Designing a carbon market that protects forests in developing countries.

Firmly incorporated into the Kyoto Protocol, market mechanisms offer an innovative and cost-effective means of controlling atmospheric concentrations of greenhouse gases. However, as with markets for many other goods and services, a carbon market may generate negative environmental externalities. Possible interpretations and application of Kyoto provisions under COP-6bis and COP-7 raise concerns that rules governing forestry with respect to the Kyoto carbon market may increase pressure on native forests and their biodiversity in developing countries. In this paper, we assess the following two specific concerns with Kyoto provisions for forestry measures. First, whether, under the Clean Development Mechanism (CDM), by restricting allowable forestry measures to afforestation and reforestation, and explicitly excluding protection of threatened native forests, the Kyoto Protocol will enhance incentives for degradation and clearing of forests in developing countries; second, whether carbon crediting for forest management in Annex I (industrialized) regions under Article 3.4 creates a dynamic that can encourage displacement of timber harvests from Annex I countries to developing nations. Given current timber extraction patterns in developing regions, additional harvest pressure would certainly entail a considerable cost in terms of biodiversity loss. In both cases, we find that the concerns about deleterious impacts to forests and biodiversity are justified, although the scale of such impacts is difficult to predict. Both to ensure reliable progress in managing carbon concentrations and to avoid unintended consequences with respect to forest biodiversity, the further development of the Kyoto carbon market must explicitly correct these perverse incentives. We recommend several steps that climate policymakers can take to ensure that conservation and restoration of biodiversity-rich natural forests in developing countries are rewarded rather than penalized. To correct incentives to clear natural forests through CDM crediting for afforestation and reforestation, we recommend for the first commitment period that policymakers establish an early base year, such as 1990, such that lands cleared after that year would be ineligible for crediting. We further recommend an exception to this rule for CDM projects that are explicitly designed to promote natural forest restoration and that pass rigorous environmental impact review. Restoration efforts are typically most effective on lands that are adjacent to standing forests and hence likely to have been recently cleared. Thus, we recommend for these projects establishing a more recent base year, such as 2000. For the second and subsequent commitment periods, we recommend that climate policymakers act to restrain inter-annex leakage and its impacts by ensuring that crediting for forest management in industrialized countries is informed by modelling efforts to anticipate the scale of leakage associated with different Annex I 'Land use, land-use change and forestry' policy options, and coupled with effective measures to protect natural forests in developing countries. The latter should include expanding the options permitted under the CDM to carbon crediting for projects that protect threatened forests from deforestation and forest degradation. Ultimately, carbon market incentives for forest clearing can be reduced and incentives for forest conservation most effectively strengthened by fully capturing carbon emissions associated with deforestation and forest degradation in developing countries under a future emissions cap. Finally, we note that these recommendations have broader relevance to any forest-based measures to reduce greenhouse-gas emissions developed outside of the specific context of the Kyoto Protocol.