Innovative financial instruments and their role in the development of jurisdictional REDD+: an application to Brazil
Alexander Golub, Marek Hanusch, Diogo Bardal, Bruce Ian Keith, Daniel Navia Simon, Cornelius Fleischhaker
Achieving global net zero carbon emissions requires stopping deforestation and making full use of tropical forests as carbon sinks. In this paper, we examine the institutional and financial innovations to achieve a meaningful recognition of the value tropical nations and their forests can provide for global mitigation efforts. On the institutional front, tackling deforestation will require an economic transition promoting productivity beyond commodities, as well as forest conservation and sustainable rural livelihoods. As part of this transition, jurisdictional REDD+ programs at the national level would provide the most solid foundation for scaling up deforestation resources. The main contribution of this paper is to show how innovative financial instruments could be used, in the context of the ongoing development of Jurisdictional REDD+ programs, to de-risk and leverage private capital, helping host countries to monetize the future value of ERs and the benefits of avoided deforestation and reforestation, while providing new instruments for investors to obtain value, in the context of global decarbonization. We show how a combination of forest carbon bonds, where countries can sell forward their emission reduction outcomes, as well as call and put options can be used to de-risk and encourage early investment in jurisdictional REDD+. We evaluate the potential scale of these innovations for the case of a hypothetical Brazilian “Sovereign Amazon Financing Edifice" (SAFE), which would consolidate financial resources and direct them to tackle deforestation directly and through investments in local economic diversification and productivity. Our estimates suggest the SAFE could obtain up to US$9-18 billion in trading call options on future emission reduction vintages (2024-2030) and raise up to US$45 billion for upfront investment by issuing low-risk forest carbon bonds. These amounts would represent a critical contribution to effective forest conservation. The instruments and methods we propose can be used by other tropical nations that are prepared to implement a large-scale jurisdictional REDD+ program.
Event: World Bank Land Conference 2024 - Washington
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