Investors wary of ‘green’ forestry

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The value of forests is growing as a result of climate policies, but the complexity of carbon markets coupled with the effects of the financial crisis are deterring investment, investors and analysts said in London on Thursday.

In plantation forests, new demand for wood to generate low-carbon renewable power generation to replace fossil fuels is adding to traditional pulp and paper demand, potentially fuelling values.

For managers of natural and virgin forests, new carbon markets to reduce emissions from deforestation and degradation (REDD) are emerging to pay owners not to chop down trees.

But investors said they were deterred by the complexity of those new markets, and were wary of making investments in plantation forests for bio-energy.

"We see potential in the REDD process, but from an investor perspective it's difficult to make a convincing case right now," said Marko Katila, a partner at Finland-based timber fund Dasos Capital, which raises money from institutional investors.

"Our fund right now is not looking seriously at these types of investments," he added, referring to payments for not chopping down natural forests, speaking on the sidelines of an Environmental Finance forestry conference in London.

Complicated

Discussions on REDD are part of stalled UN climate talks, and are complicated by issues of how to measure carbon savings from reduced deforestation.

"Frankly the discussions are not progressing at all," said Pedro Costa, co-founder and former president at carbon offset company EcoSecurities, and now at Oxford-based E2 Advisors.

"I find it extremely unlikely that REDD will favour any individual investment at least in the short-term, if ever. It's hellishly complicated."

Costa was focused on projects in the Brazilian Amazon, where he said philanthropic capital may be drawn by returns to investments in sustainable forestry, including a combination of selective logging and conservation.

A draft US climate bill unveiled on Wednesday may boost forest carbon markets, however, proposing to allow foresters and farmers to earn tradable carbon offsets from emissions cuts they make in the United States.

The American Power Act also recognised payments for avoided deforestation, or REDD, in developing countries, but experts said the draft bill had little chance of passing Congress this year.

Low-carbon energy targets in the Europe Union are fuelling demand for wood chips from plantation forests, or careful, selective thinning of natural forests.

Britain's Helius Energy, for example, recently won planning consent for a power plant which it said, if built, would consume the equivalent of 8% of Britain's total annual tree cut.

"It looks like there'll be a massive demand for biomass products," said Helius feedstock director Daniel Davidson.

Investors were still wary of funding new plantation forests, said Dasos Capital's Marko Katila.

That reluctance reflected the long cycle of forest investments, which were largely up-front, making these rather illiquid and more difficult to justify against a backdrop of financial uncertainty.

"Since the financial crisis it has been difficult to sell something very illiquid," Katila said.

(EURACTIV with Reuters.)

UN-led climate negotiations are currently trying to agree on a successor to the Kyoto Protocol, which expires in 2012. Addressing deforestation is central to the talks, as it accounts for a fifth of global CO2 emissions, according to the UN.

Deforestation will be addressed by separate rules for land use, land-use change and forestry (LULUCF) in developed countries and a funding mechanism called REDD (Reducing Emissions from Deforestation and Degradation) in developing countries. The REDD debate foresees the inclusion of forest credits in carbon markets.

Last year, a Greenpeace report warned that if forest protection credits were to be included in international emissions trading, carbon prices would crash by up to 75% by 2020 (EURACTIV 31/03/09).

  • 31 May - 11 June: Next session of UN climate talks in Bonn.
  • Second half of 2010: Two additional meetings.
  • 29 Nov.–10 Dec.: UN climate conference in Cancún.
  • United Nations Framework Convention on Climate Change (UNFCCC):Homepage

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