Amazon Opportunity: Brazil Doesn't Count on Carbon Market

Forest Issues Take Center Stage at Cancun Climate Talks

This story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.

Brazilian businessman Roberto Waack has told potential investors around the world about his sustainable forestry firm, explaining how it sells certified wood, conserves water, and protects forests. But at meeting after meeting, he gets the same question: Is there money to be made from trees absorbing fossil fuel emissions?

Waack says he has watched a wave of speculators edge in on Brazil, eyeing the world’s biggest tropical-forest country as the ideal place for polluters to pay off the wrongs they’ve done to the atmosphere. By paying to preserve a piece of the Amazon, they hope to “offset” the carbon dioxide they’ve released by burning coal, oil, and natural gas in factories and power plants across North America, Europe, and Japan.

(Related: Global Footprints Map)

Brazil’s sprawling forests are indeed an important carbon “sink,” naturally pulling carbon dioxide from the air. Efforts to give forests a formal role in absorbing such emissions have marked a rare point of progress at United Nations climate talks, under way through December 10 in Cancun, Mexico. Negotiators at the summit are expected to approve a framework that may ultimately link forests to carbon markets—potentially drawing a flood of environmental investment to forest-rich Brazil.

But Brazil’s government bristles at the idea that it should shoulder the burden for solving global warming. A rising economic power and top exporter of soy, beef, corn, and sugar, Brazil doesn’t want outside investors or other nations to stall its agricultural expansion or to dictate the terms of its land-use plans.

(Related: “Brazil Ethanol Looks to Sweeten More Gas Tanks”)

Other Brazilians insist the infrastructure and international regulations needed to transform a patch of standing trees into a tradable asset simply don’t exist yet. Unless forest protection can be combined with other ways of reducing emissions—for example, using less coal, oil, and gas—it won’t save the planet, they say. And Brazil isn’t counting on carbon markets as an engine of growth.

“We’ve passed the phase of dreaming about making huge amounts of money from carbon and forests,” says Waack, who runs the São Paulo-based forestry firm Amata and chairs the Forest Stewardship Council, a global nonprofit that certifies sustainably managed forests. “That illusion of a gold mine is gone.”

The Appeal of Forest Offsets

Companies including the international hotel giant Marriott and one of the largest power companies in the United States, American Electric Power, have already poured cash into forest preservation or tree planting in Brazil. Financiers tour remote jungle regions looking for opportunities, and one indigenous group even hired an international law firm to clarify its crediting rights to protect its ancestral plots of carbon-absorbing trees.

Most of those efforts are linked to the concept of carbon credits that took shape with the U.N.’s 1997 Kyoto Protocol, which sought to cap and reduce heat-trapping greenhouse gases to slow rising global temperatures. To help do that, Kyoto created a “clean development mechanism,” or CDM, which allows polluters in the developed world to “offset” their continued carbon-dioxide emissions by paying for pollution-reducing projects in emerging economies. The world carbon market, including these CDM projects, grew 6 percent, to $144 billion, last year despite the global recession, according to the World Bank, as banks including Goldman Sachs, Citigroup, and Barclays directly financed projects or bought and sold credits.

Brazil in fact proposed the original CDM, in a bid to get wealthy polluters like the United States to compensate for decades of emissions by helping emerging economies to slow their own pollution gains. In 2005, Brazil’s Commerce Ministry and BM&FBovespa commodities exchange formed a local carbon-trading platform, where about $35 million has been raised in auctions since 2007.

Yet despite Brazil’s vast forests, none of those credits have had anything to do with trees. Because the CDM accepts only projects that reduce pollution by directly cutting emissions or planting forests—not protecting them— most forest offsets don’t count toward Kyoto caps. Instead, they’re bought for public relations purposes, or on a bet that a new climate treaty will include forest preservation. As a result, these offsets make up less than one percent of carbon credits traded worldwide, according to data from the World Bank and Ecosystem Marketplace—hardly enough to fuel a sustainable “green rush” of growth in the Amazon.

“The carbon credit alone will not be a significant driver for any economy,” says Kedin Kilgore, head of U.S. environmental markets at Barclays Capital.

