbon Fund launched a new tranche with $280 million of funds to support landscape level initiatives, the Forest Carbon Partnership Facility (FCPF) Carbon Fund received additional contributions, and new EPA regulations in the US may create new market potential. The voluntary market and bilateral and multilateral mechanisms currently drive demand. On the supply side a large number of jurisdictional programs have been submitted to the FCPF Carbon Fund.

The graph above allows users to explore the growth and decrease in supply or demand for REDD+ credits between 2015 and 2025 by selecting and combining diverse supply and demand scenarios based on projections which include different levels of variability.

Methodology

The demand projections represented here rely on assumptions about prices, emissions, emissions growth and decline, caps, offset volumes, REDD and REDD+ credit volumes and percentages, timing of policy decisions, and the types of rules likely to be introduced. Some of the assumptions are based on historical data that may not be a reliable indicator of future behavior. Nevertheless historical data has been used extensively in the development of the REDD+ demand projections.

There are three demand scenarios. The scenarios cover low, but certain demand (Status Quo), expanding compliance demand (Compliance Growth), and high, but uncertain demand (Blue Sky). Within each scenario an interval is used to indicate variability within each scenario, providing low, mid, and high demand guidance. The Status Quo demand estimate does not include the Green Climate Fund. It was not included as there were no pledges and no breakdown of how anything would be spent. Should the fund start operations during 2015-25 then this would increase demand in the Status Quo scenario.

The supply model is based on ex-ante carbon estimates extracted from those REDD+ mitigation activities (projects and programs) that demonstrated a measureable potential to produce high-quality credits that may be considered “compliance-grade”[1] within the context of future compliance frameworks.

The supply estimate is composed of a number of project scale activities that have already met criteria to produce compliance-grade credits (referred to as Level I), projects preparing to satisfy criteria to produce compliance-grade credits (referred to as Level II), and jurisdictional-scale programs that have expressed an intent to pursue REDD+ credit markets and received REDD-readiness funding or a minimum established ex-ante estimates.

Significant uncertainty in jurisdictional supply exists over and above that included in the credit pipeline resulting from programs under the umbrella of the Governor’s Climate and Forests Task Force (GCF) and Brazil National programs. A scenario approach is used to illustrate the impact of potential supply from these sources.

[1] Compliance-grade REDD+ credits are considered to be those accounted and verified under a high-quality voluntary market standard that is either i) of comparable robustness to compliance market standards and/or ii) may be recognized as eligible to meet regulated obligations under a compliance market. VCS is the dominant carbon accounting standard on the supply side, and for purposes of this study represents the sole source of compliance-grade project level REDD+ credits. For jurisdictional or sub-national supply the VCS Jurisdictional and Nested REDD+ standard was included, as was submissions to the FCPF’s Carbon Fund that would follow its Methodological Framework. Other jurisdictional proposals were also considered.