Making REDD+ more attractive for the Private Sector

The private sector is often cast as a necessary but dangerous antagonist in the REDD+ world, and there are good reasons for this.  From carbon cowboys to imaginary baselines, there is plenty of evidence that when money can grow on trees, a lot that can go wrong.  However, with an estimated additional $40 billion a year needed to halve global deforestation by 2030, global efforts to reduce emissions from deforestation and forest degradation (REDD+) will fall short without sustained private sector capital.

Up till now the REDD+ mechanism spearheaded by the UN has not seen much progress in involving the private sector in advancing its objectives. Continuing institutional challenges like corruption, changing regulations, lack of tenure security along with the challenges in valuing and monitoring carbon sinks have all fuelled the private sector’s reluctance to jump in with both feet. As a panelist from PriceWaterhouseCooper noted in a session on engaging the private sector in REDD+ at Jakarta’s UN-REDD Global Symposium : “Private sector finance is expected to provide a significant amount of all REDD+ finance” . However, he added, “the threat of the private sector not getting engaged is getting bigger and bigger.”

To address this increasing concern, the UN-REDD Program recently released a policy brief titled “The Role of the Private Sector in REDD+: the Case for Engagement and Options for Intervention. While it does not propose specific policies, the report serves as a scene setter, identifying relevant private sector actors and outlining their potential role, in the context of REDD+.

Will the private sector please stand up?

From the onset, the report acknowledges the difficulty in putting a label on the private sector. “There is huge diversity amongst private sector actors, and it is consequently challenging both to make meaningful generalizations about them and to conceptualize the private sector as a whole”. However it highlights two kinds of private actors: a) those focused on producing verified emission reductions (VERs) and b) those involved in the supply chains of forest-risk commodities. The first group of actors are usually producers or agents who sell VERs to other private sector parties. This group includes “project developers, technical service providers, financiers and VER buyers” and accounts for an estimated linked reduction of 26 MtCO2e14 a year (roughly $237 million in 2011).  The second group of actors are those primarily associated with the production and supply chains of agricultural commodities or “drivers of deforestation and forest degradation”. This group includes producers, suppliers, manufacturers, consumers and technical service providers.

This second group, the UN REDD brief argues is “orders of magnitude larger” than the category of those involved in the production and sale of VERs (estimated annual producer values for palm oil, beef and soy were US$ 47 billion, respectively in 2011 alone).  However, up till now, most of the engagements with the private sector has come in the first set “while the potential of engaging the second group to achieve REDD+ remains underexplored”.

 How to get the Private sector in on the action

Not surprisingly, the private sector holds major sway in how many of the developing world’s carbon rich forests will be treated in the coming decade. The demands of the global market economy, increases in global population and shifting consumption patterns all exert significant pressures on how land is used. The UN REDD brief argues that while the private sector contributes to these pressures, it can help remedy these aswell through innovation, investment and implementation. Here, as the largest terrestrial land user, the private sector is expected to invest, give leadership by “incorporating new systems, knowledge, technologies and practices” and help midwife transitions to the green economy.

The natural question then is to ask how to incentivize or influence the private sector to do so? To answer this, the authors of the brief outline 4 basic categories of Public sector interventions: incentives, risk mitigation instruments, standards of behavior and business environment.

For any private sector actor, incentives matter most. This holds truer for the second type of actor as they usually have to revamp major business activities like raw material sourcing and supply chain management to become REDD+ friendly. Here, apart from financial incentives like grants, tax breaks or payments, non-financial incentives like clear land use rights and stable regulations are extremely important. This of course requires good governance in terms of transparency as well.  Similarly, risk mitigation instruments like commercial and political risk insurance or guarantees (e.g OPIC) for these actors will allow them to share the risk of forestry related activities, especially in politically troubled areas like the Democratic Republic of Congo.

However, risk mitigation can only go so far if governments do not address the underlying drivers of risk. How well a country manages to attract private finance in protecting its forests depends on what kind of business conditions it can offer. Improving these conditions requires fundamental reform processes in political, legal, economic and societal structures. There have been some reported successes on the local level in countries such as Peru, Indonesia and Congo. These successes have been borne out of improved land tenure and local governance, partnerships with communities based on Free, prior and informed consent (FPIC), transparent and multi-stakeholder MRV activities. Jurisdictional/subnational REDD+ initiatives also have a higher chance of engaging the private sector as they can better maneuver limited government and technical capacity and benefit from quicker, community led reform. A good example of this is the WWF’s REDD+ initiative in Kutai Barat, Indonesia, where the private sector logging companies worked with regional officials and community leaders to utilize regional models for sustainable logging. These regional successes may give impetus to provincial and state level governance initiatives that allow for reliability and scale-ups. However, critics argue that the more important causal mechanism is that of the state driving important reform which is Long (in terms of policy timescales), Loud (targeted activities made more attractive than “business as usual”) ,Legal (has clear, binding legal framework) and Light (must be easy and affordable to adhere to).

Good governance is vital first step towards securing private finance for REDD+ initiatives.  If the additional $40bn gap is to be narrowed, developing country governments need to take lead and create transparent, sustainable and stable business climates.

Bilal Bawany is a second year Master of Global Policy Studies student at the LBJ School specializing in International Development and Governance. His experience in the public health, agribusiness and education sectors has fuelled his interest in how public private enterprise, aid and development policies affect the political economy of service delivery in developing countries.

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