Moreoever, Brazil is wary of letting foreigners essentially buy rights to the Amazon in order to keep polluting. As a result, officials first ignored a proposal by Brazilian scientists to incentivize forest preservation. Now known as Reducing Emissions from Deforestation and Degradation, or REDD, that plan plays a key role in the global climate talks now under way in Cancun. It could provide “positive incentives,” including carbon credits, to “enhance removals of greenhouse gases by forests,” according to an agreement issued at last year’s U.N. climate summit in Copenhagen.

Rather than endorse a patchwork of independent REDD projects, Brazil encourages countries to donate to its new Climate Change Fund and to an Amazon Fund managed by its national development bank. Norway has pledged $1 billion by 2015. The World Bank has suggested that Brazil combine public- and private-sector financing to draw both international donations and carbon-market income.

But REDD critics echo elements of Brazil’s hesitation, warning that if credits become a loophole for wealthy polluters, global emissions will keep climbing. It can be hard to certify that forest preservation is permanent in remote areas vulnerable to illegal logging and fires; and even without those technical obstacles, several CDM auditors have been suspended by the U.N. for failing to follow proper verification procedures.

Adding to the uncertainty, Brazilian experts complain about a lack of domestic rules for carbon trading. Most of the country’s environmental assets are unregulated, deterring institutional investors, according to presenters at a BM&FBovespa-sponsored seminar last month in São Paulo.

A Question of Demand

Doubt also lingers about demand. This year, the United States Congress failed to pass a climate bill that included provisions for up to $1 billion in international offsets, which the U.S. Environmental Protection Agency said could have saved taxpayers more than 30 percent of emissions-cutting costs.

(Related: “How Prospects Cooled for a U.S. Global Warming Bill”)

The Chicago Climate Exchange, the first voluntary U.S. carbon market, announced that its trading program will end at the close of this year.

(Related: “A U.S. Cap-and-Trade Experiment to End”)

And while Europe has had the world’s largest CDM market, its future depends on whether international negotiators can come up with a treaty to replace the Kyoto accord when it expires in 2012. In Cancun this month, the best the delegates are hoping to do is to lay the groundwork for an agreement next year.

Yet while nations stall, states are implementing their own cross-border climate plans. Voters in California last month upheld a law that would allow local companies to use forest offsets to meet emissions caps, and Sgassesacramento signed a partnership with Brazil’s Acre state—one of several Amazon provinces with ambitious carbon-credit schemes that have courted California independently of their federal government.

And while it may not see the carbon market as a road to riches, Brazil hasn’t sat quiet on climate change. In October, it announced that emissions had dropped 30 percent from their 2004 peak as a wave of illegal-logging crackdowns, loan programs and consumer awareness campaigns helped to slash Amazon deforestation, the country’s top source of greenhouse gases, by 72 percent. Officials say Brazil will now meet its 2020 emissions target early—though a pending revision of the nation’s Forest Code could threaten that plan. In the past, the U.N. has attributed more than 17 percent of global greenhouse-gas emissions to deforestation, though that share is now shrinking as deforestation slows and fossil-fuel emissions keep rising.

At U.N. talks, Brazil has partnered with India, China, and South Africa to push developed countries to finance global clean-air efforts, using its wins against deforestation as a source of diplomatic—if not market—power.

“No other country has reduced greenhouse-gas emissions faster than Brazil, and no other country is contributing more to the planet,” President Luiz Inácio Lula da Silva said in October.

Meanwhile, the U.N.’s definition of REDD has evolved into “REDD-plus,” incorporating broader elements of sustainable forest management that entrepreneurs like Waack deem essential. In that spirit, he plans to one day include carbon credits within the suite of forest services offered by his firm, where he says they could generate up to 10 percent of revenue.

While that might not constitute a “carbon boom,” those modest contributions can subsidize conservation if Brazil ultimately helps to open carbon markets to forests. “Valuing a forest only for its carbon is like valuing a computer chip only for its silicon,” says Thomas Lovejoy*, a leading Amazon expert. “But carbon credits are essential to getting a greenhouse-gas concentration that is sensible—the problem is too big to be solved without them.”

(Related: “Climate Change Talks Hinge on ‘Green Growth,’ says DeBoer”)

Reporting for this story was supported by a grant from the International Reporting Project.

Thomas Lovejoy is chairman of the advisory council for National Geographic’s Great Energy Challenge initiative, for which this story was produced.

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